A New Vision of Economic Development

 

Photo by Drew C. Wilson of the Wilson Times


I attended a forum in Wilson, North Carolina last week that talked about how fiber is transforming their city. They talked about how they are trying a new model for economic development.

The traditional economic development model concentrated on searching for big piles of jobs. Communities made efforts to attract major employers and worked hard to keep companies from leaving their town. But it’s pretty obvious when looking around rural America that this model stopped working somewhere along the line. I visit far too many communities that have lost big employers and that are not finding anybody to replace them. This is due to some degree to the overall huge decrease in US manufacturing jobs. But it also is due in part to the general decline of businesses located in smaller communities.

Wilson is a community of around 50,000. Historically the city was known as the ‘world’s greatest tobacco market’ in the 19th century and tobacco was huge in the area until a few decades ago. Wilson was also the birthplace to BB&T bank, which is still the largest employer in the city. But like happened with many US cities, Wilson also went through a decline. Some small manufacturers closed and the tobacco business died. In a scene that is familiar across the country the downtown business district dried-up as retail moved to other places.

Wilson started its fiber optic business in 2008 under the tradename of Greenlight. They were one of the first cities in the country to offer gigabit broadband to residents. And that fiber network was the linchpin for the city in developing their new vision of economic development.

The concept behind Wilson’s vision sounds simple. They figure that that the best way to attract jobs to the community is by working to make their community a place where people want to live. They want visitors to the city to like it enough that some of them will want to move there. And they figure that when they reach that goal that businesses will naturally want to locate there. So they are looking to grow their economy by concentrating on and improving the assets they already have.

Of course, this is anything but simple. Many cities have tried this and only a few have found a way to rebound from the decaying downtowns we see all over the country. Wilson is making the turn by concentrating on the downtown area. They lured the Wilson Times, a local daily newspaper, to refurbish an old building and move back into downtown. They raised the money to renovate an old theater to create the Edna Boykin Cultural Center. There is a project to build new housing downtown next to the whirligig park (the picture accompanying this blog). They attracted Peak Demand to make a $2.6 M investment to manufacture electrical components in an old tobacco processing plant. And these investments are bringing back other businesses. There are new restaurants and two brew pubs that have opened in the downtown.

Wilson is using an approach that other cities should consider. They involve all of the stakeholders in the community in the effort to improve quality of life there. That includes working with Barton College, a 1,200-student liberal arts university and nursing school. They challenged the arts community to move and grow downtown and have a thriving art scene. They put an emphasis on buying local, which we all know has a tremendous local economic multiplier effect. The various constituencies in the city meet often to discuss ways to make the city better.

But they credit the fiber network for being the change that started everything. While big companies and big employers are important to every community, Wilson understood that the work-from-home entrepreneur movement is creating a lot of jobs and a lot of wealth. And so they foster innovation in a number of different ways and strive to make small and new businesses successful.

The big shame is that the North Carolina legislature passed a law to prohibit other communities in the state from following the Wilson model. Cities are no longer allowed to become retail ISPs in North Carolina. If they build fiber it has to be operated by somebody else – and we know that is a far harder model to make work. One only has to look at what’s happening in Wilson to understand that fiber is an important component these days for economic vitality. But fiber alone is not a guarantee for economic success. It takes a community-wide effort like the one in Wilson to take advantage of what fiber offers. Wilson still has a way to go, but you can feel the excitement in the community – and that is what makes any city a place where people want to live.

Speed Matters

slow-downPark Associates just published the results of a survey that looks at why consumers switch broadband providers. The survey showed that 9% of households changed broadband providers last year. The company surveyed households that had changed and categorized their responses into seven categories.

It turns out that the number one reason that people changed providers was to get faster speeds and 35% of households listed the need for faster speeds as their primary motivation.

Of course, there are still households that care about price. 18% of households that changed broadband providers did so because they could buy comparable speeds at a lower price. But almost nobody changed providers to accept a slower speeds, even with a savings.

