This is Episode 209 of the Community Broadband Bits Podcast. Christopher Mitchell sits down with Lisa Gonzalez, Senior Researcher at MuniNetworks, to discuss crushing consolidation. Listen to this episode here.
Christopher Mitchell: Hey Lisa, come over here.
Lisa Gonzalez: Got my heels on, too.
Christopher Mitchell: Welcome to podcast 209 with the focus on consolidation and independence.
Lisa Gonzalez: If I had my fife, I'd be playing it for the crowd.
Christopher Mitchell: Yes, you would, in your Ren Fair costume, no doubt, predating our great Declaration of Independence.
Lisa Gonzalez: Nice try, Chris.
Christopher Mitchell: I just want everyone to know, Lisa loves the Renaissance Fair.
Lisa Gonzalez: I do, yes, but you know what I love even more?
Christopher Mitchell: Consolidation?
Lisa Gonzalez: No. Crushing consolidation.
Christopher Mitchell: Yes, crushing consolidation, which either could be a descriptive term, because that's what consolidation can be, or it could be what we would like to do to consolidation, which is to crush it.
Lisa Gonzalez: That's right, yes.
Christopher Mitchell: We want to talk today about consolidation, what happens when companies combine and that sort of thing. We want to talk about consolidation in the wake of Google having just bought Webpass, an ISP that we interviewed a few weeks ago and thought was really great and one of those signs of those innovative young companies that can bring competition to the marketplace and give people choices, and now they're owned by Google. Google certainly has a history of delivering very high quality services and customers tend to like them, but frankly as Google grows, I am worried about whether or not they can keep that up. I'm very disappointed that Webpass is no longer independent.
Lisa Gonzalez: Womp, womp, womp.
Christopher Mitchell: Yes. I fully expect that Webpass will continue to do a good job and whatnot, but they are not independent, and seeing how this is a week in which we should be reflecting on independence, we wanted to circle back and talk a little bit about why that's important. I think maybe a good place to start is in one of those things that we talk about a lot, which is the over-hype of public private partnerships.
Lisa Gonzalez: Yes, Chris' favorite.
Christopher Mitchell: Some people want to talk about how public private partnerships are the only way to do anything and this and that, but I think we just had a good lesson earlier this year about the danger of public private partnerships, which we might just call PPPs or P3s to save our popping.
Lisa Gonzalez: The poison pills of public private partnerships.
Christopher Mitchell: What happened at UC2B, the Urbana-Champaign network earlier this year?
Lisa Gonzalez: The UC2B network is one of those networks that was created by the municipalities. Actually, it was a collaboration between Urbana-Champaign and the University of Illinois was also involved. They deployed a fiber optic network, which actually ended up serving a lot of people who would not otherwise have been able to get such great service. There were people who obtained service for as low as $20 a month.
Christopher Mitchell: Right, so they had connected all these community anchors, and as a part of that, they also connected these low income neighborhoods where people were unserved or under-served.
Lisa Gonzalez: Right, and one of the reasons it was lauded as such a great network is because it was in a last mile network and there were so many people who were able to get service, affordable, fast, reliable service.
Christopher Mitchell: Right, so UC2B has this network connecting low income neighborhoods, and they're really excited about trying to figure out how to extend that to the entire city. They search far and wide. They cast a wide net. They worked really hard to find the best possible provider to work with them, because they didn't want to do it themselves. They're a city in which they don't even have a water utility. They have no utility functions as a city or as either one of their cities. The university sure didn't want to run it, so they're finding a partner. They worked really hard. I'm trying to make this point. They worked really hard to find just that right partner, the Goldilocks partner.
Lisa Gonzalez: They chose iTV-3 because —
Christopher Mitchell: They were a local provider.
Lisa Gonzalez: Right.
Christopher Mitchell: They had a great reputation for customer service, and lo and behold, less than a year after signing that agreement, it's announced that this new entity, Countrywide, that no one really has any idea what it is except that it's funded by some capital folks out in New York, so the money comes from New York. Apparently, the people are coming out of St. Louis and they're going to be taking over this network in Illinois and they're going to be adding on.
Lisa Gonzalez: They bought all the assets.
Christopher Mitchell: Yes. Fortunately, iTV-3, when they decided to sell, the communities actually have a right of first refusal because they put that in the contract, and that was very smart. Now, they've elected not to use that, and so they're going to work with Countrywide, and they're actually excited, because iTV-3 had not actually expanded in the way that was expected. I think a lot of people thought that iTV-3 was having problems with cash flow because they had been getting a lot of money from their family rental video business, which hadn't been doing very well, and I think may have just fallen off a cliff. At any rate, this is what happens when you're not independent, right? You have a community that was dependent on a partner. They worked very hard to select just the right partner, and then that partner, being a free entity in the great United States of America, they can just sell themselves, and they did. Now the community UC2B had the ability to buy the network and give themselves some protection. They elected not to do that, but I think that just having that provision gave them a little more control in terms of negotiations with the two. It's one of those things where people talk about PPP, PPP, PPP. That's nine Ps, I think. They're so excited. They think everything's got to be a public private partnership, ignoring all of the problems that can come along and the uncertainties that can result because who knows who you'll be dealing with in a few years when you're working with a private company in this industry. Private companies like US Internet that have been around for a long time, I do not see them consolidating. I think Sonic will be independent for as long as Dane can sign his name to things, but I worry about a lot of partners, and I worry about where they'll be in 10 or 15 years.
