Will Banks Invest in Infrastructure Again?

Six local banks in Kentucky banded together to create a $150 million investment fund to support public private partnerships. The fund is called the Commonwealth Infrastructure Fund and is intended to provide debt financing to state and local PPP initiatives in the state.

You might not think this is newsworthy, but it is for several reasons. It’s one of only a handful of examples of bank debt being clearly earmarked for infrastructure investing. In this country virtually all debt for projects that involve the government is financed with municipal bonds. But this wasn’t always the case. While municipal bonds, or their equivalent, have been around for centuries, as recently as fifty years ago banks also played a big role in lending to municipal projects.

But for various reasons banks backed out of infrastructure investing. First, banks have backed away over the years from lending into long-term projects. Municipal projects are often of long duration and it’s not unusual to see infrastructure projects financed over 20 – 30 years. That’s a long time for a bank to tie up money and it also carries the risk of lending into future higher interest rates.

There have also been some spectacular failures with municipal bond defaults in places like New York City and Detroit. While the risk of lending to commercial businesses is a lot higher, the municipal defaults have added risk to lending to municipal-based projects. However, to offset this, the collateral on municipal loans can be extremely safe, particularly if default on a loan is backed by tax revenues.

It’s important to note that this particular fund is looking specifically at public private partnerships. That is a venture that that benefits the government but is backed to some degree by private capital. PPPs come in many flavors. At one end of the spectrum are projects that are all private money, such as some recent projects where a commercial company built new schools and then leased them back to the government. At the other end of the spectrum are PPP projects where the government mostly finances but a private firm largely operates the venture. A good example of this is the fiber network in Huntsville, AL where the city built the project and Google Fiber operates the business.

This fund is something that the country really needs. I’ve seen estimates that there are somewhere between $4 – $6 trillion of needed infrastructure improvements in the country. This ranges from deteriorating roads, crumbling overpasses and bridges, old government buildings, outdated schools, old dams and water projects, etc. But currently there is already over $3.7 trillion in outstanding municipal bond debt. The cities and states can’t begin to take on all of the additional debt needed to bring our infrastructure up to snuff. So we need private money to enter the picture and to help pay for projects where that makes sense.

Anybody lending into PPPs understands the relatively low returns from infrastructure investing. Municipal bonds today generally pay interest rates of 2% to 5%. A lot of private money has been chasing the higher returns of technology investing, but there are still plenty of sources of money like pension funds that are happy with long-term stable and predictable returns. All of the financiers I know say that they are seeing a renewed interest in long-term safe returns.

This Kentucky fund would be a perfect place to look for help with fiber projects. Kentucky is one of the states that still has huge amounts of its geography with poor or non-existing broadband. I would be surprised if the telcos in the state don’t show interest in the fund, assuming the fund would be interested in them.

Raising $150 million for infrastructure lending is only a drop in the bucket when looking at the big picture. But it’s a start and hopefully this will lure other banks and sources of debt and equity to give more consideration to infrastructure funding.

Bad Telecom Deals

FierceWireless recently published a short article listing the 10 worst telecom business moves of the last 10 years. And there are some clunkers on the list like Google’s purchase of Motorola, AT&T’s effort to buy T-Mobile and Time Warner Cable’s agreement to pay over $8 billion for the rights to broadcast the LA Dodgers.

One of the bad moves listed was Fairpoint’s purchase of Verizon’s customers and networks in Maine, New Hampshire and Vermont. Everything imaginable went wrong with that purchase that closed in 2007. The transition to Fairpoint was dreadful. There were numerous network outages as the cords were cut to the Verizon network. Customers lost email access. They couldn’t place long distance calls out of state and many couldn’t even call customer service. Customers abandoned the company in droves and in 2009 Fairpoint declared bankruptcy and recently sold the company to Consolidated.

There are other similar stories about companies that have bought large number of customers from the large telcos. Earlier this year there was reports of widespread customer dissatisfaction after Frontier bought a large swath of Verizon lines.

