Tag: "economics"

Posted May 4, 2011 by Rita Stull

This is the first in a series of posts by Rita Stull -- her bio is available here. The short version is that Rita has a unique perspective shaped by decades of experience in this space. Her first post introduces readers to the often misunderstood concept of the Right-of-way, an asset owned by the citizens and managed mostly by local governments.

yarn1.png

In the process of knitting a baby blanket, a whole ball of yarn became tangled into this mess. . . .

. . . reminding me of the time, in the early eighties, when I was the second cable administrator appointed in the U.S., and found myself peering into a hole in the street filled with a similar looking mess—only made of copper wires, instead of yarn.

yarn2.png

Why talk about yarn and copper wire in the same breath on a site dedicated to community broadband networks? Because it was the intersection of ‘art and cable’ that got me started in the ‘telecommunications policy’ arena, the same kind of thinking that continues today in our tangled telecom discussions: Is it content or conduit, competitive, entertainment, essential, wireless, landline, gigahertz, gigabits?

I transferred from the Recreation Department to launch the city’s cable office as an experienced government supervisor with a Masters in Theater. My employer and I thought cable TV was the ‘entertainment’ business and I had the requisite mix of experience and skills to manage one of the first franchises awarded in 1981.

Yikes. Imagine my surprise on discovering that cable was a WIRE LINE UTILITY using PUBLIC LAND, which each citizen pays TAXES to buy, upgrade and maintain! And, our three-binders-thick, cable franchise was a ‘legal contract’ containing the payment terms for use of our public rights-of-way, as well as protection of local free speech rights. I was thirty years old, a property owner who had never thought about who owned roads, sidewalks and utility corridors.

Rights-of-way are every street plus about 10 feet of land on each side. That land belongs to everyone in the community. Rights-of-way are a shared public asset—sometimes called part of our common...

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Posted March 1, 2011 by Christopher Mitchell

As the North Carolina Legislature considers HB129 and S87 to greatly limit community broadband networks (we analyzed the bill here), it is worth taking a step back to understand why companies like Time Warner Cable provide broadband that is unreliable and comparatively both slow and costly without having other companies come in to offer a better product. The problem is basic economics: the problem of natural monopoly.

Ever wonder why you generally don't have a choice between two major operators like Comcast and Time Warner Cable? They have carved up the market due to the costs and difficulty of directly competing with one another.

Some folks have a choice of cable companies -- RCN and Knology, for instance, have been successful overbuilders in a few regions (though they went through troubles far worse than most public networks that have been termed "failures").

But for the most part, overbuilding an incumbent cable company is all but impossible -- especially for a private sector company looking for a solid return on investment inside a few years. In the face of a new cable entrant, massive companies like TWC start lowering prices, offering cash or other enticements, and lock both residents and businesses into contracts to deny the entrant any subscribers.

Companies like TWC can do this because they have lower costs (through volume discounts for gear, content, and even marketing synergies as well as because they long ago amortized the network construction costs) and can take losses in one community that are cross-subsidized by profits from non-competitive areas. New entrants, both private and public, have higher costs as well as a learning curve.

This is why we have so little broadband competition. Without competition, the few providers we have invest less and charge more, which is other countries are rapidly surpassing us (not because we have large rural areas, nonetheless a popular straw man).

In the face of this reality, communities have built their own networks for a variety of benefits, including creating competition or changing the dynamic of a duopolistic "market." Massive incumbent providers responded by claiming competition from communities was unfair and using their lobbying power to...

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Posted December 21, 2010 by Christopher Mitchell

There is so much to say about Burlington Telecom and its struggles that it cannot be covered in a single post. This is one of several posts that will discuss pieces of the situation. One of the questions that has been raised by the Larkin "audit" of BT is whether BT was losing money on the broadband it provided to City Departments.

