Community Broadband As Generative Infrastructure

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April 16th, 2016

In an earlier post I discussed Marjorie Kelly’s framework for distinguishing “generative” vs. “extractive” ownership models.  In this post, I’ll try to further clarify this distinction by considering some key characteristics of community-owned local access networks in relation to Kelly’s framework (in my next post I’ll shift my focus to middle mile and special access fiber).

To get started, I’ll reiterate one of my key working premises, that when an extractive ownership model is combined with a lack of competitive pressure or corrective regulation (as is currently the situation in much of the nation’s local access and special access markets), service providers can achieve high levels of financial extraction.  This can lead to broad and substantial economic harm, especially in the case of core infrastructure like the Internet and telecommunications in general.  That’s because these infrastructure resources tend to be “spillover rich” when managed in a non-discriminatory way, but less so when constrained by dominant ISPs’ internal monetization priorities, as I discussed in the latter section of an earlier post, and which Brett Frischmann addressed in far more depth in his book, Infrastructure: The Social Value of Shared Resources.

As discussed in my last post, I view the longstanding focus on shareholder returns at the expense of network upgrades by AT&T, the nation’s largest ILEC, as one example of this dynamic.  Another relates to the nation’s leading cable operators.  On one hand these companies have been able—thanks to their much higher speeds relative to DSL—to capture nearly all net broadband customer growth in recent years (see the table here for 2015 data).  But, at the same time, these same companies have consistently been ranked at or near the bottom among all U.S. industries in customer satisfaction surveys.  Simple economic logic tells us that, if there was minimally healthy competition in the market for these higher-speed broadband connections, this combination of strongly positive market share gains with strongly negative customer satisfaction would be a very unlikely outcome.  As the title of Susan Crawford’s 2013 book points out, these growing ranks of customers signing up for and retaining cable modem service are, in a very practical sense, a Captive Audience.

Later on in this post I’ll suggest some research questions I believe are worth pursuing related to the operation and impacts of community-owned networks and the relevance of Kelly’s ownership framework to the broadband access market. But before I do, I want to consider how some of Kelly’s “generative” characteristics apply in theory and practice to community broadband.

In applying Kelly’s framework to local access ownership models, it makes sense to start with Purpose, which Kelly describes as the most fundamental design element.

Having studied a number of community-owned broadband networks, I’d say that all or most were undertaken with a purpose along the following lines: to provide local households, businesses and public service organizations (e.g., schools, healthcare providers, public safety, etc.) with affordable, reliable, symmetrical, high-capacity broadband connectivity and related services; to support their ability to thrive in an increasingly competitive and knowledge-based global economy and; to provide decent paying jobs to local citizens who, in turn, provide high quality customer service to the network’s customers.

While privately owned networks, including those owned by publicly-traded corporations, might claim to have the same or a very similar purpose, years of listening to earnings calls of these publicly-traded companies tells me that such goals are, at best, secondary priorities to the overriding goal of maximizing shareholder value, and ones that will be jettisoned if they conflict with the latter goal. And if shareholder value-maximizing decisions are not made with sufficient speed, vigor and clarity of (extractive) purpose, a publicly-traded firm’s management is likely to face intense pressure from investors, particularly those focused on a relatively short time horizon for measuring shareholder value.

It’s also clear to me that compared with most publicly-owned cablecos and telcos, community-owned networks tend to have locally Rooted Membership (vs. the Absentee Ownership characterized by publicly-traded stocks); Mission-Controlled Governance focused on achieving benefits for the local community (vs. Governance by Markets, stock price and related measures of financial profitability); and tend to function as part of local and national Ethical Networks focused on supporting sustainable community development (vs. Commodity Networks geared toward maximizing financial extraction).  And, as discussed further below, while the capital intensive nature of last mile access networks makes reliance on Stakeholder Finance challenging, there are models developing on this front as well.

A mix of generative characteristics and results

The general family of community-owned networks includes both municipal ownership (often through an existing municipal power utility) and end-user cooperatives (often through an existing rural electric co-op). While there are legal, organizational and financial differences between these ownership models, my preliminary research suggests these aren’t large enough to significantly alter the fundamental ways in which they differ from ownership by publicly-traded cable and telephone companies.

That being said, different combinations of generative characteristics may yield somewhat different sets of strengths and weaknesses, with these sometimes impacted by other factors, including relevant state laws and local regulations, existing institutional relationships and expertise, local market dynamics, and the mix of stakeholders supporting the project.