The survey results are backed-up by real world statistics. In most markets in the US today there is still duopoly competition between the cable company and the phone company, with the cable company generally having faster speeds. There has been a steady exodus for years from phone company DSL to cable modems and in 2015 alone the cable companies added 3 million new customers, while DSL continued to decline.

There is a lesson to be learned from these statistics. While the news is full of talk of gigabit fiber networks, not all fiber networks offer blazingly fast speeds. I know of a number of owners of fiber networks that offer speeds that are not much faster than the cable modem products they compete against. Those networks are not capitalizing on their technological advantage.

One thing that most of my clients have learned over the years is that increasing customer speeds doesn’t cost them very much. I’ve followed up on hundreds of network speed increases and almost universally ISPs report that customers use the Internet the same after a speed increase than before – but customers always say they love the faster speeds. And so, to the extent that faster speeds don’t cost much to implement, a fiber owner ought to always have speeds faster than their cable competitors – why would you not?

One issue that continues to confound customers is the different between advertised speeds and actual speeds. I have one client whose basic product on fiber is 30 Mbps and they deliver that speed very solidly all of the time. They are competing against a cable modem product advertised as ‘up to 60 Mbps’. And yet, in that market, the fiber product is demonstrably faster than the cable modem product. But this advertising discrepancy creates confusion in the minds of consumers.

There might be some help coming in this area since the FCC will soon be requiring the large broadband providers to disclose more information to customers about their broadband products. But I guess we’ll have to wait to see how truthful they really become.

My company conducts surveys and one thing we’ve found is that that only a small percentage of consumers actually know the speed they are supposed to be getting or the speed they are actually getting. But what they do understand is when their speed is not fast enough to do what they are trying to do.

We know that overall that the amount of data used by the average household has been doubling about every three years. What that means is that people will buy a data product and within a relatively short number of years they will start bumping against that speed and realize they need something faster.

I think the cable companies understand this issue. Comcast has upped speeds across the boards for data customers at least twice this decade that I can recall. Increasing speeds periodically stops customers from hitting their speed ceiling and keeps them happy with the product they have. If you are operating a network that can provide faster speeds you should be increasing speeds from time to time also. You don’t want many of your customers to be in the 9% looking for a new broadband provider.

How Long Does Fiber Last?

Copper wireI am asked all of the time how long fiber lasts. People want to know if they make the big investment in a fiber network whether they will get their money’s worth. And there is at least some reasons for the people to be confused. For example, I’ve seen opponents of municipal fiber networks say publicly that a new fiber network won’t last twenty years.

So how long does a fiber network last? The answer is – it depends mostly on how it is installed. While fiber is tough, it can be stressed during construction, which can significantly shorten its life. The number one cause of fiber damage during construction is damage caused when pulling fiber through ducts. There is almost no damage caused by either blowing or pushing fiber, making those the safest installation techniques. But it’s possible to overstress fiber when pulling, which will eventually result in it developing opacity. The opacity in fiber grows over time as very tiny cracks and stress points in the fiber grow larger and start deflecting light..

The second most common flaw in installed fiber is at splice points. Over time, as fiber expands and contracts from temperature changes, the splice points can shift tiny amounts and degrade the connection. Luckily, most damage from shifting splices can be fixed by re-splicing the fibers as they go bad over the years.

This does, though, speak to the issue of water damage to fiber. Water in itself doesn’t harm fiber, but if water gets into the sheath and freezes and melts over time it can either break splices or it can cause tiny flaws in the walls of the fiber to grow into bigger flaws. Over time, with enough little cracks and flaws, a given fiber can become unusable. So, just like with most other kinds of buried wires, care must be taken to keep water out of fiber lines in areas that will experience freezes.

But changing temperatures alone can do the same damage over time, so fiber that experiences wild temperature swings is not going to last as long as fiber that is protected from temperature extremes. Of course, burying fiber deep enough is possibly the best way to insure steady temperatures over time.

Fiber has gotten better over the years as manufacturers have improved manufacturing techniques. Today’s fibers are nearly perfect out of the manufacturing process and ought to last longer than fibers made thirty or forty years ago. The manufacturers have adopted techniques such as pre-stressing fiber during the manufacturing process (pulling it slightly) which pulls out any tiny flaws to keep them from getting bigger.