There are a number of lessons to be learned from the Fairpoint and similar transactions. First, it is exceedingly difficult to buy customers from the large telcos. The processes at the big companies are mind-numbingly complicated. I remember talking to a guy at AT&T years ago about the process of provisioning a new T1 to a customer. As we walked through the internal processes at the company I realized that nearly a dozen different departments at AT&T scattered across the country were involved in selling and connecting a single T1. It’s impossible for a new buyer to step into the middle of such complication – no matter what employees might come with the purchase of a property there will be numerous functions that the acquired folks don’t know how to do.

I recall helping a client buy a few exchanges from Verizon back in the 1990s. The buyer got literally zero records telling them the services that business customers were using. The buyer had to visit every business customer in the hopes of getting copies of bills, which were often undecipherable. I remember even years later that there were business customers that had working data circuits that the buyer didn’t entirely understand – they worked and their philosophy was to just never touch them.

The point of all of this is that the transition of a property from a big company always has major problems. No matter how long the transition process before conveying everything to the buyer, on the day the switch is thrown there are big holes. And this quickly leads to customer dissatisfaction.

The other issue highlighted by these transitions is that a buyer rarely has enough human resources ready to deal with the onslaught of problems that start immediately with the cutover. It can be massively time consuming to help even a single customer if you don’t have good enough records to know what services they have. Multiplying that times many customers spells disaster.

Not all sales of big telco properties are in massive piles and I’ve helped clients over the years to purchase smaller numbers of exchanges from the big telcos. I have several clients looking at potential purchases today, which highlights the other big problems with buying telco properties.

Today, any small buyer of a copper network probably only does so with a plan to convert the new acquisition to fiber-to-the-home. The condition of acquired copper plant is generally scarily bad. I can remember that Verizon let it be known for at least fifteen years that the whole state of West Virginia was for sale before Frontier finally bought it. Industry folks all knew that during that whole time that Verizon had largely walked away from making any investments in the state or even doing anything beyond putting band-aids on maintenance problems. Frontier ended up with a network that barely limped along.

So a buyer has to ask how much value there really is in a dilapidated copper network. If a buyer spends ‘market’ rates to buy a telco property and then spends again to upgrade the acquisition they are effectively paying for the property twice. I’ve crunched the numbers and I’ve never been able to find a way to justify this.

I think we may have reached the point where existing copper networks have almost zero market value. Even with paying customers, the revenues generated from older copper networks are not high enough to support buying the exchange and then spending again to upgrade it. This is something that prospective buyers often don’t want to hear. But as I always advise, numbers don’t lie, and it’s become obvious to me that it’s not a good economic deal to invest in old copper networks. It usually makes more sense to instead overbuild the property and take the customers.

The Competition Dilemma

One of the most perplexing issues for fiber overbuilders is what I call the competition dilemma. That is where the big cable companies like Comcast will match the prices of any major competitor in their footprint, making it impossible for a competitor to ever get a price advantage.

A lot of fiber overbuilders enter the market and hope to gain customers by offering lower prices. You saw this when Google Fiber offered a gigabit broadband connection for $70, and I see the same thing from many smaller ISPs. But any price advantage disappears if the large incumbent cable company matches the lower prices.

This is an interesting dilemma for municipal cable systems. They often enter the market with a goal of lowering prices in their market. And when the incumbent provider matchers their prices the municipality has achieved their goal since everybody in the city then benefits from lower prices.

But this comes at a cost. Lower prices mean lower margins, and any ISP that lowers prices is hurting their own bottom line. You would think that lower prices also hurt the incumbent providers, but the big ISPs have the advantage of being able to charge more in surrounding communities to offset lower margins where there is competition. They factor in competition when setting their nationwide prices, so it can be argued that competition doesn’t really hurt big companies at all – they make up for competitive losses by charging a little more everywhere else.

There doesn’t seem to be any limit on how low an incumbent provider will go to match prices. Take the example of the cable TV product on the city-owned Click! Network in Tacoma, WA. For many years the city didn’t raise cable prices, and Comcast matched their low pricing. Over time the cable prices in Tacoma were over 30% lower than prices in the Tacoma suburbs and nearby cities like Seattle. The customers in the city benefitted from low cable rates, but the city was losing money on cable TV and over time raised their rates back to the market rates.