The mix of generative characteristics and situational factors can also impact how a community network evolves over time, and whether its particular model is sustainable within the environment in which it has taken root.

For example, in the case of municipally-owned networks, the departure of strong founding project leadership has sometimes led to a migration of decision-making to political leaders lacking appropriate industry expertise, particularly if the network was deployed in a community that lacked an existing public utility that was well-managed and enjoyed the loyalty and respect of its local customer base. In my view this type of management transition led to problems for the community-owned network in Burlington, VT, and highlights a potential point of design weakness for municipally-owned networks lacking a well-established and sufficiently independent, professional, non-political utility management unit.

In other cases, management of a municipally-owned network has experienced disruptive discontinuities when local political leadership has changed. This seems to be most likely if such change occurs when the network and/or city is facing financial or other challenges, and/or when candidates or newly elected officials view the shortcomings of their predecessors’ network project as a useful rallying point for mobilizing political support.  This also supports the notion that, once launched, the ongoing management of a community network needs to be sufficiently sheltered from day-to-day and election-to-election political pressures.  My research suggests that this is most readily achieved in communities that already have some form of municipal utility infrastructure (or set up a strong-enough one when a network project is launched).

Similarly, the interaction of political dynamics among multiple jurisdictions has sometimes complicated and/or delayed decision-making, adding to the challenges of addressing unexpected financial or operational problems. My sense is that this has been a factor for the multi-city UTOPIA fiber network in Utah, one that was made even more difficult by state restrictions on the network’s ability to provide retail services.

This latter point highlights the significance of state regulation as a factor that can influence which generative characteristics are likely to be most effective (or even legal) in achieving a project’s internal and external goals.  In the case of UTOPIA, the retail-service prohibition presented  serious and not-well-understood challenges and risks related to marketing, finances, technology and overall management of a wholesale-only local access enterprise.  As those risks became more clear with time, the task of addressing them was made even more challenging by the project’s multi-city management and financial structure.  As a result, this pioneering and arguably over-ambitious project, launched a dozen years ago, has become the perennial poster boy used by critics to make their case against community broadband.

In my view, the risks related to local political dynamics suggest that communities without existing public utilities take these risks very seriously.  While establishing a strong and sufficiently independent municipal utility structure is one option, another would be to adopt a form of cooperative structure (e.g., similar to the rural telephone and electric cooperatives common in very rural areas).  This would help ensure that the network is responsive to end-users rather than to local politicians with many and often conflicting priorities and, in some cases, focused too much on the next election and lacking appreciation for the management requirements of the network. That being said, cooperative managers are not immune from losing touch with their members needs, nor can these members always be relied upon to wisely exercise the rights and responsibilities of their membership.

These challenges highlight the value of initial and sustainable stakeholder “buy-in” for a community network to succeed, a factor that relates to Kelly’s concepts of Rooted Membership and Mission-Controlled Governance.

The value of building and maintaining stakeholder buy-in seems especially important during a network’s early years, when the bulk of construction is underway. This is because costs are especially high during this startup phase, while revenues are just beginning to ramp up. Case study research suggests that it’s during this startup period that incumbents have the most leverage to mobilize their considerable resources to weaken both the economic viability and credibility of community networks.

Given its role as core communication infrastructure,  a community-owned broadband network is a resource likely to impact virtually every organization in a community, including local government, public safety, education, healthcare, non-profits, and businesses both large and small.  This suggests that important elements of generative structure (e.g., Rooted Membership and Mission-Controlled Governance) will be closely tied to how these various stakeholders (as well as residential users) are involved in setting goals and priorities and the decision-making processes related to network management, build-out plans, resource allocation, service development, pricing, etc. This governance issue also relates to the Ethical Network element of generative ownership, as reflected in the relationships among community leaders, their local constituencies and their counterparts in other communities that have invested in a community-owned network or are considering such an investment.

Stakeholder finance: challenging but potentially fortifying

Deploying a community broadband network that relies on Stakeholder Finance strikes me as more challenging than Kelly’s other generative design elements, in large part because the high upfront cost and capital-intensive nature of communication networks has typically required access to public debt markets.

One of the clearest and apparently successful examples of local stakeholder financing is Vermont’s ECFiber, now officially known as the East Central Vermont Telecommunications District.

As the following excerpt from ECFiber’s website indicates, its decision to initially rely on local stakeholder financing was made out of necessity:

On Town Meeting Day 2008, 24 towns voted to join ECFiber…In August, 2008 23 towns signed the Inter-local Contract and by early September, the initiative’s underwriter, Oppenheimer & Co., had pledges of $70 million. One week later the international financial markets collapsed taking ECFiber’s initial funding effort with it.

