The Industry

A New Model for Open Access?

Fiber CableThe traditional open access business model to serve residential customers has never worked in this country. I am familiar with the financial performance of most of the existing open access networks and from a purely financial perspective they are all failures. A few networks have failed outright like Provo. A few others have been able to generate enough revenues to cover annual operating costs, but most don’t even do that. And from what I’ve seen, none of the existing open access networks have ever been able to generate enough cash to pay anything towards the cost of building the fiber network, leaving the cities that build the network holding the financial bag for the initial investment.

There are a few reasons that this has never worked. First is that open access naturally drives ISPs towards cherry picking. Open access networks operate by charging fees to ISPs to use the network. If an ISP pays the typical $30 per month fee to use the network, they are not going to sell inexpensive broadband to anybody in the community. So when ISPs only sell high-priced products they don’t get enough customers and the city network owner doesn’t collect enough revenue to pay for the network. This has happened to every traditional open access network. None of them have signed up enough customers to pay for the networks and everyone who has built a network using this model ends up heavily subsidizing the open access network.

The other issue is that most cities have had trouble attracting very many quality ISPs. The whole concept of open access is to offer choices to customers. But most of the open access networks in the country only have a few ISPs, and even the ones they attract are often tiny, undercapitalized businesses. Attracting ISPs is so hard that there is one large open access network today that has been reduced over time to having only one residential ISP on the network. That’s not providing much customer choice.

But there are two cities looking at an alternative model. One is the small city of Ammon, Idaho, and the other is San Francisco. Both cities want residents to pay for the basic cost of the network. It’s an interesting idea.

In Ammon a household that wants broadband access will pay a tax levy of $10 to $15 per month and will also pay a utility fee of $16.50 per month. This means that each subscriber will pay $26 to $31 per month for the fiber network – a very similar charge to what is charged to ISPs on other open access networks. The Ammon commitment is voluntary and only those that sign up for broadband will pay the fees.

San Francisco is considering a similar proposal. There, residents would pay a monthly utility fee of $25 and businesses would pay as much as $115. In San Francisco this fee would be mandatory and everybody in the City would be assessed the fee. In an NFL city the fee probably has to be mandatory to assure that the network will be paid for.

Having customers pay a fee to the city takes the pressure off the cherry picking issue. By lowering what ISPs pay there is a lot better chance of having affordable products on the network. And that ought to result in more customers on the network.

But like any idea this one still leaves some open questions. For instance, how does the city make enough money over time to pay for the inevitable replacement of electronics or catastrophic events like storm damage? Or what does a city do if the ISPs don’t do a good job and customers don’t like them? The Ammon plan requires the payment of fees for a very long time, and small businesses like ISPs often don’t have the staying power to last for a long time. How will the business keep up with inflation – will the fees have to increase every year? And what happens if the city doesn’t get or keep enough customers to pay for this – will the fees go up for everybody else or will the city subsidize the network?

In a voluntary system like Ammon I also wonder what the consequences are for homes that change their mind over time. What if somebody has a financial problem and is unable to pay the fees? What happens when they want to sell their home – is this fee a tax lien of sorts? That’s what has happened to homes that buy solar power systems that are paid for over time. And what happens if a new buyer doesn’t want the fiber and doesn’t want to pay the fee? No doubt over time there will be legal issues to figure out.

The challenge to make this work in San Francisco seems much more difficult. It’s not hard to envision lawsuits from citizens who don’t want to pay the fees. And I can imagine a fierce battle with Comcast and the other current ISPs over the legality of a mandatory fiber utility fee. This seems like a concept that could take a decade of court time to resolve.

But the idea of having citizens somehow pay for the fiber network is an interesting one. Irrevocable customer pledges are a revenue stream that can be used to finance fiber construction. It’s hard to know if this concept will work until we see it in action. But it shows how serious cities are becoming to get good broadband. One has to think that if households are willing to sign long-term pledges to pay for fiber that it has to make a difference. I am sure communities all over the country will be watching to see if this works.

The Industry

Small Cities Really Want Fiber

It’s obvious that small towns in America really want fiber and they are starting to take steps to try to get it. Just a few years ago fiber was one of the many things that City Councils around the country talked about from time to time. But lately it seems to have moved to the top of the list of things that towns think they need to thrive and survive.

There a number of towns that already have fiber. Most of these just happen to be lucky enough to be close to an independent telephone company or other business that has decided to invest in fiber in their neighborhood. And some towns have taken it upon themselves and have built fiber networks to everybody. But the vast majority of cities don’t foresee any options to get fiber, particularly if they don’t want to build it themselves, or if they live in a state where they are prohibited from building fiber.

I am starting to see a large number of RFPs (requests for proposals) from smaller town that are asking somebody to please come and serve them. I haven’t counted them, but I would not be surprised if I’ve seen 150 such RFPs in the last two years.

Sadly these RFPs rarely work. There are a few successes. For instance, the announcement that Google is coming to Huntsville AL started with an RFP looking for a partner. But Huntsville is a large metropolitan area and very different than smaller towns who issue the same plea.

The whole RFP process is an odd one and is almost guaranteed to fail. Generally small towns will describe everything they want from a fiber provider and then plead for somebody to come with their own private money and build fiber. This process demonstrates some financial naivete because the cities almost invariably present a list of ‘demands’ for how they want the fiber business to operate. They are failing to recognize that anybody with the money to build fiber is going to get to call the shots and that smaller communities have little role in the process other than to say yes or no to somebody who wants to build fiber. I also find it extremely unlikely that a serious fiber investor would negotiate in a public forum like an RFP. And even if they did, the investor would be the one telling the City what they need, and not the other way around.

But the existence of so many fiber RFPs shows the building level of desperation of cities to get fiber. I assume that before cities issue RFPs that they have already talked to potential nearby service providers and found no takers. I see these RFPs as a last ditch effort to find somebody willing to invest in the needed infrastructure in their City.

Cities are also looking at more creative solutions. I just saw last week that the City of Ammon, Idaho is looking to create what they call a ‘fiber optic district’. This would be a tax district similar to special districts established to pay for fire protection, water systems and all sorts of other public benefits. It’s an interesting concept in that it puts those living within a district on the hook to somehow help to pay for fiber. There have been a few other communities around the country who have obtained some kind of property tax lien or other pledge from citizens to pay for fiber. But this is the first time that I’ve heard it being considered as a special taxing district.

The Ammon idea has a twist, and if I read it right it’s a voluntary tax district in that only those that agree to pay for fiber would be on the hook. I know just enough about municipal law to see all sorts of problems in that part of the idea. But even if the way that Ammon wants to do this doesn’t work out as planned, the idea of putting citizens on the hook for part of the funding for fiber is a good one. Lenders always care about recourse – who is going to pay them back if a project fails. If the citizens of a city want fiber badly enough to be that recourse it’s going to be a lot easier to fund fiber.

It’s going to take more ideas like the Ammon one to get fiber to small-town America. As cities become increasingly desperate for fiber I expect to see more creative ideas being used to finance networks. There are a whole lot more communities that want fiber than there are overbuilders willing or able to invest, and that means communities have to go the extra mile to make it onto an overbuilder’s list of potential opportunities.

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