But none of what I said answers the question asked – how long will fiber last? Material scientists have been studying fiber since the 1980s and they have built models to predict how long fiber will last if properly installed. They look at all of the factors that can cause failure – how it was made, the presence of tiny flaws, factors that can cause cloudiness, the protection provided by the sheath, etc.

And what they found is very reassuring. Studies have shown that properly installed fiber will only have a chance of failure at a rate of 1 in 100,000 per kilometer per year between years 20 and 40 after installation. Statistics are funny things and that kind of rate is not easy to apply for a layman, but it ought to be obvious that this means very few failures for a normal fiber installation during that time frame. This means that fiber ought to easily last forty years and far beyond. Nobody will yet say how much further beyond, but I talked once to a few engineers from Corning and they told me that as long as it’s treated well that their best guess is at least 75 years. We’ll have to wait around to see if that is true.

The same scientists have studied real life applications of fiber and have calculated that the chances of buried fiber being cut is 1 in 1,000 per kilometer per year. This means it is 100 times more likely for a fiber to be cut than to have it fail from inherent flaws. Again, statistics like this aren’t straight-line ratios, but it you operate a 500-mile fiber network, this tells you that you can expect a fiber cut every year or so. And of course, some networks do worse than that. Outages from fiber cuts and the consequent weaknesses created by the repair splices are a far larger threat to your fiber network than any degradation of the fiber. So bury it deep!

Wireless is Not a Substitute for Wireline

Cell-TowerAny time there is talk about government funding for broadband, arguments arise that wireless broadband is just as good as wireline broadband. But it is not the same and is not a substitute. I love wireless broadband and it is a great complement to having a home or business broadband connection, but there are numerous reasons why wireless broadband ought not to be funded by government broadband programs.

The most recent argument for wireless broadband comes the Minnesota House which is currently in session. In last year’s legislative session, Minnesota approved a $20 million grant program to help expand broadband in rural areas of the state. That grant was distributed to a number of broadband projects, all wireline, which required a significant matching fund from an entity building the wireline facilities. The 2014 funding, which mostly went to independent telephone companies, is being used to bring broadband to thousands of rural residents as well as 150 rural businesses and 83 rural schools and libraries.

But the chairman of the House Job Growth and Energy Affordability Committee in Minnesota killed an additional state grant; it’s been left out of this year’s House budget. Rep. Pat Garofalo, R-Farmington, said that wired broadband is too costly in sparsely populated areas and believes that wireless and satellite technologies are more financially effective.

In another case, Verizon recently got the New Jersey State Board of Public Utilities to agree that it could use LTE data plans as substitutes for homes that are losing their copper or DSL services.

Another place where this same argument is being made concerns the upcoming funding from the Connect America Fund, which is part of the federal Universal Service Fund, and that is being directed towards expanding rural broadband. As written several years ago, the Fund is allowed to consider investing in wireless as well as wireline broadband networks.

There have been numerous parties lobbying to try to get these billions get directed towards landline networks and not towards wireless networks. The NTCA, which is now called the Rural Broadband Association, sponsored a report from Vantage Point Solutions that compares wireless and wireline technologies, and which argues that government funding should only be used to fund wireline networks. This whitepaper makes many of the same arguments I have been making for years about the topic, and included a few I had not considered. Here are some of the major arguments made by the whitepaper:

