The Industry

The Pushback Against Smart Cities

If you follow the smart city movement in the US you’ll quickly see that Kansas City, Missouri touts itself as the nation’s smartest city. The smart city movement got an early launch there when the City was announced as the first major market for Google Fiber. That gigabit fiber network attracted numerous small tech start-ups and the City also embraced the idea of being a technology leader.

The city’s primary smart city venture so far has been to bring smart city technology to a 54-block area in downtown. But this area only covers about 1% of the total area of the City. The City is currently contemplating expanding the smart city into the neglected east side neighborhoods near downtown. This is an area with boarded up storefronts and vacant lots, and the hope is that investing in smart city will bring a boost to this area as a way to kick-start economic development.

So far the primary smart city applications include smart parking, smart intersections, smart water meters and smart streetlights. The city also installed video surveillance cameras along the 2.2-mile downtown corridor.  The existing deployment also includes public WiFi provided through 25 kiosks placed throughout the smart city neighborhood. As of last fall there had been a reported 2.7 million log-ins to the WiFi network.

In the east side expansion WiFi will take on a more significant role since it’s estimated that only 40% of the residents in that area have home broadband today – far below the national average of 85%. The city is also looking to implement a rapid transit bus line into the east side as part of the smart grid expansion.

The new expansion into the east side is slated to have more surveillance including new features like gun shot detectors. There has been public fear voiced that this system can be used to disadvantage the largely minority population of the area.

The biggest hurdle to an expanded smart city services is money. The initial deployment was done through a public-private partnership. The city contributed $3.7 million, which it largely borrowed. Sprint, which manages the WiFi network contributed about $7 million and Cisco invested $5 million. The cost to expand the smart city everywhere has been estimated to cost half a billion.

It is the public-private partnerships that bring a troublesome aspect to the smart city concept. It’s been reported that Sprint collects data from those who log in to the free WiFi network – information like home zip code and results of Internet searches. It’s also been reported that Sprint can track people who have once subscribed to the service, even if they don’t log in. Sprint won’t say how it collects and uses customer data – but as we are learning throughout the tech world, it is the monetization of customer data that fuels many ISPs and online services.

There is also growing public concern about surveillance cameras. It’s starting to become clear that Americans don’t want to be tracked by cameras, especially now with the advent of decent facial recognition technology. We saw Seattle have to tear down a similar surveillance network before it ever went into service. We’re seeing huge pushback in Toronto about a proposed smart city network that includes surveillance.

We only have to look at China to see an extreme example of the misuse of this technology. The country is installing surveillance in public places and in retail areas and tracks where people are and what they do. China has carried this to such an extreme that they are in the process of implementing a system that calculates a ‘citizen score’ for every person. The country goes so far as to notify employers of even minor infractions of employees like jaywalking.

It’s going to be an uphill battle, perhaps one that never can be won for US cities to implement facial recognition tracking. People don’t want the government to be tracking where they are and what they do every time they go out into public. The problem is magnified many times when private companies become part of the equation. As much as the people in Kansas City might not fully trust the City, they have far less reason to trust an ISP like Sprint. Yet the smart city networks are so expensive it’s hard to see them being built without private money – and those private partners want a chance to get a return on their investment.

Current News The Industry

The Battle for 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.

Technology The Industry

Will Telecom Investing Become Sexy Again?

Image via CrunchBase

Will the fact that Google is investing in fiber make it sexy again to invest in telecom? The last time that there was a big boom in investing in new telecom ventures was the late 90’s. At that time there were dozens of start-up CLECs, a number of which were able to issue IPOs and go public. Every smart investor had some telecom stocks in their portfolio.

But the new CLECs and telecom firms of that time almost all went bust with only a few of them still around today. There are a number of reasons for the bust. The business plans of many telecom startups depended upon arbitrage – using the facilities of the incumbent rather than making infrastructure investments. And many of the telecom start-ups had bad business plans that expanded into too many markets too quickly to do it well. And somehow the telecoms got tied in with the dot.coms and when those went bust the telecoms followed them down the tubes. And investors lost a lot of money and got soured on telecom. The lasting effect of the bust was that it became unsexy to invest in telecom.