This issue is going to be in the news a lot more in the future. In a recent blog I talked about an analyst who believes that Comcast is going to double their broadband rates over the next few years. Even if their rate increases aren’t that drastic I think it’s obvious that they plan to raise rates. This is probably the number one reason they have been lobbying hard to get rid of Title II regulation, since that is the only tool that regulators could use to examine and react to broadband rate increases.

If Comcast and the other big ISPs undertake regular broadband price increases they will create an interesting dynamic in the industry. Anybody with a competing network is going to have to decide if they are going to raise rates to match them. It’s going to be tempting to do so because increases in broadband rates flow 100% straight to the bottom line. But if a competitor doesn’t raise rates, then it’s likely that the big ISPs will raise rates everywhere except where there is significant competition. And that would result in big difference in broadband prices between markets with and without a competitor.

It’s also likely that as the big ISPs raise broadband rates that they will be inviting competitors into the market. I create a lot of financial business plans and there are many markets where it’s hard to make a business case for building fiber at today’s broadband rate. But raise those rates and a lot more business plans become attractive.

The final issue raised by the competition dilemma is customer choice. Most cities desperately want competition in their markets because they can see the large cable companies becoming near-monopolies. One of the primary reasons why cities build fiber networks or lure ISPs to do so is to provide more choice. But you have to ask what kind of choice customers really get when there is no price difference between a competitor and the incumbents?

TiVo’s Latest Video Trend Report

TiVo just released their Q2 2017 Online Video and Pay-TV Trends Report, and as usual it’s full of interesting statistics about the cable and video industries.

They looked in detail at those without a traditional pay-TV service – the cord cutters and cord nevers. They found the following:

  • One-fourth left cable TV during the last 12 months – proof that cord cutting is a real phenomenon.
  • 7% use an antenna to get over-the-air free TV.
  • Over 85% report that they don’t have cable TV because it costs too much.
  • Almost 46% use an OTT service like Netflix, Hulu or Amazon.

For people that still have a cable TV subscription:

  • 53% are satisfied with the value of their cable and another 31% are very satisfied. Those percentages are higher than past quarters, possibly due to the dissatisfied cord-cutters leaving cable.
  • In a statistic that might surprise many, only 15% are dissatisfied with the value of their cable subscription.
  • 47% of households now pay between $50 – $75 per month for cable. Over 36% of households spend more than $100 per month for cable, with 10% of households spending more than $150 per month.

TiVo looked at those who plan to change TV service in the next year:

  • 6% plan to cut the cord
  • 8% plan to change to another TV provider
  • 31% say that they have thought about cutting the cord.
  • 56% would change to an a la carte TV offering that let them buy only the channels they want.
  • 39% said they would be more willing to cut the cord if there was some easy way to navigate between OTT providers.

Many are still buying premium movie channels:

  • 27% of households are buying HBO, up from 22% just a year ago.
  • 17% are buying Showtime
  • 17% are buying the Movie Channel
  • 13% buy a premium sports package
  • 13% buy Starz
  • 12% buy Cinemax

They also looked at TV viewing habits:

  • 89% of households watch TV on a daily basis
  • 67% of homes watch recorded content (DVR / DVD) content on a daily basis.
  • 63% watch OTT content on a daily basis

Households are largely loyal to a handful of content:

  • Over 80% of homes report that they watch 10 or fewer different channels of content.
  • 59% of households watch 5 or fewer different shows per week.
  • 83% of households watch 10 or fewer shows per week.

Households were asked what they like most about OTT services:

  • 59% like services where each family member can create their own profile.
  • 56% like the lower prices of the service
  • 46% like auto-play of episodes where the next show comes on automatically

TV Everywhere still doesn’t have universal acceptance

  • Just over 50% of households are aware that their cable service offers TV Everywhere
  • Just over 1/3 of households actually use TV Everywhere to watch content on cell phones, tablets, etc.

Local Government Funding for Fiber

There is an interesting new trend where local government acts as the banker for rural broadband projects. It’s an interesting new twist on public / private partnerships and is a model that more communities should consider.

Consider these rural broadband projects in Minnesota.

