Chad Crank: And when I think about the opportunity side of it, again, perspective of a telecom operator, investor, and I think about areas of growth, areas of opportunity. I do think that the DOD and the national security side of our industry is a great opportunity and one that maybe has been less focused on by rural operators out there.
Jeff Johnston: That was Chad Crank, managing director, Grain Management, about the new business opportunities the Department of Defense represents for rural operators.
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 communications industry. This podcast is brought to you by CoBank’s Knowledge Exchange group.
U.S. communication networks are playing an increasingly critical role in the country’s national defense interest, amidst a dynamic and rapidly changing world security environment. As Chad puts it, more has changed in the last two to three years than has changed in the past two to three decades. Many rural operators are well positioned to serve this growing need given the investments the DOD and other divisions of the government are making in rural America.
Chad looks at the world through a unique lens. He’s been investing in the digital infrastructure market for over 30 years. And prior to that he served on active duty as a combat arms officer in the U.S. Army after he graduated from West Point.
So, without any further ado, pitter patter let’s hear what Chad has to say.
Johnston: Chad, it's a pleasure to have you here today. Welcome to the All Day Digital podcast.
Crank: Well, great, Jeff. Thanks for having me. Thanks for your support at CoBank, for all our portfolio companies have always enjoyed our discussions. Looking forward to today.
Johnston: Hey, me too. I always learn something when I talk to you, Chad. Super excited to have you here today. On the podcast, we've previously talked about the intersection of communication networks and national security concerns. This is specifically speaking to the Secure and Trusted Communications Network Act from 2019, where U.S. operators were required to, and still are required to replace unauthorized, essentially Chinese manufactured infrastructure equipment, replace that in their network.
We've spent some time on that, and that's been super interesting, as we continue to follow that story. Having you on today, I'm really excited because I think we're going to take a little bit of a different approach here and talk about U.S. broadband networks as it relates to the role that they play in protecting or aligning with our national security interests.
Again, excited to have you here because A, based on your experience, and then B, I think based on the position you have, with Grain Management, I think gives you a really unique perspective on all this stuff. Just to get us started here, Chad, perhaps you could, talk about, as you see it, the role that networks play in protecting our national security interests.
Crank: Happy to talk on that. You touched on experience there a little bit, and I think it's important just for the listeners to understand what I do and don't know, because this is a huge topical area that touches on both technical elements, operational elements, national security elements, political elements, et cetera. I do have a very unique lens into that experience, but I don't know it all. I'll try to speak to what I do, know, and try not to speculate too much on what I don't know.
As you mentioned, my primary experience over the last 20 or 30 years has been investing in telecom and digital infrastructure assets, primarily rural fiber networks, which overlaps quite well and hence our relationship with CoBank over the years. I've also invested in companies that have a government services element to them. Definitely have experience around those two areas. Then additionally, I’m a West Point graduate, served on active duty as a combat arms officer in the U.S. Army, and have a son going to West Point.
This is an area that I think is near and dear to me in many ways, and an area that I follow more broadly. But probably more importantly than all that, frankly, for all of us as U.S. citizens, I would start by saying that the world security situation is rapidly changing. I think that's something that people are aware of to a degree, but probably not as aware of as they probably should be. I would posit that in the last two or three years, our geopolitical stability has probably changed more than it has in the last two or three decades.
And so we all need to be more aware of that than we probably ever have been in terms of making operational and risk and opportunity decisions as investors. Starting with that, but then when I think about the opportunity side of it, again, perspective of a telecom operator, investor, and I think about areas of growth, areas of opportunity. I do think that the DOD and the national security side of our industry is a great opportunity and one that maybe has been less focused on by rural operators out there. I think it's an area that, much like all sectors of our economy need reliable broadband, secure broadband for their operations, the DOD and national security side of things, I think it's probably that in spades.
