Rural broadband providers face a new era of competition

Chad Duval: Great group of companies up in Oregon that years ago came together and said, “Okay, we do a lot of the same things, and we have challenges in hiring the right people and so on and so forth.”

These are things that we all have to do: accounting, regulatory, operations, and so on and so forth. How do we, over time, bring some of that structure together to be more efficient, to share resources, to share best practices, to really operate in an environment where we look and feel much bigger than we actually are?

Jeff Johnston: That was Chad Duval, principal at Baker Tilly, with an example about how broadband operators can work together in creative ways to help reduce costs and to run their businesses more efficiently and profitability.

Hi, I’m Jeff Johnston, and welcome to the All Day Digital podcast where we talk to industry executives and thought leaders to get their perspective on a wide range of factors shaping the digital infrastructure market. This podcast is brought to you by CoBank’s Knowledge Exchange group.

The broadband industry is evolving rapidly as new technologies and operators enter the market. This has created some headwinds for incumbent operators as growth is harder to come by while costs continue to rise. Chad’s extensive industry experience and his role at Baker Tilly gives him a unique perspective on the industry. So I asked him to come on the pod to talk about success stories and challenges facing broadband operators.   

So, without any further ado, pitter patter, let’s see what Chad has to say.

Johnston: Chad, it’s great to see you again. Welcome back to the podcast — and congratulations on being a grandad or, as you call it, a grand Chad.

Duval: Thanks, Jeff. I thought that was our secret. I’m hiding behind this image of youth, trying not to feel like I’m getting old, but really excited about the growing family. Also, thanks again for having me back. I’m a regular listener to the show, love it. Every time it comes out, I learn a lot. I’m always honored to have an opportunity to come talk to you about a variety of topics, so thanks for having me.

Johnston: Absolutely. Thanks for coming on. By the way, you look great, and you’re clearly not letting the old man in. Even though you’re officially grand Chad, you don’t look like one, so there you go.

Duval: I appreciate it.

Johnston: Well, hey, look, I was hoping we have a real broad industry conversation. The lens that you look through at Baker Tilly, I think, is just a great, insightful lens around what is happening out there with broadband operators. I’ve got a bunch of just high-level questions that I want to run by you here.

To get us going here, Chad, I would love to get your characterization of the current state of the rural broadband industry.

Duval: Yes. It’s an interesting time. I would say, in general, I would describe the industry as holding strong with some potential headwinds. I say potential headwinds because there is a lot out there on the regulatory front. There’s just a lot going on, primarily before the FCC, but also at Congress. Even within the court system, we see a lot of things that I don’t want to say are bad news, but if they all go the wrong way, it certainly could be bad news. If they all go the right way, could be some very good news. I say holding strong with some potential headwinds.

I wanted to characterize it a little bit in the context of we just released our 2025 Baker Tilly benchmarking study of the rural broadband industry. What I’d say, in general, is we’re seeing continuing positive growth, seeing some positive trends, but things seem to be slowing down a bit. At the same time, we see cost continuing to rise a little bit. We’re seeing growth on the revenue side, growth on the customer side of things.

We’re starting to see or continuing to see cost rise a little bit. That’s the concerning trend: slowing growth, increase in cost. Just some generalities that come out of that study that I think hit on or drive home that holding strong, “but” we need to be thinking about some things. So from a rural perspective, looking at the average revenue per user, that ticked up a little bit in 2025, but the pace of growth is starting to slow down a little bit.

Overall, from a customer penetration perspective, we’re continuing to see increases, but again, at a slower pace than we’ve seen in recent years. And we’re starting to see more and more from a churn perspective, that competition is really coming into play. We’re seeing customers trying other carriers, trying other services. Again, some good things there. We’re seeing overall growth, net growth is there, but it’s at a lower pace than we’ve seen in the past.

From a cost perspective, we’re seeing those continue to rise, and at rates that are higher than inflation, so a little bit concerning there. Then the last thing that I wanted to talk about just in terms of headwinds, and, again, not trying to be negative, just what are the things out there that we’re eyeing and seeing through this benchmarking study is that rural carriers are still highly dependent on universal service funding.