And almost nobody has invested in telecom since then. It’s hard to find anybody who doesn’t recognize that the US is falling behind the rest of the world in telecom infrastructure, namely fiber. Since the telecom bust the only ones investing in fiber to whole communities have been Verizon, some municipalities and some smaller independent telephone companies. Verizon’s decision to build fiber was a bold one, but it didn’t drag anybody else along. And Verizon’s fiber build dwarfs all of the rest of the builders collectively. The vast majority of the country does not have fiber but wants it badly.

But now Google comes along and is boldly investing in fiber in large communities – Kansas City and Austin. What they are telling the world is that there is profit in fiber, profit in infrastructure investing. Kansas City was touted as a trial, but by having announced Austin so quickly it is obvious that Google thinks that their experiment is working. And while Google has made an announcement for Provo, Utah, that is a one-off since they were able to pick up an existing fiber network and customers at a very good price.

I keep hearing that there is a lot of money today on the sidelines, meaning money waiting to get invested in good projects. And this is interesting to me since there is such an obvious need in this country today for new and upgraded infrastructure. In addition to a huge need for fiber networks there is a huge demand for clean energy generation plus the usual things like bridges and roads. Perhaps at least to some small degree the Google decision to boldly invest in infrastructure can be the first step towards unleashing the private equity in the country to invest in infrastructure again. Google thinks such investing can be profitable and obviously it is good for the country. Will others follow?

Technology The Industry What Customers Want

“Dumb Pipe” versus Full-Service Provider

Broadband and cable TV companies have been looking at their long-term strategy and they are going to have to decide if they are going to be what we at CCG call either a “dumb pipe” provider or a full-service provider.

A “dumb pipe” provider is a broadband company that sells a very fast Internet connection as its primary product and not much of anything else. A perfect example of this is what Google is doing in Kansas City. Google is selling a 1 Gbps Internet connection there for $70 per month. That is far more speed than is possible from the competition, but it is also more expensive. The only other product available from Google is one cable TV package that is bundled with the data for $120. Google only offers one other data package for low-income homes. Google doesn’t offer different size cable packages. They don’t offer voice. They don’t offer security, or cloud services or any of the panoply of new services that can be provided over fiber.

In my opinion Google has looked into the future and they believe that most of the other services that they could be selling will be available to customers over the very fast Internet connection that Google is selling them. One of the primary advantages to Google of the dumb pipe strategy is that they have a very simple product mix to sell. Fewer products means less staff needed to market, sell, provision and support customers.

The downside to the dumb pipe provider is that they will have a much lower average revenue per user (ARPU) than the full service provider. But both types of providers have a very similar cost of the network. And this is at the heart of the discussion that many of my clients are having about the long-term trends in the industry.

Most providers in the industry today are full-service providers. They support the full residential triple-play, have multiple options for cable TV, have multiple options for voice. They also sell a wide range of other products and their marketing strategy is aimed at getting the highest ARPU from customers they can.

But the full-service providers are worried when they look at some of the trends in the industry. They have already seen a lot of voice customers drop off the network. They are starting to see cable customers leave the network and they look ten years down the road and see a very different cable market. And so full-service providers are faced with figuring out how to go from where they are today to where they think they must be in the future.

I am starting to see evidence of the shift in the strategy of full-service providers. In the last year I have seen data prices being increased all over the country for the first time. And this is not because the cost of providing data is growing, because the margins on data have grown steadily each year over the last decade and are still growing. I think the service  providers have embarked on a long-term upward shift in data prices so that they will be getting more revenue from the one product that is likely to survive into the future.

The companies with the biggest dilemma are these just entering the market for the first time. Do they make the leap straight to being a dumb pipe provider, like Google, or do they become a full-service provider and enjoy the remaining years of high ARPU before voice and cable TV losses pull those numbers downward? It is a hard decision and a conversation I am now having with every new service provider.

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