The Gigabit Divide

WDM_FOWe all know what the digital divide is – it’s when one place or demographic has broadband when those nearby do not. The term was originally coined after DSL and cable modems came to urban areas while rural America was left with dial-up access.

Over the years the definition is still the same but the circumstances have changed. For example, there still are some millions of households in the country stuck with dial-up or satellite broadband. But most of the digital divide today is an urban / rural divide where the telecom companies have invested in much newer and faster technology in urban areas and have ignored rural areas. Metropolitan areas all over the country now have at least some 100 Mbps cable modems while surrounding smaller towns often still get maybe 3 Mbps. And there is an economic digital divide within cities where some neighborhoods, particularly richer ones, get better infrastructure than poor.

But we are about to embark on the most dramatic divide of all, the gigabit divide. I spent last week in Austin and they are a good example of what I fear will be happening all over the country. There are three companies building gigabit fiber in Austin – Google, AT&T and Grande. None of them are going to build everywhere. For instance, Google will only build to a ‘fiberhood’ where enough people in an area pre-sign with Google. And the other two carriers are going to do something similar and carve out their parts of the market.

This is great for those who get fiber. They will end up with the fastest fiber connections in the world, and hopefully over time that will make a big difference in their lives. But my concern is that not everybody in Austin is going to get fiber. To see how this works we only have to look at Verizon FiOS. For years Verizon built to the neighborhoods with the lowest construction costs. That meant, for example, that they would favor an older community with aerial cable that could be over-lashed over a newer community where everything was buried and construction costs were high.

You find a real hodge-podge when you look closely at FiOS – it will be on one street and not the next, in one neighborhood and not the adjoining one. And Austin is going to be the same way. These three carriers are not going to all overbuild the same neighborhoods because in a competitive 3-way overbuild none of them will make money. Instead it is likely that Austin will get balkanized and chopped up into little fiberhoods for each of the three carriers.

But what about those that don’t get any fiber? There will likely be significant parts of the City where nobody builds. Those houses are going to be on the wrong side of the gigabit divide. Since most of the world is on the wrong side of the gigabit divide that doesn’t sound so bad. But think what it means. Who is going to buy a house in the future Austin that doesn’t have gigabit fiber? This is going to create a permanent and very tangible division of fiber haves and have-nots.

Cities used to protect their citizens against this sort of thing and that is why cable franchises were awarded locally so that a City could make sure that everybody got served. But cities are embarrassingly falling over themselves for Google to the detriment of many of their own citizens. They are going to take care of the richer neighborhoods at the expense of the poorer ones. This is not what cities are supposed to do since they represent all of their citizens. We have had processes in place for years to make sure that telecom companies don’t bully and divide our communities, and now City Hall is in front of the line inviting them to do so.

I say shame on Austin if they wake up five years from now and find that 20% or 30% of their City doesn’t have fiber and is being left far behind. The houses and businesses in those neighborhoods will have lost value and will probably be the seeds of the slums of the future. When we look back twenty years from now I think we’ll see that this short-sighted policy to bow to Google cost the City more money than it gained.

The Battle for Austin

Official seal of City of Austin

Official seal of City of Austin (Photo credit: Wikipedia)

An interesting battle is shaping up in Austin as AT&T and Google are taking the early steps in head-to-head competition. Both have announced that they will build gigabit networks in the City. The obvious beneficiaries of this business will be the top-end customers in the City. It will be interesting to watch how both companies do there.

Other than a few greenfield tests, this will be AT&T’s first foray into fiber-to-the-premise. They have built their broadband business using DSL over multiple copper lines. It’s obvious that AT&T is drawing a line in the sand with Google and telling them that competition with fiber in AT&T markets is going to be met with competing fiber.

AT&T has announced their pricing for their faster product. Initially they will be offering Internet speeds of up to 300 Mbps, with the promise that those products will be upgraded for to gigabit free once the fiber has been built. This certainly gives them a leg up early since they have the ability to sign customers now.

There are two pricing options for the AT&T data product. For $99 customers will get the full gigabit (after upgrade). But interestingly, customers will be able to get the same gigabit speed for $70 if they agree to let AT&T monitor their Internet usage and give them directed advertising. That makes you pause for a second until you realize that this is the Google model. Every customer who uses a Google product, be that Gmail, Google+ or any of the other host of products is continuously monitored so that Google can know more about them. I think AT&T is being quite clever in that this compares their $70 product directly to Google’s product. What I think AT&T is really offering is a premier-priced product that comes without monitoring.

Both companies offer a handful of cable TV options. At least for now one would think AT&T has a leg up in this area since the word in the industry is that customers like all of the programming options they get with today’s U-Verse offering.