ECFiber then submitted several funding proposals under the American Recovery and Reinvestment ACT (stimulus program), but with no operating history at that point, we were edged out by competing proposals from other local companies.

But undaunted, ECFiber returned to the Vermont roots of self-reliance and initiated our current program of grass-roots funding. With the advice of local counsel, ECFiber developed a program of issuing promissory notes in a private placement offering. The notes are offered in $2500 units. The first round of financing, in January,2011, raised $912,000, which enabled us to build our first 20+ mile loop… Additional rounds of financing have brought total investment to nearly $5 million…It is ECFiber’s intention, at some suitable point, to return to the capital markets to seek sufficient funding to build out the entire network in all member towns.

According to a March 11, 2016 press release, ECFiber has reached the point where it is ready to augment its initial base of local stakeholder financing via institutional capital markets:

ECFiber…plans to activate 110 miles of network in 2016 and build an additional 250 miles in 2017. “Working with bond underwriters, we believe ECFiber has reached the point in its financial development that allows us to access institutional capital markets for the first time in 2016,” says Irv Thomae, District Chairman.

While the financing model pioneered by ECFiber may lead to slower network buildout, it may strengthen the Stakeholder Financing element of its generative ownership design, since most of its initial funding came from community members with a three-pronged interest in its success—as customers, as local community members, and as direct financial investors.

This underscores a broader and important point: community broadband planners are likely to increase their chances for success if, from the beginning, they keep in mind all elements of Kelly’s generative ownership structure, including how they interact with each other to support the project’s Living Purpose.

To a large extent, all of Kelly’s ownership characteristics relate to the effective and sustainable harnessing of stakeholder support and participation.  As both successful and unsuccessful community broadband projects have demonstrated, strong and sustained support from community stakeholders provides a solid—and perhaps the most essential— foundation upon which to build a community network.

As noted above, this foundation has proven to be especially important during a project’s startup phase, when learning curves and financial pressures abound, and when community networks are likely to be most vulnerable to well-financed political, legal and predatory pricing attacks by incumbent service providers. The more fully and firmly that stakeholder support is embedded in a community network’s design, the more likely it is to weather these startup storms and any squalls that might follow in later years. And the more likely it will be to remain focused on prioritizing the social benefits and community development goals that give it the Living Purpose that distinguishes it from the financial priorities of extractive ownership models.

More research can help

The existing body of research focused on community broadband networks tends to be heavily polarized and somewhat anecdotal, with proponents focusing on success stories and opponents on the sector’s most notable failures, even if, as with UTOPIA, they were launched many years ago and were subject to a unique mix of situations and constraints that virtually guaranteed they would illustrate painful lessons for others to learn from. To a large extent the tone and content of existing research reflects the often intense political battles at the state, local and national levels regarding restrictions on community broadband projects.  As with most politically charged policy-related research, the result is a strong tendency toward cherry-picking of projects to study and data to analyze.

My own view is that case study-oriented research by myself and others provides clear evidence that community-owned broadband networks can and often do succeed in terms of both their internal economics and in bringing to their communities lower prices, faster speeds, better customer service and more robust support for the potentially large but difficult-to-internally-monetize social goods discussed in Frischmann’s book.

That being said, I also believe that state and local policymakers, local decision-makers and communication scholars could benefit from additional and less agenda-driven research in this area, perhaps conducted by a team of researchers representing a range of perspectives and expertise, and well sheltered from bias based on the source of their funding.  Among the questions I view as worthy of such research are the following:

Given the intensity of debate surrounding state laws restricting the ability of communities to finance and control their local broadband networks; the FCC’s efforts to preempt such state restrictions and; the expansion of both publicly-owned and privately-owned (e.g., Google Fiber) competitive network models, I believe research focused on these questions can help local leaders, state and federal policymakers, and private sector players make better-informed decisions about how best to leverage the power of high-speed Internet access to benefit our nation’s citizens, businesses and public institutions.

While the focus of this post has been the relevance of Kelly’s ownership framework to the local broadband access market, I believe it is also relevant to policy issues and research questions related to the special access market, which is the focus of the final blog post in this series.

