Thanks to Jeff Hoel for providing the transcript for the episode 55 of the Community Broadband Bits podcast with Chris and Lisa on "overbuilding" in Part Two of 'Crazy Talk'. Listen to this episode here.
Lisa Gonzalez: Hello. This is the Community Broadband Bits Podcast, from the Institute for Local Self-Reliance. And I'm Lisa Gonzalez.
In a past episode, we listened to common arguments from telecommunication company lobbyists that Chris had recorded at an event in Wisconsin. We chose three typical statements, and addressed them, one by one. This week, we travel back a bit to June 2011 and Washington DC. Chris participated in a debate sponsored by the Information Technology Innovation Foundation. Rob Atkinson, President of the foundation, put forth several arguments. We chose three of his arguments and examine them for part two of our "Crazy Talk" series. We talk about the concept of "overbuilding," the claim that building in the U.S. is more challenging than in other parts of the world, and the misconception that subscribers demand nothing more than minimal speeds. Even through Mr. Atkinson argued these points two years ago, they're the same sound bites lobbyists use today. Let's jump right in.
Rob Atkinson: I just don't see any rationale for the federal government -- or state government -- funding overbuilders. It just, to me, is a waste of societal resources when we have, according to the FCC -- what is it? -- around 8, 9 percent of homes, communities -- households that cannot get broadband. There's a real reason they can't get broadband. It's not that the providers are nefarious or selfish. It's because it costs more to give them than you can get in revenues.
Chris Mitchell: Well, let me ask you, Lisa -- when we start off about this, let me ask you, when you hear the term "overbuilder," what does that mean to you?
Lisa: When I hear the term "overbuilder," I think of something that's unnecessary. I think of something that is predatory. Those are the first two words that come to mind for me.
Chris: So, this is something that industry often uses, right? I mean, a lot of us think of having multiple choices a competition. But when you're an economist that is supported heavily by the cable and telephone companies, then "competition" is now called "overbuilding." Right?
Chris: Which is to say, there's a network in place, and one is building a new network over top of it. And you're right. It is this idea that it's unnecessary, it's duplicative. The thing to do, though, is to step back and to think about, if we have a problem of connecting everyone -- A perfect example of this is in northern Minnesota, with the -- Lake County. Lake County has two towns of some significant size. Both of them have cable service from Mediacom. And, now, the county has said, we want to make sure everyone in our county has access to the Internet. And so they've said, we're going to connect EVERYONE. And the business model works a lot better if they're connecting people in rural areas that don't have any access, AND they're connecting people in those few towns where there is access. And so, Mediacom says, it's unfair, because you're "overbuilding" us. To which, I say, you need to build a network that's going to cash flow, right? Because if you build a network that is only going to connect those areas that may be unincorporated, or are very rural, and you don't tie in the areas where there's a little bit of scale, where you get a little bit of benefit from the higher densities, then that network will always need to be subsidized. And what are you going to here then from Mediacom and others? Oh, well, you're going out and subsidizing those networks. Right? That's what they're going to say. For them, it's a win-win argument.
What has happened is, private companies are doing what's called cream-skimming. Which is that they've connected the areas that are the most lucrative. And then they turn around and say, well, you can't overbuild us. You should just focus on connecting those other areas. To make a business model work, you often have to engage in a little bit of "overbuilding" -- or giving people a better choice -- in order to make the whole network cash flow when you're connecting those unconnected areas. There's this idea that, oh, well, you should just build in the areas that are unprofitable. Well, that would be nice. But the reason that they're unprofitable and that they're unconnected is because it's a very high-cost area with a low return on the investment. And so, I don't think it's fiscally responsible to build networks that can never cash flow. I think it makes a lot more sense to connect areas -- and, yes, to go over and "overbuild" -- to provide a real choice in some other areas -- particularly where there's one provider that basically has decided it's going to "own" that territory, not really invest in it, and not provide the connections that are needed in the modern economy.
You know, the less charitable, flip response might be to say, you know, is it "overbuilding" when the interstates were built, 'cause it put the dirt roads out of business? No. It's fundamentally, actually -- I mean, you can just poke a finger in their eye and say it's not overbuilding. You have a cable network that's 15 years old. And you haven't put any -- hardly any money into. And we're building a network that's going to connect everyone, for many years into the future, with much faster speeds. So, there's a lot of ways you can go on that, depending on how friendly you want to be.
