Open access FTTP offers potential route to having edge providers defray FTTP infrastructure costs

AT&T’s joint venture with BlackRock to build and operate fiber to the premise delivery infrastructure as an open access network has implications for an issue related to how infrastructure deployment and operating costs are financed. Particularly, how revenues from internet service providers can defray the cost of planning, constructing, and operating it.

Some telecom industry trade groups have argued “big tech” edge providers such as Google, Microsoft, Amazon, and Meta should contribute to these expenses since their businesses benefit from the FTTP infrastructure providing them access to subscribers of their services and delivery platforms. The argument has been raised in a statutorily mandated U.S. Federal Communications Commission inquiry on universal service and the future of the Universal Service Fund as well as before EU regulators.

In an open access network, service providers pay to lease access from the network operator. Service provider leases could potentially offer investor owned telephone companies an indirect route to get edge providers to help defray them via contracts with ISPs offering services on open access networks. Edge providers would pay the ISPs to bundle their offerings and offer them to end users. Such an arrangement would naturally favor the scale of larger networks such as AT&T’s joint venture Gigapower hopes to attain.

Bringing ISP lease revenue to the table alters the traditional business case analysis for deploying FTTP since it provides owners/operators a revenue source independent of monthly end user or subscriber fees. Traditionally, business case analyses focus on household take rate and ARPU revenue estimates only. That has left many households effectively redlined for FTTP because a viable business case often cannot be made based solely on subscriber revenues.

Service provider lease revenue can flip the analysis, instead constituting most of the network revenues instead of end user subscriptions. For example, the publicly owned open access network UTOPIA Fiber gets 70 percent of revenues from these leases, according to a preliminary bond offering issued April 14, 2022 for $30 million in tax exempt telecommunications revenue bonds. The balance is from end user service contract fees.

More patient capital meets burgeoning demand for fiber

A shift is underway in capital investment in fiber to the premises (FTTP) advanced telecommunications infrastructure. In the United States, FTTP investment has lagged for decades due to the capital investment limitations of investor owned telephone companies. They are constrained by overleveraged balance sheets and investor expectations of traditionally high shareholder dividends that necessitate rapid returns on any capital investment. Those limitations became apparent in the late 2000s when Verizon faced a shareholder revolt, forcing it to scale back plans to modernize its legacy copper outside plant to FTTP. It later moved into fixed wireless that offered lower capital costs. Infrastructure investment is a long term proposition that requires patient capital not found in these companies.

Now AT&T is attempting a workaround to access more patient capital with its Gigapower joint venture with investment firm BlackRock to invest in open access FTTP delivery infrastructure outside of its service area. That patient capital includes state and local pension funds, sovereign wealth funds, and family endowments, Adam Walz, told a panel presentation this week by Broadband Breakfast. Walz is managing director of BlackRock’s Global Infrastructure Fund focused on investments in digital infrastructure opportunities across fiber networks, data centers, and wireless infrastructure.

Notably, other builders of open access FTTP also rely on patient capital including UTOPIA Fiber, owned and financially backed by a 20 Utah municipalities and privately owned SiFi Networks, funded by European pension fund APG. However, Gigapower CEO and retired AT&T executive Bill Hogg, said these players have “nowhere near the scale we will have,” claiming Gigapower will be “much larger than any other provider in the space. The scale at which we are going to operate will be a differentiator in the U.S. marketplace.”

But patient capital doesn’t mean it isn’t concerned about maximizing returns. All these players are targeting more densely developed areas most likely to produce strong ROI and ARPU, capitalizing on the strong demand for FTTP delivered services. Had U.S. telecom policymakers made more erudite decisions decades ago, fiber would have reached nearly all American doorsteps by 2010 at the latest instead of the estimated 40 percent currently. That gives Gigapower lots of runway as well as first mover advantage: first with fiber owns the location for the long term. “We’ve found plenty of attractive locations to build fiber where there’s no fiber today,” Hogg said, pointing to Las Vegas (Google Fiber is looking at that metro as it enters Nevada) and locales in Florida and Arizona. 

The concentration on densely developed areas will require patient capital investment by governments and consumer utility cooperatives to serve less developed areas, particularly those at the exurban edges of metro areas that have seen in migration by knowledge workers as knowledge work decentralizes out of urban cores.

