Low federal funding to replace Huawei and ZTE equipment could force rural telecoms to find partners

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The Secure and Trusted Communications Networks Act of 2019 passed the US Senate by a unanimous vote and is headed to President Donald Trump’s desk to be signed, according to Politico.

Once signed into law, the bill establishes a $1 billion fund to reimburse rural carriers with fewer than 2 million subscribers for the cost of removing and replacing any networking equipment made by Huawei and ZTE.

Rural carriers are not yet mandated to remove Huawei and ZTE equipment, but the Federal Communications Commission (FCC) is considering a proposal that would require all companies receiving government funds to do so. The US has long been pushing for the ban of equipment from the two Chinese manufacturers, which the government believes pose a threat to national security.

While the $1 billion fund will help some carriers pay to “rip and replace” their equipment, it likely won’t cover the full cost. FCC Commissioner Geoffrey Starks estimated in November 2019 that the real cost to remove and replace the offending equipment could be as much as $2 billion.

Moreover, rural carriers like Colorado-based Viaero and Wyoming-based Union Wireless have calculated their equipment replacement costs to be $410 million and $300 million, respectively. These two carriers alone would account for about 70% of the budgeted funds, leaving little for the other 104 US telecoms believed to use Huawei and ZTE equipment.

These high costs are in line with replacement cost estimates in other markets that have legislated the extent of Huawei’s involvement in wireless networks. For instance, in the UK, where carriers can’t use Huawei equipment on more than 35% of their networks, local telecom BT said it would cost £500 million ($651 million) to reduce its use of Huawei equipment over the next five years.

Big US carriers like AT&T, Verizon, T-Mobile, and Sprint can leverage high rip and replacement costs as an opportunity to grow their presence in rural areas. For example, larger carriers with deep pockets could use this as an opportunity to provide financing to a rural carrier, which may be facing a funding shortfall.

Financing could give larger carriers leverage to help negotiate better rates to use the rural carrier’s network to plug a hole in their own coverage maps. Additionally, if rural carriers are unable to find the money to cover their upgrades, it could open the door for larger telecoms to snap up distressed assets, like towers or spectrum holdings, providing a cheaper way to build out their own rural networks.

These options will likely appeal to larger US carriers, especially after the recent public criticism from lawmakers of their spotty rural coverage and concerns over inaccurate coverage maps. This criticism has also halted the promise of government funds to help build out rural 4G LTE coverage, meaning deals with rural carriers represent a way for larger national carriers to build their rural networks while still splitting the cost.

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