Lisa: Um hum. I don't own a business. So, you know, maybe I'm thinking strictly from a consumer's point of view. But if I own a business, and I realize that telecom is its own special industry, do I have any advantages at all to having some form of competition? Or is that strictly always going to be bad for me?
Chris: Well, it depends. And I can actually use an example of Chattanooga's Electric Power Board, which, though it is owned by the city, nonetheless, is a business that has to cash flow ...
Lisa: Um hum.
Chris: ... and is under tough pressure to do so in a variety of ways. Now, they're not competing for customers, for electricity, so it's not exactly the same example. But nonetheless, when they engage in telecom, they like that they were getting into more of a competitive area. Because it forced them to be more efficient.
Lisa: That's -- yeah, and that's what I would think too. And you could be learning from your competitors. It would sort of drive the whole industry in the area, to offer better services for your customers. And, I would think, with customers that are happier, you have a better chance of getting more customers.
Chris: Right. I think that that's true. I think that you'll find that if you're forced to invest -- which is something that you may not want to do because you want to maximize the return to shareholders -- that, indeed, people will be happier with your service; they may be willing to pay more for it; they may just take more of it -- if you give them that option. In a situation where you're not giving them that option, then you don't know. So, it's -- I mean, it's complicated. And it's further complicated by the fact that I don't think -- in this sector, the economics do not support having MANY competitors.
Chris: Right? And so, we can't just say, oh, the more competition the better.
Lisa: Right. Right.
Chris: But I think that having a choice beyond one or two providers is important. And, honestly, I think, to some extent, it matters in having a choice between an accountable provider and one that isn't.
Chris: So, if you have a locally-owned network that's competing against a larger, maybe privately-owned network, then that gives people more choices. Because it's not just two choices. It's one that's accountable to the community in ways that the other is not.
Lisa: Um hum.
Chris: And so you have different dynamics there, that go beyond just a choice between A and B.
Lisa: Um hum. Yeah. Right. I mean, if you go to the bank and you happen to see your neighbor, who happens to work for the telecom, and -- I mean, you're more likely to treat them well, than if they're someone in another country, and ...
Chris: Absolutely. No, and I often -- I mean, we are very supportive of networks that are owned locally. And the reason we don't tend to think local private ownership is a solution -- a long-term solution -- is because they tend to sell out to the private sector -- consolidation -- sooner or later. So -- They'll get a really good offer. And from a network like Comcast. Because, you know, Comcast did not grow by building systems everywhere. They grew by BUYING up other systems ...
Lisa: Yup. Yup.
Chris: ... and often, then, sinking some money into improving them, and things like that. But, fundamentally, I think it is a form of regulation when you go to church with your customers.
Chris: That's the way I often think of it, in smaller towns. Right? I mean, you're going to the grocery story, the post office, to church, with those customers. You're seeing them on a regular basis. And so, even though you're privately-owned, it is a form of regulation. It's a form of discipline.
Lisa: Um hum.
Rob: And one of the points that the advocates say, oh, you know, broadband is terrible in the U.S. What they forget is that broadband -- the broadband-built environment in the U.S. is one of the hardest in the world. Perhaps matched by Canada. It's a lot harder to build broadband in the U.S. than it is in these other countries. We have the longest local loop length of any country that we found. In other words, the length of our copper between the C.O. and the home is twice as long as in many, many countries. That's because we're just a suburbanized, low-density country, and it costs a lot more to lay broadband when you're in a situation like that.
Chris: Yes. The old "it’s so much harder here because we're SO MUCH BIGGER." I visited 46 states so far. And I'm looking forward to picking up those other four. And so I can attest to the fact that we are a big country. I've actually driven across the entire country multiple times at this point.
Lisa: And it took a long time, didn't it?
Chris: It sure did. Even on the interstates. And, you know, it's a tempting argument. Because we are a big, beautiful country. And we have a lot of mountains that make it very hard to build out in a number of areas. However, if you were just comparing our metropolitan areas to other metropolitan areas, you find that we are really behind. You know, you take a look at New York City, Chicago, L.A. -- you know, Austin, San Antonio -- I'm just trying to think -- Boston in particular. I mean, a lot of these places, with the exception of where Google's investing, there's no real hope on the horizon for a fiber optic network. Whereas, many of those peer cities in other nations are very -- are faster already, and they have plans for delivering even faster speeds.
Lisa: They're less expensive too -- a lot less expensive, aren't they?