  • Even without considering the cost of spectrum, it costs far more to build a wireless network when comparing construction cost per megabit that can be delivered to end users. Modern fiber networks rarely cost more than $10 per Mbps capacity created, and often far less than that, while it costs several hundred dollars per effective megabit to construct a wireless network using any of the common technologies like LTE.
  • From a physics perspective, the amount of frequency available through US allocated spectrum is not large enough to deliver large symmetrical bandwidth, which is the goal of the National Broadband Plan. This limitation is a matter of physics and not of technology. That limitation is still going to be there with 5G or later wireless technology unless the FCC massively reworks the way it allows frequency to be used.
  • At least in today’s world, the prices charged to customers are drastically different for wireless and wireline data. Already today, 25% of residences are downloading more than 100 gigabits per month in total data. That can be affordable on wireline, but almost every current wireless provider has monthly data caps that range upward from just a few gigabits per month. A customer on a capped data plan who uses 100 gigabits in a month would face an astronomical monthly bill.
  • The report also made the economic argument that the shelf-life for wireless equipment and networks is relatively short, in the range of seven years, while fiber networks can have an incredibly long economic life. The report argues that the Connect America Fund should not be investing in technology that will obsolete and potentially unusable just a few years after it’s built. There certainly is no guarantee that the large wireless carriers will make needed future investments once they stop getting a federal subsidy.
  • The report also made all of the normal comparisons between the two technologies in terms of operating characteristics such as available bandwidth, latency times, and high reliability, all of which tilt in favor of landline.

I agree with this report wholeheartedly. I know that when I first read the language in the Connect America Fund my initial reaction was that the money would all go to cellular companies who would use the money to build rural cell towers. But fiber technology has gotten far more efficient in just the few years since that order. Also, the wireless businesses of Verizon and AT&T are the two most profitable entities in telecom, by far, and it makes no sense to flow billions of federal dollars to them to build what they will probably build anyway with their own money.

Certainly, expanding rural LTE would get some broadband to more people, but in the long run we would be better off directing that same money to bring a permanent solution to some rural areas rather than a poor solution for all of it.

CenturyLink Bullish on Fiber

CenturyLinkAt a time when AT&T wants to ditch millions of copper lines, and when Verizon apparently want to phase out of the wireline business and is even selling off FiOS, CenturyLink is taking a different approach.

The company has begun building gigabit fiber in a few cities and has announced plans to build in many more. CenturyLink has already deployed gigabit fiber to some residential customers in some parts of Omaha and Las Vegas, and to some businesses in Salt Lake City. The company has announced plans to provide new residential gigabit fiber in new markets including Seattle, Portland, Salt Lake City, Denver, Minneapolis / St. Paul, and in Columbia and Jefferson City in Missouri. Additionally the company plans gigabit fiber for businesses in Spokane, Sioux Falls, Colorado Springs, Albuquerque, Phoenix and Tucson.

This initiative makes CenturyLink the only large incumbent telco that is investing in fiber. And since the cable companies are mostly upgrading speeds in response to competition, this make CenturyLink the only large ISP that is being proactive with fiber.

With that said, I have no idea how much fiber they are actually going to build. CenturyLink inherited a company from Qwest with a very ugly balance sheet and which still today does not spin off enough cash to make a huge fiber investment. And so there is the possibility that they are building a little fiber in each market for press release purposes and not intending (or able) to finance the construction of a lot of fiber in the same way that Verizon invested in FiOS.

But in reading between the lines I think they really want to invest in fiber. CenturyLink inherited possibly the worst local network in the country when they merged with Qwest. Qwest had been in marginal financial shape for so long that they had let the networks in most markets deteriorate significantly. Qwest instead invested on long-haul and large city downtown fiber to make money in transport, long distance and sales to large businesses. And they did okay in those areas and have one of the best nationwide fiber networks.

CenturyLink has the most to lose of the large ISPs. AT&T and Verizon have become cellular companies that also happen to be in the landline business. The cable companies have captured the lion’s share of the residential data market almost everywhere. But CenturyLink has no fallback if they lose landline-based revenues. They inherited a network that lost the residential battler everywhere in head-to-head competition with the cable companies. And in every large city they have significant competition for business customers from CLECs, cable companies and fiber providers.

So I think CenturyLink has hit upon the right strategy. In every market (or at least in every neighborhood) there is likely to only be one fiber provider who is willing to build to everybody. Over time, as households and businesses want more data, fiber is going to be the only long-term network that will be able to satisfy future data demand.