Bountiful, Utah offers states business model for BEAD Five Year Action Plans

While states and local communities are gearing up for the disbursement of $42.5 billion from the federal BEAD program courtesy of the bipartisan infrastructure law, Bountiful joins a growing list of cities who have figured out a way to build a municipal broadband network without relying on grant funds, providing yet another example how publicly-owned, locally controlled networks can still be built and financed even without federal or state subsidies.

https://communitynets.org/content/garden-spot-utah-moves-build-bountiful-fiber-network-face-dark-money-campaign

The business model and financing scheme employed in Bountiful, Utah offers states a model to use in their planning for universal service mandated by the National Telecommunications and Information Administration’s (NTIA) Broadband Equity, Access and Deployment (BEAD) program – part of the Infrastructure Investment and Jobs Act (IIJA). States must develop Five-Year Action Plans this year that include “a comprehensive, high-level plan for providing reliable, affordable, high-speed internet service throughout the (state) including the estimated timeline and cost for universal service.” Additionally, the plans must include an estimated timeline and cost for universal service and planned utilization of federal, state, and local funding sources to pay for it.

In Bountiful’s model, the municipality finances and owns the distribution fiber. A separate entity – the Utah Telecommunication Open Infrastructure Agency (UTOPIA) -- was selected by a competitive bidding process to build, operate, and maintain the network. The city leases access to providers to deliver services over the open access network.

The city is issuing a $48 million bond to finance construction costs, with end user fees servicing the bond debt. While the project is municipal in scope, the business model is also employed on a regional basis like UTOPIA in Utah and by California’s Golden State Connect Authority. Regional entities -- similar to the bell operating companies formed in the 1980s offering analog voice and long distance service -- offer enhanced economies of scale beyond that of a single municipality or county. That's an important consideration to reduce costs and produce greater revenue to service bond debt obligations.

As the excerpted article above notes, this model provides a sustainable funding mechanism that does not depend on one off grant subsidies such as the BEAD grants allocated by the NTIA to states in June. Those funds are most likely to be awarded to large incumbent telephone and cable companies to selectively edge out their distribution infrastructure in less densely populated exurban and rural areas lacking wireline advanced telecommunications infrastructure or served by legacy ADSL over copper.

The Bountiful model could also be employed in less densely populated areas with state and federal grant subsidies used opportunistically for qualifying construction. It also comes with the cost advantages of not having to generate profits or pay income taxes unlike investor owned entities, making subsidy funding go farther. It also builds in a source of local funding that states can include in their Five-Year Action Plans.

Private activity bonds could fund regional open access fiber networks

Nearly all U.S. airports are owned by state or local governments, mandated by the federal government to be as self-sustaining as possible, and thus receive little or no direct taxpayer support, according to the Airports Council International-North America (ACI-NA), an industry association representing local, regional and state governing bodies that own and operate commercial airports in the United States and Canada.

Over the past decade, according to the ACA-NA website, about 60 percent of bonds issued to finance airport capital projects were issued as private activity bonds, a type of municipal bond that is issued to finance a facility that serves a public purpose for the benefit of a private user – in this case airline companies. “Private activity bonds used for airport construction and renovation—are the most cost-efficient form of infrastructure financing available today,” the ACA-NA states.

Section 80401 of the Infrastructure Investment and Jobs Act (IIJA) amended Section 142(a) of the Internal Revenue Code of 1986 to specifically include advanced telecommunications infrastructure as an eligible use of private activity bond proceeds. Specifically, for “qualified broadband projects.”

On its face, the eligibility definition is more generous than the IIJA’s Broadband Equity, Access and Deployment (BEAD) program providing grant funding of up to 75 percent of infrastructure deployment costs. Basic BEAD eligibility is limited to builds where at least 80 percent of serviceable addresses lack access to infrastructure providing throughput of at least 20Mbps for downloads and 3Mbps for uploads with latency below 100ms. There is no definition of the minimum number of addresses that must be included. Projects could be as small as a handful of addresses or even a single address.

Eligibility for private activity bond funding is available for projects in one or more census block groups in which more than 50 percent of residential households do not have access to fixed, terrestrial broadband service which delivers at least 25Mbps downstream and at least 3Mbps upstream. Funded projects must provide access with at least 100Mbps for downloads and 20Mbps megabits for second for uploads.