  • First is RS Fiber. This is a new broadband cooperative that serves most of Sibley County and some of Renville County in Minnesota. Bonds were approved to fund 25% of a broadband project and those bonds are backed by the counties, some small cities and also by townships that are getting the fiber. The expectation is that the project will make the bond payments.
  • Next is in Swift County Minnesota. Federated Telephone Cooperative, an existing telephone company, was awarded $4.95 million to build fiber to rural homes in the county. The county approved general obligation bonds of $7.8 million to complete the project, or 60% of the funding.

Both projects are classic examples of a public private partnership. In these particular cases the company that will own and operate the network is a cooperative, but these same agreements could have been made with a for-profit telco or some other telecom provider as well.

These kinds of projects make sense for a number of reasons:

  • The process of approving bond financing is far faster than securing traditional funding for these kinds of projects.
  • Bonds for fiber can be financed over a long period of time – 20 to 30 years, while loan terms for commercial loans are usually shorter. Just like with a home mortgage, borrowing for a longer time period means lower annual debt payments, which is essential to make these projects financially feasible.

In both cases the Counties and other local government entities have taken on the role of banker. The local governments will have no operational role in running the fiber business (a role they did not want). The Counties expect for the bond payments to be covered by the fiber project. And since these networks are being built in rural areas with few other broadband alternatives the new fiber ventures should get high customer penetration rates. But if the ventures fail then the local governments are on the hook to cover any shortfalls in the bond payments.

These are both cases of local governments deciding that the need for rural broadband was great enough to risk taxpayer money to get this done. They also decided that the risk of not getting paid is low. The business cases show that even in the worst case the revenues from the projects should cover almost all costs, meaning that the downside risk to the Counties is minimal. In the case of RS Fiber, as a start-up new cooperative, they would not have been able to get any traditional funding without the seed money from the local governments.

This is a model that the rest of rural America should consider. Small ISPs like these cooperatives stand ready to serve a lot of rural America, but they often don’t have the financial wherewithal to do so. In these cases, a public private partnership with local government as the banker seemed to be the only way to make this happen.

Everywhere I travel in rural America homeowners and farmers want good broadband. They understand that it’s costly to build fiber to farms and small rural towns. But they also seem willing to help pay to make this work. I think if more rural counties would listen to their constituents they would take a harder look at this model.

Of course, a county needs to do their homework up front and make sure they know it’s a sound project and that the estimated cost of building the broadband network is accurate. But assuming there is a solid business plan, perhaps the most valuable role a county can tackle is that of being the banker to help new broadband builds get off the ground

A Doubling of Broadband Prices?

In what is bad news for consumers but good news for ISPs, a report by analyst Jonathan Chaplin of New Street Research predicts big increases in broadband prices. He argues that broadband is underpriced. Prices haven’t increased much for a decade and he sees the value of broadband greatly increased since it is now vital in people’s lives.

The report is bullish on cable company stock prices because they will be the immediate beneficiary of higher broadband prices. The business world has not really acknowledged the fact that in most US markets the cable companies are becoming a near-monopoly. Big telcos like AT&T have cut back on promoting DSL products and are largely ceding the broadband market to the big cable companies. We see hordes of customers dropping DSL each quarter and all of the growth in the broadband industry is happening in the biggest cable companies like Comcast and Charter.

I’ve been predicting for years that the cable companies will have to start raising broadband prices. The companies have been seeing cable revenues drop and voice revenues continuing to drop and they will have to make up for these losses. But I never expected the rapid and drastic increases predicted by this report. Chaplin sets the value of basic broadband at $90, which is close to a doubling of today’s prices.

The cable industry is experiencing a significant and accelerating decline in cable customers. And they are also facing significant declines in revenues from cord-shaving as customers elect smaller cable packages. But the cable products have been squeezed on margin because of programming price increases and one has to wonder how much the declining cable revenue really hurts their bottom line.

Chaplin reports that the price of unbundled basic broadband at Comcast is now $90 including what they charge for a modem. It’s even higher than that for some customers. Before I left Comcast last year I was paying over $120 per month for broadband since the company forced me to buy a bundle that included basic cable if I wanted a broadband connection faster than 30 Mbps.

Chaplin believes that broadband prices at Comcast will be pushed up to the $90 level within a relatively short period of time. And he expects Charter to follow.

