Subsidizing Rural Broadband

In a rare joint undertaking involving the big and small telcos, the trade groups USTelecom and NTCA—The Rural Broadband Association sponsored a whitepaper titled, Rural Broadband Economics: A Review of Rural Subsidies.

The paper describes why it’s expensive to build broadband networks in rural areas, with high costs mostly driven by low customer density. This is something that is largely universally understood, but this describes the situation for politicians and others who might not be familiar with our industry.

The paper goes on to describe how other kinds of public infrastructure – such roads, electric grids, water and natural gas systems – deal with the higher costs in rural areas. Both natural gas and water systems share the same characteristics as cable TV networks in this country and they are rarely constructed in rural areas. Rural customers must use alternatives like wells for water or propane instead of natural gas.

The electric grid is the most analogous to the historic telephone network in the country. The government decided that everybody should be connected to the electric grid, and various kinds of government subsidies have been used to help pay for rural electric systems. Where the bigger commercial companies wouldn’t build a number of rural electric cooperatives and municipal electric companies filled the gap. The federal government developed subsidy programs, such as low-cost loans to help construct and maintain the rural electric grids. There was no attempt to create universal electric rates across the country and areas lucky enough to have hydroelectric power have electric rates that are significantly lower than regions with more expensive methods of power generation.

Roads are the ultimate example of government subsidies for infrastructure. There are both federal and state fuel taxes used to fund roads. Since most drivers live in urban areas, their fuel taxes heavily subsidize rural roads.

The paper explains that there are only a few alternatives to fund rural infrastructure:

  • Charge higher rates to account for the higher costs of operating in rural areas. This is why small town water rates are often higher than rates in larger towns in the same region.
  • Don’t build the infrastructure since it’s too expensive. This is seen everywhere when cable TV networks, natural gas distribution and water and sewer systems are rarely built outside of towns.
  • Finally, rural infrastructure can be built using subsidies of some kind.

Subsidies can come from several different sources:

  • Cross-subsidies within the same firm. For example, telephone regulators long ago accepted the idea that businesses rates should be set higher to subsidize residential rates.
  • Cross subsidies between firms. An example would be access rates charged to long distance carriers that were used for many years to subsidize local telephone companies. There are also a number of electric companies that have subsidized the creation of broadband networks using profits from the electric business.
  • Philanthropic donations. This happens to a small extent. For example, I recently heard where Microsoft had contributed money to help build fiber to a small town.
  • Government subsidies. There have been a wide range of these in the telecom industry, with the latest big ones being the CAF II grants that contribute towards building rural broadband.

Interestingly the paper doesn’t draw many strong conclusions other than to say that rural broadband will require government subsidies of some kind. It concludes that other kinds of subsidies are not reasonably available.

I suspect there are no policy recommendations in the paper because the small and large companies probably have a different vision of rural broadband subsidies. This paper is more generic and serves to define how subsidies function and to compare broadband subsidies to other kinds of infrastructure.

Highlights from the NTCA PPP Panel

ppp_logoI was just on a panel at the NTCA Spring Convention looking at the topic of Public Private Partnerships (PPPs). The audience was mostly independent telephone companies and cooperatives. I was one the panel with Curtis Dean of Smart Source Consulting, and Dan Olsen and Ben Humphrey of Finley Engineering. Together this particular group has a lot of day-to-day operational experience working with or for municipal telecom companies.  Following are a few of the major points made during the presentation and the follow-up questions:

Cities are Different. Cities don’t think the same way as commercial companies. They have different goals. They have a number of issues that make working with them a challenge such as slow decision making, open records laws, public purchasing practice, and of course, politics. They even have a different idea of what a successful venture looks like and any business that can cover costs and not need a subsidy is considered successful.

A Good Partnership Can be Harder to Maintain than a Good Marriage. In general, it’s hard to find a good partner, commercial or municipal, that you will feel comfortable with working over a long period of time. The recommendation was to take the time up front to ask the right questions to make sure that you understand the differences in working with a city, and to figure out an operating structure that will let both sides be comfortable with the differences over many years.

Don’t be Afraid of PPPs. There is no reason to be afraid of PPPs. There are numerous examples of successful PPPs already in existence and the parties in those ventures found ways to make it work. While cities and commercial companies are very different, if you do the hard work up front in creating a sustainable partnership it can work.

Shield a PPP from Politics. Probably one of the most harmful things that can happen in a PPP is for politics to influence decision-making after it’s up and running. You need to find a governance structure that isolates the business to some extent from direct political interference. A PPP should not require government approval to raise rates or to make operational changes needed in the business.