That appears looser than the basic BEAD “unserved” eligibility standard of at least 80 percent of serviceable addresses unserved. But then it gets tighter with an additional qualification, unfortunately creating ambiguity. Private activity bond funding is available “only if at least 90 percent of the locations provided such access under the project are locations where, before the project, a broadband service provider— (i) did not provide service, or (ii) did not provide service meeting the minimum speed requirements.”

In another unfavorable provision, the IIJA amendment to the Internal Revenue Code opens this financing mechanism to potential incumbent gaming and stalling, further requiring existing providers be notified of a planned project and its intended scope and given at least 90 days to provide information on their ability to deploy, manage, and maintain a network capable of providing access at gigabit speeds – essentially fiber to the premises (FTTP).

The aeronautical analogy easily translates to publicly owned regional open access fiber network such as the Utah Telecommunication Open Infrastructure Agency (UTOPIA). Kimberly McKinley, UTOPIA’s chief marketing officer, described its partnership with an open access FTTP network rolling out in Bozeman, Montana as similar to city or state construction financing for airports, according to a recent article in the Bozeman Daily Chronicle.

UTOPIA is also partnering with the Golden State Connect Authority, a joint powers authority of 40 less densely developed California counties to build publicly owned open access FTTP. Its chair, Calaveras County Supervisor Jack Garamendi, compared it to a regional airport authority in a 2022 interview with the Electronic Frontier Foundation.

Regional open access fiber as the telecom regional airports of the 21st century

As the U.S. continues to debate the role of public and private ownership and operation of advanced telecommunications infrastructure, a California local government official offers simple aeronautical analogy to progress beyond the debate and bring ubiquitous connectivity to nearly every American doorstep.

Just as local governments own and operate regional airports, regional open access fiber infrastructure can serve as the airports for internet service providers operating as the airlines. Like airlines that rent terminal space at airports, the ISPs would rent access to the infrastructure to deliver service to their customers.

Calaveras County, California Supervisor Jack Garamendi’s concept makes a lot of sense. Investor owned vertically integrated providers cannot afford to bring fiber connections serve all homes, businesses and institutions in their nominal service areas. That’s because their investors expect relatively short term returns on capital investments incompatible with the long term investment horizon for infrastructure. Hence, the nation is handicapped with partially deployed infrastructure with only about a third of all homes having access to fiber connections that should have reached nearly all of them by 2010 with better policy and planning.

Now Garamendi is working to build what amounts to a regional airport system serving 38 California counties as president of the Golden State Connect Authority (GSCA). As a joint powers authority and governmental entity, the GSCA plans to access the public bond markets to finance the fiber. That’s more patient capital that’s compatible with fiber infrastructure serviceable for decades – much like airports. California legislation enacted in 2021 appropriates continuous funding to help secure the bond debt.

The GSCA is modeling itself on and working with the State of Utah’s Telecommunication Open Infrastructure Agency (UTOPIA), a group of 11 Utah cities that joined together in 2004 to build, deploy, and operate fiber infrastructure connecting all homes and businesses.

According to Garamendi, the GSCA plans to ramp up deployment of fiber rapidly, starting with more densely settled areas. “We’ll go fast and we’ll pick up speed,” he said at an Electronic Frontier Foundation event this week.

Let’s hope so. The GSCA must avoid only partially deploying like the large corporate investor-owned telephone companies that serve limited, more densely developed areas. Great numbers of residents and small businesses in GSCA counties have coped with lack of landline connections for many years – even in not so thinly populated exurban areas at the outlying edges of metro counties, forced to rely on high cost, low value wireless services.

The GSCA won’t be able to bring fiber to every location, Garamendi noted, given some are in very remote rural areas of the Golden State. But access to patient capital will allow it to go much farther than the far less patient capital of investor-owned providers that naturally cherry pick areas conforming to their stringent rate of return and profitability standards. 

State and regional public telecom entities like UTOPIA and the GSCA offer the nation a badly needed self sustaining model to build and operate fiber networks to provide near universal service and affordable access. Such self sustaining business structures are particularly needed in the absence of coordinated, sustained federal policy and funding designed to ensure fiber connections reach all American homes and small businesses.

Regionalism isn't new for telecom infrastructure. Telephone companies were structured as interstate regional bell operating companies formed upon the divestiture of AT&T in 1982.