If Chaplin is right one has to wonder what price increases of this magnitude will mean for the public. Today almost 20% of households still don’t have broadband, and nearly two-thirds of those say it’s because if the cost. It’s not hard to imagine that a drastic increase in broadband rates will drive a lot of people to use broadband alternatives like cellular data, even though it’s a far inferior substitute.

I also have to wonder what price increases of this magnitude might mean for competitors. I’ve created hundreds of business plans for markets of all sizes, and not all of them look promising. But the opportunities for a competitor improve dramatically if broadband is priced a lot higher. I would expect that higher prices are going to invite in more fiber overbuilders. And higher prices might finally drive cities to get into the broadband business just to fix what will be a widening digital divide as more homes won’t be able to afford the higher prices.

Comcast today matches the prices of any significant cable competitor. For instance, they match Google Fiber’s prices where the companies compete head-to-head. It’s not hard to foresee a market where competitive markets stay close to today’s prices while the rest have big rate increases. That also would invite in municipal overbuilders in places with the highest prices.

Broadband is already a high-margin product and any price increases will go straight to the bottom line. It’s impossible for any ISP to say that a broadband price increase is attributable to higher costs – as this report describes it, any price increases can only be justified by setting prices to ‘market’.

All of this is driven, of course, by the insatiable urge of Wall Street to see companies make more money every quarter. Companies like Comcast already make huge profits and in an ideal world would be happy with those profits. Comcast does have other ways to make money since they are also pursuing cellular service, smart home products and even now bundling solar panels. And while most of the other cable companies don’t have as many options as Comcast, they will gladly follow the trend of higher broadband prices.

Is 5G Really a Fiber Replacement?

I recently saw a short interview in FierceWireless with Balan Nair, CTO of Liberty Global. In case you haven’t heard of the company, they are the biggest cable company in the world with over 28 million customers.

One of the things he discussed was the practical widespread implementation of 5G gigabit technology. He voiced the same thing I have been thinking for the last year about the economics of deploying 5G. He was quoted as saying, “5G will be a ‘game-changer’ in its superior ability to transfer data, but the technology will not replace fixed-network broadband services anytime soon. The economics just aren’t there. You’re talking about buying hundreds of towers and all of that spectrum. And on the residential end, putting a device outside the window and wiring it back into the home. It’s a question of business model and if you plan on making any money. The economics benefit fixed.”

The big telcos are making a big deal out of 5G, mostly I think to appear cutting-edge to their investors. And I have no doubt that in certain places like dense urban downtowns that 5G might be the best way to speed up gigabit broadband deployment. But I look at what’s involved in deploying the technology anywhere else and I have a hard time seeing the economic case for using 5G to bring fast broadband to the masses.

5G will definitely make an impact in urban downtowns. You might assume that cities already have a great fiber infrastructure, but this often isn’t the case. Look at Verizon’s FiOS deployment strategy in the past – they deployed fiber where the construction was the most cost effective, and that meant suburban areas where they had existing pole lines or conduit. Verizon largely avoided much of the downtowns of eastern cities because the cost per mile of fiber construction was too expensive.

Now, 5G can be deployed from the top of high-rises to reach the many downtown buildings that never got fiber. New York City recently sued Verizon since the company reneged on its promise to build fiber everywhere and there are still 1 million living units in the city that never got fiber broadband. Verizon, or somebody else is going to be able to use 5G in the densely populated cities to bring faster broadband, and as Nair said, this might be a game changer.

But as soon as you get out of downtowns and high-rises the math no longer favors 5G. There are three components of a 5G network that are not going to be cheap in suburbia. First, 5G needs fiber. You might be able to use a little wireless backhaul in a 5G network, but a significant portion of the network must be fiber fed. And in most of the country that fiber is not in place. Deloitte recently estimated that the cost for just the fiber to bring 5G everywhere is $130 billion. There is nobody rushing to make that investment.

