Community Fiber Networks: Bringing Competition and World-Class Infrastructure to American Cities

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February 12th, 2015

In the following video, President Obama announced several steps his Administration is taking to encourage municipally-owned broadband networks, as well as the rationale for taking them.

A few weeks after the president’s January 14 speech, the FCC announced it would be voting on a similar approach to municipal broadband at its February 26 meeting, where it will also vote on a proposal to classify broadband access as a Title II common carrier.  Since community broadband is a topic I hope to write about here in the future, and the Commission’s meeting is only two weeks away, I thought I’d share some initial thoughts on the subject, using the President’s plan and its significance as a focal point.

As always, feedback (especially from those who see this issue differently) is welcome…

Nearly all of us would agree that free markets are fundamental to the strength of the American economy. But we sometimes forget that markets need real competition to be truly “free.” A good example is the local farmers market, where we can compare the quality and price of each vendor’s produce before deciding what to buy. A vendor offering poor quality at a premium price won’t attract much business, since shoppers can readily find substitutes with better quality and/or lower prices.

When it comes to Internet access, however, competition and choice are sorely lacking for most Americans.  President Obama understands this, and on January 14, he announced a set of initiatives aimed at increasing competition in the Internet access market. The main thrust of his program is to make it easier for underserved communities to invest in their own state-of-the-art fiber optic network. These are the kind of networks that dominant ISPs rarely build, but that experts and local communities are recognizing as essential 21st century infrastructure.

A key part of the President’s agenda is to remove laws in the roughly 20 states that make it impossible or nearly so for communities to invest in this kind of advanced network. In most cases, the impetus for these laws came from lobbying funded by the state’s dominant cable and telephone companies. Though claiming to support competition, they’ve spent heavily to block it.

These large ISPs argue that competition and choice is already abundant in the Internet access market. But the evidence says otherwise.

As many of us are reminded every time we wait on hold, or for an installer or repair tech to arrive, or for service to return after the latest outage, Internet access in most American cities is nothing like the farmers market described above.  As study after study has shown, the dominant ISPs are among the least popular companies in the nation, and have remained so for years.  In a truly competitive market, companies like Comcast and Time Warner Cable, which consistently rank at or near the bottom in customer satisfaction, would not at the same time be claiming the lion’s share of customer growth.  But that is the case for high-speed Internet, where competitive options– especially for very high speeds–are too often not available.

The lack of competitive options seems pretty clear when you look at data compiled by the FCC and NTIA.  For example, a paper accompanying the President’s announcement noted that more than 55% of U.S. households have only one option if they want Internet download speeds of 25 Mbps (in most cases that provider is a cable operator), while more than 19% can’t get those speeds from ANY provider. That’s roughly 75% of homes without competitive options for the kind of speeds increasingly in demand thanks to the growing popularity of services like Netflix, Hulu, YouTube and Skype, which provide competitive alternatives to the TV and phone services provided by the dominant ISPs.  On top of this is the proliferation of multiple devices per household, and the potentially massive bandwidth requirements of new applications with potential to transform our nation’s education, healthcare and manufacturing sectors.  [For a more extensive analysis of competitive dynamics, feel free to check out this draft report I prepared last year based on industry data as of YE2013]

There are, however, some exceptions to this lack of competition, and some of the most notable ones are in cities that have taken the initiative to invest in state-of-the-art fiber optic network infrastructure. These networks provide powerful competition to incumbent service providers, offering gigabit (1,000 Megabit) speeds at attractive prices, and high-quality customer service provided locally, not from some distant location in another state or country.

And “Gigabit Cities” such as Chattanooga, TN and Lafayette, LA are thriving, becoming hot-beds of entrepreneurial activity and innovation in technology, education, healthcare and government services, and rich with civic pride and sense of community.

The president’s action is reminiscent of similar steps taken by past presidents from both parties who recognized the essential role of world-class infrastructure in keeping our nation strong.

Imagine where we’d be today if FDR, a Democrat, hadn’t mobilized federal support for expanding electricity to America’s small towns and farms via cooperatives and municipal utilities when private power companies didn’t see enough profit in serving these areas. Or if Eisenhower, a Republican, decided it was best to wait until private investors saw healthy profits in building an interstate highway system. We might still be waiting, or paying highway tolls that increase as fast as our cable TV bills!