San Francisco eyes municipal telecom infrastructure project to bring fiber to every doorstep

San Francisco Municipal Broadband Targets $26 Monthly Base Price - Telecompetitor: City officials have recommended construction of a San Francisco municipal broadband network based on a public-private partnership. The recommendations came in a 103-page report issued by the office of Supervisor Mark Farrell on March 15.
According to the San Francisco Municipal Fiber Advisory Panel’s report – Financial Analysis of Options for a Municipal Fiber Optic Network for Citywide Internet Access – a publicly funded broadband utility network would cost the city an estimated $867.3 million in construction costs plus $231.7 million a year in maintenance costs. Projected subscriber revenue would result in an annual deficit of $145 million. Given this, as well as the desire to build in some market competition, the authors recommended the city launch a public-private partnership model that calls for all San Francisco homes and businesses to pay an average $26 per month utility fee for baseline Internet access. Introducing tiered pricing models based on type of service or bandwidth use could offset operating costs and lower baseline fees.

The Utah Telecommunication Open Infrastructure Agency (UTOPIA) had planned to expand its services using a similar financing mechanism with a private finance partner, Macquarie Capital Group. It pulled the plug on the partnership last month amid resistance to the utility fee. However, the model could fare better in the city by the bay due to multiple factors including its relative affluence, more liberal political leanings and its well established place in the information technology industry. Unlike UTOPIA, a regional network involving several municipalities, San Francisco is also a much more compact service area of just 14 square miles with pre-existing municipal infrastructure that would facilitate construction. That likely made it easier for San Francisco to reject the model used by legacy telephone and cable companies and Google Fiber that builds infrastructure serving some but not all neighborhoods.

UTOPIA reconnoiters as resistance to local parcel fee halts PPP with Macquarie

Macquarie is probably dead, and that’s probably okay – Free UTOPIA!: While I wasn’t able to attend the latest UTOPIA board meeting (bit of a drive from Cedar City), I did get a summary of what was discussed during that meeting. One of the things that came up was the long-delayed Macquarie deal. For all intents and purposes, it’s most likely not going to happen. There appears to be slow action on a binding public vote and the utility fee was very unpopular (and wasn’t coming down). The board has voted to pay Macquarie what they are due and take those reports as valuable information to plan for the future with no further action.

As this blog reported last March, resistance to a utility parcel fee stalled progress on a public-private partnership between the Utah Telecommunication Open Infrastructure Agency (UTOPIA) and an Australian firm that invests in public infrastructure projects, Macquarie Capital Group. That resistance created a massive stumbling block to the expansion and financial future of the UTOPIA regional fiber to the premise (FTTP) that serves 11 Utah municipalities.

Now nearly a year later as the blog cited above reports, that resistance has proven fatal to the partnership. In order for it to work under the long term financial plan prepared by Macquarie, the parcel fee was a necessary component of the partnership given that a public-private partnership by definition requires the contribution of public financial resources. No public contribution means no partnership, leaving the private partner like a single hand clapping.

This development is yet another example of the lack of adequate funding mechanisms at the state and local government level to ensure the construction of FTTP telecom infrastructure serving all American homes, businesses, and public institutions. The situation calls for an aggressive federal public works program to construct this needed infrastructure for the 21st century as I propose in my recently issued eBook Service Unavailable: America’s Telecommunications Infrastructure Crisis.

UTOPIA holdout cities should adopt broader view of economic benefit of UTOPIA-Macquarie PPP

Orem, Utah and four other cities that have opted out of a public-private partnership between the Utah Telecommunication Open Infrastructure Agency (UTOPIA) and Macquarie Capital Group are now grappling with a fundamental question as to how to finance the future operation of fiber to the premise (FTTP) telecommunications infrastructure to serve their residents. The question: support the partnership’s public works approach to the increasingly essential infrastructure or default to legacy incumbent telephone and cable companies and the poor value and customer service and disparate access they typically offer as monopoly providers.

Six of the 11 cities comprising UTOPIA agreed in concept in 2014 to assess a parcel utility fee to help offset the cost and mitigate the business risk associated the pure subscription-based model used by incumbent providers. They mitigate their business risk by cherry picking neighborhoods believed to have the greatest profit potential for their proprietary network investments while redlining those that don’t.

The utility parcel fee is a key sticking point in negotiations between UTOPIA and the five hold out cities including Orem. A Daily Herald dispatch cites from a memorandum to the Orem mayor and council from Orem City Manager Jamie Davidson:

"There is a concern that Orem is unpredictable and not easy to work with," Davidson said. "It's concerning to me to see new options entering the market [UTOPIA] with a stranded investment for the future."