5G then needs somewhere to place the transmitters. This is more easily achieved in a downtown where there are many tall rooftops and existing towers. But the short delivery distances for millimeter wave frequencies mean that transmitters need to be relatively close the end-user. And in suburban areas that’s going to mean somehow building a lot of new towers or else placing smaller transmitters on existing poles. We know suburbia hates tall towers and it’s always a struggle to build new ones. And the issues associated with getting access to suburban poles are well documented. An ISP needs to affordably get onto poles and also get fiber to those poles – two expensive and time-consuming challenges.

And then there is the economics of the electronics. Because millimeter wave spectrum is easily disrupted by foliage or any impediments it means that there won’t be too many homes served from any one pole-mounted transmitter. But the 5G revenue stream still has to cover both ends of the radios as well as wiring into the home.

I build a lot of landline business plans and I can’t see this making any economic sense for widespread deployment. In many cases this 5G network might be more expensive and slower to deploy than an all-fiber network.

I instead envision companies using 5G technology to cherry pick. There will be plenty of places where there is existing fiber and poles that can be used to serve suburban apartment complexes or business districts. I can see strategic deployment in those areas and the technology used in the same way that Verizon deployed fiber – 5G will deployed only where it makes sense. But like with FiOS, there are going to be huge areas where there will be no 5G deployment, even in relatively dense suburbia. And the business case for rural America is even bleaker. 5G will find a market niche and will be one more technology tool for bringing faster broadband – where it makes economic sense.

The End of the Free Web

The web model of using advertising revenues to pay those who create content is quickly breaking down and it’s going to drastically change the free web we are all used to. It feels like a lot longer, but the advertising web model has now been operating for only twenty years. Before that people and companies built web sites and posted content they thought was interesting, but nobody got compensated for anything on the web.

But then a few companies like AOL discovered that companies were willing to pay to place advertising on web pages and the web advertising industry was born. Today news articles and other content on the web are plastered with ads of various kinds. And it is these ads that have funded the new industry of web content providers. These are now numerous web magazines and other websites that are largely funded by the revenues from ads. Most of the news articles you read on the web have been funded from the ad revenues.

But ad revenue of this kind are disappearing and this is likely going to mean a major transformation of the web in the near future. Here are some of the main reasons that ad revenues are changing:

  • People have changed the way that they find and read content. Twenty years ago we all had a list of our favorite bookmarked sites and we would peruse those web sites from time to time to catch up on their content. But today the majority of people get their content through an intermediate platform like Facebook, Twitter or Google. These platforms learn about your tastes and they direct articles of interest to you. We no longer search for content, but rather content finds us.
  • And that means that the big platforms like Facebook control the flow of content. A few years ago Facebook reacted to user complaints that their feeds were too long and busy and the company reacted to this by only flowing a percentage of potential content to users. That meant that a person might not see that an old high school friend bought a new puppy, but it also meant that each user on Facebook saw fewer web articles. The impact from this change was dramatic to web publishers, who on average saw a 50% immediate drop in their revenue from Facebook.
  • Meanwhile the big platforms decided that they should keep more advertising revenue and they are now promoting content directly on their platform. For example, Facebook now pays people to create content and Facebook favors this over content created elsewhere – which has further decreased ad revenues.
  • Advertisers have also gotten leery about the web advertising environment. This has worked using instantaneous auctions where web sites bid for advertising slots. Web sites willing to pay the most get the best advertising content, but the automated selling platforms strives to place every ad somewhere on the web. This resulted in large companies getting grief after finding their ads on unsavory web sites. Big companies were not enamored in finding that they were advertising on sites promoting racism or radical political views. So the big companies have been redirecting their advertising dollars away from the auction-driven ad system and have instead been placing ads directly on ‘safer’ sites or directly on the big web platforms. Google and Facebook together now collect the majority of web advertising.
  • There has also been a huge growth in ad blockers. People use ad blockers in an attempt to block many of the obnoxious ads – those that pop up and interrupt with reading content. But using ad blockers also deprive revenue for those sites that any user most values. While only miniscule amounts of money flow from each ad view, it all adds up and ad blockers are killing huge numbers of views.
  • The last straw is that web browsers are starting to block ads automatically. For example, the new version of Chrome will block ads by default. Soon, anybody using these browsers will be free of auction-generated ads, but in doing so will kill even more ad revenues that have been paying those that create the content that people want to read.

