Tag Archives: open access

Should Grant-funded Networks be Open-Access?

There was an interesting political effort in the Washington legislature recently to expand the use of open-access networks. There was language included in the Substitute House Bill 1147 that would require that any network funded from BEAD grants must become open-access and available to other ISPs.

Open-access has been a topic in Washington for many years. There was a long-time prohibition against Public Utility Districts (PUDs) from offering retail broadband. These county-wide government-owned utilities wanted to bring better broadband and settled by building open-access networks. Over the last few decades, a number of PUDs have launched open-access fiber networks, some of them with tens of thousands of fiber customers.

For those not familiar with open-access, it is a network where multiple ISPs can buy access to reach customers. This provides customers with the choice of using multiple ISP on the same network. All reports are that customers like the extra choices they get. Every broadband survey my firm has ever conducted has shown a huge public preference preference for choice.

The legislature finally relaxed the prohibition for PUDs last year, but in a bizarre fashion. The legislature passed two conflicting bills that allow PUDs to provide retail broadband services. Rather than choose between the two bills, the Governor signed both simultaneously (a pen in each hand) so that both bills went into effect. As might be imagined, this created as much confusion as clarity over the issue.

I doubt that anybody will be surprised that the biggest ISPs in the state vehemently opposed this legislation. The big cable companies have always immediately fought any suggestion that they allow other ISPs to use their networks. The big telcos were forced to sell unbundled copper loops starting with the Telecommunications Act of  1996, but that requirement continues to wane as the amount of copper keeps shrinking. The telcos started fighting against the unbundling rules as it was enacted, and over the years succeeded in greatly weakening the ability of outsiders to use their copper.

I don’t think anybody will be surprised to find out that the big ISPs in Washington succeeded in killing this idea. The big ISPs threatened to not pursue any grant funding if this proposal becomes law. Some even made veiled threats to stop investing in the state if this became law.

But it’s an interesting concept. The BEAD grant rules have a clear preference for open-access networks, and any carrier promising an open network will get extra points on a grant application. But the open-access preference is only a suggestion and not a requirement – something the big ISPs in Washington all pointed out.

Requiring open-access is not a far-fetched idea because open-access is required on all of the middle-mile networks that were announced this week as recipients of NTIA grants. But the whole point of the NTIA middle-mile networks is to build networks to places where backbone connections are unavailable or unaffordable. Requiring the grant recipient to sell affordable connections to everybody is a good use of federal grant dollars.

But this raises a much larger question. I know there are a lot of open-access proponents in the country who think that any network funded with government dollars ought to be made open-access to provide the most value to the taxpayers who are funding it. That is exactly what was suggested in Washington, but it didn’t take very long for the big ISPs to kill the idea.

Many industry folks want to take this idea even further. I don’t think I’ve seen a thread on this topic that doesn’t include somebody who thinks government should own all grant-funded fiber infrastructure, which should then be made available to all ISPs that want to use it. Obviously the BEAD grant rules weren’t written that way, and with the sway that big ISPs hold in D.C. it probably never will happen. But is something that Congress could do if they ever have the will to enact it. We’re starting to see cities who are adopting this idea, so we’re going to keep seeing new open-access networks coming to life. I have to think that the citizens in every city close to an open-access network is going to be asking why they can’t have the same thing.

Should ISPs Consider Open-Access?

There are suddenly a lot of open-access networks springing up around the country. Traditionally, open-access networks have been built by local governments such as the PUDs in Washington, the small cities in Utah that are part of Utopia, or cities in states like Colorado. Today, there are also open-access networks being built by commercial network owners.

I’ve been asked by several ISPs if they should consider operating on an open access network. Like with any decision of this magnitude, there are no easy right or wrong answer, but instead a lot of pluses and minuses to consider. Following are a few of the most important factors to consider about operating on an open-access network.

Capital Expenditures. One of the primary reasons to think about using somebody else’s network is the savings from not having to fund and built a new network. For small ISPs without a lot of borrowing capacity, an open-access network might be one of the easiest ways to get more customers.