NTCA did a study recently with Cartesian. It really did a deep dive on this. When we strip out that universal service funding, the median company, right in the middle of the study, we’re seeing those companies dip into the red, that they’re becoming unprofitable, having negative margins once we take universal service funding out of the picture. As an industry, I think this is something that we’re working on, everyone’s working on this. We’re working on it with our clients, with the rural associations, just trying to make sure that we solidify universal service funding in the long term. That’s been an ongoing effort, and I think will be an effort at least over the next couple of years.

At the same time, I think we need to see companies acting with urgency to grow those revenue streams, do whatever they can to increase that top line, and then look at some cost efficiencies to help really strengthen that bottom line. If and when things do change a bit from a universal service funding perspective, we’re able to continue and thrive, even with lesser support or maybe with no support.

Johnston: That’s great. I really appreciate that. I want to touch on ARPU [average revenue per unit] a little bit because this always really gets me, because when you think about the value of broadband, it’s compelling. If you work from home and your broadband goes out, you can’t work. If you don’t have cable, which a lot of people have gotten rid of, and you’re trying to watch TV and your broadband goes out, you can’t watch TV.

Just the overall value and utility of broadband, to me, is really, really high. Yet, at the same time, as you mentioned, pricing power on behalf of the operators seems to be a little bit limited, despite the fact that people can’t live without their broadband. I’d love to get your thoughts on that. And then, are you guys seeing broadband operators being successful in moving customers to higher-tier plans in a way to provide a better experience and increase overall ARPU?

Duval: A lot of really good questions packed in there, Jeff. Hopefully, I’ll hit on the key points here. I would say, first of all, we are seeing pricing pressure from competition. You see the LEOs [low earth orbiting satellites] out there, you see what I call the big three fixed wireless plays: AT&T, Verizon, T-Mobile. They are out there aggressively bundling and discounting services and marketing heavily nationwide, but a significant focus on the rural consumer because that’s where they have spare capacity, that’s where they can easily add customers, and they’re really bringing those prices down.

I think what we’re seeing from an ARPU perspective is we have to be careful there. We can’t just say, “Hey, we’ve got the best network, we’ve got fiber, we’ve got local, we’ve got all of these things that are beneficial for the customer. So, customer, you need to pay us more.” Yeah, maybe they will pay us more, but when Starlink’s coming in at $50 a month, and I’m at $99 a month, I’ve got to bridge that gap somehow for the consumer, because I just don’t think that they’re willing to pay double for that better experience or that local experience. At least they’re going to give Starlink a try to see how it works. In many cases, I think they’re having pretty positive experiences with it.

So what are companies doing to address that? What can we do to address that? I think we do have to be creative about bringing those prices down. I think you talked a little bit about how do we get more out of the customer. I think we start by not getting more out of the customer, but giving them more, giving them that free candy, if you will, for a little while, upping their speed and keeping the price low, coming in with low introductory prices for a better service offering, a better experience, than we know they’re going to get with Starlink or with fixed wireless.

Get them hooked on that and then start moving that up to a price point that we’re more comfortable with, still competitive. Again, I don’t think we can be at double the price of LEO, but I think we can come in at a price that’s a little bit higher than LEO, provide a really positive experience. Don’t let the customer think about, “Hey, what is Starlink like? What is Amazon LEO going to be like? Why wouldn’t I bundle services with T-Mobile? I’m having a tremendous experience with my local broadband provider over fiber, the best network possible, at a reasonable price. Why would I consider changing?”

I know that’s easier said than done, but we’ve seen some clients of ours do it very, very successfully, run promotions where they’re saying, “Hey, your price is going to be where it is today. Your speed’s going to be much higher, or maybe a nominal increase in rate, but much higher speed,” and say, “Hey, try this for a year and see what you think. At the end of the year, if you want to go down to a lower service package at a lower price, great, we’ll convert you over. If not, here’s what the price is going to be if you stay on that service.”

And it’s sort of early days, we’re seeing some customers rolling off of those initial promotional offerings, but they’re seeing very high retention rates in those customers. 70% to 80% of those customers are staying at the higher speeds and paying more, and very, very happy with the experience they’re having.

Johnston: I guess as I think about what you’re discussing here, it’s being a little bit more creative. I think the mindset of some of these operators historically was we just get to inherit customers. They’re just going to come to us, and now they have to be in the mindset of, “We have to go out and acquire customers now because the market has changed.” Being a little bit more creative, having a different mindset.

And I also think, too, that making sure that you’re messaging with your customers is understood, meaning just because Verizon or AT&T and T-Mobile are advertising 5G fixed wireless and you have 1 gig of fiber connection doesn’t make 5G wireless faster than 1 gig because 5 is a bigger number than 1. You know what I mean?

