The Industry What Customers Want

Local Government Funding for Fiber

There is an interesting new trend where local government acts as the banker for rural broadband projects. It’s an interesting new twist on public / private partnerships and is a model that more communities should consider.

Consider these rural broadband projects in Minnesota.

  • First is RS Fiber. This is a new broadband cooperative that serves most of Sibley County and some of Renville County in Minnesota. Bonds were approved to fund 25% of a broadband project and those bonds are backed by the counties, some small cities and also by townships that are getting the fiber. The expectation is that the project will make the bond payments.
  • Next is in Swift County Minnesota. Federated Telephone Cooperative, an existing telephone company, was awarded $4.95 million to build fiber to rural homes in the county. The county approved general obligation bonds of $7.8 million to complete the project, or 60% of the funding.

Both projects are classic examples of a public private partnership. In these particular cases the company that will own and operate the network is a cooperative, but these same agreements could have been made with a for-profit telco or some other telecom provider as well.

These kinds of projects make sense for a number of reasons:

  • The process of approving bond financing is far faster than securing traditional funding for these kinds of projects.
  • Bonds for fiber can be financed over a long period of time – 20 to 30 years, while loan terms for commercial loans are usually shorter. Just like with a home mortgage, borrowing for a longer time period means lower annual debt payments, which is essential to make these projects financially feasible.

In both cases the Counties and other local government entities have taken on the role of banker. The local governments will have no operational role in running the fiber business (a role they did not want). The Counties expect for the bond payments to be covered by the fiber project. And since these networks are being built in rural areas with few other broadband alternatives the new fiber ventures should get high customer penetration rates. But if the ventures fail then the local governments are on the hook to cover any shortfalls in the bond payments.

These are both cases of local governments deciding that the need for rural broadband was great enough to risk taxpayer money to get this done. They also decided that the risk of not getting paid is low. The business cases show that even in the worst case the revenues from the projects should cover almost all costs, meaning that the downside risk to the Counties is minimal. In the case of RS Fiber, as a start-up new cooperative, they would not have been able to get any traditional funding without the seed money from the local governments.

This is a model that the rest of rural America should consider. Small ISPs like these cooperatives stand ready to serve a lot of rural America, but they often don’t have the financial wherewithal to do so. In these cases, a public private partnership with local government as the banker seemed to be the only way to make this happen.

Everywhere I travel in rural America homeowners and farmers want good broadband. They understand that it’s costly to build fiber to farms and small rural towns. But they also seem willing to help pay to make this work. I think if more rural counties would listen to their constituents they would take a harder look at this model.

Of course, a county needs to do their homework up front and make sure they know it’s a sound project and that the estimated cost of building the broadband network is accurate. But assuming there is a solid business plan, perhaps the most valuable role a county can tackle is that of being the banker to help new broadband builds get off the ground

The Industry

Is Now the Time to Invest in Fiber?

It’s been obvious for a decade that the ISP market is not going to get competitive until new entrants join the market and build fiber networks. We don’t need the government to tell us that there is not very much head-to-head competition between large ISPs. Verizon is the only large incumbent that has built any appreciable amount of last-mile fiber, although there has been a lot of fiber built in smaller markets by the independent telephone companies.

Until now there has been virtually no competition from new market entrants other than Google and about a hundred municipalities that have built fiber in their own towns. And even most of those municipalities took advantage of the facet that they were already in the electric business. But I think the market forces are finally lining up to make this a more attractive market for new entrants.

There certainly seems to be a demand for fiber. Households clearly want faster and more affordable broadband and better customer service and are clamoring for competition. Cities everywhere have been crying out for fiber investments and have offered incentives to anybody who will build it. Certainly Google has awakened this demand by elevating the conversation to be about gigabit fiber service.

On the supply side it’s getting easier all of the time to build fiber. The cost of the electronics needed to serve customers has dropped steadily over the last decade. Where fiber used to require an expensive box on the side of the house, the ONT is now a tiny device with an integrated WiFi that can be powered from inside the house. And 802.11AC WiFi has enabled ISPs to be able to deliver services within many homes wirelessly, allowing them to ignore the costs and problems of using existing wires. There are now also more cost-effective ways of getting the fiber drops from the curb to the home.

On the supply side you also have to consider the lack of competition from the incumbents. The Department of Commerce just released numbers that show that vast majority of customers who want Internet speeds of 25 Mbps or faster only have one ISP option.

It’s also gotten easier in the financing world. The economy has improved significantly since the sub-prime mortgage meltdown of 2007 and the consumer confidence index has risen steadily. Interest rates are still low and investors have built up a huge war chest of investment money looking for good shovel-ready projects.

All of these factors are coming together to enable new entrants to look at fiber as a profitable market opportunity. Certainly the margins on data products are sky-high with operating margins of at least 80% compared to margins on voice at about 60% and on cable TV of maybe 20%. A competitor can look at those margins, along with the public’s general dislike of large ISP customer service and see an opportunity to make money.

There are a handful of new market entrants that are building fiber networks. Consider the following examples:

  • Tucows from Toronto has already made a name in the US through Ting wireless. They have done well in wireless through great customer service and by pricing so that cellphone customers only pay for what they use. Tucows just purchased Blue Ridge InternetWorks in Virginia and plans to build fiber in Charlottesville, the home of the University of Virginia. They see room in the ISP market for companies with great customer service and competitive pricing. They plan to offer gigabit speeds and will by eyeing additional markets.
  • Brooklyn Fiber is building gigabit fiber in Brooklyn and surrounding areas. It comes as a shock to people when they learn that Brooklyn and many other older east coast communities never got Verizon FiOS fiber. Brooklyn Fiber offer speeds up to a gigabit at affordable prices.
  • Sonic is an ISP in California that has installed gigabit fiber in Brentwood and Sebastopol. The company has been an ISP since 1994 and has resold service on incumbent copper. But with superior customer service they have become the dominant ISP in their neighborhoods.
  • US Internet has been building residential fiber in small parts of the Twin Cities in Minnesota. They offer 1 Gbps servive for $65 per month and have just announced a 10 Gbps product at $400 per month.
  • RS Fiber Cooperative is a new cooperative that will soon be bringing fiber to rural Sibley and Renville Counties in Minnesota. I can’t remember the last new telecom cooperative that was formed. The Cooperative model is an interesting one since the customers own the business. Over the long run cooperatives can thrive where other providers can’t due to not needing to make big profits In fact, by law cooperative are largely required to plow profits back into their businesses. This new business is particularly interesting since they are bringing fiber to the farm.

These handful of companies don’t yet constitute a movement, but perhaps they are the first of what may be many new competitors. The actions of the incumbents – poor service, high prices and relatively lows speeds – are inviting competition into existing markets, and so perhaps we have finally reached the time when it’s a great idea to invest in fiber.

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