We are already seeing what this shift means. We are seeing content providers now asking readers to directly contribute to help keep them in business. More drastically we are seeing a lot of the quality content on the web go behind paywalls. That content is only being made available to those willing to subscribe to the content. And we are seeing a drop in new quality content being created since many content creators have been forced to make a living elsewhere.

But the quiet outcome of this is that a huge chunk of web content is going to disappear. This probably means the death of content like “The ten cutest puppies we found this week”, but it also means that writers and journalists that have been compensated from web advertising will disappear from the web. We’ll then be left with the content sponsored by the big platforms like Facebook or content behind paywalls like the Washington Post. And that means the end of the free web that we all love and have come to expect.

Maybe Coops are the Answer

I’ve been talking with a lot of rural counties lately and also with rural service providers. For the vast majority of rural broadband projects the biggest roadblock to getting started is almost always funding. Building fiber-to-the-home or even fiber backbones to extend fiber deeper into rural communities is expensive and there are not a lot of funding sources ready to support fiber projects. But there is one business structure that can sometimes make financing a little easier and perhaps it is time for more communities to consider forming a cooperative as a way to get a broadband solution.

Cooperatives are governed under federal law by the Capper Volstead Act. There are also state laws governing coops that differ a bit from state to state, but are mostly the same everywhere. A cooperative is a legal entity owned and controlled by its members and members generally are also the consumers of its products or services. Cooperatives are typically based on the cooperative values of self-help, self-responsibility, community concern, and caring for others. Cooperatives generally aim to provide their goods or services at close to cost and any excess earnings are generally required by law to be reinvested in the enterprise or returned to individual patrons based on patronage of the cooperative.

There are several advantages of coops that make them worth considering:

  • Coops are corporations and not municipal entities. Coops ought to be exempt from all of the many state laws that prohibit or discourage municipal ownership of broadband networks. If you’re in a place that makes it hard to create a municipal broadband solution then a cooperative might be a great alternative.
  • Cooperatives don’t have the same profit-motive as privately-owned entities. From a financing perspective this makes them look more like a municipal venture in that a coop is happy with cash flows that cover costs rather than having to also make a profit.
  • Cooperatives often have some tax advantages over other kinds of corporations. For example, ‘profits’ from serving their customers is often income-tax free. This can vary by state, but for the most part cooperatives pay little income taxes as long as they focus only on serving their own members.
  • The typical financing sources for broadband are used to working with cooperatives. The RUS, part of the Department of Agriculture has a long history of lending to cooperatives. CoBank, a bank that is part of the US Farm Credit System was established specifically to loan to agricultural, electric and telecom cooperatives. While the RUS was tasked a number of years ago to include municipalities under their umbrella, the nuances of that program make it nearly impossible for a municipality to borrow from them.
  • Cooperatives have a unique funding source that is not available to anybody else. Coops are allowed to loan excess cash to each other and I’ve seen new coops get low, or even zero interest loans from other cooperatives to help them get started. Many older electric and agriculture coops sit on big cash reserves that they might consider lending – particularly when the new telecom cooperative covers the same member territory.

But as you might expect, there are other issues that present challenges for new cooperatives:

  • Any lender to a new fiber venture is going to want to see some equity put into a new venture so that it is not 100% financed. It can be more of a challenge for a cooperative to raise equity compared to a commercial company because there is no way to guarantee that such equity will earn a good return or that it can be returned in any reasonable time frame. So this basically means that an equity drive means asking prospective members in the community for money. I’ve seen a few cooperatives get started and it can be done – but it’s not easy.
  • Cooperatives are governed by Boards elected from the membership base. Existing coops hire employees to operate the business and these employees provide the technical expertise that makes lenders trust lending to the business. But until a new cooperative is funded and can hire those employees there is a classic chicken-and-egg dilemma in that a lender can’t be positive that the cooperative knows how to operate their business.
  • The local acceptance of the cooperative idea varies by region. In some places in the Midwest a majority of local businesses are cooperatives, but there are other places where there are few if any cooperatives.

There are many situations where a cooperative might be the only reasonable operating structure for a rural area to get the broadband they want. If a community is not finding any solutions from a commercial provider and is unable to provide municipal funding, then a cooperative is well worth considering.

