Friday, June 19, 2015

Seattle's search for a viable FTTP business model

Gigabit Internet access for $45 a month: How Seattle could make it happen - GeekWire: Seattle’s top technology and budget officials say the city can’t bear the cost on its own, if funding for the project comes purely from subscriber fees. But they acknowledge that the city would have a better chance of bankrolling the build-out by adding a property tax to the mix.

A property tax would have several advantages. First, under the financial models used by consultant Columbia Telecommunications Corp., the monthly fee for subscribing to Seattle’s municipal Internet service would drop to $45/month if a property tax were used to subsidize the cost, rather than the $75/month envisioned otherwise.

This, in turn, would make it tougher for Comcast, CenturyLink or any other commercial provider to engage in a price war with the city.

This article is an excellent, comprehensive overview of the financial challenges Seattle faces in pursuing its decade-long goal of building fiber to the premise (FTTP) telecommunications infrastructure for Emerald City residents. Adding public funding in the form of property assessment reduces the so-called "take rate" risk of a purely subscriber paid business model for fiber to the premise (FTTP) such as employed by investor-owned incumbent telephone and cable companies.

As I've blogged previously, from a policy perspective a property assessment makes economic sense because studies have shown a fiber connection to a property boosts its market value just as does a paved road running nearby. It also has the knock on effect for local governments of bolstering economic activity and the tax revenue that such activity generates. Bringing public funding into the mix is also part of the business models of regional FTTP projects including the Utah Telecommunication Open Infrastructure Agency's (UTOPIA) public-private partnership (property fees) and WiredWest in western Massachusetts (municipal bonds supplemented by state grant funding).

But as long as incumbent telephone and cable companies are in the picture to the extent they are in large urban areas like Seattle, even mitigating the take rate risk with public funding doesn't solve all the financial challenges as noted in the article:
In an interview last week about the consultant’s report, Matmiller also cautioned that there would be no guarantee of success with the scenario of a $45/month rate subsidized by property taxes. “We still want a model that puts less risk to the system,” he said.“Even though it’s a cheaper monthly amount, if Comcast or a competitor comes in and uses their pricing power to match it and takes away the consumer argument to switch over, then we are stuck in same boat where now you’re paying a property tax and we have to shut down the system.”

Seattle like other municipalities reserves the nuclear option of inverse condemnation if it wants to push the incumbents out of the way in the name of progress to get FTTP to all city residents in a timely manner given the incumbents have no incentive to move quickly given their monopoly status. But that too comes with major downsides. The city would have to pay fair market value to the incumbents to acquire legacy metallic cable plant, adding more costs and likely years of delay as the condemnation process wound through the legal system.

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