If Google sticks with the same product line they have in Kansas City, then they will also be offering a $70 gigabit offering and a few cable options. So the two companies will have the same basic price for gigabit service and will not be competing on price.

A gigabit product prices at $70 is clearly a product aimed at the more affluent households in the market. A lot of homes are going to find that too pricy regardless of the speeds that come with the product. In Kansas City, Google only rolled out their gigabit product in neighborhoods that guaranteed them at least a 15% take rate. It is going to be interesting in Austin, with two gigabit providers to see if there are many places where Google will be able to achieve that same take rate. If they can’t get that, how much will they build in Austin?

In any market a large percentage of households go for products in the $40 range for Internet, regardless of what other speeds are available. To some degree this is a matter of economics, but it also has a practical aspect. Most likely the households who subscribe to a $40 service in Austin are those homes who have not yet chosen to watch much of their video on the web. House holds with multiple people who are all trying to use the web for video are finding basic Internet products to be inadequate.

There is another competitor in the market, Time Warner, and nobody is talking about them. One has to think that today that they are the predominant ISP in Austin since the cable companies have won that battle almost everywhere over DSL. One would think that if they can offer something relatively fast, say 50 Mbps download for less than $50 that they might hang on to the majority of the market while the other two companies beat up each other going for the top end of the market.

One last point to mention in that I am scratching my head trying to figure out how AT&T is going to deliver speeds today of ‘up to 300 Mbps’ over existing copper. Such speeds over DSL either require the customer to be very close to the DSLAM or else require multiple pairs of copper, far more than the normal bonding of two pairs. From what we know about AT&T’s normal networks, those are not practical alternatives. There are fiber-to-the curb technologies that will deliver 300 Mbps, but those require fiber very close to the home. So that claim has us wondering if that is a real claim or a marketing claim.

Two Fiber Networks?

Image of Austin, Texas

Image of Austin, Texas (Photo credit: Wikipedia)

The conventional wisdom in the industry is that two companies would never invest in side-by-side fiber networks to serve residential customers. I have had this conversation many times with clients who were planning to build a fiber network and who were worried about the response of the incumbent providers. Everyone has always believed that the first fiber builder wins because there is not enough margin in the residential market to support two fiber networks. AT&T has shown that conventional wisdom to be wrong by announcing that they will build a second fiber network in Austin as a counter to Google’s announcement to do the same.

This is not without precedent, although on a much smaller scale. The City of Monticello, Minnesota built a fiber network to pass every home and business in the City. The municipal fiber build was prompted by the fact that the City had some of the highest telecom rates in the country. Soon after the City built their network, TDS Telecom, the incumbent telephone company built a competing fiber network.

And as expected, both fiber providers are not faring well. After building fiber TDS decided to win back customers with an aggressive price war. Charter, the incumbent cable company also got into the price war fray. And so customers in Monticello are benefitting from a price war while all of the companies are underperforming.

It is fairly easy to understand TDS’s motivation for building the fiber network and for the price war. The company serves numerous other towns like Monticello and I see their response there as a clear warning to anybody else who is planning on overbuilding their serving territory. It is also clear that they are hoping that the City will give up and leave the fiber business.

And now we are going to see this scenario play out in the much bigger market of Austin. Google already overbuilt one AT&T market in Kansas City and one can easily envision Google overbuilding many other large cities. AT&T’s response in Austin is the same as TDS’s response in Monticello. AT&T has made it clear to Google and others that they are not going to side idly by and watch their major markets go to somebody else.

So it will be interesting to see the impact of AT&T’s announcement. It’s possible that the announcement will cause Google to pause and not build in Austin. Certainly they will not do as well as expected if there are two fiber networks. It’s also possible that both companies will build fiber and we will see side-by-side competition with two fiber networks and the cable company – the kind of competition we have never seen in a major city in the US.

But the real impact of AT&T’s announcement is going to be felt everywhere else. One has to wonder what kind of impact AT&T’s announcement will have on any company, Google included, who is contemplating building a fiber network in a large city. Google has very deep pockets and might proceed anyway, but almost any other company would not be able to afford the much lower returns that come with hard competition.

While this announcement might result in real competition for the citizens of Austin, it also might have the effect of stifling anybody else from trying to build fiber in a large City. This announcement could result in killing anybody from building fiber in large cities due to the fear of a similar reaction. While hearing about two companies wanting to provide gigabit fiber sounds like a good thing, the long-term consequence of this might mean less overbuilding, less fiber and less competition.

And I don’t know that AT&T had any choice. Their only other option was to watch their large markets go to an aggressive competitor. Nobody knows what Google plans to do, but some have speculated that they might build in most of the major cities. Now we’ll just have to watch this one play out, so pull up a chair. This should be interesting.