Thanks to Jeff Hoel for providing the transcript for the Episode 80 of the Community Broadband Bits podcast with Eric Lampland on justifying a network with indirect cost savings. Listen to this episode here.
Eric Lampland: But the overall impact, when you look at the economic development is much greater than the narrow metrics that we use to determine whether or not the network itself can be successful.
Lisa Gonzalez: Hi there. This is the Community Broadband Bits Podcast, from the Institute for Local Self-Reliance. I'm Lisa Gonzalez.
This week, a special guest stopped our offices in Minneapolis for our podcast conversation, Eric Lampland. He's Founder and Principal Consultant for Lookout Point Communications. Eric has worked with numerous entities, both public and private, looking for ways to improve connectivity. We discussed benefits that often accompany municipal networks but don't always find their way into a feasibility study or business analysis. Over the years, Eric has documented many examples of ancillary benefits, both economic and otherwise. His work emphasizes the need to consider a broader approach when assessing pros and cons related to assessing municipal networks.
Chris Mitchell: Welcome to another edition of the Community Broadband Bits Podcast. This is a special edition. We're all in one room. I'm Chris Mitchell. We got Lisa Gonzalez.
Lisa: Hey there.
Chris: And joining us today is Eric Lampland, the Founder and Principal Consultant for Lookout Point Communications.
Eric Lampland: Good afternoon.
Chris: Eric has a long history of building these networks. You've done it both with large enterprise customers and with communities, helping them to build networks. And you and I, in fact, worked together in Prior Lake, on a subcommittee. And so we have a lot of familiarity working with each other. And for listeners out there, you should know that the fact that I know the difference between GPON and active Ethernet is entirely due to this guy right here, Eric, who provided a lot of tutoring over the years. And so it's been very helpful, and we would not have muninetworks.org the way it is without your input over the years. So, thank you for that.
Eric: Thank you.
Chris: So, the reason I wanted to invite you in today was because we were talking, and you mentioned that you had come to this realization when you were looking at the numbers of Prior Lake, a suburb of Minneapolis. Just what was happening there?
Eric: Well, in Prior Lake, we were doing a feasibility study. And the intention of the feasibility study was, like most municipalities, to determine whether or not it was realistic to build a municipal network. And in that discussion, one of the concerns was economic development. And so the real question was, well, what was economic development -- what we were looking at. And there were a number of aspects that were important to Prior Lake. One was incubators, the growth of companies coming to town. And one was, what was the actual dollar impact to the city? It was in that area that we looked at cost savings to the citizens.
Chris: Right. And so, a lot of communities, they look at these networks, and their question is, if I build a network, can I get enough customers, that will generate enough revenue to allow me to pay off my operating costs and pay off the debt from building the citywide network. And it sounds like you're starting to think, maybe that's too narrow of a way of looking at it.
Eric: That's correct. You know, I mean, the way you phrase it is exactly what we do, over and over -- and we've done it for over 150 cities now. And so, those cities look at it in that businesslike manner. But the overall impact, when you look at economic development, is much greater than the narrow metrics that we use to determine whether or not the network itself can be successful.
Chris: OK. So, let's talk very specifically. If a city's not going to justify building a network because it's not going to get enough money back for selling services, what WILL justify building that network, that fiber optic network that's going to be super-advanced? It's going to offer the fastest speeds available. It's probably going to lower prices. It's going to be far more reliable. It's going to have all these benefits. But which of them justify building the network specifically?
Eric: Well, there's been a long conversation about what are the ancillary impacts in building networks. You know, as we talked about first, it's simply revenues against costs, and the capital expense initially, and the operational expense on a year-to-year basis. And that's fine, if you're looking at it from a business case perspective. But when you're looking at from the fact that these governments are really doing this out of concern for their citizens, then what is that concern? And one of those areas is, well, what is, in fact, the expense that the citizens are carrying for paying for the services that we all today find absolutely necessary in life?
Chris: What kind of economic impacts did you find when you were looking at how a fiber network would change things in Prior Lake?
Eric: Well, beyond the normal economic development issues, like some company coming to town -- which is hard to forecast, because at the time you're doing the study, you don't have that actual data -- we looked specifically at what were the cost savings to the citizens. And so, in this particular study -- in the Prior Lake study -- we used a factor that came out of a 2003 GAO study, that indicated ...