I think the information side of warfighting and security is rapidly taking an increasing slice of both the mind share of the security establishment, but probably more important than that for operators, the wallet share, as well. Therefore, it's I think a growing economic opportunity for network operators to provide access, and I think that's not going to change for the near to midterm. I think it's an area that presents an opportunity for our portfolio companies and many of the CoBank customer base.
Johnston: Maybe we can dig in a little bit here. If you have any specific examples of what you've seen from a rural operator perspective, on some of the things or the alignments that these operators have or could have with the U.S. military.
Crank: I think that's what we see amongst our portfolio, that again, are supported by CoBank. I'll just give a few examples of that. I will also preference. I'm not going to talk about specific contracts or who we do or don't serve here, but just talk in general about the opportunity as an example. Just across our portfolio, there are numerous ones. Example would be Great Planes, which has Offutt Air Force Base just outside of Omaha, Nebraska. That's the home to STRATCOM for those that don't really know how their role fits in, but they effectively are the command-and-control function for all our nuclear forces,
Another example would be Ritter, another CoBank customer, has the Millington Naval Station just right down the road. From their operation, again, it would make sense that they would be a logical traditional broadband provider of those facilities, but probably the one that in our portfolio is the most, I think, unique and probably uniquely positioned for supporting the DOD national security is Quintillion.
It's a very unique fiber optic network in Alaska, providing middle mile connectivity to some of the most rural parts of our country. That was what they were established on. They were not established to provide specifically connectivity to the DOD or national security.
Just given how difficult the terrain is in Alaska and some of the environmental impacts of this region. Their network actually goes out into the Arctic circle, into the Arctic Ocean, and becomes a subsea network, and then loops around the western portions of Alaska, connecting pretty much all the communities along those coastal areas that have, or at least before this network was constructed, effectively no other fiber, internet access other than satellite which is very expensive and not particularly reliable. That was really the original vision and dream of this network.
Then since that time period, they've won a $90 million middle mile grant from the NTIA. That network grant is to extend their network all the way around Alaska.
That's just a snapshot of the business and what it was constructed for originally. Then today, I would say that the national security and DOD side of what they do is a relatively modest portion of the business. We see a very significant opportunity for that changing going forward. Maybe just let me give you a little bit of backdrop of what's going on in Alaska, I think a lot of people don't really know this, but there's been a significant military buildup going on in Alaska for the last several years.
That was a true statement pre-Ukraine, and then with the Ukraine war back to some of the comments of the world's changing very, very rapidly that is also changing very rapidly in Alaska. Given that they are effectively 2.4 miles from Russia and Quintillion's Network actually runs 20 miles from Russia. This buildup in Alaska is, I would say, huge. Today, there's about 28,000 DOD personnel in Alaska. It's about 6% of the Alaskan GDP.
Many of those areas are in dire need of digital infrastructure upgrades. Just to give, again, not specifics, but just examples that listeners could publicly be able to learn more about, when you think about Russia and how close we are there, and you think about things like early warning systems that would detect either ballistic missiles or aircraft. Much of that system is along the coastal areas of Alaska, but it was put in place in the 1950s under the Eisenhower administration. It was called at the time the defense early warning system, or the DEW line. A lot of that stuff was put in place in the '50s. There was a very modest upgrade in the '80s but suffice it to say underinvested and most of it is really dependent upon very limited back with infrastructure in these areas. A lot of it's satellite backhaul and so there is, I think, a huge need and opportunity to upgrade that.
I think the DOD is very closely evaluating that. I think that's just one example of the opportunity set that that Quintillion is very well positioned to be able to capture because they're really the only fiber optic network in that whole coastal region of Alaska.
Johnston: Wow. That's a great overview. Super exciting times for Quintillion indeed. Let me just ask you a quick question. You mentioned the NTIA grant that was received to build out the fiber network. Is there opportunities to partner with the DOD from a funding perspective to build some of these networks to support a national security?