“However, bottom line, the proposal remains a utility fee-based model,” Davidson said. “If, as a council, you cannot wrap your arms around the assessment of a monthly utility fee to all customers (with potentially a few exceptions, for example, the indigent), nothing else matters.”

Davidson’s right. The parcel fee is essential to making the UTOPIA partnership with Macquarie pencil out by mitigating the business risk of relying solely on customer subscription revenues. UTOPIA operates an open access fiber network, enabling competition among ISPs that want to offer customer premises services delivered over the network. In that regard, the UTOPIA network is like a road or other public works project that benefits and enhances the value of the properties it passes. The UTOPIA cities benefit because these properties can support higher levels of economic activity as well as boosting their market value and, by extension, their ad valorem property tax revenue potential to fund other municipal services.

UTOPIA’S “fiber highway” offers roadmap to greater competition for premise telecommunications services

A major complaint about Internet service in the United States is legacy incumbent telephone and cable companies lack incentive to provide better value and customer service and to build out their networks to fully serve communities and neighborhoods and not just selected segments. Many believe the solution is introducing more competition.

But given that telecommunications infrastructure costs a lot to build and maintain, that circumstance creates high economic barriers to potential competitors. That leaves the incumbent telephone and cable companies firmly entrenched in a market that naturally tends to be monopolistic. It puts them in the dominant position and consumers in the weaker role, forced to be what economists call “price takers,” meaning they must pay whatever their ISP charges or go without service. 

Summed up, a market that’s naturally monopolistic can’t easily be transformed into a competitive one without a radical reordering. One such example is the Utah Telecommunication Open Infrastructure Agency (UTOPIA), which operates its regional fiber telecom infrastructure as public works -- like a road or highway. That introduces competition by giving consumers the choice of what Internet services they want to purchase and from which ISPs. “The value to users is generated through greater choice of providers that generates a shift in the balance of power from the ISPs to the user and the superior service that the new network will provide,” notes this recent update by Macquarie Capital on its public-private partnership venture with UTOPIA.

As the report notes, there has been some resistance to a key financing element: a proposed monthly utility fee. But as it also points out, the estimated $22.60 monthly utility fee is offset by better value consumers would receive than as price takers of the incumbent telephone and cable companies.

As the maxim holds, there’s no free lunch. But some lunch deals are better than others, particularly when they help fund fiber to all and not just some premises as with Google Fiber’s “fiberhoods.” UTOPIA’s open access model provides the additional advantage of ensuring everyone is connected regardless of where they live or operate their business. Applied on a regional basis as UTOPIA plans, the utility fee model is a particularly important financing mechanism in places like Bettendorf, Iowa and Danbury, New Hampshire -- small localities that would be challenged to fund Internet infrastructure construction without new revenue streams.

The Obama administration and the Federal Communications Commission – looking for ways to increase competition for premise telecommunications service amid a growing tide of consumer dissatisfaction – would be wise to look to UTOPIA’s open “fiber highway” model. And consider tax incentives such as making utility fees tax deductible for all taxpayers to make them more palatable.

The FCC is moving to preempt state broadband limits - The Washington Post

The FCC is moving to preempt state broadband limits - The Washington Post: Under Section 706 of the Communications Act, the FCC is authorized to promote the deployment of broadband in the United States. By ruling that the anti-municipal state laws constitute barriers to that mission, the FCC's draft order invokes Section 706 in preempting the laws.

But that theory has already been questioned by Republicans who believe private investment is a more effective tool for rolling out high-speed broadband. 

Private investment in theory might be effective -- if there was a lot more of it. The legacy, shareholder owned incumbent providers are constrained in their capital investment capacity by the demand for short term profits and high dividend obligations and debt loads. Witness Verizon, for example. The company stopped new build outs of its FiOS fiber to the premise infrastructure in response to shareholder concerns.

Private pension money might be brought into play as is the case with Australia-based Macquarie Capital, the financial partner of the Utah Telecommunication Open Infrastructure Agency (UTOPIA). But so far no other similar financiers with the billions that are needed have emerged.

In summary, there really isn't any point in debating what's the best source of U.S. fiber to the premise telecommunications infrastructure funding. What's truly important is that there be an adequate and viable funding source -- something the nation is currently lacking.