Duval: I think you make a really, really good point in something that-- Then again, I don’t want to paint with a broad brush or say negative things about the companies we work with, but I don’t know that as an industry as a whole that we’re very marketing savvy, but we need to be far more so. We need to be aggressive in explaining the quality of the service and the benefits of local and what fiber does, what the AI future is going to look like, and how fiber is likely necessary for that.

Johnston: That’s good advice, Chad, for sure.

Let’s talk a little bit about what you guys have seen out there in terms of success stories in the face of a lot of these new challenges. You’ve talked a little bit about some of the creativity on the acquisition side. What are you guys thinking about, or what are you seeing as it relates to cost management? Things that are really under the control of operators that they can do to make sure that they maintain their margins, and any stories or things you’re seeing to share along those lines?

Duval: Yes. It’s always a tough one. Again, I’ll point back to that NTCA study performed by Cartesian and a lot of the things that they talked about there. There’s a couple of things that can be done, and it all sort of boils down to economies of scale.

In my mind, there’s two ways of really accomplishing those economies of scale. One of which is acquisition, growing the size of the business. It’s easier said than done, and I think everyone out there fancies themselves to be acquisitive when the right opportunity arises. Yes, sure, we want to be a buyer if we could. We love the business we’re in; we want to do more of that, we want to serve more customers, and that’ll help us be more efficient, bring our cost down, and so on and so forth. I certainly encourage people to do that. I think there are opportunities out there, and there will continue to be opportunities out there, with some challenges to that.

I think the other thing is just partnering and working with like-minded companies that are very similar. I always point back to the CBS [Consolidated Business Services] example up in Oregon. Great group of companies up in Oregon that years ago came together and said, “Okay, we do a lot of the same things, and we have challenges in hiring the right people and so on and so forth. “

These are things that we all have to do: accounting, regulatory, operations, and so on and so forth. How do we, over time, bring some of that structure together to be more efficient, to share resources, to share best practices, to really operate in an environment where we look and feel much bigger than we actually are?

There are still independent small cooperatives with their own approach to things and so on, but where they can, on the edges, they’re saying, “All right, there are better ways of doing these things, we can do them together, we can save costs, we can access resources we otherwise wouldn’t. We can go to vendors in the marketplace and negotiate better deals. We’re buying more fiber or more electronics as a group. Back office systems, we’re sharing, and so the cost of acquisition is lower.”

Just giving the appearance in the marketplace of being bigger than you actually are, I think, could be tremendously successful, but back to my original thought on that is we haven’t seen that take hold or really root in the industry as we envisioned it would. Thought that CBS was a trailblazer back-- I think it was about 2013 that they started up. I thought that this would really have a bit of a flywheel effect. In all fairness, CBS has got a unique environment with a lot of companies in a fairly small geographic area with a lot of similarities to them.

Fortunately, I think we’re starting to see more and more companies saying, “Okay, we have to do this, we have to look bigger to the marketplace, we have to operate in a way where we can generate our own efficiencies. How do we work together? How do we come together to just really look bigger to the marketplace? We can stay small, we can stay nimble, we can stay consistent to our roots. We don’t have to change everything, we don’t have to sell, we don’t necessarily have to buy, but how do we give the appearance that we’re doing that to create the economies of scale that are necessary?”

Johnston: That’s great to hear; that’s a great story. I can imagine the operational challenges of pulling off some type of a consortium like you’re describing here. Those aren’t easy, that’s, I’m sure, very difficult. But when I think about that, though, in the context of what’s happening in the supply chain today, we hear a lot about shortages and price increases on optical equipment and fiber, and this is largely coming from the hyperscalers.

To your point, the bigger you can look, the bigger check that you can write, the more product you can take. You can probably move up the stack a little bit more than if you were just a single buyer.

Duval: Yes, absolutely. The best time to do it was yesterday; the next best time to do it is today. It’s one of those things of, yes, we can’t fix what we haven’t done already, but looking at what’s going on, looking at, like I said, some of the headwinds, some of the things we’re seeing in that benchmarking data I talked about, there are ways of getting there.