 

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Extractive vs. Generative Ownership of Telecom Infrastructure

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April 16th, 2016

In her 2012 book Owning Our Future: The Emerging Ownership Revolution, Marjorie Kelly, Executive Vice President and a Senior Fellow with The Democracy Collaborative, provides a framework for understanding and distinguishing what she describes as “generative” vs. “extractive” ownership designs.  In key respects, the book builds on Kelly’s first book, The Divine Right of Capital: Dethroning the Corporate Aristocracy, published more than a decade ago (you can read the latter’s introduction here).

Drawing an apt and powerful parallel to the divine right of kings, Kelly’s first book does a masterful job of opening readers’ minds to the arbitrary and distorting nature of the ownership and control model embodied in today’s publicly-traded corporations. In Owning our Future, she does an equally impressive job helping readers understand and appreciate the significance of the range of alternative ownership structures emerging across the economy.  A clear, succinct and enjoyable read, Owning Our Future clarifies:

In a May 17, 2012 talk entitled From the Fringe to the Leading Edge: Generative Design Goes to Scale, at the annual conference of the Business Alliance for Local Living Economies (BALLE), Kelly highlighted the fundamental importance of ownership in our economy and our world, and the problems caused by today’s dominant form of ownership:

Every economy is built on the foundation of ownership… Questions about who owns the wealth-producing infrastructure of an economy, whose interests it serves, these are among the largest issues any society can face…The crises we face today, ecologically and financially, are tangled at their root with the particular form of ownership that dominates our world – the publicly traded corporation, where ownership shares trade in public stock markets. The revenues of the 1,000 largest of these corporations represents roughly 80% of global GDP.

Kelly then briefly reviewed what her years of research have led her to understand about “generative” alternatives to the dominant “extractive” form of ownership. “The first and most important difference” she says is a “Living Purpose.”

…the many ownership alternatives – from community land trusts and cooperatives to social enterprises and community ownership of the commons – these alternatives represent a single, coherent school of design. It’s a family of generative ownership designs. Together, they form the foundation of a generative economy.

 Generative means the carrying on of life, and generative design is about the institutional framework for doing so. In their basic purpose, and in their living impact, these designs have an aim of generating the conditions where all life can thrive. They are built around a Living Purpose.

This is in contrast to the dominant ownership designs of today, which we might call extractive. Their aim is maximum extraction of financial wealth. They are built around a single-minded Financial Purpose.

But, according to Kelly, “purpose alone isn’t enough.”  Also needed, she says, is “the presence of at least one other structural element that holds that purpose in place.”  These additional elements of generative design are:

Membership. Who’s part of the enterprise? Who has a right to a say in profits, and who takes the risk of ownership? Corporations today have Absentee Ownership. Generative ownership has Rooted Membership, with ownership held in human hands.

Governance. Extractive ownership involves Governance by Markets, where control is linked to share price. Generative ownership involves Mission-Controlled Governance, with control held in mission-oriented hands.

Finance. Instead of the Casino Finance of traditional stock market ownership, generative approaches involve Stakeholder Finance, where capital becomes a long-term friend.

Networks…If traditional approaches use Commodity Networks, where goods trade based solely on price, generative economies use Ethical Networks, which offer collective support for social and ecological norms.

Kelly then notes that, while “[n]ot every ownership model has every one of these design elements…the more elements that are used, the more effective the design.”

How does this apply to the telecom sector?

Having listened to many an earnings call and followed the telecom industry for nearly three decades, it seems pretty clear to me that the dominant publicly-traded cable and telephone companies have an overriding Financial Purpose, as expressed by management’s intense focus on cash flow, stock price, profits, market share, average revenue per unit, pricing power, and other financial metrics.

Related to these metrics is an intense focus (in statements made to Wall Street analysts as well as actual financial decision-making) on “return of capital to shareholders,” largely in the form of dividends and stock buybacks.

While this is perfectly legal and very understandable from the perspective of corporate management (whose compensation is often based on stock price), the fact is that these returns to shareholders are allocations of cash flow that might otherwise be used to deliver more value to customers. For example, this cash flow could be invested in network upgrades and/or improved customer service. The latter is particularly notable, since both the cable and telephone industries have longstanding and well-earned reputations for poor customer service, as reflected in virtually all national surveys (and plenty of anecdotes shared among friends and posted on the web). This, I believe, is largely because, as monopolists or duopolists with substantial market power and extractive ownership designs, these companies tend to be more focused on satisfying the desires of shareholders and Wall Street analysts than those of largely-captive customers with limited options for taking their business elsewhere.

