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Wednesday, April 24, 2013

2-in-5 is 0-9

As expected, USAC released the funding demand estimate for FY 2013.  And once again, the 2-in-5 Rule has completely failed to rein in Priority Two spending. The current funding shortage makes my long-running campaign to repeal the 2-in-5 Rule somewhat irrelevant, but I'm not one to give up an argument just because it's pointless.

"But wait," you're thinking, "funding demand is actually lower."  True enough: overall demand is down 5%.  But the 2-in-5 rule only affects Internal Connections (IC) funding.  "And IC demand is down 19%," you point out.  OK, but let's look at the only applicants who have to worry about the 2-in-5 Rule: the 90-percenters.  IC funding requests by 90% applicants is up 31%.  Now that is failure.

Increase in Internal Connections funding requests from 90% applicants since the 2-in-5 Rule kicked in: 146%.

Can we kill this stupid rule yet?

So what caused the drop in overall demand?  The 0-in-5 Rule.  Historically, all but a few applicants have gotten IC funding zero times every five years.  And for 2013-2014, the 80%ers have figured out that the IC gravy train now only stops at the 90% station, so they've stopped waiting at the platform.  IC demand among applicants with discount levels between 80% and 89% dropped by 63%.  If we remove the effect of that decrease, IC demand is up 10%, total demand up 9%.  Basic Maintenance (BMIC) demand from 80-89% applicants dropped 57%, but BMIC is relatively paltry, so also removing that drop only makes total demand increase 10%.

The more astute among the readers will note that I'm sort of double-counting when I remove the 80-89% decrease, because at least some of that decrease comes from applicants with some 90% locations making the smart move of applying for IC for only those locations, jettisoning funding requests for locations with lower discounts.  That probably explains some of the plummet in IC requests from 80%ers, but it does not explain the whole decrease, since the decrease from 80-89% applicants was $716 million, while the increase from 90%ers was $360 million.

Poking around the data, I'm seeing another effect of the 0-in-5 Rule: Priority One (P1) requests from 80-90% applicants are up 19% over last year (while demand from the rest of the bands is pretty much flat).  It's possible part of the reason is that our sluggish economy is driving applicants further up the discount matrix, but we're not seeing the shift at lower discounts, so I think the main reason is that as 80-89% applicants (and even 90% applicants) give up on P2 funding, they are pushing more into P1.  Funds for Learning saw this several weeks ago in the increase in demand for cell service.  Here it is in broader strokes: applicants are replacing equipment with less cost-effective P1 solutions, because E-Rate funding twists the cost/benefit ratio against equipment purchases.  The FCC is out in front of this one, with their plan to ban free equipment, which will make mobile voice and data solutions much more expensive.  Now is also the time to get rid of the On-Premise Priority One Equipment loophole, because it's about to be abused.  90% applicants are E-Rate junkies now.  They can't afford their current infrastructure without E-Rate paying for it, so if they can't have their P2 funding, they'll go through all sorts of contortions to cram their equipment into P1.

It's a little late now, but the FCC should be weaning the 90%ers off the E-Rate by cutting the top discount rates.  At a 90% discount, almost any contortions needed to get funding are feasible.  With a top discount level of 75%, the E-Rate funding still twists cost-effectiveness, it just doesn't twist nearly as hard.

And, of course, it's time to get rid of the 2-in-5 Rule.

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