But there is a flip-side to not spending money on capital. If the ISP plans on eventually selling the business, there is a lot more long-term value created by owning a network than by riding somebody else’s. There might be far more corporate value created by building a small fiber network with a few thousand customers than by serving 10,000 customers on an open-access network. If you pursue open-access, it has to strictly be about the cash flow generated today rather than about the value created in the future.

Economy-of-scale. Another reason to consider operating on somebody else’s network is that anything that makes your ISP larger adds to economy-of-scale. There is a big benefit to spreading the costs of overheads like OSS/BSS systems and corporate staff costs over as many customers as possible. Any costs you can shuffle off to an open-access expansion should make your other markets more profitable.

But economy-of-scale savings can diluted if you decide to tackle a open-access network that is far away from your existing operations. It’s never as cost-efficient to open and operate in a new distant market compared to one that is next door.

Trust. One of the scary parts of being on an open access network is being captive to the processes and prices charged by the network owner. An ISP is taking a leap of faith that the network owner will always perform as promised.

If the network owner decides to increase wholesale rates, there is no option but to go along. While a rate increase would also apply to the other ISPs on the open-access network, it’s possible for rates to get too high compared to other competitors like the cable company.

It can also be a problem having to rely on somebody else’s processes. For example, in most open-access networks, the network owner builds new fiber drops and installs customer electronics. It can be devastating for a marketing plan if the network owner can’t deliver customer installations on time, or decides it has a limited budget to add more customers. An ISP is also a captive of all other processes of the network owner like trouble reporting and resolution, timely network upgrades, network monitoring, and the ordering process. Even if the processes are good today, the network owner can change the way they do anything. This is possibly the biggest reservation for an ISP that is used to working on its own network.

No Technology Advantage. It’s an odd situation for an ISP to be operating on a fiber network and yet have no technology advantages over many of your competitors. Every ISP on the open-access network has the identical capabilities as you. This means that an ISP on an open-access network must distinguish themselves through either price or customer service. Open-access can turn into a race to the bottom if one of the ISPs on the network decides to deeply slash prices.

This blog wasn’t meant to scare ISPs away from working on an open-access network. There are ISPs that are thriving in this environment. But it’s not for everybody, particularly for ISPs that want to control the customer experience from beginning to end.

The New Open-Access

It’s fairly easy to understand the concept of open-access. This is where somebody owns a fiber network and allows other ISPs to use the network to compete for customers. The most common owners of open-access networks have been owned by local governments, although SiFi Networks, a commercial entity, has built and is operating several open-access networks.

The open-access dynamics have been similar everywhere. The network owner makes the big investment in the network and sells individual connections to ISPs. This is an interesting operating model for an ISP because it doesn’t have to make any significant capital outlays to be able to provide gigabit bandwidth over a fiber network. In the traditional open-access model, the network owner not only owns the fiber, but also the electronics needed to reach customers. The network owner maintains the network and is responsible for repairs and periodic electronics upgrades. The ISPs sell and provide service to customers.

The traditional open-access model has mostly attracted local and relatively small ISPs. The appeal of the model for ISPs is that they don’t have to make a big capital investment to gain paying customers. If there is any downside to the traditional open-access model, it’s that having multiple ISPs tends to force down consumer prices and pushes down margins. Traditional open-access also requires a different marketing pitch because every ISP is using the identical technology – the value proposition from an ISP has to be based on price and service.

But there are new models related to open-access that don’t fit the traditional open-access model. Consider the West Des Moines conduit model. The city is building empty conduit to reach every home and business in the city. ISPs that want to use the network have to make a significant investment by pulling fiber throughout the city and also providing the electronics. The conduit model is not going to attract undercapitalized ISPs since an ISP has to make a significant investment to reach customers. So far, the City has attracted Google Fiber and Mediacom, and the City is hoping for more ISP tenants.

It’s hard to describe this as open-access. Instead of getting a dozen or more small ISPs on the fiber network, West Des Moines has attracted two large ISPs so far. That’s not meant as a negative, because the West Des Moines model is already bringing more competition using fiber than if the City had decided to become an ISP or if the City had entered into a more traditional public-private partnership with a single ISP. Bringing two or three large ISPs to compete in a city seems like a big upside.