Crank: I think that's a huge opportunity and frankly, a need from the government to get better organized around that. There are programs and Quintillion is tracking on several of those programs. They're pretty ad hoc, relatively small and it comes from a variety of different agencies that have small pockets of money. When I say small, we're still talking about maybe tens of millions of dollars of capital here and there for a variety of programs. Whether it be the DOD, Homeland Security, the Department of State is increasingly focused on subsea cables in particular.
Johnston: Chad, you mentioned subsea fiber networks. I definitely want to spend some more time talking about that because these networks are obviously critically important for a variety of reasons. They also, I think, come with a good bit of risk for both investors and operators. We would love to get your thoughts on those risks and then maybe are there things that the U.S. government can do to help insulate or protect investors and operators that own some of these subsea fiber networks?
Crank: Yes, absolutely. This is a fascinating subsector of telecom. Maybe I just start with many people probably know this, but maybe don't visualize it. When you think about connectivity of the United States, particularly the continental United States to effectively the rest of the world, to Europe, to Asia there are fairly small number of cables that connect and provide that traffic.
I think we're talking about dozens of strands not hundreds and hundreds of cables, and they come into what a factory or landing stations in the U.S. and those, again, are measured in handfuls of locations. The geographic concentration of these networks is what creates the, I think, the risk to them because they're in a very, very defined area. It's a convergence point. They can't be moved at all.
Those are very, very well-known locations. Cutting those cables would obviously be a target for pure threats or bad actors and disrupt wide swaths of both civilian and military operations if that were to happen.
There have been instances of sub-sea cables being targets all the way back to World War II and even more recently, as recently as March of this past year when it was believed that the Houthis forces off the coast of Yemen cut, after threatening publicly to cut.
This is definitely a real threat that needs to be considered both for the DOD and governmental agencies that have the purview over this but then to your point, it's also a risk that owners, operators, and investors in these networks need to be cognizant of.
To your second question of what are the things that the U.S. government can do to help mitigate these risks?
First of all, it would be reducing the bureaucracy and the time delay required to actually construct or transfer these networks. Essentially, all subsea cables are required to go through a full team telecom review, which is, at this point, a year-plus-long process requiring multiple government agencies to approve that construction or transfer. It's the DOD, DOJ, FCC, Homeland Security as well as others. The process itself is I think necessary but very protracted and unnecessarily painful.
I think a clear step would be to streamline that effort and make it more streamlined for particularly parties that have already gone through that review and are known entities.
I think a more direct thing would be to ensure or protect network operators in the event that their networks are cut and it's truly determined that that's a bad actor and that those have been targeted from a security or military perspective, so effectively underwrite or backstop those operators so that the loss of revenue and the repair work that would be required for those assets would be funded by the government. I think that's important. It's more of an insurance-type risk.
Again, hopefully, that's not ever utilized, but at least that would protect that operator and that downside case scenario and allow them just to focus on the more traditional technical, and business risks. I'd say that's probably point 2. I'd say point 3 is sharing more information on the potential threat, sources and the locations and mitigation in the design phase in terms of how these networks could be routed or designed in a way that may not cost a dramatically larger amount initially but could provide a more resilient network.
Then the last would probably be in the category of more frequently utilizing U.S. resources in support of construction or repair of these robust networks. What I have in mind there, thought there is, for example, in the Arctic Ocean, there are just a very few number of icebreaker ships, and I think today, depending on the time period, the U.S. may have one or two of those, in that region.
Those are very precious resources that are very expensive and that really only are available to the government, and defense owners of those networks where using those in more closely coordination with the construction facilities or providing security, whether it be from the Coast Guard or the Navy in the construction of networks.
Johnston: Well, that’s super interesting. Chad, are there other opportunities that you see out there in the overall digital infrastructure market or landscape for public-private partnerships?
We hear a lot about data centers nowadays with generative AI and the impact it's having on data creation and storage and the energy complex. I'm sure that the DOD and other divisions of the government are clearly very, very much involved in that. What other opportunities do you see for rural operators to participate whether it's the DOD or other branches of the government in a public-private partnership to provide connectivity and other services in the digital infrastructure market?