Chris: General Accountability Office -- for those who are not government geeks like us.
Eric: Very good. General Accountability Office. ... had done a study in 2003. 2003, it's important to recognize that that's prior to the building of most fiber-to-the-home networks in the nation. So you're looking at competition at a very poor level at that time. And yet, there, we were seeing that in those towns, with that kind of competition, there was about a 15 percent reduction in the cost of services to the citizens. So we took the simple [figure] of 15 percent, and we applied it against that population, and realized that in the first five-year period of time, we would return to the citizens of Prior Lake a number about $4 million greater than the capital expense of building the network -- totally beyond the matrix of questions that deal with the business case.
Chris: So, what you're saying is that regardless of whether citizens of Prior Lake -- regardless of whether a household decides to stay with their preexisting provider or whether they go with the city's provided network, they're going to be paying less for services than they had been. That's going to be money that's going to be sticking around in their pocket. And over five years -- you're saying already -- that amount of money, that people are not spending, is far in excess of what is spent to build the network.
Eric: Right. And I should be a little bit careful about the math here. The money that we came forward with -- $4 million in excess of capital expense, OK? -- was actually the savings only experienced by the subscribers that applied to the city itself. And yet, your point's well taken. Because, in looking back at these various cities, the prices from the carriers go down 15 percent too. So that we could add those customers to it, and we could get a much larger number.
Chris: Right. It's something that we talked about in our discussion with Dean Curtis from Iowa, at one point. And he likened it to the amount of money that they saved every year is like an armored truck just dropping bundles of cash every year, you know, on Main Street, and people being able to come and pick it up. Because that's money in people's pockets that is there. It's real money. And they tend to spend that money in local restaurants, and entertainment, and things like that. It's not that -- you know, people aren't necessarily going to notice. It's like those little stimulus that governments sometimes does, where it's ten bucks a paycheck. But it adds up.
Eric: It very definitely adds up. If you take a look at most of the carrier financial reports, you'll find that what we call the average return, or the revenue from a given user, ...
Eric: Yeah. ARPU. Good old ARPU.
Chris: Average Revenue Per User.
Eric: Very good.
Chris: You find it in every feasibility study. Yup.
Eric: If you look at, you know, Comcast or Charter, or the large cable companies, you'll note that their ARPU is running about $150 a month. And, naturally, that varies with where in the country and a whole series of other factors. But across their entire base, if that's the average, that's a pretty good number to use. And so if you do the math on that, and you just assume their $150 per month, and you take 15 percent of that, you get a number something in the area of about $22.50 a month. Or, you know, round it up to $25, making it easy, or round it down to $20, and be a little kinder to them. You're looking at a dollar savings for any given household that probably approximates something in the area of $300 a year. Over a five-year period of time, that's $1500, which is well in excess of the cost of typically driving by.
But when we looked at this in Prior Lake, I started to begin looking at it in other communities that we had been servicing. And -- where we actually had numbers about what the impact of competition was. So, some of our customers are public utilities that have been on the verge of migrating from hybrid fiber coax networks to fiber-to-the-home networks. And in those cases, we actually have some real numbers that they have actually experienced. And it's not uncommon to find a number that says that outside the template of competition -- of the competitive area -- that prices are 40 percent higher. So, when you start looking at 40 percent savings, you're talking about substantial kind of monies, not only the $10 a month that disappears on somebody but actual, real cash, that they can recognize. And those kinds of numbers are not normally included in feasibility studies.
Chris: Right. Well, I think elected officials are often reluctant to say, hey everyone, let's talk on the level. We're going to build a network, and this network, it's going to be close to breaking even. We're not sure if it's going to pay for itself in the first five years or not. But what we know for sure is that even if it costs you a few hundred thousand dollars in money from the general fund -- or a few million dollars in money from the general fund, as in the case of Monticello, which has had to struggle against this really predatory competition -- predatory pricing, which should be illegal under the Sherman Anti-Trust Act, but we don't believe in anti-monopoly laws anymore, since Reagan.
But if you look at those kind of subsidies that some cities have put into networks, which is pretty rare in my experience, nonetheless the community is still coming out ahead, in many of those cases, because, even if your taxes go up one dollar or two dollars, your savings on your telecommunications bill are ten or 20 dollars.