Chris: Yes, they often are. I mean, you look at Paris in particular -- and not all of Paris but a lot of areas of Paris, they have these deals that end up being -- they end up paying $35 a month for what we end up paying $150 or $200 a month for. It's incredible. And so, you know, it -- I've run into this same argument in other ways too. I've heard people say, oh, well, we have more broadband connections than anywhere else in the world. Which was true until China really got into high gear, you know. But, it's crazy. You know, it's like saying we have more trees than Italy. Well, yeah, you know, we're, like, what, like, twenty times the land mass? Well, actually, I mean, considerably more, when you count Alaska and what not. I mean, it's just -- these -- if you're going to do aggregate figures, the fact that we're one of the larger land masses, that we have so many people, those stats are meaningless. What you want to do is, you want to compare like to like. And so, you want to look out in the, for instance, French countryside and see how are they doing, and compare that to places in the U.S., like, perhaps, rural Minnesota, where there are areas that are comparable. And you find, in many cases -- but not all -- that not only are those places better connected, in other parts of the world, but they have a plan for improving the connectivity, in ways that we don't.
We do have a National Broadband Plan. It's pretty vague. And there's no real sense from the present administration that they actually care about enacting it. So, I just think it's one of those things that you have to be really wary of, and make sure you're comparing like to like.
Lisa: And ...
Chris: It does not make sense to compare Iowa to Seoul, South Korea.
Chris: Absolutely. However, we should be comparing our flagship cities with Seoul. And that's exactly why a lot of people are growing concerned. Because our major cities are not on a path to be competitive with Hong Kong, with Seoul, and other places like that.
Lisa: Um hum. And there are places where we've made big installations. You know, there's that one network in North Dakota.
Chris: Right. Right. Right.
Lisa: So, it's not like we can't do it. It's not like we can't.
Chris: No, that's exactly it. 10,000 square miles of fiber-to-the-home. Why? Because cooperatives care about investing locally. They have a lot of incentive to. They have the same tools that are available to private companies, like CenturyLink -- very big private companies. And those companies have decided not to invest in the way coops have.
So, I mean, you're absolutely right. I mean, our -- some of our rural areas are far better connected, even, than our bigger cities. The interesting thing, of course, is that to solve this problem of making sure we have the best connections in our major cities, we may have to engage in a little bit of overbuilding, I'm sorry to say.
Lisa: [laughs] No. No fair.
Lisa: OK. Let's do one more question. And we will see what Chris has to say.
Rob: The demand is not there today for that network. And that's the reason why we don't have it. Most people -- if you look at the take rates of a lot of -- even these municipal networks -- the take rates of the speed tiers, most of them are at the lowest speed tier. The reality is, at this point in time, most people are happy with 15 megs, or 10 megs, or 20 megs, or something like that.
Lisa: I wish I could get 10 megs.
Lisa: I live in Minneapolis, and the most I can do is 3.
Chris: Well, for affordability ...
Lisa: Right. For affordability. Yup.
Chris: Because Comcast would be happy to sell you a $75 a month connection.
Lisa: Yeah. But I'd also I'd also have to get their TV and their phone in order to get that price.
Chris: Well, we -- my household -- we pay -- I want to say -- $80 a month, about, for a middle-tier on Comcast. And we have to take a few television channels.
Lisa: Um hum.
Chris: But that is -- it gives us a pretty decent connection. I mean, it's slow, compared to what I would get in Chattanooga, or Kansas City, or any one of these cities that are making some real investments. But I think, you know, the question there was -- it's often being used against the gigabit networks. And then the faster networks. Which is to say, people are fine with what they have. And the reason we know that is because, you know, you're not taking a gigabit, Lisa. If you wanted a gigabit, you'd be paying for it. Right?
Lisa: Yeah. That's right. I would.
Chris: So -- I mean, there's so many different layers to this. First is to admit that, absolutely, what we see, time and time again, is that most people are going to sign up for an economically-priced tier. They're going to take the -- sort of the base tier that's offered. Often, it's between $30 and $60 a month, depending on DSL, cable, and a lot of other things. And they're not going to go for the higher tier just to get faster speeds.
Now, that's changing a little bit. There's recently some news with Verizon FiOS where they're finding that, increasingly, more people are signing up for a middle tier. Because they are recognizing the benefits. And what's interesting, that middle tier actually provides higher upload speeds than the other packages. And so, I think we are seeing more and more people recognizing, now. That debate -- that sound clip -- is about two years old, I want to say. Largely still true, In the sense that, in places where people only have an option of slow networks, they tend not to develop a demand for super-fast networks. It's like saying, you know, nobody wants to buy a racecar in an area where you're not allowed to drive more than 30 miles an hour. Well, why would you -- why would anyone build a racecar if all the speed limits were 30 miles per hour?