Crank: Yes, there are several and you're touching on a few. The data center space is obviously very hot right now. Lots of build out there. It's an area that we spend some time in, but less so. Absolutely, the national security is a huge customer base there. No surprise, the biggest and most dense data center facilities on the planet are right outside of DC in Loudoun County and the surrounding areas in Northern Virginia. That should not be a surprise in that correlation between those DOD and national security customers are clearly why they're there.
Lots of opportunity there, private wireless and the wireless side of things is an area that I think has been and will increasingly be an area of cooperation between commercial operators as well as government entities. I think that comes from two different directions. One, just the economies of scale of operating wireless networks, these are huge networks with billions of dollars of capital that even could make the Department of Defense and the U.S. government even have a pause point around just their construction costs and their operating costs.
It makes logical sense that there's continued cooperation there that already is occurring to a degree with AT&T's FirstNet, but other opportunities there, I think for them to work more closely together and share those networks I think is an important area. Somewhat related to that I think is something that's very topical and top of mind is spectrum and spectrum sharing or the access to spectrum.
As you dig into the future opportunities around spectrum and where it will come from, the Department of Defense is the likely source of that spectrum. They're one of the largest, if not the largest, holder of spectrum in the U.S. and to a degree, globally. They have a huge, huge portfolio, and they're using it actively. Obviously, these are for mission-critical resources, and so they're reluctant to give that spectrum up. But at the same time, if you forecast out bandwidth demand and usage across wireless networks, they are or will increasingly become spectrum-constrained.
If more spectrum is not freed up, then it will become a constraint on the operation of these networks and therefore, the U.S. economy to a degree. Those two are at loggerheads or they're indirectly pulling and tugging against each other. What's widely been talked about is increased Spectrum sharing. More flexible ways to allow commercial and civilian customers to use that spectrum in times when the threat is not as great but then be able to flip that capacity over to the military in times of need, that's an example of how that spectrum sharing could evolve so that you use it for both sides, but you reserve that capacity when it's needed and not have redundant networks or redundant spectrum portfolios.
Johnston: Hey Chad, look, we've covered a lot of material here today. It's been great having you on, but before we wrap it up, I just wanted to give you an opportunity to share anything that we haven't covered or topics you think are important. The stage is yours.
Crank: Yes. Well, I think we've covered a lot of ground today. I would just leave our listeners with the thought that I think we started out with. Which is that our national security as a country and that situation is changing more rapidly, probably than it has in most people's telecom careers. The last two, three years have been significant, and I don't think there's as wide of appreciation of that across the United States.
I think being aware of that and then starting to think about the risks and opportunities that that presents I think should be something that's being talked about more in the boardrooms, in the management team sessions going forward, and really look for those opportunities, but also be cognizant of those risks going forward.
Johnston: Yes. Look, well said and I completely agree. I think those are very, very important points. Hey Chad, thanks again so much for being here with us today on the podcast. It was an absolute pleasure having you on.
Crank: Jeff, thank you, and appreciate the support of CoBank over the years, both as friends as well as on the lending side, and look forward to continue to do more work with you as a firm, as well as maybe do another podcast someday.
Johnston: A special thanks goes out to Chad for being on the podcast today.
I like to pride myself for being somewhat informed on geopolitical issues, but I must admit I did not appreciate how quickly the world security situation is evolving. Digital infrastructure plays a critical role in this, as do public-private partnerships that strengthen our communication networks, which should benefit our national security interests. Rural operators like Quintillion are a great example of this and I’m sure there are similar opportunities in rural areas that have yet to be discovered.
Hey thanks for joining me today and a special thanks to my fellow CoBank associates Christina Pope and Tyler Herron who make this podcast possible. Watch out for the next episode of the All Day Digital podcast.
