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.