Lisa: Um hum. Plus, there's a difference between the demand for residential and the demand for business.
Lisa: You know, what was he even referring to?
Lisa: You know, you can't lump them both together. They're two totally different things.
Chris: Right. That's the thing. And another piece of that, I think, is demand over time. Which is to say that, now that we have these gigabit networks, you see a lot more people that are wanting that. Well, it takes time to build those. And so, as local governments -- there is a responsibility to plan ahead for infrastructure.
Lisa: Um hum. Yeah.
Chris: You don't build an interstate and then hope that it's crowded on day one.
Lisa: Um hum.
Chris; Right? You build it to the capacity so that over time it will meet the needs ...
Lisa: Um hum.
Chris: ... and you also build it with the idea that you're -- that it's going to change demand. Right? So, when you have a gigabit network, it starts generating more demand for that network.
Lisa: Um hum.
Chris: These are -- I mean, it's a complicated situation that they just want to simplify with these nice little sound bites about how -- I know that nobody wants a gig. And I know that because nobody has a gig.
Lisa: Um hum.
Chris: It's lunacy.
Lisa: Lunacy. Yeah.
Chris: One of the things that he says in that is that most people are happy with the 15, or the 10, or whatever. And I think there's an important point there. And there's a marketing piece that comes to us from, actually, a coop out in the Dakotas, where a very savvy person started around -- let's just say -- two weeks before Christmas and two weeks after Christmas -- for that one-month period -- they kick everyone up a speed tier without increasing their prices. They send out a little note saying, hey, this is our gift to you for the season. Enjoy the higher speeds. Knowing that after a month of getting used to those higher speeds, a lot of those people are going to say, you know what, that is worth it for an extra $10 a month, or an extra $15 a month, to have that higher-capacity connection. Because there's a saying, the slowest speed that you'll accept is the fastest speed you've ever experienced.
Lisa: Um hum.
Chris: I've had personal experience with this. Where, over March Madness, I was visiting my parents, watching a lot of basketball, trying to get a little work done during the commercial breaks. And I found that on their DSL connection -- which was still 8 Mbps downstream, 1 megabit up -- it seemed to me that it was crawling. Because I'm used to a speed that's four or five times faster than that. And so, it was a realization to me. When I did the speed test, I almost didn't believe it. Because -- 8 megabits down and 1 up -- it just seemed so slow. I thought that my perception wouldn't have been warped that much. But -- People's patterns change, but they cannot change until they experience the golden land ...
Lisa: Um hum.
Chris: ... Right? Right? Until they see how good it can be, they're not going to be willing to pay for it.
Lisa: Um hum.
Chris: And that is the truth. It doesn't mean there's not a demand for it. And similarly, I think, we saw a pattern develop with electricity as well. Which was, in the early years, I think, people had a couple of light bulbs. Right? There was a sense of, well, no one's ever going to need to have, you know, 20 light bulbs, and 10 different major appliances, and all that. Maybe rich people.
Lisa: Right. [laughs]
Chris: Maybe really rich people can have, like, more than one refrigerator. You know? And, over time, things change. And, in particular, they change if we make sure everyone can afford it.
Lisa: Um hum.
Chris: And I think that's an important point. Because if electricity cost $3 a kilowatt-hour, well, I think a lot fewer of us would have refrigerators.
Lisa: Um hum.
Chris: We'd like to know how people react to this. Because I think it can be useful to respond to these talking points. If people want to send in talking points that we should address, they should feel free to do so. And if they want to join us, to this sort of thing, I think we should invite them on to share their best way of rebutting a talking point.
Lisa: Absolutely. That would be great! It would be nice ...
Chris: Send in an MP3. Try and keep it to, let's just say, three minutes or less. And let's hear how you want to respond to some of the talking points you here.
Lisa: Sounds great! And, definitely, send them to us.
You can watch the full debate at muninetworks.org , where we have it archived in our video resources section. Thanks again for listening to the Broadband Bits Podcast. If you encounter other statements of lunacy and you want ideas on how to address them, let us know. Feel free to send them to email@example.com and we'll be happy to share them with our audience. We also want you to share your ideas for future shows. And we want your feedback. You can follow us on Twitter, where our handle is @communitynets . This show was released on July 16th, 2013. Thank you to the group Eat at Joe's for their self-titled song, licensed using Creative Commons. Thanks for listening.