Federal policies to encourage community-owned networks–as reflected in President Obama’s speech and the FCC’s upcoming vote– reaffirm two national priorities that helped make our country the envy of the world for more than two centuries: strong support for truly competitive markets, and a commitment to make world-class infrastructure available to all our citizens as they pursue a better life for themselves and their children.

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3 thoughts on “Community Fiber Networks: Bringing Competition and World-Class Infrastructure to American Cities”

  1. William Dutton says:

    Thank you, Mitch, for such a clear and compelling case for this initiative. I believe that one of the major questions raised about community broadband networks is whether there is a business case: Will they be self-supporting? I don’t want to answer my own question, but I assume that private providers doubt their profitability, because they cannot realise the full benefits of broadband to the local community, such as in helping local businesses to succeed, while the local community could reasonably justify subsidising the direct costs of such a network precisely because they see many indirect benefits flowing to the local community.

    1. Mitch Shapiro says:

      I’m glad you raised this issue Bill. The key question in my view is not whether a municipally (or cooperatively) owned network can financially internalize all or even any of the benefits the network provides to the local community, but whether it can cover its costs (unlike most private companies, its business model does not require a profit). In my view, the preponderance of evidence indicates that, in most communities where residents and businesses feel underserved by incumbent providers, the answer to this has been and will be yes.

      And, as to realizing positive externalities, community owned networks are more likely to encourage this, whereas profit-oriented private companies will have less motivation to do so if they cannot financially internalize them, or may even discourage externalities they see as having potential to interfere with their revenue and profit maximization goals. This would especially be the case if these private providers face minimal or no competition (a fairly common situation) and thus have less market-driven incentive to satisfy customer demands that are not readily and reliably monetized.

      A good source of information on this general subject is the Community Broadband Networks web site, which includes a map of many of the nation’s community networks and a range of case studies, reports, etc. I co-authored a report on this subject back in 2008 that included some modeling of financial feasibility and its sensitivity to things like density, penetration rates, etc (see pp. 101-106). That analysis was done when fiber optic equipment costs were significantly higher than they are today, so I’d consider its conclusions regarding financial feasibility relatively conservative in today’s environment. And with bandwidth usage a lot more intensive today, the capacity advantages that a municipal fiber network has over cable and especially DSL is is an even bigger competitive factor than it was back then. The result is improved prospects for achieving the market penetration levels necessary for the community-owned fiber network to be financially healthy.

      There are, of course, projects that end up struggling financially, but I believe they are in the minority. And a key reason some of them struggle is that state laws make it harder for them to operate relative to the companies with which they compete. A good example of this is Utah, where a state law passed years ago forbids municipal networks from offering retail service. This presented a serious challenge to the state’s muni-nets (e.g., the multi-city UTOPIA project and the Provo network that has since been sold to Google). This is because their ability to service their debt relied on the early market success of small poorly-capitalized retail providers and an unproven and challenging business model. While this wholesale-only model is more viable today, in Utah it was forced upon the municipal networks, something that would not be the case if these kinds of state laws were struck down by the FCC. That’s one reason the FCC’s decision to preempt such laws is an important step toward creating a level competitive playing field.

      I’ll leave it at that for now, though I may return to this subject after the FCC releases its decision on two anti-muni state laws later this month.

  2. Hi there everybody.

    Wanted to reply the first comment, I believe is really important to find a case of profitability into the fiber networks, and actually i believe that the point is to pass the knowledge to the constructors and the people living in these communities that actually their own houses is getting more expensive.

    In a recent report by the FTTH Council – http://beyondtech.us/blogs/news/37052033-ftth-adds-3-1-to-your-home-value – the released results got pretty interesting that indicates a gigabit FTTH connection can add up to 3.1% to the value of a home.
    That equates to an extra US$5,437 on a typical home. The study also found that upgrading the FTTH connection from 100 Mbps to 1 Gbps adds another 1.8%.
    Don’t let me do the talking about economic, educational and governmental innovation that this kind of infrastructure can drop in an american city.

    I’ll leave it at that and i will wait for another reply. but is really important to have a clear consensus on this topic, and also understand that maybe we don’t need to see the profitability of the infrastructure in the short term… maybe, we should look it has a long term positive externality.

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