The Industry

A New Model for Open Access?

Fiber CableThe traditional open access business model to serve residential customers has never worked in this country. I am familiar with the financial performance of most of the existing open access networks and from a purely financial perspective they are all failures. A few networks have failed outright like Provo. A few others have been able to generate enough revenues to cover annual operating costs, but most don’t even do that. And from what I’ve seen, none of the existing open access networks have ever been able to generate enough cash to pay anything towards the cost of building the fiber network, leaving the cities that build the network holding the financial bag for the initial investment.

There are a few reasons that this has never worked. First is that open access naturally drives ISPs towards cherry picking. Open access networks operate by charging fees to ISPs to use the network. If an ISP pays the typical $30 per month fee to use the network, they are not going to sell inexpensive broadband to anybody in the community. So when ISPs only sell high-priced products they don’t get enough customers and the city network owner doesn’t collect enough revenue to pay for the network. This has happened to every traditional open access network. None of them have signed up enough customers to pay for the networks and everyone who has built a network using this model ends up heavily subsidizing the open access network.

The other issue is that most cities have had trouble attracting very many quality ISPs. The whole concept of open access is to offer choices to customers. But most of the open access networks in the country only have a few ISPs, and even the ones they attract are often tiny, undercapitalized businesses. Attracting ISPs is so hard that there is one large open access network today that has been reduced over time to having only one residential ISP on the network. That’s not providing much customer choice.

But there are two cities looking at an alternative model. One is the small city of Ammon, Idaho, and the other is San Francisco. Both cities want residents to pay for the basic cost of the network. It’s an interesting idea.

In Ammon a household that wants broadband access will pay a tax levy of $10 to $15 per month and will also pay a utility fee of $16.50 per month. This means that each subscriber will pay $26 to $31 per month for the fiber network – a very similar charge to what is charged to ISPs on other open access networks. The Ammon commitment is voluntary and only those that sign up for broadband will pay the fees.

San Francisco is considering a similar proposal. There, residents would pay a monthly utility fee of $25 and businesses would pay as much as $115. In San Francisco this fee would be mandatory and everybody in the City would be assessed the fee. In an NFL city the fee probably has to be mandatory to assure that the network will be paid for.

Having customers pay a fee to the city takes the pressure off the cherry picking issue. By lowering what ISPs pay there is a lot better chance of having affordable products on the network. And that ought to result in more customers on the network.

But like any idea this one still leaves some open questions. For instance, how does the city make enough money over time to pay for the inevitable replacement of electronics or catastrophic events like storm damage? Or what does a city do if the ISPs don’t do a good job and customers don’t like them? The Ammon plan requires the payment of fees for a very long time, and small businesses like ISPs often don’t have the staying power to last for a long time. How will the business keep up with inflation – will the fees have to increase every year? And what happens if the city doesn’t get or keep enough customers to pay for this – will the fees go up for everybody else or will the city subsidize the network?

In a voluntary system like Ammon I also wonder what the consequences are for homes that change their mind over time. What if somebody has a financial problem and is unable to pay the fees? What happens when they want to sell their home – is this fee a tax lien of sorts? That’s what has happened to homes that buy solar power systems that are paid for over time. And what happens if a new buyer doesn’t want the fiber and doesn’t want to pay the fee? No doubt over time there will be legal issues to figure out.

The challenge to make this work in San Francisco seems much more difficult. It’s not hard to envision lawsuits from citizens who don’t want to pay the fees. And I can imagine a fierce battle with Comcast and the other current ISPs over the legality of a mandatory fiber utility fee. This seems like a concept that could take a decade of court time to resolve.

But the idea of having citizens somehow pay for the fiber network is an interesting one. Irrevocable customer pledges are a revenue stream that can be used to finance fiber construction. It’s hard to know if this concept will work until we see it in action. But it shows how serious cities are becoming to get good broadband. One has to think that if households are willing to sign long-term pledges to pay for fiber that it has to make a difference. I am sure communities all over the country will be watching to see if this works.

The Industry

New Life for Open Access Networks?

Google Fiber and Huntsville Alabama just announced an interesting public private partnership. This is something that’s new for Google. In this partnership Huntsville is going to build and own the network and Google will lease connections on the network. Other ISPs will also be able to get on the network making this an open access network.

The details of the arrangement were not announced but there have already been a couple of interested parties that have made public records requests about the deal, so we ought to know more soon about how it will work.

There are a number of different ways to operate an open access network. For instance, a city can only own the fiber network and leave it up to ISPs to install the needed fiber drops and the customer electronics. At the other extreme a city could pay for everything. Since it’s been widely reported that Google uses some proprietary electronics my guess is that Google will be responsible for the electronics and the city for the rest. But we’ll have to wait a bit to see those details.

If Google does utilize a custom set of electronics it will be interesting to see how the city proposes to handle adding other ISPs to the networks. There are a lot of networks that would have a hard time handling different kinds of electronics mixed everywhere throughout the network.