These same industry dynamics are also clear evidence that, in addition to Financial Purpose, the nation’s large publicly-traded cable and telecom giants are also characterized by what Kelly refers to as Absentee Ownership, Governance by Markets, Casino Finance and Commodity Networks, and that their managements are heavily influenced by pressure from Wall Street analysts and traders, whose work takes place even more deeply at the core of our economy’s financial extraction machinery.

AT&T as an example of extractive ownership

In my view, AT&T, the nation’s largest ILEC, is a good example of the kind of financially extractive ownership model that currently dominates the top tier of telecom companies, virtually all of which have their historic roots in a monopoly or near-monopoly market environments. Below is a brief review of key elements of the company’s history over the past decade or so, to illustrate what I mean.

In 2004 AT&T (then SBC Communications) announced that its next-generation network upgrade strategy would rely mainly on fiber-to-the-node (FTTN) technology, which uses a form of DSL technology to deliver both Internet and TV services over the final stretch of copper wires that connect customer locations. The initial budget allocated $6 billion to deploy a FTTN network (dubbed U-verse) that passed 18 million premises.

By late 2012, AT&T’s U-verse footprint had expanded to 24.5 million premises, which suggests a total U-verse investment up to that point of about $8 billion. At that time, AT&T announced Project Velocity IP (VIP), which was to invest another $6 billion over three years to expand U-verse availability to 33 million premises (roughly 43% of its total footprint), while deploying next-generation DSL technology to boost Internet speeds for another 24 million premises, suggesting a total next-generation wireline investment of roughly $14 billion over the course of a decade.

It’s important to note that, based on AT&T’s announced plan, when this second major upgrade program was to be completed, roughly 19 million premises (one of every four passed by its networks) would not have access to ANY wireline broadband service from AT&T.

To put AT&T’s network upgrade strategy in a financial and corporate strategy context, consider that, between 2006 and 2015, AT&T returned an average of nearly $14 billion per year to its shareholders in the form of dividends and stock buybacks. This means the company has returned roughly as much money to shareholders in an average year as it has allocated over a decade to its next-generation wireline network upgrade. In total, between 2000 and 2015 the company returned nearly $172 billion to shareholders in the form of dividends and stock buybacks. That’s equal to 73% of its total capital spending during this period, with two years, 2012 and 2013, seeing shareholder returns exceed CapEx (117% of CapEx in 2012 and 107% in 2013).  By my estimation, if AT&T had reallocated just half of these shareholder returns to full “fiber-to-the-premise” network upgrades, it could have extended state-of-the-art all-fiber networks to nearly 90% of the roughly 76 million premises passed by its network, assuming construction costs comparable to those budgeted by Verizon, the nation’s second largest telco, nearly a decade ago.  Boost that CapEx reallocation percentage a bit more, and virtually all of AT&T’s customers and the communities in which they live and work would by now be enjoying the direct and spillover benefits enabled by fiber’s symmetrical gigabit-level speeds and superior reliability.

A related indicator of AT&T’s priorities is its 2015 acquisition of DirecTV for $67 billion, about $48.5 billion of which was financed by equity and the remainder by debt. While this may prove to be a smart move for AT&T from a competitive and financial perspective, given the competitive weakness of its underfunded but once much-touted U-verse upgrade strategy, it’s worth noting that this massive M&A investment: 1) generated virtually no new infrastructure or competitive entry; 2) involved an additional debt burden greater than the total amount AT&T had invested in the initial U-verse and follow-on Project VIP phases of its wireline network upgrade, and a total acquisition-related investment nearly five times the financial magnitude of these wireline upgrade investments.

One need not be a technology or financial expert to get a sense from the above that the strategic priorities driving AT&T’s investment decisions focus more on share price and profits than on maximizing the social value of the Internet’s “spillover rich” infrastructure within the service territory originally granted to Ma Bell as a protected monopoly, and later inherited (and largely reconsolidated) by the corporate entity we now know as AT&T. While this strategy may make very good sense from the perspective of AT&T’s management and shareholders, my point here is that, given the company’s (and its peer group’s) dominant role in the communication sector and our national political economy, “what’s good for AT&T,” may not be so good for the nation as a whole.  And, if that’s the case, perhaps there’s more that we, as a society, can and should do to shift the focus of public policy toward an approach to the Internet that does, in fact, focus on maximizing its positive (yet difficult to quantify and even more difficult to internally monetize) direct and indirect spillover effects.

In the next post in this series I consider Kelly’s framework in the context of the local broadband access market.

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