Lisa Gonzalez: Yes. If it's a company that, these family owned companies, if it is independent, it's family owned, sometimes the kids just decide they don't want to do it.
Christopher Mitchell: Right.
Lisa Gonzalez: That happens.
Christopher Mitchell: Well, you were here an hour ago for my rant about how the inheritors of things ruin everything.
Lisa Gonzalez: That's right.
Christopher Mitchell: Yes, yes. Children ruin their parents' legacy.
Lisa Gonzalez: That's right, and you see what happened with family farms.
Christopher Mitchell: It's not to say that Countrywide is a bad company that's not going to do a good job. The problem is the uncertainty, and the problem is you invest all that effort into finding just the right partner, and then first of all, they don't even really deliver on what you thought they were going to deliver, and then second of all, they sell themselves to a company that you had no ability to vet ahead of time. It just sort of sprung on you. These are good reasons why you might want to think, "Wow, public private partnerships might not be the only possible solution for our problem of having better internet access." Municipal networks are challenging and if you're going to do a public private partnership, then you really want to structure it more like Westminster did where they own the fiber, and not where you only have this right of first refusal. The right of first refusal is better than nothing, but there are better ways, and Westminster, Santa Cruz, these are smarter public private partnerships that give more power to the public sector, and that's what's needed for long-term investments.
Lisa Gonzalez: Although we should be clear, because UC2B does own fiber.
Christopher Mitchell: They own some of the fiber.
Lisa Gonzalez: Right. The original fiber, they own.
Christopher Mitchell: Right. The original fiber, they own, and it is complicated because then whatever iTV-3 bought now has also been up for sale, and that's what the community could have purchased. That's a good correction, but I think the larger point is just that when it comes down to it, don't pretend that public private partnerships are somehow easier or less risky. They're different. In fact, we have a paper that's going to be exploring this that should be out very soon by the time this podcast is airing.
Lisa Gonzalez: Fingers crossed.
Christopher Mitchell: Yes, exactly.
Lisa Gonzalez: It's very meaty.
Christopher Mitchell: Right. Let's talk about something else. Let's talk about big cable. What happened with Charter and Time Warner Cable's merger?
Lisa Gonzalez: Well, they're going to do it. They got the blessing, but they have to expand broadband to two million more premises.
Christopher Mitchell: Right. This is one of those requirements that actually seems like a really good requirement, right?
Lisa Gonzalez: Right, but let's just hold our breath until it actually happens. No, we better not, because then we would suffocate.
Christopher Mitchell: This is one of those situations in which we have really bad consolidation, I think, because you have the industry is getting more and more consolidated at the top. It's really bad for people who are going to be stuck with monopolies that have even more power, and in particular, if you go back to our conversation with the American Cable Association, I actually think this is going to be doubly or triply bad for competition among the smaller providers, because it makes it much harder for smaller providers to compete when you have these mega companies at the top. They're going to find ways of shifting costs onto the smaller providers in the sector. This requirement that Time Warner Cable, New Charter, that they expand to two million new premises —
Lisa Gonzalez: Two million really isn't very many.
Christopher Mitchell: Of those two million, one million actually have to be expanded in areas where people already have broadband as an option, and so I think the FCC is thinking, "We're going to increase cable competition," but New Charter sees that and they think, "Well, there's no way we're going to compete with Comcast. They're our friends. They're our frenemies. We wouldn't want to possibly overbuild them. That would be a bad precedent." What they're probably going to do is go out and target these smaller cable operations, which even if you're stuck with a cable monopoly, odds are if you have a local cable company, you're probably getting much better service than from a massive cable company. The FCC I think is unintentionally basically screwing a lot of those smaller cable companies. Now, I don't want people to think every small cable company is just necessarily good. Some of those small cable companies are rotten. Some of them I actually hold in incredibly high esteem, so I'm hoping that the ones I hold in high esteem aren't the ones that are basically attacked by New Charter, which has all of these advantages that the regulators have just given them in terms of the new scale, but I think this is not really good policy, frankly. I don't even know if they have the power to do it, but it would have been great to say, "You have to compete with Comcast. You, Godzilla, and —“
Lisa Gonzalez: — Mothra.