Though the report prepared by Larkin for the State revealed a number of disturbing practices by Burlington Telecom, a number of them have been strongly disputed. The report clearly has a number of weaknesses, from an apparently lack of expertise on somewhat basic telecom economics to the fact that the "auditors" do not appear to have attempted to talk to anyone who knew anything about how BT operated.

That said, something surely went dramatically wrong with BT and the Larkin report may help shed light on it.

But when one reads articles in the local press about it, it is quickly evident that the writers have practically no understanding of what they write and harbor a strong hostility against Burlington Telecom. Consider this passage from the Burlington Free Press:

Auditors observed as well that the city, a prime user of BT services, was charged “below market rates” and “below BT’s cost of service. The low rates charged by BT ... to the city could be viewed as a form of cross-subsidization,” which, the audit notes, is a violation of a provision of BT’s state license. The building of the system in general, auditors said, was marked by a “lack of timely and accurate accounting information.”

While the quote does come from the Larkin report, it offers no foundation for the claim and later hedges against it (two paragraphs later -- all from page 26):

The fact that BT is providing services to various City departments at below- market rates that may be below BT’s cost of service, which could be viewed as a form of cross-subsidization, is a problem.

After stating without referencing any evidence that BT is providing services to Departments below the cost of provisioning, the conclusion two paragraphs below states BT may be providing services to departments at...

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Posted September 28, 2010 by Christopher Mitchell

Lafayette's LUS Fiber network, after recently kicking off its ad campaign, has decided to offer 100Mbps residential connections after a number of requests from subscribers. The network previously offered a 100Mbps business service for $200 -- it seems they are now just allowing anyone to subscribe at that level and price.

As John notes at Lafayette Pro Fiber blog, this is the only tier for which residential plans come with the same price as business plans.

The other residential tiers are cheaper than their corresponding business tiers by 45-48%. Nor, according to Huval's remarks in the comments is the monthly usage cap any different—in both the residential and the commercial versions of the 100 meg package is capped at 8 terabits. (Note: that'd be about 1 terabyte of hard disk storage.) The idea behind the higher prices for businesses is that they use much more bandwidth than households—and LUS pays for its connectivity by capacity.

LUS Bandwidth Caps

This brings up something I don't think I previously noted in discussions about LUS Fiber - it comes with a monthly transfer cap. I cut the cap chart out of their user agreement [pdf] above. Remember, 8 bits to the byte. Thanks to DSL Reports for the link to the user agreement.

This raises an interesting discussion. Private cable companies typically enforce caps because their network cannot physically support many users using a lot of bandwidth simultaneously. When hundreds of users share a single connection (as with cable), a few major users can seriously impact the experiences of others.

In a FTTH network like Lafayette's, there is no real danger of one user's activities affecting another's. However, there is a danger of racking up a high bandwidth charge for LUS Fiber if many users are constantly using a lot of bandwidth. By constantly, I mean really constantly as in...

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Posted September 17, 2010 by Christopher Mitchell

Jackson Energy Authority in Tennessee, long the largest community fiber network in the US, is investing in greater smart-grid capabilities. If you aren't already familiar with this network, an article in Electric Light & Power offers some history:

After receiving local government support and revenue bond issue funding, JEA went ahead with the $54 million project. Now its FTTP network boasts 16,500 cable, 10,843 Internet and 7,000 telephone subscribers. JEA is preparing for the next phase of its FTTP deployment with a smart grid initiative expected to begin in 2010.

The article also makes an important point that many find confusing in understanding the economics of these community fiber networks:

In the early years, JEA focused on subscriber growth as its key performance metric, rather than average revenue per user (ARPU). The capital-intensive cost of acquiring and hooking up new customers, however, can create significant cash flow problems for a network operator, especially when growth substantially exceeds the business plan. JEA had to secure more financing to support its incremental growth. The utility also adjusted its business model to focus instead on ARPU and increasing the number of existing subscribers using two or three services. JEA employed special promotions and service packages that took advantage of the huge bandwidth capabilities of its fiber network to build customer loyalty and overcome the customer churn typical of the industry. Today, JEA’s network has passed more than 30,000 homes, more than 16,000 of which are subscribers.

