As Salisbury prepares to officially launch its publicly owned FTTH network offering triple-play services, it offers lessons for other communities that want to follow in its footsteps. As we wrote a month ago, Fibrant has candidly admitted it cannot win a price war with incumbents. Companies like Time Warner Cable have a tremendous scale advantage, which allows them to price below cost in Salisbury because the large profits from all the non-competitive markets nearby can subsidize temporary losses.
On October 10, the Salisbury Post ran a story "Fibrant can't match cable company specials." Alternative possible titles for the article could have been "Cable Co cuts prices to drive competition from market," or "Time Warner Cable admits customers pay different prices for same services." Interestingly, when Fibrant unveiled its pricing originally, the headline read "Fibrant reveals pricing" rather than "Fibrants offers speeds far faster than incumbents."
A lesson for community networks: do not expect the media to cover you fairly. The big companies have public affairs people with relationships with the press and they often buy a lot of local advertising. This is not to say all local media is bought off -- far from it -- but local media will have to be educated about the advantages of community networks.
Quick question: When you hear this quote, who do you first think of?
"We always work with customers to meet their needs and budget."
The cable company, right? Well, that is Time Warner Cable's claim in the above Salisbury Post article. Later in the article, a local business owner expressed a different sentiment: "Time Warner has the worst customer service I have ever dealt with."
The business owner goes on:
“Fibrant may have these same kind of issues, however I can actually go to the source to deal personally with someone who is vested in the community, not spend two hours on the phone and never solve the problem as I do with TWC,” he said.
“Even if pricing is higher, I would make the change. Price is important, but quality and service is tantamount.”
Speaking of the services...
The cable giant regularly offers specials and recently announced a new bundle including Internet, cable and phone for $99 per month for one year. That’s about $45 cheaper than Fibrant’s comparable package, Deluxe.
The new special was not a direct answer to Fibrant’s recently published rates, Ballister said, and the company views Fibrant as “just another player in the competitive field.”
Riiiiiiiiiight... we see a lot of these coincidences. Similarly, somehow the residents in Tacoma (with a publicly owned cable competitor) keep getting better deals for the same content than residents in Seattle (with no publicly owned network yet). One of the first benefits of a community owned network is savings for subscribers to incumbent networks -- those networks cut prices in response to competition. If TWC cuts its prices by $30/month, that is $360/year more in the pocket of each subscriber in the community directly attributable to the community network.
Consider the speeds available from Time Warner Cable:
The $99 special includes Road Runner High Speed Online with a download speed of 7 megabits per second and upload speed of .384 Mbps. For a limited time, subscribers can upgrade for free to Road Runner Turbo, boosting their Internet speed to 10 Mbps for downloads and .512 Mbps for uploads.
Fibrant's advertised upstream speeds (at 15Mbps symmetrical) are 30x faster than Time Warner Cable's and will likely be 40-50x faster in practice due to the many problems with older coax networks. Now consider this quote:
“It’s just interesting that during these economic times, when city and county budgets are being cut back, that they would want to spend millions of dollars providing services that are already out there,” Ballister [TWC flack] said.
Once again, we hear the incumbent cable company asking if there is really a difference between dirt roads and interstate highways.
Then we hear the same old false claims:
Cities pay no property or income taxes. They can operate the utility at a loss and cross-subsidize from other areas of government, Ballister said.
“They can level taxes on citizens to recover their operating costs,” he said.
Fibrant is expected to operate at a loss for three years and have a positive cash flow by year four. It will take longer to make a profit, Clark said.
In fact, cities do pay many taxes as well as making payments in lieu of taxes (PILOT). As the city does not make a profit for building infrastructure in the same way that private companies are supposed to pay taxes on their profits, they should not be compared on a 1 to 1 basis. However, it must be noted by big companies like Time Warner often get special treatment thanks to their lobbyists and accountants, allowing them to pay much less in taxes than smaller companies do.
The rest of his statement is also at odds with reality. Government faces tremendous pressures not to operate at a loss and in most states is explicitly prohibited from cross-subsidizing.
Unfortunately, the reporter falls for this and adds to it by failing to explain why the network will run at a loss for several years. All massive networks are built and financed this way -- public and private. Networks take millions, tens of millions, or hundreds of millions to build depending on the size. Most of that cost is upfront and will only break even after years of signing up subscribers.
Cities in the fiber optic business also can hike the fees their competitors must pay to get access to their subscribers, Ballister said.
“They are the gatekeepers to rights of way and pole attachments,” he said.
The company has no specific examples of fee hikes to hurt Time Warner, but “these are valid concerns that exist right now,” Ballister said.
Of course, federal and state laws prevent munis from arbitrarily raising those costs. And if a muni raises the prices for accessing the ROW, the muni will have to pay those higher fees also... and while we might view it as payments from the muni to the muni, the people running different divisions certainly do not see it that way. If Salisbury raises the costs of accessing the ROW, Fibrant must pay more and will take longer to break even.
Turning now to the disapppoint of a Fibrant supporter,
Even though Fibrant’s bandwidth is nearly unlimited, the city is no different than Time Warner in the way both providers are partitioning the Internet, said Michael Young, who owns Downtown Graphics Network.
“Unlike cable, which has limited bandwidth and sells Internet speed like a commodity, expectations for Fibrant were for one Internet speed and one speed only, as fast as fiber optic would go,” Young said in an e-mail to the Post.
I am not sure how this business owner developed that expectation - I never got that impression from the Salisbury folks (though I have not followed it nearly as closely as someone who lives in the community). Offering the fastest speeds possible would be prohibitively expensive.