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FCC's $2B CAF Auction to Strengthen Network in Rural U.S.

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Leading wireline and wireless service providers that are interested in extending their reach in rural United States with high-speed broadband services will get a chance to bid for an additional $2 billion in government’s Connect America Fund II (CAFII) subsidy.

In 2015, the Federal Communications Commission had (FCC) offered more than $10 billion over the next six years in CAFII subsidy to deploy high-speed Internet connections through rural United States.  In May 2016, the FCC had approved a reverse auction to provide an additional $2 billion in funds to rural broadband providers through its CAF II program in an effort to accelerate growth.

The FCC will adopt four technology neutral service standards: (1) delivering 10/1 Mbps speed (2) delivering 25/3 Mbps and offering a usage allowance of 150 GB a month (3) meeting an above baseline tier that requires bidders to provide 100/20 Mbps and (4) an unlimited monthly usage allowance and meeting a Gigabit performance tier that requires bidders to provide at least 1 Gbps downstream and 500 Mbps upstream and offer an unlimited monthly usage allowance.

In 2015, several large wireline operators including AT&T Inc. (T - Free Report) , CenturyLink Inc. (CTL - Free Report) , Frontier Communications Corp. (FTR - Free Report) and Windstream Holdings Inc. (WIN - Free Report) accepted $9 billion over a period of six years from Phase II of the Connect America Fund to expand broadband in their rural service areas. Later in March 2016, the FCC reformed its broadband support for the nation's smallest carriers, providing $20 billion over the next decade.

CenturyLink carries a Zacks Rank #5 (Strong Sell) while AT&T, Frontier and Windstream carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Double-Edged Sword of Trump

President Donald Trump’s proposed policy changes have made the overall economic outlook fairly bullish. The two pro-growth agendas of Trump, namely, significant cut in corporate tax and deregulation are major catalysts to the U.S. economy.  The proposal to reduce corporate taxes from their current 35% to 20% is likely to bring corporate tax rate at its historic low in 78 years. The tax proposal is likely to provide incentives to companies to repatriate accumulated profits from overseas with an even lower tax rate.

Additionally, Trump has stated that he wants to do away with nearly 75% of all governmental regulations during his term as President. Major proposals like a pledge to spend $1 trillion in infrastructure projects over a period of 10 years coupled with the above-mentioned policy changes are likely to spur higher consumer spending that may create about 25 million new jobs over a decade. This in turn will fuel long-term economic growth.

Bottom Line

The telecommunications industry is witnessing rapid technological improvement. A growing economy speeds up the demand for real-time voice, data, and video manifold. The escalation in demand for telecom services in the rural areas has encouraged telecom service providers to undertake large network extensions while upgrading plans.

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