Despite more favorable market conditions, incumbent telephone and cable companies unlikely to expand limited Internet infrastructure footprints

Over the past 15 years, the market dynamics for incumbent legacy telephone and cable Internet service providers have improved from a risk standpoint. Early on, there was substantial uncertainty as to how many customers would subscribe to premise Internet connections. Telcos marketed advanced “broadband” services as an add on to their voice telephone service as did cable companies as an adjunct to their pay TV offerings.

They calculated only a fraction of customers would choose to receive these services -- and pay extra for them. Hence, they deployed the infrastructure to deliver them to a select set of homes and small businesses -- favoring higher density and income levels -- to reduce the risk that there would not be sufficient revenues to cover the cost of deployment and ongoing maintenance.
 
Some developed formulaic approaches to utilize large numbers to spread their risk. For example, Comcast adopted a hard rule that it would build infrastructure only in areas where there were 16 occupied premises per linear road or street mile. That mitigated risk because it could be reasonably predicted that with that many premises, enough would take Internet services to help defray the cost of building out and upgrading the network in order to serve them.

Now with premise Internet service increasingly regarded as essential as landline telephone service was before it was succeeded by the Internet, the risk picture has changed. The likelihood of residential and small business customers subscribing to the incumbents’ Internet service is significantly higher, even than it was just five years ago.

One might think given the improved commercial risk picture, the legacy incumbent telephone and cable companies would be undertaking an aggressive effort to construct infrastructure to serve nearly all and not limited “footprints” within their service territories. Not likely. The reason is the large, shareholder- owned incumbents that dominate in much of the United States lack business models that allow them to make the significant capital expenditures that would be required. That would divert dollars that could boost earnings, pay generous shareholder dividends and fund stock repurchases.

Consequently, the nation continues to need alternative approaches to ensure all premises have Internet service to meet their current and future telecommunications needs such as community operated networks or public-private partnerships that tap into sources of patient investment capital such as Utah’s UTOPIA.

Broadband and the future of learning | Computerworld

Broadband and the future of learning | Computerworld: Since learning may take place anywhere and anytime, connected learners also need broadband access outside of school. Although 70% of U.S. households now have broadband, millions of households still do not. Private-sector initiatives are helping to expand access. For example, Comcast’s Internet Essentials program offers low-income families broadband service for $9.95 a month, along with the option to purchase an Internet-ready computer for under $150 and free digital literacy training. In its first three years of operation, the program has provided affordable broadband service to more than 350,000 households.

It should be noted that Comcast and other incumbent legacy providers redline many neighborhoods, leaving them without access to modern landline Internet connectivity at any price.

There are also promising public-private partnerships to increase access. In Forsyth County, Georgia, the local school district worked with the Chamber of Commerce to create a directory of free Wi-Fi locations in the community and to provide participating businesses with signs indicating where free Wi-Fi is available. And a middle school in Manchester, Tenn., that has equipped all sixth-graders with iPads had convinced local businesses to open their Wi-Fi hotspots to students to maximize the benefits of their technology tools.

Public-private partnerships need to go far beyond Wi-Fi and help construct fiber to the premise infrastructure to make blended learning possible since it heavily relies on students having adequate access in their homes. A good example is in Utah, where an investment firm, MacQuarie Capital, is partnering with the Utah Telecommunications Open Infrastructure Agency (UTOPIA) to finance and complete the construction of open access fiber to the premise infrastructure.

U.S. FTTP infrastructure projects falling into 2 categories

The construction of fiber to the premise (FTTP) Internet infrastructure in the United States is falling into two main categories:

1. Projects in large and midsize metro centers such as those started or planned by Google Fiber, AT&T and Century Link as well as some cable companies. An article in the July 2014 issue of Broadband Communities magazine lists these deployments.
2. Community or regional projects by local governments, utility cooperatives and public-private partnerships serving less densely populated areas not containing large cities such as those tracked by the Institute for Local Self Reliance.

The bifurcation of these infrastructure projects is distinguished by the economic health of their respective markets. Those in the first category undertaken by investor-owned providers that need a rapid return on investment are targeted to markets undergoing rapid economic growth, Broadband Communities editor Masha Zager writes in her article on large metro projects, citing the FTTP deployment strategy of Cox Communications:

Cox explicitly named rapid growth as one of its criteria for selecting cities for gigabit deployments. In contrast to municipalities, which often deploy fiber in an effort to jump-start lagging economies, large players favor localities that are healthier to begin with.

