Tag: "economics"

Posted March 17, 2010 by christopher

The Star Tribune ran my opinion piece on Monday, March 15

The vast majority of Minnesotans, like the rest of the country, are served by only two broadband suppliers: the cable or telephone company. These companies generally want to maintain their monopolies because they can postpone upgrades while keeping prices and profits high. Just about everyone else just wants a better choice among providers.

The result of this structure is that we pay much higher prices for slower internet connections than our peers in Europe and Asia.

Here in Minnesota, Monticello has broken the mold. It has transitioned from relying on an overpriced and slow DSL network to now offering the best broadband in the entire state. Monticello residents can choose between a symmetrical 20 Mbps connection (extremely fast) from the City for $35/month or the incumbent telephone company’s new 50 Mbps downstream and 20 Mbps upstream option for $50/month. They have better packages than Comcast’s best residential offers in the Twin Cities – and available at half the price!

Entering the local telecommunications market is quite difficult. Building a network costs hundreds of millions for large cities and tens of millions for communities from 10,000 to 50,000. Once the network is built, the costs of adding new customers actually decreases as the number of subscribers increases. This cost structure gives incumbents tremendous advantages because they can drop their prices precipitously if a new entity – public or private – tries to build a competing network. To date, incumbents have largely succeeded in fending off competition.

Given the sorry state of broadband in many communities, especially rural ones, it should be no surprise that many cities and counties have started to build their own networks. And happily, they’ve done so with great success. Creating competition forces incumbents to invest and cut prices, generating significant community savings as well as other advantages from a network that operates in the public interest.

Unfortunately, there are additional barriers for communities attempting to build their own state-of-the-art broadband networks. As a result of lobbying by incumbents, some eighteen states have created obstacles to publicly owned networks.

The need for any state barrier to community networks is dubious. Most states see no need for...

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Posted March 11, 2010 by christopher

The good folks at Broadband Properties Magazine recently ran an article I wrote about Brigham City's use of a new financing model for FTTH networks. You can read it there in the nice layout and formatting, or here:

The UTOPIA project, an ambitious fiber-to-the-home network developed by a consortium of 16 Utah cities, has encountered difficulties that delayed its original buildout schedule. However, it is now building out fiber in Brigham City, one of the original cities in the consortium. Brigham City found a local solution to UTOPIA’s slow deployment schedule and created a model to speed buildout in willing communities.

Brigham City, a city of 18,000 in northern Utah, decided to form a voluntary assessment area – sometimes called a special assessment area – to finance the network buildout that will pass all homes and connect residents looking to subscribe. As with all wired networks, upfront costs are steep and typically require a heavy debt load. Brigham City’s unique approach may catch the interest of deployers unwilling or unable to shoulder that debt.

For several months, a group of canvassers organized by UTOPIA went door to door in Brigham City to talk to residents about UTOPIA and ask if they were interested in subscribing to the network. Supporters organized some 30 block parties and invited UTOPIA to attend with a mobile home to demonstrate the superiority of full fiber optic networks. Residents who wanted service were requested to ask the city to create a voluntary assessment area. Creating this special district would allow participants to finance their connections themselves.

Residents who wanted to subscribe could either pay the connection cost up front or agree to pay up to $25 per month (the exact amount would depend on how many joined the program) over the course of 20 years. This amount does not include the cost of services; rather, it is the cost of connecting to the network and having the option of subscribing to UTOPIA-based services (see sidebar for current services). Those uninterested are not levied.

In other UTOPIA cities, when residents subscribe to services on the UTOPIA network the connection costs are included in the service fees. Those connection costs will be deducted for Brigham City residents who have paid the full cost of their connections, meaning that the...

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Posted November 12, 2009 by christopher

Elinor Ostrom's Nobel Prize Award was a significant victory for those of us who have recognized not only a difference between the public good and private good, but really for those of us who have recognized the great variety of approaches on how to promote the public good.

First, the background - Elinor Ostrom has won a Nobel Prize in economics for her work demonstrating ways that public commons may be successfully managed to the benefit of all. "The Commons" is a term for a resource that is collectively owned by everyone.