Johnston: All right, so Chad, I’d like to talk about M&A and consolidation in the broadband industry. I think, post-COVID, things got a little bit frothy, valuations seemed to be stretched, and there was a lot of very active bidding going on between infrastructure funds and private equity, and it was a real hot space for quite a while. My sense is that we’re in this steady drumbeat of M&A; we’ve seen some larger ones with T-Mobile, obviously, but I’d love to get your thoughts on consolidation in general in this space, and where you see it heading over the next few years?

Duval: Maybe a couple of thoughts there. First, I’ll start with, probably 10 years ago, when we first saw the ACAM [Alternative Connect America Cost Model] program coming out, my prediction was we would see a lot more consolidation than we have. Just felt like that long-term certainty in universal service funding provided those who are on the acquiring side more certainty in, “Hey, we can put valuations out there on the table that are going to be attractive to sellers. Let’s push forward with more acquisitions here.”

I think we saw a little bit of that, but not a lot. Like you said, I think COVID drove some in just that renewed understanding. And so,people are like, “Hey, wait a second. Here’s an opportunity where people are paying more for broadband at home. They’re paying attention to it. It’s impacting the value of homes and the like.” I think we saw a lot of acquisition activity at that point in time.

Just thinking forward, as we talked about economies of scale and so on already, I think it becomes important. I think that we’re naturally going to see and probably should see some further consolidation to produce those economies of scale and so on that make it make more sense. I think we’re primed to see more activity.

You talked about the private equity and the infrastructure funds and so on. In my experience and understanding, those folks are still out there actively looking for the right opportunities. I know that there are also strategic investors, folks who are saying, “Hey, I’m in this business. I am a rural broadband provider, and I love what we do. My family’s been in this business, or the cooperative’s been in this business, for a hundred years, and we want to do more of this.” Those strategic investors that are saying, “We want to buy the neighboring company or companies,” or  “We want to expand our scope to create those economies of scale for our operations.”

I think there’s a lot of opportunity out there. Interestingly, I think what slows the pace of M&A down is the fact that, if you were to put all, whatever the number is now, 1,200 rural broadband providers, the traditional ILECs [Incumbent Local Exchange Carriers], in a room and have people raise their hand and say, “Okay, are you a buyer or are you a seller? You have to be one or the other.” Probably 90% raise their hand as buyers, and maybe 10% would raise their hand as sellers, and that just doesn’t add up very well. Certainly, for those who are trying to sell, they may find that there’s a lot of opportunity there for them to sell. There may be plenty of bidders if and when they do go to market.

But, at the same time, it’s not as if there’s ignorant money in the market. Not just anyone’s going to buy everything that’s out there for sale. They’re looking for the right opportunities, looking at competition, looking at fiber deployment, looking at opportunities to expand the service territory and get into competitive markets, and the like. I guess it’s a long way of saying that I think the industry is ripe for consolidation. I think it has been for a while. There are some uncertainties from a regulatory perspective. I think getting those locked down over the next year.

Johnston: Yes, that makes a lot of sense.

Hey, this has been great, Chad, super helpful as always. You did not disappoint. I knew you wouldn’t. Before we wrap it up and you go get to spend time with your grandchild-- By the way, is it a boy or a girl?

Duval: It’s a girl. A little girl.

Johnston: Your granddaughter. Excellent. Well, you get to go spend time.

Duval: Loving seeing the pictures every day.

Johnston: Yes, that’s great. Hey, any closing thoughts at all, Chad? Anything that we didn’t talk about that you want to touch on before we say goodbye?

Duval: I think I’ll just close with never mean to come across as negative or a downer of any kind. There are headwinds, but there have been headwinds. Like I said, I’ve been in the industry for 30-plus years, and there’s always been regulatory this, competition that. The rural broadband providers that we all work with have been very successful throughout that time frame. I think it’s just little tweaks to the business plan, little tweaks to how we operate and how we approach the world. I think we can continue to be tremendously successful. We’ve got an amazing product, amazing service, very strong local presence, and I think there’s a great story to be told there.

Johnston: Let’s leave it there, Chad. Thank you again so much. Again, congratulations on the addition to your family.

Duval: I really appreciate it, Jeff. Thanks for having me.

Johnston: A special thanks goes out to Chad for being on the podcast. I think my main takeaway from talking to Chad is that operators need to think outside of the proverbial box. I love the CBS example from Oregon and I bet we start seeing this play out in other states. It also sounds like operators need to put greater emphasis on marketing to ensure their value proposition is well understood and appreciated by the market.