For the second category of projects, FTTP is clearly an economic development strategy to a far greater extent than the first. Unlike those in the first category financed by the impatient capital of telcos and cablecos burdened with high debt loads and large shareholder dividend obligations, community or regional projects will rely on patient capital. Sources include long term public bonds and creative public-private partnerships that blend public and private funding such as the Utah Telecommunications Open Infrastructure Agency (UTOPIA).

The second category is also distinguished from the first by the ownership and business models of the network infrastructure. In the first category of investor-owned projects, the network is a proprietary, closed access property. The telcos and cablecos that own the networks charge a retail monthly subscription fee to connecting premises.

By contrast, the second category is more likely to utilize an open access business model (such as UTOPIA) where fiber infrastructure is like a public works project such as a road or highway. Instead of selling individual subscriptions to customer premises, an open access model operates as a wholesaler selling network access to Internet service providers who provide services to customer premises. This model is a better option for the second category of projects because it removes the business risk of getting sufficient numbers of premises to sign up for service in order for the network deployment to be economically viable.

Another public regional telecom infrastructure project may be ripe for PPP investment

In Utah, several cities are moving ahead with due diligence on a public-private partnership (PPP) to construct fiber to the premise (FTTP) telecom infrastructure.

Another public FTTP infrastructure project in the eastern United States might also be an attractive partner for private investment companies like Australia-based Macquarie Capital Group, which is looking at investing in Utah's UTOPIA regional network.

This one's in western Massachusetts and is a utility cooperative of 42 municipalities. According to a June 2014 update by the Wired West cooperative, it is hoping to obtain state funding to move forward with construction as people in western Massachusetts continue to be vexed by the lack of adequate internet service.

Given the scope of the Wired West project, it will likely need significantly greater funding from the private sector as part of a PPP like that under consideration in Utah.

Two sharply divergent alternative business models for Internet infrastructure play out in Utah

For the past decade, much of the United States has been plagued by telecommunications infrastructure market failure. Many residences and small businesses need fast, reliable landline premise Internet connections but are unable to obtain them because legacy telephone and cable companies have opted not to upgrade and build out their networks to reach them. Alternative business models are thus urgently needed to ensure they don’t remain isolated from the Internet grid and effectively cut off from the many services it provides.

In Utah, two alternatives to construct and operate fiber to the premise (FTTP) infrastructure -- which is also being referred to as “gigabit broadband” in reference to fiber’s substantial carrying capacity that eliminates sluggishness and latency -- are playing out in close proximity.

One model is quasi-public, the other private. The first is the Utah Telecommunication Open Infrastructure Agency (UTOPIA), of which 6 of 11 member municipalities are moving forward with diligence on a partnership to bring in private investment capital. (Story here) UTOPIA’s model treats its fiber infrastructure as a public asset similar to roads and highways. 

By contrast in nearby Provo, Google’s Google Fiber unit is utilizing the subscription-based business model used by legacy telephone and cable companies to sign up residential (but not business) customers living in selected “fiberhoods.” Google Fiber is open only to Google whereas the UTOPIA model allows Internet Service Providers access to the network on a wholesale basis.

Since Google Fiber sells subscriptions like a magazine, it has to sell enough subscriptions to be economically viable. Being part of online advertising giant Google means Google Fiber is also motivated to get as many subscribers as possible in order to maximize eyeballs on Google-delivered content and ads. With the bill and keep subscription model, teaser and special rates are utilized to goose subscriptions such as Google Fiber’s announcement it is cutting its $300 flat rate, low cost subscription rate to only $30 for a limited time in Provo fiberhoods – similar to limited time magazine offers for new subscribers. (See this item from Google Fiber blog)

Of these two models, the UTOPIA model despite initial resistance to a modest public utility fee is best able to scale quickly enough to address America’s significant telecommunications infrastructure gaps short of a massive federal infrastructure program on the scale of the Federal Highway Act of 1956. The public-private partnership model being utilized by UTOPIA relieves network operators of the risk burden and uncertainly associated with having to sell subscriptions and avoid customer churn. It can also more easily attract the many billions of dollars necessary to build out fiber to nearly all Americans regardless of where they make their homes and businesses.