Christopher Mitchell: Mothra. Thank you. I knew you'd bail me out on that one. Godzilla, Mothra, you have to fight. You can't just go around picking on the little people of Manhattan or Tokyo, I suppose, depending on your movie. I think that's all the big news and big company consolidation that we want to cover. I think we want to cover some of the other little things that are happening. When we talked about consolidation, you wanted to note that —
Lisa Gonzalez: — Not all consolidation is bad? Is that where you're going?
Christopher Mitchell: Well, I think you're going to try and make that case, yes.
Lisa Gonzalez: Yes. I don't think that all consolidation is bad, as long as it's not too ginormous. As an example, there's a network in Georgia, CNS, and it is a combination of several different communities, and one of them, Moultrie, it basically rescued a couple of different communities by consolidating.
Christopher Mitchell: These are in Georgia.
Lisa Gonzalez: Yes. There is a small community nearby, Doe Run, and another one, Norman Park. One of them had a little private network that was on the verge of collapse because the company couldn't afford to keep it up, and Doe Run had its own little municipal network. It also couldn't afford the upgrades, but Moultrie came in and bought those two networks and it became part of CNS, and now all of those people have fiber service. In that case, consolidation was a good thing, but that's because it's not huge and because their "shareholders" are the people who are being served.
Christopher Mitchell: Right. I think that's right. I would be concerned if this network was then reaching all across Georgia. I think nearby communities, I think we're likely to see that they'll continue to have an interest in providing it. In some ways, there's a difference I think between private consolidation and public consolidation, in part because the public, even though Chattanooga is making the decisions about the network, EPB, the electric power board in Chattanooga, is making the decisions and they're connecting the nearby communities that are within their electrical footprint, those are not communities that have direct oversight over EPB. EPB still treats them basically the same, and that's because they're not trying to maximize profits. They're not trying to pull the maximum amount of resources out of the community the way that New Charter and Comcast do. I think there's a difference in perspective, and I also think that some small local consolidation can be effective. This is an industry in which there are returns to scale, and so we don't want everyone to reinvent the wheel, and we really don't want communities to be operating inefficiently when they could be working with their neighbors collaboratively. I think that's a good point. I would say that my rants against consolidation are generally targeted at maybe just the top few providers in the country.
Lisa Gonzalez: Sure, absolutely. Consolidation as a word could be taken as a relative in this particular instance.
Christopher Mitchell: Sure. Here's an example in which some regional consolidation like that actually has been harmful, and that's the podcast we just did with Bob Farmer from Glenwood Springs.
Lisa Gonzalez: Oh, yes. Open access in Glenwood Springs.
Christopher Mitchell: Right, so they had this open access network and they got some small local providers that wanted to operate on it, and those companies were then bought by regional providers and those regional providers didn't really have any interest in operating on the open access network. I think it's the kind of thing where if you're an ISP, maybe you're a WISP, and you're active in this community and then you have an opportunity to jump on this local fiber network and double your number of customers or something like that, that's a great opportunity, but then maybe you get bought by a company that's 20 times larger than you, and suddenly that number of customers on the open access system, that seems insignificant or less important. Here again, we see where if you're planning on doing open access and you're planning on having local providers, you should be aware of the dynamic. This is an industry which has tremendous consolidation, and that's because generally, if I owned a network and I was serving a few thousand people and that network, let's say it's worth a few thousand dollars per person that's served, and I got an offer from a bigger company to say, "Hey, sell us your network and we'll pay you 50% above what it's worth to get you to sell it to us," well, that might be pretty nice for my family. I'm thinking I'm going to send my kids to college or we're going to buy an island in the Pacific.
Lisa Gonzalez: Right, that's what I was thinking.
Christopher Mitchell: It's important to recognize that things can change rapidly in this industry. When I talked to the folks from Webpass, I never would have had the idea that they would want to be taking orders from Google, and maybe they're not going to be or maybe they think they're not going to be, but sometimes that payday really looks nice.
Lisa Gonzalez: Speaking of paydays, I think you also wanted to talk about Cincinnati Bell.