I’m just speculating, but my guess is that a market that draws a handful of large ISPs is probably not going to bring a lot of price competition. I would be surprised if Google Fiber or the other ISPs interested in this model will lower their prices due to the presence of a few other large ISPs in the market. In West Des Moines, the ISPs aren’t sharing a network since each ISP brings its own unique set of electronics and associated features – although everybody will have fast speeds.

Another new model that I see a lot of cities contemplating is best described as dark fiber leasing. In this scenario, a city builds fiber everywhere and leases unlit fiber to ISPs. This model requires an ISP to provide end-to-end electronics. which is a far smaller investment than requiring an ISP to pull fiber through city-owned conduit. There are hundreds of cities doing this already on a small scale, but I can’t think of a larger city that has tried this everywhere yet. But I won’t be surprised if somebody tries this.  I also have a hard time calling this open-access since there would likely not be the capacity to offer this citywide to more than a few ISPs.

But maybe these are open-access, and I’m just getting hung up on the labels. Perhaps the easiest names for these operating models are open-access conduit and open-access dark fiber. It just makes it harder to talk to policymakers and politicians about open-access if it covers such a wide range of business models.

Mediacom and West Des Moines

In 2020, the City of West Des Moines, Iowa announced it was building a fiber conduit network to bring fiber to pass all 36,000 residents and businesses in the city. It was a unique business model that can best be described as open-access conduit. What is unique about this arrangement is that conduit will be built along streets and into yards and parking lots to reach every home and business. The City is spending the money up front to cross the last hundred feet.

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?

Google Fiber Comes to Iowa

The City of West Des Moines recently announced a deal with Google Fiber to bring fiber to pass all 36,000 residents and businesses in the city. This is a unique business model that can best be described as open-access conduit.

The city says that the estimated cost of the construction is between $35 million and $40 million and that the construction of the network should be complete in about two-and-a-half years. The full details of the plan have not yet been released, but the press is reporting that Google Fiber will pay $2.25 per month to the city for each customer that buys service from Google Fiber.

What is most unique about this arrangement is that conduit will be built along streets and into yards and parking lots to reach every home and business. I know of many cities that lease out some empty conduit to ISPs and carriers, but the big limitation of most empty conduit is that it doesn’t provide easy access to get from the street to reach a customer. West Des Moines will be spending the money to build the conduit to serve the last hundred feet.

This business arrangement will still require Google Fiber to pull fiber throughout the entire empty conduit network – but that is far cheaper for the company than building a network from scratch. The big cost of building any fiber network is the labor needed to bring the fiber along every street – and the city has absorbed that cost. The benefit of this arrangement for Google Fiber is obvious – the company saves the cost of building a standalone fiber network in the City. It’s the cost of financing expensive networks up-front that makes ISPs hesitant to enter new markets.

From a construction perspective, I’m sure that the City is building fiber with some form of innerduct – which is a conduit with multiple interior tubes that can accommodate multiple fibers (as is shown in the picture accompanying this blog). This would allow additional ISPs to coexist in the same conduits. If the conduits built through yards also include innerduct it would make it convenient for a customer to change fiber ISPs – disconnect fiber from ISP A and connect to the fiber from ISP B.

The City is banking on other ISPs using the empty conduit because Google Fiber fees alone won’t compensate the city for the cost of the conduit. The press reported that Google Fiber has guaranteed the City a minimum payment of at least $4.5 million over 20 years. I’m sure the City is counting on Google Fiber to perform a lot better than that minimum, but even if Google Fiber connects to half of all of the customers in the City, the $2.25 monthly fee won’t repay the City’s cost of the conduit.

This business model differs significantly from the typical open-access network model. In other open-access networks, the City pays for 100% of the cost of the network and the electronics up to the side of a home or business. The typical monthly fee for an ISP to reach a customer in these open access-networks ranges between $30 and $45 per month. Those high fees invariably push ISPs into cherry-picking and only pursuing customers willing to pay high monthly rates. The $2.25 fee in West Des Moines won’t push ISPs to automatically cherry-pick or charge a lot.