New telecom infrastructure financing model struggles to emerge in Utah

A new public-private model to finance the construction and operation of modern fiber to the premise (FTTP) telecommunications infrastructure is struggling to emerge in Utah. Of 11 Utah cities that would be part of a public-private partnership to build out an existing FTTP network serving their region, only half have agreed to participate in the partnership as of this week’s deadline to decide. (See story here)

The sticking point is on the public side of the proposed partnership that entails a $20 monthly utility fee to finance construction and operating costs over a 30-year period. Since the Utah Telecommunications Open Infrastructure Agency (UTOPIA) network is an open access network that will build a fiber telecommunications highway to about 160,000 premises, the utility fee is based on the principle that like paved roads, all properties benefit from its presence directly or indirectly, both in the present and the future.

Those cities that have declined to participate in the UTOPIA partnership should revisit their decision. For four reasons:

1. FTTP telecommunications infrastructure is needed to serve burgeoning demand for Internet connectivity and high capacity performance both now and in the future. Premise Internet service is shifting into a new phase where it is an essential telecommunications service like telephone service was in the 20^th century and not an add-on feature to telephone or cable service in those limited areas where it is offered.
2. Like roads, telecommunications infrastructure is expensive to build and maintain. That prevents the formation of a healthy competitive market since these high costs make it a natural monopoly. The existing private telephone and cable companies thus have no competitive incentive to upgrade and build out FTTP infrastructure. Private investor-owned providers are also highly risk averse when it comes to expansion since they owe a primary duty to their shareholders to generate profits and dividends with customer needs subordinate to that duty.
3. Given high construction and operating costs, neither the private sector nor state and local government can shoulder the burden alone. Both must pool their financial resources into a public-private partnership to generate the large sums of necessary capital.
4. The $240 annual utility fee needed to make the deal pencil out is a modest amount that approximates what many households are already paying every two months for telecommunications services.

Future of U.S. telecommunications infrastructure could be determined in Utah

Utah is the site of an economic laboratory for two different business models for the construction and operation of fiber to the premise telecommunications infrastructure. The outcome of the experiment is likely to have significant implications for role of the public sector in these networks as well as the overall future of U.S. telecommunications infrastructure at a time when the nation has reached an inflection point on the issue.

Drew Clark of BroadbandBreakfast has written an overview of the two models: a closed access network based on the business model used by incumbent telephone and cable companies and an open access network operated by a public-private partnership. In a closed access network, the network operator acts as a retailer that “owns” the customer, billing them monthly based on subscribed services. By comparison, an open access network is akin to a public thoroughfare. It wholesales network access to information and service providers that pay to reach customers.

Provo is the site of the closed access model operated by Google Fiber, which is purchasing iProvo, a municipally operated network. Nearby, an open access network operated by the Utah Open Telecommunications Infrastructure Agency (UTOPIA) serves 11 cities. Both the iProvo and UTOPIA networks have encountered financial difficulties but already have deployed a significant amount of fiber serving customer premises, making them attractive test beds for the contrasting business models.

Macquarie Capital, an Australian-based investment company that invests in large scale infrastructure projects like airports, is proposing to invest more than $300 million of debt and equity financing as part of a 30-year leasehold of the UTOPIA network. The rest of the funding needed to fully build out the network would come from a monthly telecommunications utility fee on all residences and businesses within the 11 cities of $18-20 per household, $9-10 per apartment unit and $36-40 per business connection, according to Clark’s summary. Residences would receive free access to a basic broadband network initially offering 3 Mbps symmetrical connectivity.

The key strength of the UTOPIA model is the utility fee assessed on all premises that helps mitigate the business risk of whether enough premises will sign up for services to generate sufficient revenues to offset construction and operating costs and in the case of investor-owned networks, generate operating profits within a reasonable time frame. This uncertainly has been the primary obstacle to build out of incumbent telephone and cable company networks that operate on the customer subscription model. Since Google Fiber uses the same model, it is similarly constrained and thus limits its fiber networks to select “fiberhoods” where the company believes enough premises will subscribe to its network.

UTOPIA’s open access model also has some uncertainty associated with it -- whether Internet service providers will choose to offer services over the network. Since the open access model is novel in the United States and runs counter to the dominant closed access model, UTOPIA has had difficulty attracting enough ISPs necessary to offer services in order to attract customers. Offsetting this uncertainty, however, is the UTOPIA model’s ability to scale and build out to reach areas ignored by closed access, investor-owned networks leery of the business risk associated with deploying to these areas that leaves about one in five U.S. homes without Internet connections.