Some had argued that the only way to prevent a few from despoiling the commons was by enforcing private property rights - but Ostrom's work demonstrated that different communities around the world have successfully maintained the commons without resorting to auctioning it off.

Perhaps most importantly from our perspective, she clarified in an NPR podcast that there is no single solution to managing the commons. In many cases, a government should avoid preemption when local people are able to work out the management on their own. In other areas, government may have a stronger role to play.

This is the same philosophy that we have embraced on the issue of broadband - we are not advocates solely for municipal ownership. We advocate accountability - the network must put community first and be responsive to those changing needs.

Posted November 10, 2009 by christopher

One the goals of this site is to catalog reports, articles, and all things related to publicly owned broadband. A number of older articles about muni broadband still resonate today -- As part of its May 2005 issue, Broadband Properties offered a pro and con view of municipal networks. Carl Kandutsch, a former FCC attorney, wrote "The Case for Municipal Broadband." Other articles from that issues are also available here.

The piece generally focuses on matters of economics and law, but in an accessible manner. The threat of private, monopolistic service providers -- particularly in rural areas -- is indeed a significant motivation and reason to embrace public ownership.

He also delves into debunking specific arguments against municipal ownership and argues that publicly owned networks are at a disadvantage relative private companies:

The municipal balance sheet must then be compared with that of private firms existing actually or potentially in the relevant market, taking into account the often huge tax breaks granted to private sector communication firms, the economies of scale conferred on incumbents from ownership of pre-existing infrastructure and nationwide or international service areas, the freedom to contract with any other entity on any terms within the limits of the law and so on.

And

Moreover, whereas private firms are permitted to operate behind closed doors, municipal utilities must comply with numerous open-records requirements, and must secure public approval for all significant decisions. The level of public scrutiny under which a municipal utility operates ensures that significant operational inefficiencies will be short-lived, and that utility officials are politically accountable for their decisions.

Posted October 23, 2009 by christopher

Wherein I answer some questions to clear up common misconceptions about the broadband and cable networks upon which we depend...

Posted October 22, 2009 by christopher

For another real-world example of how companies respond to public entry into the telecom market (as opposed to theoretical arguments about crowding out investment), let's look back down to Lafayette and how cable incumbent Cox responded:

“Cox froze the cable rates in Lafayette, and they didn’t freeze the rates in other areas,” said Terry Huval, director of LUS, a municipally owned utility company which fought major incumbent opposition before building an FTTH network in Lafayette and starting to offer service earlier this year. “We figured our citizens saved over $3 million in cable rates even before we could offer them service.”

I have yet to see a cable company leave a market or reduce investment following the introduction of a public competitor. The opposite tends to happen - they increase investment and often drop prices or leave them lower than in surrounding, non-competitive areas. Often, the rates are not really advertised but if you call from the competitive area, they will offer a better deal:

Trae Russell, communications manager for EATEL, the local telephone franchise in Ascension, La., and some surrounding communities, had seen the same thing happen in his area, when EATEL started offering FTTH-based services in 2006. In fact, EATEL went so far as to take out an ad in the Lafayette newspaper, alerting cable customers there to the discounts that Ascension customers were getting and forecasting similar lower rates in Lafayette once the LUS network was in the works.

“It was an incredibly bold move on our part,” Russell said. “Cox came in with an incredibly aggressive promotion for TV service with every bell and whistle you could imagine. We couldn’t figure out how they could even make money on it. So we took out an ad in the Lafayette newspaper that basically said, ‘Hey Lafayette, look at the great prices you are going to get from Cox.’ Cox was not amused.”

This is also a lesson for those who want to build a public network. Don't expect to win just because you have a better service and you offer lower prices from what was available before a competing network is built. The incumbent has often already paid off its network. Additionally, incumbents are often larger companies that pay less for their television contracts, so they can lower prices farther than one might...

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Posted October 13, 2009 by christopher

Not too far away from Chattanooga, Tennessee, (home to the largest muni fiber network in the U.S.) lies Cleveland (Tennessee). Five prominent residents asked why they cannot get broadband:

The homeowners have discussed the problem with Charter Communications Director of Government Relations Nick Pavlis three times.

Pavlis said in a telephone interview it would cost the cable company $130,000 to run an underground cable 2 1/2 miles and “it’s just not a reasonable payback.”