Eric: That's correct. And, in fact, you know, it's sort of an interesting thing to sit back and think about a politician going to his populus and saying, we are going to support a fiber-to-the-home network here, for our local citizens; and the benefit to you, as a local citizen, is a "tax break" of $30 a month. [laughs] But that's really what happens.
Chris: On the other hand, if Comcast is sitting in this room, they're going apoplectic. And they're saying, oh my God, this is crazy. You're going to ruin free enterprise. We're going to go out of business because this is unfair competition.
Eric: There are old stories that seem to keep coming around all the time. Whenever you threaten a major carrier, it's either that we're going to lose money, or that we're going to put them out of business. And, quite frankly, they've been doing fine for a long period of time. If you look at the price reductions that they give to any new client, to induce them in, it's usually well in excess of this 15 percent that we've been talking about. If you looked at their total profit stream -- in the multi billions of dollars -- and you were to look at the contributions that that would make to local economies, you would be talking in the hundreds of millions of dollars in actual savings.
Chris: Still leaving them with billions of dollars in profit.
Eric: Yes. Indeed. They'll do fine, OK?
Chris: You know, there's -- the other thing that I'd like to bring up in that situation is just to remind people that these cable networks, the telephone networks, they were built in an era of monopoly. They were built -- they have unfair advantages that go forward to today, because they had the advantage of not having to worry about competition. And so I don't think it's unfair, for a community that is struggling and does not have the Internet access it needs to have good jobs and a good quality of life, if they decide that this is how they want to justify building this essential infrastructure, then I think that should be their choice to make.
Eric: I tend to agree with that. And I think that when we look at the changing of business models in this space, it shouldn't be any different than how we've looked at the changing of business models that have been impacted by the Internet and by the growth of technology over the last number of years. There aren't too many tears out there, that I know of, for the fact that we've lost analog film. And Kodak had some problems. But who was the crier on that? So, there are a number of businesses that have been affected by the technology change that has transpired over the last 20 years. And good businesses -- good, competitive businesses -- modify their business models and continue to compete well. In the case of telephone and cable companies, we haven't seen much modification.
Chris: Oh, I think they've modified my bill just about every year.
Eric: On the increase -- the average increase since 1995, the average yearly increase of the price of video services in the cable industry is 6.1 percent per year, OK?
Chris: And I know that you can't tell me what that is in Internet, because the fricking FCC has decided not to track it!
Eric: [laughs] Well, we haven't had that same ...
Chris: Unfortunately -- no, I mean, this is essential data that our government is not collecting.
Eric: I agree.
Chris: I'm sorry, I cut you off.
Eric: No, that's fine.
Chris: Six percent increases ...
Eric: Well, it's 6.1 percent on a compounded average increase. But, to put that in perspective, inflation over that same period of time has been 2.4 percent. So the increase in pricing in cable is two and a half times what we experience as the normal increase in price costs. So -- and that is now going to primarily six companies. But since the 1996 Telephone Act, there has been significant consolidation in the cable markets themselves. And in the telephone markets themselves. If you recall, back in the '90s, we had, you know, 22 different operating companies that were telephone companies; we're now down to three major ones. We had a similar situation in the cable market. And we're now down to Comcast being the large player, and ....
Chris: Until Time Warner Cable and Charter combine, and then maybe they'll be the large player. But... Yeah. There's no hope for any deconsolidation. Everything's getting more consolidated.
Eric: That's correct. That's correct. And even -- and when you look at the actual delivery of services, that, you know -- measuring them on -- in terms of dollars -- is certainly one metric that you can use. But when you measure them in terms of the actual delivery of services, these consolidations have had significant impacts.
Lisa: Eric, you were talking about all of these benefits to the community. And this is one of the things that we often struggle with, is how to measure them, and portray them to communities. So if a community is considering building a network, other than just telling them these are the benefits, how do you measure them?
Eric: That is an excellent question. And many people have struggled with an answer to that. We struggled with how to deal with the utility value that accrues from things that aren't normally traded in dollars. Like what is the value of a teacher's commitment to his profession, or her profession, beyond the salary? And so, there are all these different soft, if you will, kinds of pieces. The one that we initiated today, where you say that the normal rate of decrease in your average monthly cost is 15 or 40 percent, is a measurable number. And it's something that you can find in the actual experience of communities. And it's a number that you can actually tally up and say, well, this is the value of it.