Christopher Mitchell: Yes. This is one in which some conversations recently about Ohio, and when I was talking to some people in Ohio, and we were talking about how Ohio hasn't had any of the anti-muni legislation really rearing its ugly head there. I was trying to get a sense of why, and one of the reasons that someone suggested was that perhaps because Cincinnati Bell is there and Cincinnati Bell is its own entity. It's not part of AT&T, it's not part of Century Link, and so in Ohio, you actually have some different voices talking in the legislature. If it was a state that was basically just dominated by AT&T, which is the case in Wisconsin, I think AT&T can basically say, "This is the way it is," but when you have different companies who even may largely have the same interests from a private sector point of view, they have different agendas and they have different willingness to work together, and so you have different voices talking to elected officials. I think that's important. I think that if I had to have the choice between one cable company lobbying for an issue and them having the entire state or having ten different cable companies that were all privately owned and lobbying the state, perhaps even with more lobbyists in total in the capital representing private interests, I would always rather have those different groups, because you're going to have different interests. There's such danger in that consolidated speaking with one voice and talking to the legislature and convincing them that down is up because you're the only one that's really the expert in the matter speaking on it. That's one of the most under-appreciated dangers of consolidation is in the political realm because of the political power that comes. If there's one thing that we can say about the relationship between political and economic power, it's that the more economic power you have, the more political power you have. The more political power you have, suddenly the more economic power you have, because you shift the rules to be in your favor, and boom, what do you know? Your business share grows. Your market share grows. I don't know. There might be different reasons for why Ohio has that unique situation, and not totally unique, but given the dynamics in politics there, I'm surprised it hasn't come up. I think Cincinnati Bell is doing some fiber. They've been willing to think differently than AT&T and whatnot, and so I think it's worth remembering that breaking up AT&T was the right decision, that having these different companies, even if they're not competing directly with each other, just having that power a little bit decentralized and not so centralized, it makes a difference for a number of areas. I think we get better public policy outcomes when industry cannot speak with a single voice through a single company.
Lisa Gonzalez: Speaking of independence, Chris, I'm really looking forward to your vacation away from the office.
Christopher Mitchell: We're recording this the week before the July 4th weekend, and I'm going to be taking some time off and I'm sorry to say that the office will probably be a lot quieter without me. I don't know how you're going to deal with that.
Lisa Gonzalez: I don't know either. I'll be crying in my tie.
Christopher Mitchell: Maybe I'll pay someone to just show up and knock on your door and come into your office and distract you right when you're in the middle of something important. Well, thank you everyone for sticking with us in this discussion about consolidation. We didn't have a whole lot of hard evidence and whatnot. I feel like we're going to be dealing with this a lot more. I think we're going to be dealing with more privatization efforts. Bristol, Virginia, the BVU Network is about to be privatized, which I just think is really frustrating. A major reason for that is because the state legislature basically refuses to let it expand, so they're going to privatize it and a private company then will be able to expand it. That will be good for the region, but I worry about the future of it. I worry about it being consolidated further in terms of other networks in the future. I think consolidation is going to be a theme that we're going to come back to time and time again. Certainly the private cable companies, the big telephone companies, they're going to keep buying up rivals every chance they get, and the more consolidation there is, ironically, the more municipal broadband we're likely to have, I think, because the more they consolidate, the worse their service is, the more communities look for alternatives. Even though this is a dynamic that actually I think helps us make our case for why community networks are so wise, it's just frustrating to watch it happen, because consolidation kills jobs, it kills innovation, it's really bad on almost all fronts when you're talking about the big companies consolidating.
Lisa Gonzalez: It's just bad for people who want to use the services.
Christopher Mitchell: Right, exactly. Consolidating means they're firing your neighbor who works for the cable system basically, and they're going to hire a guy three towns over and he's going to cover the whole footprint, and that means you're going to have to wait three days longer to get a cable appointment. That's fundamentally what it is. Consolidation works because they fire people and reduce the payroll. It is inefficient to have multiple companies doing the same thing because there are more people doing the same thing. That, unfortunately, is actually what provides employment for most of us. There's other think tanks, there's other policy shops that are doing the same work that you and I are doing, Lisa.
Lisa Gonzalez: Yes. They don't do it as well.
Christopher Mitchell: I like to think that, as well, or at least we have a unique point of view. We're the special flower. This idea that consolidation is actually efficient, it's efficient because you lose your job, and that's not what we need. In fact, we need to strike that balance between an economy of scale in which there's some efficiency just in terms of cost. You don't want to reinvent the wheel, have three head ends in three different cities that are right next to each other, but you do want to have lots of good customer service and you want to encourage investment in that sort of thing. You don't want to consolidate so that Comcast can open a new CSR center, a customer service representative center, in the Philippines. That doesn't help us. Anyway, I was going to try and end, but I just went on another rant.
Lisa Gonzalez: Thanks everybody for tuning in again, and we will talk to you again next week.
Christopher Mitchell: Take care.
Lisa Gonzalez: That was Chris and me, Lisa Gonzales, discussing consolidation and independence and how it relates to telecommunications, internet access, and municipal networks. We want to thank the group The Fifes and Drums of the Old Barracks for the special music this week. The song was "Cork Corn Pipe" licensed through Creative Commons. Transcripts for these podcasts are available at MuniNetworks.org/broadbandbits. Please share your ideas for future podcasts. E-mail us at firstname.lastname@example.org. Follow Chris on Twitter. His handle is @communitynets. Follow muninetworks.org stories on Twitter. The handle is @MuniNetworks. Thanks again for listening to episode 209 of the Community Broadband Bits Podcast.