Fiber for Everyone?

Fiber CableJust a few days ago I wrote about the two cities that are considering having citizens pay for their fiber networks through utility fees and pledges to support the fiber financing. After writing about Ammon, Idaho I heard back from several people in the industry pointing out that the proposed Ammon utility fee was a pledge intended to support bonds. The fees, which are supposed to be about $16.50 per month for about twenty years, would total nearly $4,000 over that twenty-year period and would be used to secure, and then pay for, the bonds needed to build the system.

That raises an issue that I have raised before: how important is it that everybody in a community get access to broadband? Every community that thinks about finding a fiber solution faces this issue. They can look for an approach that will get fiber to every household or they can settle for something less. This choice is sometimes a philosophical decision, but it often comes down to the difference in cost between the two choices.

Ammon has clearly chosen a solution that will benefit homeowners who are able and willing to pledge a lien on their homes. To be able to make the pledge a resident must own a home that can be pledged, so this eliminates renters. Interestingly it might also make it a challenge for anybody who doesn’t think they’ll be in their home for long. According to the US Census, the average time that families stay in an owned home is 13 years. And fewer than 40% of homeowners stay even 10 years. So anybody that thinks they are going to move out of their home in Ammon in the next few years probably ought not to pledge since they are likely to have to cover the remaining amount of the lien when they sell their home.

I don’t want to sound like I’m coming down negative on Ammon, because they have come up with a creative solution to get fast broadband to at least part of their city. And that is exactly what a whole lot of other cities have done. Ammon is unique because of their creative financing solution, but a whole lot of other cities have settled for broadband to less than everybody.

For instance, almost every city getting Google fiber is going to end up with fiber built to only parts of their city. Only cities willing to step up with a lot of city dollars like Huntsville, Alabama are going to get fiber everywhere. And the vast majority of cities that got Verizon FiOS years ago now thinks they made a mistake since they now have fiber in some neighborhoods and not others. They are now seeing a big difference between neighborhoods with fiber and those without. This difference is likely to grow since both Verizon and AT&T have made noises about tearing down copper in older city neighborhoods. We might end up with more urban households without affordable landline broadband than we have today in rural areas.

Fifteen years ago I worked for several cities that wanted to get Verizon’s attention to get onto the FiOS list. At that time these cities were so ecstatic to get some fiber that they didn’t insist that Verizon eventually build their whole city. But it probably would not have mattered if they had – because there are cities that got that agreement from Verizon but which still don’t have fiber everywhere.

I don’t want to make Google and Verizon sound like bad actors because almost every large fiber overbuilder is doing the same thing in only building to the most profitable parts of cities. The returns from only building to the best neighborhoods are dramatically better than from building everywhere – I’ve created dozens of business plans that quantify the difference. This is also the approach being taken by CenturyLink, Aspire, and half a dozen other fiber overbuilders – they are simply making the best financial decision for their company.

This is a tough philosophical issue for a city. Do they take the high ground and hold out for a solution that gets fiber everywhere or do they take the practical approach and get some fiber built? The risk of holding out for a whole-city solution might mean that nobody gets fiber. But the flip side of this is that building to only parts of a city probably means there will be neighborhoods that will be cut off from fiber for decades to come – talk to any city that has FiOS if you don’t believe that.

It’s almost impossible to build a reasonable business plan today to somehow fill in fiber where Verizon didn’t build – because they built where the construction costs were the lowest.  So Ammon is not at all unique, and in fact they are joining the majority of the cities in the US that have elected a solution that will result in something less than 100% fiber coverage. My primary reaction to this issue is a personal one – I know how I’d feel if I was in one of the neighborhoods that didn’t get fiber. I think that any city that elects to build less than 100% fiber ought to expect to hear an outcry from the rest of the city for many years to come.

Why Aren’t There More Fiber Overbuilders?

Fiber CableThere are cities everywhere hoping for somebody to build fiber in their communities. I see cities surprised all the time when they can’t find anybody interested in building fiber. I think cities and people in general greatly overestimate the ability of private companies to fund and build fiber. So why aren’t there more fiber overbuilders?

First, there are hundreds of companies that are building fiber, but most are relatively tiny. There are independent telephone companies, cable companies and ISPs that are building fiber in their local markets. But every small company has a natural debt ceiling that restricts their ability to raise money, similar to a limit on how much money a family can borrow. As these small companies borrow money to build fiber they can quickly max out their ability to borrow more money. I have talked to dozens of small companies who have already built some fiber and that would like to build more – but once they get to a certain level of debt on their balance sheet lenders won’t extend them more credit.

Borrowing also requires cash equity. It is not unusual for a lender to want to see 10% to 20% of a project funded by equity before they will lend. Even a fairly modest fiber project can cost $30 million or more and that means that a builder would need $3 million to $6 million in cash equity to fund such a project. I don’t think most people realize that small companies rarely sit on that kind of cash. And even if they do, once they use their cash reserves for a project or two they are unable to finance additional projects.

Fiber business plans are also hard to finance because they lose money for the first few years before they generate any cash. That is a real challenge because during the first few years the builder has to not only cover operational losses, but they also normally have to begin making debt payments before they have generated enough cash to cover those payments. This then forces them borrow to cover debt payments – something that is hard to make work. I have seen numerous fiber business plans that cannot be funded because there is no easy way for the borrower to make it through the first three or four years. Many of these projects would eventually become great cash generators, but nobody is willing to take on a project that will run out of cash before getting to that better future.

Probably the biggest problem for small fiber builders is that there are not very many good sources of commercial debt for fiber builders. There was a time in this country when infrastructure construction was funded by the big banks. But those institutions – for a number of reasons – have largely bailed on funding almost all kinds of infrastructure. This affects not just fiber projects, but also roads, bridges, electric grids, water systems and infrastructure of all kinds.

There are a few sources for funding fiber projects, but the funding available represents only a small fraction of the demand that the public has for fiber projects. If every penny of funding that is available for fiber was to be borrowed the country would still largely be without fiber. There are not enough lenders willing to make the cash available to fund the national need. And this means that builders must be very selective and only put their money where they can make the best returns.

Interestingly, it’s now easier to fund rural fiber projects than it is to fund projects in larger towns (larger being towns over 20,000 population). There are a number of federal loan guarantee programs and other financing tools like new market tax credits that can help with rural projects that are not available to support fiber in larger communities. It’s certainly an interesting financial market that will fund fiber to farms before funding fiber to whole cities.

The best returns on fiber are made from what I call cherry picking. This is when a fiber builder only builds to business districts or to a few key parts of a city. Building very selectively where the returns are the best is probably the best use of the limited capital that a builder has available.

A lot of cities don’t understand the economics and want to impose a lot of restrictions on fiber builders. They want a builder to serve the whole city quickly; they want them to offer low-priced broadband to solve the digital divide and they even want them to finance a network and then open it up as an open access network for other carriers to use. The handful of fiber builders can be very selective and will shy away from markets that make these kinds of demands. Cities don’t seem to understand that in a world with very few fiber builders that those builders get to call all of the shots.