Any ISP willing to come to the city has a few issues to consider. They avoid the big cost of constructing the conduit network. But a new ISP will still need to pay to blow fiber through the conduit. Any new ISP will also be competing against Google Fiber. One of the most intriguing ISPs already in the market is CenturyLink. The company has shown in Springfield, Missouri that it is willing to step outside the traditional business model and use somebody else’s network. I would have to imagine that other ISPs in the Midwest perked up at this announcement.

In announcing the network, the City said that they hoped this network would bring fiber to everybody in the City. Google Fiber doesn’t typically compete on price. Earlier this year Google Fiber discontinued its 100 Mbps broadband connection for $50. Many homes are going to find the $70 gigabit product from Google Fiber to be unaffordable. It will be interesting over time to see how the city plans on getting broadband to everybody. Even municipalities that own their own fiber network are struggling with the concept of subsidizing fiber connections below cost to make them affordable.

One thing this partnership shows is that there are still new ideas to try in the marketplace. For an open-access conduit system to be effective means attracting multiple ISPs, so this idea isn’t going to work in markets much smaller than West Des Moines. But this is another idea for cities to consider if the goal is to provide world-class broadband for citizens and businesses.

Will Congress Fund Rural Broadband?

Members of Congress seem to be competing to sponsor bills that will fund rural broadband. There are so many competing bills that it’s getting hard to keep track of them all. Hopefully, some effort will be made to consolidate the bills together into one coherent broadband funding bill.

The latest bill is the Accessible, Affordable Internet for All Act, introduced in the House of Representatives. This is part of a plan to provide $1.5 trillion of infrastructure funding that would include $100 billion for rural broadband. $80 billion of the funding would be used to directly construct rural broadband. It’s worth looking at the details of this bill since it’s similar to some of the other ideas floating around Congress.

The bill focuses on affordability. In addition to building broadband it would:

  • Require ISPs to offer an affordable service plan to every consumer
  • Provide a $50 monthly discount on internet plans for low-income households and $75 for those on tribal lands.
  • Gives a preference to networks that will offer open access to give more choice to consumers.
  • Direct the FCC to collect data on broadband prices and to make that data widely available to other Federal agencies, researchers, and public interest groups
  • Direct the Office of Internet Connectivity and Growth to conduct a biennial study to measure the extent to which cost remains a barrier to broadband adoption.
  • Provide over $1 billion to establish two new grant programs: the State Digital Equity Capacity Program, an annual grant program for states to create and implement comprehensive digital equity plans to help close gaps in broadband adoption and digital skills, and the Digital Equity Competitive Grant Program which will promote digital inclusion projects undertaken by individual organizations and local communities
  • Provide $5 billion for the rapid deployment of home internet service or mobile hotspots for students with a home Internet connection.

This bill also guarantees the right of local governments, public-private partnerships, and cooperatives to deliver broadband service – which would seemingly override the barriers in place today in 21 states that block municipal broadband and the remaining states that don’t allow electric cooperatives to be ISPs.

This and the other bills have some downsides. The biggest downside is the use of a reverse auction.  There are two big problems with reverse auctions that the FCC doesn’t seem to want to acknowledge. First, a reverse auction requires the FCC to predetermine the areas that are eligible for grants – and that means relying on their lousy data. Just this month I was working with three different rural counties where the FCC records show the entire county has good broadband because of over-reporting of speeds by a wireless ISP. In one county, a WISP claimed countywide availability of 300 Mbps broadband. In another county a WISP claimed countywide coverage of 100 Mbps symmetrical broadband coverage, when their closest transmitter was a county and several mountain ranges away. Until these kinds of mapping issues are fixed, any FCC auctions are going to leave out a lot of areas that should be eligible for grants. The people living in these areas should not suffer due to poor FCC data collection.

Second, there are not enough shovel ready projects ready to chase $80 billion in grant funding. If there is no decent ISP ready to build in a predetermined area, the funding is likely to revert to a satellite provider, like happened when Viasat was one of the largest winners in the CAF II reverse auction. The FCC also recently opened the door to allowing rural DSL into the upcoming RDOF grant – a likely giveaway to the big incumbent telcos.

