The Industry

Sonic – the Transition from UNEs to Fiber

In my continuing series of writing about interesting competitors, today’s blog is about Sonic, a CLEC and fiber overbuilder working in the San Francisco Bay area and other communities in California. It’s an interesting company because they are the poster child for building a competitive telecom company based upon the rules established by the Telecommunications Act of 1996. That Act required that the large telephone companies unbundle their networks to allow competitors to use their copper lines.

Sonic got started in 1994 as an ISP, then became a CLEC in 2006 and followed the path envisioned by the 1996 Act. This meant collocating electronics in AT&T central offices to provide DSL to customers over unbundled copper loops (UNEs). The company found a receptive customer base since they offered faster broadband than AT&T’s at an affordable price. They grew to be collocated in 200 AT&T central offices around the Bay Area, Sacramento and greater Los Angeles. These offices are tied together by the use of unbundled interoffice transport – also created by the 1996 Act. They originally deployed DSL that used one copper pair but have migrated to VDSL2 and other faster versions of DSL that use two copper pairs and delivers significant bandwidth. They still have almost 50,000 customers in the region using this technology.

What’s interesting is that Sonic did this starting in 2006 – a time by which much of the rest of the industry had written off the use of telco copper. The UNE business plan got a sour reputation with many in the industry when the CLEC industry using UNEs spectacularly imploded in 2001-2002. This collapse of the CLEC industry was due to a perfect storm of economic events and had little to do with the benefits of using telco copper.

If anything, it’s easier to use telco copper today because today’s DSL technology is far better than the DSL in 2000. Sonic and other CLECs are able to provide fast and reliable broadband using ADSL2+ and VDSL2, bonded over multiple copper pairs. Most people in the industry are probably surprised to hear that Sonic can use bonded copper UNEs to provide speeds as fast as 400Mbps to serve businesses. The usefulness of unbundled UNEs is far from dead.

Sonic also reaches roughly 25,000 customers using resale. This allows them to sell the same DSL products sold by AT&T in locations where they don’t have collocations. All of the Sonic products offer a bundle with a voice product that includes all of the expected features plus unlimited calling to the US and to landlines in 66 other countries. They are still finding strong demand for the voice product – something that also might surprise many in the industry.

Five years ago the company decided to use the cash flow from the UNE business to build fiber. Their fiber network now covers roughly 1/3 of the City of San Francisco, plus Brentwood, Sebastopol, Albany, Kensington and Berkeley in the East Bay. They are eying other markets around the region, the state, and beyond. They are an aggressive competitor and their fiber product line starts with a symmetrical gigabit for $40 per month, bundled with the unlimited voice product. They won’t publicly disclose the number of fiber customers, but their goal is to soon have more customers on fiber than on DSL. In my opinion, this is the essence of the vision of the 1996 Act – a transition from UNEs to facility-based networks.

The company’s biggest worry right now is that the FCC recently got a petition from the large telcos asking to end the use of unbundled network elements (UNEs). The big telcos argue that the UNE business plan is obsolete and that there is sufficient competition in the marketplace without unbundling their copper – while also claiming that “In the residential marketplace, competition will not be materially affected by forbearance from Section 251 ( c )(3) because there is effectively no remaining UNE-based competition in that marketplace.” and that “To the extent CLECs serve residential customers using ILEC facilities, they do so on commercial platforms.

But Sonic and a number of other CLECs using UNEs show this to be untrue. Given that just Sonic alone serves nearly 50,000 California households with UNEs these claims are incorrect and misleading. Sonic is using the unbundled copper in exactly the manner envisioned by Congress when they wrote the 1996 Act – to allow competitors to place the best technology possible on the telco copper networks. The Congress at the time reasoned that telephone ratepayers had paid for the copper networks and that the public ought to derive any benefits possible from the networks they had paid for.

The big telcos have always hated the idea of unbundling their networks. They have slowly chipped away at some of the products envisioned by the 1996 Act such as access to telco dark fiber. They would love to kick CLECs like Sonic off their networks – and in Sonic’s case that would deprive 50,000 customers of fast DSL and telephone service at prices they can afford.

Almost every major market in the country, and many smaller ones have CLECs that use unbundled network elements to provide DSL – usually the newer and faster DSL that the telcos won’t invest in. The telcos are slowly walking away from DSL which can be seen by the huge numbers of customers switching to the cable companies.

But CLECs like Sonic have used the copper to bring products that people want – and, unlike the telcos they are pouring those profits back into building fiber to these same communities. That’s exactly what Congress had in mind in 1996 and it would be a shame to see the FCC choke off some of the companies who are offering a competitive alternative to the big cable companies.

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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