The real question that everybody is going to want to know is if the city can make enough revenue from this arrangement to pay for the network. I’ve modeled open access networks many times and about the only way I can see for the network owner to break even with open access is if there are a lot of customers using the network.

And that is the biggest dilemma for owning an open access work. The big open access networks in Europe have a very high overall penetration rate because there are literally a dozen quality ISPs that compete on each network – basically multiple Googles. But if customer penetration rates fall below 50% it gets harder to see a path towards profitability for the network owner.

Fairly simple math can be used to demonstrate the dilemma for open access. If the network has a high penetration rate, say 70% or higher like happens in Europe, then the network owner can charge a relatively small fee per connection and can still break even. But should that same network have a small penetration, say 30% or 40%, the network owner would have to charge twice as much per connection to recover their costs.

The dilemma for network owners is that charging a high connection rate naturally leads the ISPs to cherry pick – that is, not sign up customers with low revenues that don’t create a good enough margin over and above the cost of the network connection. To give an example of this, if a network has a connection charge of $15 per customer, then some ISP in the market is probably going to be willing to use that connection to sell relatively low-price broadband, perhaps at $35 to $40 per month. But if the connection charge is instead $30 per customer, then no ISP is likely to chase those same $40 customer revenue opportunities and will only pursue customers willing to pay more.

This puts network owners in an economic bind. If they charge a low rate but don’t get a lot of customers they don’t make enough revenue to recover their costs. But if they raise the connection charge they force the ISPs to cherry pick and only sell more expensive products, and the network owner still might not sell enough connections to break even. The higher the connection charge, the fewer the potential connection that can be sold. It’s an interesting economic dynamic and one that puts all of the risk on the network owner.

I’m sure the deal is good for Google or they wouldn’t have signed it. It certainly relieves Google of a huge capital outlay. What others cities are going to be most interested in is if this a good deal for Huntsville. Most of the open access networks in the country have not done well for the network owner and it will be interesting to see if having a premiere tenant like Google will make a difference in the open access dynamic.

The Industry

Can Open Access Work?

Today I am meeting with the Public Utility Districts (PUDs) in Washington State and they have been gracious enough to invite me to be the keynote speaker at their convention. These are the rural electric companies that serve much of the state outside of the major cities.

Whenever there is any listing of the fastest Internet speeds in the country the areas served by some of these PUDs show up among the fastest places because many of the PUDs have invested heavily in fiber. But they have a unique business plan because there is a legal restriction in the state that prohibits PUDs from being in the retail telecom business. This has forced them into operating open access networks where they build the fiber network and let other companies provide services.

No two of the PUDs have gone about this wholesale business in exactly the same way, and so together they provide multiple experiments on ways to operate a wholesale open access network. I know several of the PUDs well and they have one universal problem – no large, well-financed service provider has agreed to offer service on their networks. No big cable companies or telcos or anybody you ever heard of wants to serve the many customers on these fiber networks. There are a handful of connections sold to companies that serve large businesses, like Zayo and Sprint, but no bit company that wants to serve smaller customers.

What is lacking is vigorous competition on their networks from multiple companies willing to serve residents and small businesses. And that is what open access is supposed to bring. Instead, most of the retail service on these networks is provided by local ISPs who took advantage of the opportunity to reach more customers. In many cases the local ISPs were so small and undercapitalized that the PUDs had to assist them to expand onto their networks.

There are not many other open access networks in the US. One of the largest ones was in Provo, which struggled with the model and eventually sold their network to Google. I was privy to Provo’s books and they could not find a business plan model that would make their business model cash flow. But if we look outside the US there is another great example of how open access can work if done right. Europe has a number of cities that have built fiber networks and invited ISPs and others to serve customers. In Europe this has been a big success because numerous service provider show up to provide service. Some of these providers were the former state monopoly companies that were unleashed to compete after the formation of the European Union. But there are also new competitors there akin to our CLECs and ISPs.

The big difference between US and Europe is that here none of the incumbent competitors are willing to operate on somebody else’s network. I can’t think of one example in the US of large cable companies competing against another one. And there is very little competition between the big telcos other than some fierce competition for some giant government and business accounts. Here in the US the PUDs have only been able to attract small local ISPs to operate on their networks. For the most part these ISPs do a good job, but they are small and have the problems that all small telecom companies have.

Many of the PUDs are in the uncomfortable position of only have one real service provider on their network. Should the owner of that business die or just go out of business a PUD could see most of their network go dark and all of the residents and businesses in their towns lose their fast Internet.

Anybody who understands telco finances instantly understands why this model is so hard to make work. A company must spend a lot of money to build a fiber network and then can charge only relatively small fees to others that use it. A typical revenue for wholesale access to a fiber network is in the range of $30 per customer per month and that is really not enough revenue to pay for building and operating the fiber network. By comparison, most triple play providers have an average revenue per customer north of $130 per customer per month.

The PUDs built the fiber because they are in rural areas where nobody else was going to do it. Their communities have already benefitted tremendously from the fiber. But they have their work cut out to keep this going, and I am sure they will figure out a way to do so.

Exit mobile version