This particular bill has a lot of focus on affordability, and I am a huge fan of getting broadband to everybody. But policymakers have to know that this comes at a cost. If a grant recipient is going to offer affordable prices and even lower prices for low-income households then the amount of grant funding for a given project has to be higher than what we saw with RDOF. There also has to be some kind of permanent funding in place if ISPs are to provide discounts of $50 to $75 for low-income households – that’s not sustainable out of an ISP revenue stream.

The idea of creating huge numbers of rural open-access networks is also an interesting one. The big problem with this concept is that there are many places in the country where there a few, or even no local ISPs. Is it an open-access network if only one, or even no ISPs show up to compete on a rural network?

Another problem with awarding this much money all at once is that there are not enough good construction companies to build this many broadband rural networks in a hurry. In today’s environment that kind of construction spending would superheat the market and would drive up the cost of construction labor by 30-50%. It would be just as hard to find good engineers and good construction managers in an overheated market – $80 billion is a lot of construction projects.

Don’t take my negative comments to mean I am against massive funding for rural broadband. But if we do it poorly a lot of the money might as well just be poured into a ditch. This much money used wisely could solve a giant portion of the rural broadband problem. But done poorly and many rural communities with poor broadband probably won’t get a solution. Congress has the right idea, but I hope that they don’t dictate how to disperse the money without talking first to rural industry experts, or this will be another federal program with huge amounts of wasted and poorly spent money.

CenturyLink Ready to Launch Gigabit Broadband in Springfield, MO

It’s rare to be surprised by events in the telecom world. The announcement last summer that CenturyLink will be an ISP on a city-owned fiber network in Springfield MO was one of the most surprising things I’ve heard since the announcement years ago that Google was going to become a gigabit ISP. The joint venture has been progressing and CenturyLink says it should be adding customers in the community this spring.

The partnership between the city and CenturyLink is interesting:

  • CenturyLink has agreed to lease the network over 15-years at a payment that made the city comfortable enough to build the network. The city says they won’t have to raise electric rates since the lease revenue stream justifies the cost of the new $120 million fiber expansion.
  • The city is providing dark fiber and CenturyLink will provide all of the electronics. There have been no public announcements saying which party pays for the fiber drops. Since this is being touted as an expansion of smart-grid, it would make sense that the city owns the drops.
  • The arrangement is described as non-exclusive, meaning that other ISPs are free to serve on the network. The announcements don’t say if CenturyLink gets a head-start over other ISPs through some period of exclusivity before open access kicks in. That’s been the case in similar arrangements.
  • CenturyLink is offering $65 gigabit broadband ‘for-life’ with a guarantee that the price will never be increased. Speeds are advertised ‘up to 940 Mbps. In other CenturyLink markets the gigabit product requires paperless billing and prepayment with a credit card or bank debit. CenturyLink charges $5 for an optional WiFi modem.

There are a few other similar well-known arrangements in the industry. This is similar to the Google Fiber arrangement with Huntsville, Alabama. It’s similar to the Ting arrangement in Westminster, Maryland and Charlottesville, Virginia. What’s unusual and surprising about this deal is that it’s with one of the big incumbent telcos. However, CenturyLink is not the incumbent in Springfield and enters the market purely as an outside ISP. CenturyLink will be competing side-by-side with AT&T, the first instance of two large incumbents telcos competing in a residential market. The other competitor and the incumbent cable provider in Springfield is Mediacom.

There are some in the industry touting this as a new paradigm for bringing gigabit fiber – but I’m not sure that is so. Like with any business model, all of the facts and the numbers must line up for any market to be a good target for overbuilding with fiber. It’s possible that there are unique characteristics of Springfield that might make this model hard to replicate in most other places.