Measuring Mobile Broadband Speeds

I was using Google search on my cellphone a few days ago and I thought my connect time was sluggish. That prompted me to take a look at the download speeds on cellular networks, something I haven’t checked in a while.

There are two different companies that track and report on mobile data speeds, and the two companies report significantly different results. First is Ookla, which offers a speed test for all kinds of web connections. Their latest US speed test results represent cellphone users who took their speed test in the first half of this year. Ookla reports that US cellular download speeds have increased 19% over the last year and are now at an average of 22.69 Mbps. They report that the average upload speeds are 8.51 Mbps, an improvement of 4% over the last year. Ookla also found that rural mobile broadband speeds are 20.9% slower at urban speeds and are at an average of 17.93 Mbps.

The other company tracking mobile broadband speeds reports a different result. Akamai reports that the average cellular download speed for the whole US was 10.7 Mbps for the first quarter of 2017, less than half of the result shown by Ookla.

This is the kind of difference that can have you scratching your head. But the difference is significant since cellular companies widely brag about the higher Ookla numbers, and these are the numbers that end up being shown to regulators and policy makers.

So what are the differences between the two numbers? The Ookla numbers are the results of cellphone users who voluntarily take their speed test. The latest published numbers represent tests from 3 million cellular devices (smartphones and tablets) worldwide. The Akamai results are calculated in a totally different way. Akamai has monitoring equipment at a big percentage of the world’s internet POPs and they measure the actual achieved speeds of all web traffic that comes through these POPs. They measure the broadband being used on all of the actual connections they can see (which in the US is most of them).

So why would these results be so different and what are the actual mobile broadband speeds in the US? The Ookla results are from speed tests, which last less than a minute. So Ookla speed test measures the potential speed that a user could theoretically achieve on the web. It’s a test of the full bandwidth capability of the connection. But this is not necessarily the actual results for cellphone users for a few reasons:

  • Cellphone providers and many other ISPs often provide a burst of speeds for the first minute or two of a broadband connection. Since the vast majority of web events are short-term events this provides users with greater speeds than would be achieved if they measured the speed over a longer time interval. Even with a speed test you often can notice the speed tailing off by the end of the test – this is the ‘burst’ slowing down.
  • Many web experts have suspected that the big ISPs provide priority routing for somebody taking a speed test. This would not be hard to do since there are only a few commonly used speed test sites. If priority routing is real, then speed test results are cooked to be higher than would be achieved when connecting to other web sites.

The Akamai numbers also can’t be used without some interpretation. They are measuring achieved speeds, which means the actual connection speeds for mobile web connections. If somebody is watching a video on their cellphone, then Akamai would be measuring the speed of that connection, which is not the same as measuring the full potential speed for that same cellphone.

The two companies are measuring something totally different and the results are not comparable. But the good news is that both companies have been tracking the same things for years and so they both can see the changes in broadband speeds. They also both measure speeds around the world and are able to compare US speeds with others. But even that makes for an interesting comparison. Ookla says that US mobile speed test results are 44th in a world ranking. That implies that the mobile networks in other countries make faster connections. Akamai didn’t rank the countries, but the US is pretty far down the list. A lot of countries in Europe and Asia have faster actual connection speeds than the US, and even a few countries in Africa like Kenya and Egypt are faster than here. My conclusion from all of this is that ‘actual’ speeds are somewhere between the two numbers. But I doubt we’ll ever know. The Akamai numbers, though, represent what all cell users in aggregate are actually using, and perhaps that’s the best number.

But back to my own cellphone, which is what prompted me to investigate this. Using the Ookla speed test I showed a 13 Mbps download and 5 Mbps upload speed. There was also a troublesome 147 ms of latency, which is probably what is accounting for my slow web experience. But I also learned how subjective these speeds are. I walked around the neighborhood and got different results as I changed distances from cell towers. This was a reminder that cellular data speeds are locally specific and that the distance you are from a cell site is perhaps the most important factor in determining your speed. And that means that it’s impossible to have a meaningful talk about mobile data speeds since they vary widely within the serving area of every cell site in the world.