I keep hearing about having gigabit wireless products someday, but the physics of that product will require mini cell sites that are close to customers. And that means having a cellular network that is fed by neighborhood fiber. Anybody who thinks that the cellular companies are going to be able to supply that kind of bandwidth with the current cellular networks doesn’t understand the physics of spectrum.

I wish CenturyLink well in this endeavor. Most of the potential markets want fiber and the company will do really well if they can find the financial resources needed to build significant fiber. Their copper networks are dying and there is very little they can do about that. There are currently some industry patches on copper such as using two copper pairs joined together, but these are band-aids being applied to a dying network. Looking twenty years into the future, if CenturyLink doesn’t build fiber they won’t have much left.

I am still surprised that Verizon is selling off mature cash-cow FiOS fiber networks like they recently announced. But Verizon has obviously been taken over by the wireless guys who seem to want them out of the wireline business. But CenturyLink has no other options, so I think they either go to fiber or watch their networks and their business slowly die.

Opportunity Abounds

English: colorful fiber light

English: colorful fiber light (Photo credit: Wikipedia)

I am often asked about ideas for building a fiber network that can make money. Right now in this country there is a huge opportunity that almost nobody is taking advantage of. There have been tens of thousands of miles of middle mile fiber built in the last five years using federal stimulus grants. Additionally there are other networks around the country that have been built by state or other kinds of grants. And there has also been fiber built to thousands of rural cell phone towers.

These networks are largely rural and in most cases the networks have only been used to connect small rural towns and to serve anchor institutions, or built to go only to cell towers. If you look at these networks closely you will see miles and miles of fiber that goes from county seat to small town to county seat with a few spurs serving schools, health facilities, junior colleges, city halls and cell towers. But for the most part the fiber has not been used to serve anything else.

The whole stimulus grant was cooked up quickly and was not a well-planned affair. They tried to make awards in every state and we ended up with a true hodge-podge of networks being built. In some cases it looks to me like networks to nowhere were built, but a large percentage of the stimulus grants went through rural areas where there are nice pockets of customers.

For years I have advocated a business plan that builds fiber in short spurs in situations where there is guaranteed success. For example, one might build to one large business whose revenue will pay for the fiber route. Or these days that is most likely going to be a cell tower. And so building to that single guaranteed customer can be a successful business plan.

However, any carrier who stops with that one customer is missing the real profit opportunity in such a build. The best business plan I can find today is to build to an anchor tenant and then doing everything possible to sign every customer that is passed to get to that new tenant customer. In economic terms you can think of the cost of the fiber build as a sunk cost. Generally in any business when you make a sunk-cost investment the goal is then to maximize the revenue that can be generated by the sunk cost.

And so, if the anchor tenant you have found can justify the fiber build and pay for the sunk-cost investment, then adding additional customers to that same fiber investment becomes a no-brainer in economic terms. The extra customers can be added for the cost of a drop and fiber terminal device, and in terms of return, adding a home or small business might have a higher margin than the original anchor tenant.

They key to making this business plan work is to keep it simple. You don’t need to be in the triple play business to add residential customers. Offering a very high-speed data connection for a bargain price is good enough to get a good long-term customer with very little effort required by the carrier. If you happen to already be in the triple play business and have all of the back-office support for such customers then you can consider this as an option, but offering only data is a profitable business.

And so the business plan is to look around you and see where there are facilities built but underutilized. The key to making this work is to get cheap transport to reach the new pocket of customers. By law the stimulus grants need to give cheap access to somebody willing to build the last mile. But commercial network owners are going to make you a good offer also for transport if you can bring them a new revenue opportunity in a place they didn’t expect it. So the key is to first work with the network providers and then look at specific opportunities.

And you possibly don’t even need much, if any staff to do this. There is already somebody maintaining the backbone fibers and they will probably be willing to support your fiber spurs. And it’s quite easy today to completely outsource the whole ISP function. The only thing that is really needed is the cash needed to build fiber spurs and connect customers. The more you have the better you can do, but you could build a respectable little business with only a few hundred thousand dollars.

If you are in a rural area there are probably dozens, and maybe hundreds of these opportunities around you if you look for them with the right eye. As the header of this blog says, opportunities abound.