Springfield owns a municipal electric utility and the utility decided years ago to build fiber to serve its own needs and to bring fiber to businesses in the city. The city started this new venture already owning 700 miles of fiber – much of which will likely be the backbone for building the last-mile for this venture. Springfield is also touting this as a smart grid initiative, meaning the electric utility is likely picking up a piece of the cost of the new fiber construction. There is a good chance that the math would not look nearly so favorable for a city without an electric utility – because in that case the venture would be starting with no existing fiber and the new fiber venture would have to absorb 100% of the cost of the new construction. I’ve looked at this lease model for cities that don’t own existing fiber or an electric utility and the math is often not pretty.

Don’t read those last statements as a criticism of the fiber lease model, but rather just as a recognition that all of the financial factors must align just right for this kind of venture to work. Any city owning an electric utility ought to do the math and consider this model. Cities with low construction costs for fiber might also be good candidates.

The surprising part of this arrangement is that this is being done by CenturyLink. This is an incumbent telco that is well known throughout rural America for operating lousy copper networks. The company has been ignoring the customers in rural markets, and CenturyLink customers living in rural Missouri can’t be thrilled to hear that the company will be offering gigabit fiber in a new market while continuing to ignore their broadband plight. CenturyLink is not going to sink a lot of capital in Springfield, but it’s paying for the cost of electronics and installation.

I have to give CenturyLink credit for tackling this venture. They were building fiber-to-the-home networks before Jeff Storey, the new CEO put a kibosh on spending capital for projects earning ‘infrastructure returns’. The FTTP businesses is an economy of scale business and CenturyLink can take advantage of the staff and platforms they already have in place to operate efficiently in Springfield. Since this is dark fiber the company can still do everything the CenturyLink way – which is an important factor for a big telco. We’ll have to wait to see if this is a new business line for CenturyLink or if Springfield is a unique case.

Operating on a Leased Network

One of the comments posted on a recent blog mentioned that CenturyLink recently had agreed to operate on somebody else’s fiber network to serve residential customers – the first time that one of the big telcos or cable companies had agreed to do so. One of the major reasons cited for lack of competition in the US is the unwillingness of the major ISPs to operate outside their own networks. This certainly sounded newsworthy and I looked into the example cited.

CenturyLink has agreed to use the fiber network provided by Lumiere Fiber, an affiliate company of Sterling Ranch, a new planned community outside of Denver. CenturyLink won the ability to serve the community through an RFP competition with Comcast, the cable company serving the area. As the winner, CenturyLink will be the exclusive ISP on the network – which only has a few homes now but has plans to grow to 12,000 residences.

So is this really newsworthy? I think the answer is both yes and no – but mostly no. It is true that CenturyLink will be using somebody else’s fiber network, and a large one at that, when the community is ultimately built. But there are a number of reasons why this is not as groundbreaking as it sounds.

First, this is not really unique. While this is a large new subdivision, in many ways this is similar to the thousands of arrangements that ISPs routinely have made to serve large apartment complexes. In the vast majority of apartments the wiring is owned by the landlord and not the ISPs. There are some large apartment units around the country numbering in the thousands of units and this opportunity is unique only from this perspective of being larger than most MDUS.

CenturyLink is already building a lot of fiber to residential neighborhoods, with nearly 1 million new units passed this year – so this isn’t going to present any technological challenges. I am sure that the company will use the identical electronics and provisioning software it uses everywhere else.

This also is not going to stretch the operational systems of CenturyLink. The only real difference between this and other CenturyLink fiber is that the company doesn’t own the fiber. But they are going to take orders and connect new customers using their normal processes. They will dispatch technicians for trouble calls in the usual manner. And if Lumiere hires CenturyLink to do the fiber maintenance then they would even make fiber repairs in almost the same manner (this detail was not specified in the press releases).

There seems to be two reasons why the big ISPs don’t generally use networks owned by others. In the case of the big cable companies there seems be a gentleman’s agreement to never cross those lines. I can’t find one example of a big cable company crossing the line to compete for residential customers.

But the hardest barrier for the big ISPs to use other networks is the fact that their systems are largely incapable of making operational exceptions. They have created operation systems and processes that work for them, on their own networks, with their own employees. These processes are often highly decentralized and it takes employees scattered across the country to accomplish normal daily tasks like adding a new customer or answering a trouble call. It’s extremely difficult for a decentralized company to make exceptions for customers that are treated different than everybody else – that always results in chaos.