The values that you get into that are more subjective, like what is the benefit to education of having all students connected to high-speed video servers at the school, at no cost to the family, but actually is just part of the citizens' value within that network. Those are much harder to assess.
Chris: What you're saying is actually -- just to really put a pin in it -- is that when you build a network with these justifications, you can connect every last home, so that a family that doesn't pay for any services may still be able to connect to the school.
Eric: Absolutely. We did a particular feasibility study for a town. And we costed out for them the difference between connecting only those people who had signed up as subscriptions and using the fact that we had deployment teams in the field at the beginning of the network to connect EVERY house going by. And we found that the difference in cost was significantly low in comparison to what we anticipated. But there's a ....
Chris: So you’re saying it cost a little bit more up front, but there's a lot of savings down the road that justified that.
Chris: And you're saying that the delta, in terms of how much more it cost up front, was not quite as much as you expected.
Eric: Exactly. Exactly.
Chris: Do you look at the benefits to a community of making sure that everyone has access to this technology? And it's hard to put a number on some of that. But I think it's important. And I think the main goal of this discussion was to look at a more holistic way of understanding the benefits of building a network, and why, if a city decides that it would be OK that the network not be able to pay for itself for a very long time, or, in some cases, forever, directly. I mean, our streets don't pay for themselves, and they're still incredibly worth the investment that we put into them from the general fund.
Eric: I'll share with you that in most of the communities that we have looked at, and in by far the vast majority of communities that have actually implemented fiber-to-the-home, their services do pay for themselves. So it's not normally a question of, does the government need to subsidize these services? No. They normally pay for themselves over a period of time, and so forth. But when you look beyond that, and you look at the economic impact to the community, we've talked about the cost that is actually gone back into citizens' pockets, that doesn't normally get captured. But we also don't talk about the fact that the Internet has enabled people to build their own businesses. And if you have fiber-to-the-home, you can do that. There are a lot of aspects to it. But -- benefits to the community -- I recently just examined a new operating system back end that does network management for open access networks. Very, very, very capable product. But one of the interesting little pieces that they do in that particular open access solution is to do what they call "land parties." So, this would be the notion of you and I being able to make a connection at will, any time we wanted to, your house to my house, and being able to conduct whatever we were going to conduct....
Chris: Which we could do right now through Comcast. But, presumably, in order for me to connect to you -- a mile, mile and a half, down the street -- it's going to send my signal all the way through Comcast's network. God knows how far, on to the east coast or the west coast or Kansas City or whatever. And then it's going to come back. This is something, I'm guessing, is going to be considerably less convoluted and give us better pings.
Eric: When I heard that, it was described in that particular fashion. And the thing that leapt to my mind immediately is, how wonderful it would be for students in a given classroom in a school to create a multi-party network where they could collaborate in the evenings with all of the rest of the students in the school over a school project. You know, that's a benefit to education that isn't caught in any feasibility study.
Chris: Right. And to some extent, one could do sort of a poor man's version of that over a cable network. But there's a few things that would be enabled by a community-owned fiber network. One is the technology -- the fiber. And, two, I think, is what you're getting at, is a willingness to explore these kinds of things, because it's for a common good, not just because it would generate more revenue.
Eric: Yes. It would be -- it is for that common good that I'm talking about, which is the value back to the community of being able to do something like that. You could set these things up, and this is a benefit to the community. OK? If it's a community network. But in the event that it's a provider who needs to make revenue off of basically anything and everything we do, ...
Chris: Wants to. Let's not say "needs to." We've already discussed the kinds of profits they're sucking out.
Eric: All right. Wants to. Wants to. Fair enough.
Chris: Well, this has been terrific. Thank you so much for coming in, Eric. I hope it's the first of many discussions.
Eric: Thank you, Chris. Thank you, Lisa.
Lisa: My pleasure.
Be sure to visit lookoutpt.com for more on Eric's work and his company. We hope to talk to him again soon, because in the course of the conversation, we touched on numerous topics for another interview.
We encourage you to e-mail us with questions or ideas for the show. You can write to firstname.lastname@example.org . On Twitter, we are @communitynets . Follow us for current topics on telecommunications. This show was released on January 7th, 2014. Thank you to the group Haggard Beat for their song, "Lazlo," licensed using Creative Commons. Thanks again for listening, and we'll talk to you again soon.