This is a good example of a community encountering a problem and overcoming it. The article also offers other lessons learned along the way. Moving forward, JEA has decided to work with Tantalus to add smart-grid capabilities to the fiber network.

Posted August 14, 2010 by Christopher Mitchell

Craig Settles kicks off this event with a 45 minute presentation discussing what community networks should do to succeed financially and how they can go beyond simply making broadband access available to more people. Bryan Sivak, Chief Technology Officer of the District of Columbia; Joanne Hovis, President-Elect of NATOA and President of Columbia Telecommunications Corporation; and Gary Carter, Analyst at City of Santa Monica Information Systems Department responded Craig Settles' presentation. One of the key points is something we harp on here: if community broadband networks run in the black according to standard private sector accounting procedures, that is great. But it is a poor measure of how successful a community network is. Community networks create a variety of positive benefits that are not included in that metric and those benefits must be considered when evaluating such a network.

Posted July 16, 2010 by Christopher Mitchell

A recent article discussing testimony from the President of the industry trade group, National Cable & Telecommunications Association (NCTA) reminded me once again that Congress and the FCC have utterly given up on true broadband competition for millions of of Americans.

As with the broadband stimulus funds being handed out by the Commerce Department, NCTA is concerned that the USF money not go to overbuild its members. "It would be a poor use of scarce government resources to subsidize a broadband competitor in communities--including many small, rural communities -where cable operators have invested risk capital to deploy broadband services," McSlarrow says.

This seems like a common sense argument. Why would we want to subsidize broadband for those who already have a single option (underserved) when others have no choice at all (unserved)? Unfortunately, building networks to solve the problem of the unserved is all but impossible without simultaneously serving some who are underserved. This is because the unserved are often in areas so remote and expensive to serve, there is no sustainable business model to serve only them.

So the idea that we could somehow only target the unserved with networks is extremely suspect. Unless we want to endlessly subsidize networks in these areas (which companies like Qwest emphatically want because they would likely collect those subsides endlessly), we need to encourage sustainable networks that reach across those already served, underserved, and unserved.

He added that it also might discourage the incumbent from continuing to risk that capital. "Government subsidies for one competitor in markets already served by broadband also might discourage the existing provider from making continued investments in its network facilities.

I certainly respect this argument up to a point. But when it comes to essential infrastructure, we know that most existing providers (particularly absentee-owned massive companies) are delaying investments in network facilities anyway because the lack of true competition allows them to delay making the investments more common in our international peers (where true competition exists, often as a result of smarter government policies than we can muster here). The principle of self-...

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Posted June 15, 2010 by Christopher Mitchell

Lafayette Utilities System has filed a complaint with the FCC following what seems to be a rather arbitrary decision by the National Cable Television Cooperative (NCTC) to deny Lafayette as a member. This is a crucial issue for communities that want to build fiber-optic networks, so we will dig in and offer an in-depth explanation.

It all starts with the business model. Fiber-optic networks are fantastically expensive and are expected to be financed entirely with revenues from subscribers. Though communities typically want fiber-optic networks for the broadband capacity, they find themselves having to offer cable television services also to ensure they will attract enough subscribers to make the debt payments on the network.

Unfortunately, cable television services are the most difficult and expensive part of the triple-play (broadband, telephone, cable tv). A community network has to sign deals with different content providers in order to put together its channel lineup. Even a community network with 100,000 subscribers has little power over the companies with channels like ESPN, the Disney Channel, Discovery, MTV, Food Network, and others. Thus, it will have to pay more for those channels than massive networks like Comcast that have many millions of subscribers and therefore a stronger negotiating position. LUS has noted that video programming is the "largest single on-going cost" it incurs in the network.