An example of this is Verizon FiOS. When the company decided to build fiber they realized that they could not reshape their existing copper work processes and people to accommodate the new technology. They solved this by creating a totally new company and FiOS was new from top to bottom – from technology, to people, to processes.

The real headline I want to see is where one of the big ISPs gets on somebody else’s network in a competitive environment. For example, there are a number of open access fiber networks in Washington state that are significantly larger than the Sterling Ranch opportunity. There are numerous smaller open access networks around the country, and no big ISP has ever served residents on these networks. If the big companies would jump on competitive networks then a lot more of these networks would get built.

San Francisco is talking about building an open access fiber network and if it’s built will really challenge the big ISPs. If that network comes to fruition, will one of the other big cable companies decide to take on Comcast? That would be the big news we’ve always wanted to hear.

The San Francisco Broadband Experiment

The City of San Francisco seems poised to tackle building fiber to everybody in the city. They have conducted several studies looking at the cost of building fiber. The city also created a Blue Ribbon Panel that has recommended in this recent report that the city should construct a fiber network.

The city is proposing to finance a fiber network in a new way. The city is looking at fiber connections in the same way as any other utility like electricity or water. The concept is that everybody in the city would pay a monthly utility fee that would fund the construction and operation of a fiber network. The number that was tossed around earlier this year was an average monthly fee of $26 per month to be charged to every household and business in the city. It’s hard to tell from the various reports if that’s the number still being considered. The Blue Ribbon report does recommend that the city seek private investment which would be used to lower that number.

The city wants to build the fiber network to everybody in the city, which differs from the typical ISP demand model that only builds to those that buy a broadband connection. The city does not want to be an ISP and wants to emulate some of the large cities in Europe which open up their fiber networks to multiple ISPs. The hope is that multiple ISPs using the network for a minimal charge will create competition and low-price broadband.

It’s an interesting concept. There are smaller municipalities in the country that are financing fiber with municipal bonds – but in most cases the expectation is that the fiber project will generate enough revenue to repay the bonds. But fiber construction is expensive in big cities and the utility fee is needed to finance a network that will cost more than $1 billion in San Francisco.

The city’s rationale for considering this is to provide world-class broadband to everybody. This is a city that is in direct economic competition with cities in Japan, Taiwan and South Korea – and the city views fiber as a necessary component to long-term financial success. Comcast is the biggest ISP in the city and they have fast broadband today with speeds now up to a gigabit download. AT&T offers DSL plus has built fiber to large businesses and MDUs. Sonic has been building some fiber to residences in the Bay Area. And like in every large city there has been some fiber built by ISPs and CLECs to selected locations in the city.

But the city is concerned that a significant percentage of the public can’t afford fast broadband access today. The Blue Ribbon Panel notes that the government-sponsored fiber network in Singapore reduced broadband prices from $90 per month down to $30 – $40 today while speeds leaped to a symmetrical gigabit connection.

No NFL city has yet tried to build fiber and this proposal is going to meet a lot of resistance. Certainly Comcast, AT&T and other big ISPs will do everything possible to derail such an effort. The city says that they don’t want to directly compete with commercial ISPs, but if the fiber network really lowers gigabit prices to $30 – $40 that will clearly get most of the customers in the city.

I foresee all sorts of attempts to try to stop this project. The big ISPs are enjoying unprecedented support today in Congress and the FCC, and one ISP tactic might be to legislate against the project – either at the federal or state level. My fear is that a legislative approach might also stop more traditional municipal broadband projects. I would also expect to see numerous lawsuits from ISPs challenging the project. It’s such a new concept that it’s hard to envision the basis for such lawsuits, but I fully expect them. I can also envision a few citizen lawsuits trying to stop a mandatory new utility fee – picture forcing Comcast employees to pay to construct a competing network.