He said the company spends $500 per house as a general rule, which gives them a 36-48 month return on investment.

Yet Charter has no problem lobbying the states to prohibit publicly owned networks. Tennessee probably has more fiber-to-the-home initiatives than any other state - perhaps it is time Cleveland looked into their own or cajoling a nearby network into expanding.

Posted October 9, 2009 by christopher

We finally have a realistic estimate of the cost of bringing 100Mbps to every home in America... and Light Reading labeled the cost "jaw-dropping."

Want to provide 100-Mbit/s broadband service to every U.S. household? No problem: Just be ready to write a $350 billion check.

Federal Communications Commission (FCC) officials shared that jaw-dropping figure today during an update on their National Broadband Plan for bringing affordable, high-speed Internet access to all Americans. The Commission is schedule to present the plan to Congress in 141 days, on Feb. 17.

Don't get me wrong, I agree that $350 billion is a lot of money. On the other hand, we spent nearly $300 billion on surface transportation over 4 years from 2005-2009. $350 billion buys a fiber-optic network that will last considerably longer. Additionally, such a network will generate considerably more revenue than a highway. In fact, these networks will pay for themselves in most areas if they can access to low-interest loans.

Consider the comments of Deputy Administrator Zufolo (of the Rural Utilities Service) from my recent panel at NATOA:

Zufolo explained the RUS decision to use its $2.5 billion in funds primarily to subsidize loans and not provide grants, as the agency's best opportunity to make the more efficient use of the federal money and have maximum impact. Because the default rate on RUS loans is less than 1% and the subsidy rate is also low, only about 7%, it costs the government only $72,000 to loan $1 million for rural network development, she said.

Let's say that RUS decides to embark on getting 100 Mbps to everyone in a rural area - some of the projects will be riskier than the standard portfolio, so let's assume it costs the federal government $100,000 to loan $1 million (makes it easier math too). In order to spur the $350 billion investment for these networks, the government would have to put up $35 billion.

But it would probably be more than that because some areas - Montana, Alaska, Wyoming, and other beautiful places will need...

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Posted September 30, 2009 by christopher

On the Daily Yonder - offering coverage of rural issues - Craig Settles offers advice to community networks on the need to attract institution and business customers because networks rarely generate enough revenue to make debt payments by focusing solely on residential subscribers.

When communities compare the costs of different technologies, they often get too caught up in the upfront costs and ignore the ongoing costs (operating costs, or opex). He offers an example of a modest wireless network:

It’s important to understand that while it costs a lot of money to create a broadband network, over a five-to-ten-year period, it costs even more to operate that network than to build it. Say it costs $1 million to build a wireless network. During the municipal wireless heyday, it was estimated to cost 20% of buildout expense to operate the network annually – to pay for customer service, maintenance, upgrades, etc. That’s $200,000 a year.

This is a great intro article for those who may not be used to thinking about the economics or business plans networks need.

For the rest of us, it is a strong reminder of how many networks start (and a good path for those who want to create a network):

Santa Monica, California, had a legacy PBX phone system and slow connection circuits from incumbents. The city pooled money it was already paying for voice and data services, using this capital to build a fiber network and implement new communication technology.

City CIO Jory Wolf states, “By switching to fiber we realized a $500,000 savings in data circuits and $250,000 savings in voice circuits, all of which stayed in our fund. Ongoing savings enabled us to provide our police with video streaming in their vehicles. We have excess bandwidth, so we provide (a) large number of sites with free wireless access.” Wolf said that the city is also selling companies fiber lines that haven't yet been turned on. “Our network budget is self-sustaining,” he said, “and I have $2.5 million in capital.”

I remember Tim Nulty saying that Burlington Telecom started the same way. They figured out how much they were paying each month for telecom as a city. They used that number to compute how much they could spend...

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Posted July 27, 2009 by christopher

A one hour slideshow discussing the economics of FTTH - unfortunately it seems to have rudimentary controls that do not allow fast fowarding or rewinding, so pay attention! You can also read the bullet points to get a sense of whether you will be interested or not.

Fiber to the Home: Making That Business Model Work
This slideshow is no longer available.
View more documents from Yankee Group.

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