The Impacts of Subsidy Design on Rural Internet Access and Quality

Abstract

The impacts of subsidy design on rural Internet service are studied using data from phase II of the Federal Communications Commission’s (FCC’s) Connect America Fund (CAF II). The CAF II Subsidy program supported incumbent price-cap carriers and required that carriers trade subsidies for investment obligations. The CAF II Auction used competitive bidding to allocate subsidies and set the quality of services supported. The auction design favored bidders that delivered faster broadband services and, as a result, was associated with higher average speeds compared to outcomes in CAF II Subsidy markets. Because the CAF II auction did not require price-cap carriers to provide broadband access to unserved locations that did not receive winning bids, broadband access rates were higher in CAF II Subsidy markets. The difference in average download speeds, conditional on access, between Auction and Subsidy markets increased by more than 90 megabits per second (Mbps) between 2014 and 2020; the difference in the estimated expected download speeds between markets increased by 35 Mbps over the same period. The analysis indicates that both investment obligations and competition matter and suggests that the mechanisms used to allocate subsidies can be as important as the amount of support provided.

Keywords: subsidy, auction, costs, Internet, ruralG38, L96, L98