The final big hurdle will be in getting enough quality ISPs on the network to offer real customer choice. The few open access networks in this country have not attracted the many quality ISPs. The open access model works in Europe because the old state-monopoly telcos and cable companies have been forced into competing with each by the formation of the European Union. And perhaps quality ISPs will take a chance on a network in an NFL city. But in this country there seems to be agreement among cable companies to not compete with each other and it’s unlikely that we would see Charter, Mediacom or others stepping in to compete against Comcast.

This is a really interesting idea and it could be a viable way to get gigabit broadband to everybody in a big city. The city has not made the decision to take the leap forward, and if they do they will certainly face an uphill battle to make it work. But this could be the first trial in trying to bring the European open access model to the US.

When a Consultant Says ‘No’

Doug Dawson, 2017

One of my competitors recently held a webinar where they told a group of municipalities that they should never accept ‘no’ from a consultant who is evaluating fiber business plans. This is about the worst advice I think I have ever heard for many reasons. I think perhaps this consultant meant that one shouldn’t be afraid to be creative and to look at alternative ideas if your first ideas don’t pan out. But that’s not what they said.

Building and operating a fiber network is like any other new business venture and sometimes a new business venture is just not a good idea. This is why anybody launching a new business of any type does their homework and kicks the tires on their ideas to quantify the opportunity. A feasibility study means going through the process of gathering as many facts as possible in order to make an informed decision about a new opportunity.

The advice in this webinar was given to municipalities. Somebody giving this same advice to for-profit ISPs would be laughed out of the room. Established commercial ISPs all understand that they have natural limitations. They are limited in the amount of money they can borrow. They understand that there are natural limits on how far they can stretch existing staff without harming their business. They understand that if they expand into a new market and fail that they might jeopardize their existing company. My experience in building business plans for existing ISPs is that they are as skeptical of a good answer as a bad one and they dig and dig until they understand the nuances of a business plan before ever giving it any real consideration.

But municipalities build fiber networks for different reasons than for-profit ISPs. Existing ISPs want to make money. They also undertake expansion to gain economy of scale, because in the ISP world being larger generally means better margins. But cities have a whole other list of motivations for building fiber. They might want to solve the digital divide. They might want to lower prices in their market and foster competition. They might want to promote economic development by opening their communities to the opportunities created by good broadband.

These are all great goals, but I have rarely talked with a municipality that also doesn’t want a broadband business to at least break even. I say rarely, because there are small communities with zero broadband that are willing to spend tax dollars to subsidize getting broadband. But most communities only want a fiber business if the revenues from the venture will cover the cost of operations.

Sometimes a strong ‘no’ is the best and only answer to give to a client. Clients often come to me determined to make one specific business plan idea work. For example, many communities don’t just want a fiber network, but they want a fiber network operating under a specific business model like open access. That’s a business model where multiple ISPs use the network to compete for customers. Open access is an extremely hard business plan to make work. I’ve often had to show municipalities that this specific idea won’t work for them.

Or a commercial ISP might want to enter a new market and want to make it work without having to hire new employees. My advice to them might be that such an expectation is unrealistic and that over time they will have to hire the extra people.

My advice to clients is that they should be just as leery of a ‘yes’ answer as a ‘no’ answer. For example, every one of the big open access networks has an original business plan on the shelf that shows that they were going to make a lot of money – and those business plans were obviously flawed. If they had challenged some of the flawed assumptions in those business plans they probably would not have entered the business in the way they did. It’s a shame their original consultant didn’t say ‘no’.

I’ve always said that ‘dollars speak’ and any new business has to make financial sense before you can think about meeting other goals. Every business plan contains hundreds of assumptions and it’s always possible to ‘cook’ the assumptions to find a scenario that looks positive. I have created business plans many times for commercial and municipal clients where an honest look at the numbers just doesn’t add up. I’ve had a few clients ask me to create a more rosy forecast and I’ve always refused to do this.

I personally would be leery of a consultant that doesn’t think that ‘no’ can be the right answer for doing something as expensive as launching a fiber venture. Sometimes ‘no’ is the right answer, and if somebody tells you ‘no’ you ought to listen hard to them. It makes sense to kick the tires on all of the assumptions when you hear ‘no’ and to get a second opinion, if needed. But it’s important to kick the tires just as hard when you get ‘yes for an answer.