Have an Exit Plan. One thing that is often missing in the creation of a PPP (and in the creation of commercial partnerships as well) is for both sides to have an exit strategy. When negotiating a new partnership the two sides should always talk about what happens if things go south, and the contractual arrangement should allow both partners a way out of the partnership if it isn’t working for them.

Rural America is Growing Desperate for Broadband. Towns that don’t have great broadband today are seeing a huge gulf opening between them and neighboring towns that have good broadband. Cities are growing fearful that without broadband they will lose jobs, lose population as kids move elsewhere for work and will not attract new housing or businesses. Broadband has grown from something that is nice to have to an economic necessity and places without broadband are fearful that their towns will become irrelevant and disappear.

Municipalities Need to Put Skin in the Game. Cities are waking up to the fact that in order to get the broadband they want that they are are going to have to help pay for it. The numerous RFPs that are asking somebody to show up and build broadband are falling on deaf ears and they are realizing that they are competing against tens of thousands of other cities in the same situation and with the same need. Cities and citizens are getting more willing to put taxpayer money into the pot to find a good broadband solution. And municipal money can make it easier for a commercial partner to make the desired returns.

Seek Help. If you are considering a PPP, then seek advice from those that have already done this right. There are many things that can wrong, and no partnership is assured of long-term success or harmony. It’s worth the extra time and cost up front to make sure that you are not making one of the fatal mistakes that will be a problem five years down the line.

The Gigasphere

cheetah-993774If you haven’t already heard it, you will soon be hearing the term ‘gigasphere’. This is the marketing term that the large cable companies are adopting to describe their upward path towards having faster data speeds on their cable systems. The phrase is obviously meant as a marketing counter to the commonly used term of gigabit fiber.

The gigasphere term is being promoted by the National Cable Television Association (NTCA) as the way to describe the new DOCSIS 3.1 technology. This is a technology that can theoretically support cable modem speeds up to 10 Gbps download and 1 Gbps upload.

The large cable companies are all starting to feel consumer pressure from fiber, even in markets where fiber is not readily available. Google and other fiber providers have excited the public with the idea of gigabit speeds and I am sure cable companies are being asked about this frequently.

Right now the term gigasphere is largely marketing hype. If you have fiber to your home or business, then with the right electronics you can get gigabit speeds. But cable systems have a long way to go before they can offer gigabit speeds over coaxial cable. There is already talk of cable companies offering gigabit products, such as the recent announcements from Comcast. But these speeds are not being achieved using coaxial cable and DOCSIS 3.1, they are using fiber – something Comcast doesn’t highlight in their marketing.

With enough upgrades and money, the cable systems can eventually achieve gigabit speeds on their coaxial networks. But for now their speeds are significantly less than that. A cable company faces a long and complicated path to be able to offer gigabit speeds over coaxial cable. Their biggest hurdle is that the bandwidth on their cable systems is mostly used by TV channels, and only empty channel spaces can be used for data. DOCSIS 3.1 allows a cable system to join together the spare channels on their network into one larger data pipe.

In order to get to gigabit speeds a cable company has to convert all of the channels on its network to digital, something most of them have already done. But further, they are going to need to treat them the same as TV on the web – transmitting them as raw data instead of as individual channels. Cable systems today use a broadcast technology, meaning they send all of the channels to customers at the same time. But if they convert to IPTV they can send each home just the channels they want to watch, which would massively condense the system bandwidth needed for television.

But this conversion is going to be costly and the equipment to do it is not yet readily available. CableLabs is working on this technology and it ought to be on the market in a few years. But that change alone is not the whole price of conversion. An IPTV system will require all new settop boxes, and in many systems a major reworking of the power taps and other components of the outside cable network. I don’t see many cable companies rushing towards this expensive conversion unless they are in a market where it is competitively necessary.

So for now, the gigasphere is mostly a marketing phrase. But it’s one that you are going to start hearing all of the time in relation to cable system data capabilities. This will obviously confuse the public who will assume that gigasphere means that they will be able to buy gigabit speeds from their cable companies, when they almost certainly cannot.

It’s not like cable companies don’t have fairly fast data capabilities. Most urban systems today are already capable of speeds in excess of 200 Mbps download. And there are systems working to get to 500 Mbps, which is probably about as fast as you can go without converting to IPTV. But it seems the marketing folks in the industry are counting on the fact that customers won’t know the difference between the various flavors of fast and will be happy with their gigasphere products. And they are probably right. Where’s my 500 Mbps cable modem?