The City’s announcement also said that the conduit network is open access and is available to all ISPs. Google Fiber was announced as the first ISP tenant and agreed to serve everybody in the city. This means that Google Fiber will have to pay to pull fiber through the conduit system to reach customers.
Mediacom, the incumbent cable company in the city, sued West Des Moines and argued that the City had issued municipal bonds for the benefit of Google Fiber. The suit also alleges that the City secretly negotiated a deal with Google Fiber to the detriment of other ISPs. The suit claims Google Fiber had an advantage since one of the City Commissioners was also the primary Google Fiber lobbyist in the state.
As is usual with such suits, outsiders have no idea of the facts, and I’m not taking sides with either of the parties. A recent article said the two sides are nearing a settlement, and if so, we might never understand the facts. I find the lawsuit to be interesting because it raises several interesting issues.
A lot of cities are considering open-access networks. Politicians and the public like the idea of having a choice between multiple ISPs. But this suit raises an interesting dilemma that cities face. If a city launches an open-access network with only one ISP, like in this case, that ISP gets a huge marketing advantage over any later ISPs. On an open-access network, no ISP has a technological advantage – every ISP that might come to West Des Moines will be providing fiber broadband.
If Google Fiber is first to market, it has an opportunity to sign everybody in the city who prefers fiber broadband over cable broadband. In the case of West Des Moines, each future ISP would also have to pay to pull fiber through the network, and a second ISP might have a hard time justifying this investment if Google Fiber already has a large market share.
From my understanding of the West Des Moines business model, the City needs additional ISPs to recover the cost of building the network – the City clearly intends to bring the benefits of open-access to its citizens. It’s hard to believe the City would intentionally gave an unfair advantage to Google Fiber. But did they inadvertently do so by giving Google Fiber the chance to gain a lock-down market share by being first?
Another interesting question this suit raises is if Mediacom considered moving onto the fiber network? When somebody overbuilds a market with fiber, the cable company must be prepared to compete against a fiber ISP. But in West Des Moines and a few other open-access networks like Springfield, Missouri, the cable company has a unique option – the cable company could also jump onto the fiber network.
It would be interesting to know if Mediacom ever considered moving to fiber. The company already has most of the customers in the market, and one would think it could maintain a decent market share if it went toe-to-toe with Google Fiber or another ISP by also competing using fiber. It would be a huge decision for a cable company to make this leap because it would be an admission that fiber is better than coaxial networks – and this switch probably wouldn’t play well in other Mediacom markets. I also think that cable companies share a characteristic with the big telcos – it’s probably challenging for a cable company to swap to a different technology in only a single market. Every backoffice and operational system of the cable company is geared towards coaxial networks, and it might be too hard for a cable company to make this kind of transition. I’m always reminded that when Verizon decided to launch its FiOS business on fiber, the company decided that the only way to do this was to start a whole new division that didn’t share resources with the copper business.
Finally, one issue this suit raises for me is to wonder what motivates ISPs to join an open-access network in today’s market. I understand why small ISPs might do this – they get access to many customers without making a huge capital investment. But there is a flip side to that and there can be a huge financial penalty for an ISP to pursue open access rather than building a network. In the last few years, we’ve seen a huge leap-up in the valuation multiple applied to facility-based fiber ISPs. When it comes time for an ISP to sell a market, or even to leverage an existing market for borrowing money, a customer on a fiber network that is owned by an ISP might easily be worth ten times more than that same customer on a network owned by somebody else.
That is such a stark difference in value that it makes me wonder why any big ISP would join an open-access network. Open-access is an interesting financial model for an ISP because it can start generating positive cashflow with only a few customers. But is the lure of easy cash flow a good enough enticement for an ISP to forego the future terminal value created by owning the network? This obviously works for some ISPs like Google Fiber, which seems to only want to operate on networks owned by others. But consider a small rural telco that might be located outside of West Des Moines. The telco could generate a much higher value by building to a few thousand customers in a market outside West Des Moines than by adding a few thousand customers on the open-access network.
The giant difference in terminal value might explain why open-access networks have such a hard time luring ISPs. It probably also answers the question of why a cable company like Mediacom is not jumping to join somebody else’s network. It’s an interesting financial debate that I’m sure many ISPs have had – it it better to go for the quick and easy cash flow from open-access or take more risks but hope for the much bigger valuation from building and owning the network and the customers?