Underestimation
Back in 2019, at the height of the Trump administration’s anti-China hysteria, the US Congress passed Public Law 116-124, otherwise known as the Secure & Trusted Communications Network Act of 2019,that prohibited the use of federal funds toward the purchase of communications equipment or services from companies that pose a national security risk to US communication networks. As part of the requirements, the FCC published a list of equipment and services that would be prohibited by this law and communication providers were required to justify any such purchases to the FCC, with equipment from Huawei (pvt) and ZTE (000063.CH) being the focus. The bill also established a reimbursement program that would supply small providers (less than 2m customers), with funds to offset the cost of replacing such equipment.
The bill required that carriers that qualify make initial reimbursement cost estimates to the FCC and allocated $1b as a starting figure for the reimbursement fund, while giving carriers only 1 year from the date of funding to make the replacements, although the FCC was given the ability to grant 6 month extensions on an individual basis. Based on the initial applications, the capital allocation was raised to 1.89b in 2020. At the time of the initial applications there were 52 company submissions, however by January of this year that number increased to 181 as more companies found they could meet the necessary qualifications, but at the same time the number of applicants was increasing, so were the estimated costs for the removal and installation of qualified equipment. Based on current FCC estimates after the recent review, the cost has now risen from 1.89b to $5.6b, which leaves a funding gap of ~$3.7b, with some of the blame resting on the ‘equipment replacement cost catalog’ that the FCC initially provided to help early applicants cost out the replacement. It seems that the FCC did not do the complex cost analyses done by the carriers that includes modifications to cell towers or the replacement of downstream equipment to make it compatible with the replacements.
There are likely overestimations at the carrier side in order to protect them from potential problems during the transition, but few expect that the new $5.6b estimate will be reduced significantly, and with the continuation of silicon shortages and the rising cost of materials overall, some carriers are holding back the progress of the replacement cycle in order to see if the Congress will fund the higher amount, especially since major US carriers will be spending more this year and next for 5G mid and C-band rollouts. If the money doesn’t get allocated by Congress, it could slow the replacement project to a crawl as we doubt smaller carriers would be able to foot the bill themselves and larger carriers will focus capital spending on revenue producing 5G capacity.
The bill required that carriers that qualify make initial reimbursement cost estimates to the FCC and allocated $1b as a starting figure for the reimbursement fund, while giving carriers only 1 year from the date of funding to make the replacements, although the FCC was given the ability to grant 6 month extensions on an individual basis. Based on the initial applications, the capital allocation was raised to 1.89b in 2020. At the time of the initial applications there were 52 company submissions, however by January of this year that number increased to 181 as more companies found they could meet the necessary qualifications, but at the same time the number of applicants was increasing, so were the estimated costs for the removal and installation of qualified equipment. Based on current FCC estimates after the recent review, the cost has now risen from 1.89b to $5.6b, which leaves a funding gap of ~$3.7b, with some of the blame resting on the ‘equipment replacement cost catalog’ that the FCC initially provided to help early applicants cost out the replacement. It seems that the FCC did not do the complex cost analyses done by the carriers that includes modifications to cell towers or the replacement of downstream equipment to make it compatible with the replacements.
There are likely overestimations at the carrier side in order to protect them from potential problems during the transition, but few expect that the new $5.6b estimate will be reduced significantly, and with the continuation of silicon shortages and the rising cost of materials overall, some carriers are holding back the progress of the replacement cycle in order to see if the Congress will fund the higher amount, especially since major US carriers will be spending more this year and next for 5G mid and C-band rollouts. If the money doesn’t get allocated by Congress, it could slow the replacement project to a crawl as we doubt smaller carriers would be able to foot the bill themselves and larger carriers will focus capital spending on revenue producing 5G capacity.
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