Enter the NCTC. By forming a cooperative, many small providers (public and private) were able to gain negotiating power over content owners and even hardware manufacturers to cut costs to members by buying in bulk. In recent years, the size of NCTC rivaled that of major national providers like Charter and Cox cable. All three parties stood to gain by bringing Cox and Charter into NCTC in 2009. The addition grew NCTC significantly -- only Comcast has more subscribers currently.

The advantages of NCTC are quite significant and worth reiterating because it is a reminder of the ways in which massive private companies have the playing field tilted in their direction. Without access to NCTC, communities have to pay more for the same content and equipment (NCTC savings may start at 15%-20%. From the complaint:

NCTC market power also enables it to obtain much bigger, better, more flexible, and less costly packages, than any individual small cable...

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Posted June 14, 2010 by Christopher Mitchell

Stop the Cap! has the authored the most recent of several articles examining a unique middle mile broadband approach in the Finger Lakes region of New York. Their title summarizes the motivation: Ontario County, NY: We Need Fiber So Badly, We Just Did It Ourselves. That story includes a video clip of a recent CNBC Power Lunch 2 minute piece about the Axcess Ontario initiative (complete with the factual error that "no provider offers 100Mbps;" in fact, several community broadband networks offer 100Mbps and Chattanooga has moved beyond with a 150Mbps offering).

Ontario County has a population of some 100,000. To stay relevant in the modern era, they determined the County had to do something to improve broadband availability, so they created a nonprofit called Axcess Ontario, an initiative sufficiently impressive for the County's CIO to receive an award - State Public Sector CIO of the Year.

In creating Axcess Ontario (originally named Finger Lakes Regional Telecommunications Development Corp), the County wanted to be locally self-reliant and did not seek funding from the federal government:

Unlike numerous similar attempts in other parts of the country, Ontario County funded its network without dollars from the American Recovery and Reinvestment Act. Those who created Axcess Ontario were insistent the project shouldn't rely on the availability of outside funding, according to Edward Hemminger, CIO of Ontario County.

The network's startup costs were $7.5 million, which the municipality generated through the Ontario County Office of Economic Development/Industrial Development Agency. The organization is a quasi-government agency created by the state to generate economic activity. Businesses pay the agency for various services, the revenue from which pays for initiatives like Axcess Ontario.

In order to mollify the private sector, the county...

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Posted April 19, 2010 by Christopher Mitchell

Herman Wagter has published an informative article about the last-mile economics of fiber networks on Ars Technica.

A Utility Infrastructure Law commonly quoted by engineers says, "The closer you get to the home, the more investment is needed, averaged per home connected." This law applies to all parts of the physical network, like water pipes, sewage pipes, and electricity cables. What are the applicable numbers for telecom cables?

The large expense of building fiber networks has little to do with the technology:

In dense cities, the bill of materials is as low as 20 percent. The cost of labor per meter exceeds by far the cost of a fiber cable or a coaxial cable per meter. Deploying fiber or coax or copper wires would not make much of a difference. The phrase “it’s the backhoe, stupid” even applies in areas like Uganda.

This is why incumbents have such tremendous advantages and why policies predicated on encouraging facilities-based (as in, everyone builds their own network) have failed (and will continue to).

Given the fact that almost all costs in the access network are sunk, it is hard to envision two or more new fiber access networks being deployed in parallel to each home, leading to a stable competitive environment over time. (Unless the ISP’s or network's owners are allowed to divide the market and raise prices to compensate for the underutilization of the networks). If the medium is no longer limited and the access network is the expensive part of the investment, why duplicate the cables? We not do duplicate cables for electricity or other utilities either, for the same reasons.

As we tend toward a single fiber line (wireless is a complement for wired, not a substitute), who owns that line is tremendously important. Private companies want to monopolize the line to maximize their profits -- that is their job. Public ownership offers democratic accountability and a much greater potential for open access, creating robust competition in a sector almost entirely lacking it.

The second page of the article offers more in-depth analysis of various FTTH technologies that communities would be wise to understand before picking what model they want for their community.

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