How open access model disrupts, offers potential to more rapidly scale FTTP infrastructure.

Open access infrastructure, wherein service providers lease the access layer of fiber to the premises (FTTP) networks to gain access to subscribers, offers substantial potential to alter the economics of deploying FTTP. FTTP deployment has lagged in the United States – currently passing less than half of all homes – because the business case for its deployment is based on recovering capital investment in a short term time horizon of 5-7 years from residential subscription fees. These deployers sell both access to its proprietary delivery infrastructure and bundled services delivered over a vertically integrated offering of web, email, as well as video channels and voice over internet protocol (VOIP).

Their business case analysis considers internal rate of return standards, the number of homes likely to purchase known as “take rate,” and projected average revenue per household unit or ARPU. That calculus has historically favored household density and income with the former carrying the most weight since the cost of deployment would be spread across more homes.

Open access infrastructure changes this revenue structure. Instead of solely relying on end user revenues, it derives some from leases to service providers. In the case of Utah’s UTOPIA Fiber open access network, fully 70 percent comes from service providers and the balance from end users. Open access infrastructure must attain significant scale to reach a lot of end users in order to offer an attractive market to service providers to lease access to the network.

The open access model also lengthens the investment time horizon allowing deployers to attract more patient capital that doesn’t need to hit ROI over the short term. It’s in it for the long game. The demand for FTTP is there – owing in large part to the fact that more than half of U.S. households lack access to it - and will continue to be. It’s also a long term asset with a life span of 30 to 50 years. And it’s sticky, affording deployers first mover advantage. Whoever deploys first is likely to own that end user premise customer for decades.

As one of the first open access networks formed in the early 2000s, UTOPIA Fiber has achieved the scale necessary to make the model work, serving 20 Utah municipalities that collectively own the network. The financial appeal of the open access model has also attracted private players including SiFi Networks, which according to its website is now in 11 American cities. More recently, AT&T is getting in on the open access action, forming a joint venture with BlackRock to deploy open access FTTP outside of AT&T’s existing service area.

Northern California could potentially host the nation’s largest regional open access network in terms of scale and geography, serving 40 member counties of the Rural County Representatives of California (RCRC) with the RCRC’s nascent Golden State Connect Authority, formed in 2021 as a joint powers authority. There, the open access model could provide FTTP in less densely populated areas passed over by the large, investor owned telephone and cable companies under the traditional closed access bundled services business model. Many households there are forced to rely on substandard, expensive wireless services.

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.

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’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.

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.

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.

Forum discusses broadband possibilities in Alcona - TheAlpenaNews.com | News, Sports, Jobs, Michigan, Community Information - The Alpena News

Forum discusses broadband possibilities in Alcona - TheAlpenaNews.com | News, Sports, Jobs, Michigan, Community Information - The Alpena News

Community forums like this have been going on for at least a decade throughout the United States with little or no change in the status quo. People and community leaders show up and tout the benefits of landline Internet access and demand more of it. Incumbent providers counter they're doing the best they can within the limits of their monthly subscription-based business models that constrain the extent to which they can modernize and build out their networks. And round and round it goes as the locals and community leaders grow increasingly frustrated over the lack of progress.

As I blogged yesterday, Utah may provide a way out of this circular trap. Instead of wholly relying on Internet service provider subscription revenue to fund infrastructure construction and operating costs, nearly a dozen municipalities there are looking into a private-public partnership (PPP) that would entail a per-premise utility fee to help fund them. Communities across the U.S. that are tired of unproductive "broadband" forums should be looking to Utah as a potential path forward.

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.