Legacy incumbent providers should reassess stance on public sector telecom infrastructure

Incumbent legacy telephone and cable companies are wont to complain that public sector telecommunications infrastructure modernization projects represent unfair market competition. That’s not an accurate characterization, and here’s why. The goal of market competition is to offer better value products and services to gain market share from competitors.

Public sector telecom modernization projects don’t have an explicit objective of taking away market share from incumbent providers. Rather, their goal is to offer a more complete and robust network than incumbent, investor owned providers can build within a reasonable time frame given the short term ROI constraints of their business models that disfavor infrastructure modernization CAPex. That goal is typically in support of broader economic development objectives, not capturing market share from existing legacy providers. Thus if these providers lose market shares in public sector telecom infrastructure initiatives, it is incidental and not part of an intentional strategy. Public policy should not protect legacy providers from losing market share due to infrastructure modernization needs they cannot meet.

That said, there is potentially lucrative role for legacy providers. They have lots of experience and know how to operate and maintain telecom infrastructure. They can partner with the public sector to fulfill these functions, viewing the public sector as a customer and not a competitive threat.

Selling vertically integrated "gigabit" service inefficient, reinforces disparate access

What it's like to take on Google Fiber in Nashville: One firm's take - Nashville Business Journal: For more than two years, Nashvillians have salivated over the eventual arrival of Google Fiber, super high-speed internet courtesy of one of the world's most idolized tech companies. But while Google has yet to share specifics on when that network will officially launch in Music City, other players have made their own moves. Most notably, legacy telecoms AT&T and Comcast have launched their own networks, but smaller players like Shelbyville-based Athena Broadband are also getting in on the gigabit game.

This is a disturbing pattern that reinforces America's crazy quilt, disparate access to advanced telecommunications service. Given the high cost of constructing telecommunications infrastructure, it would be far more efficient to have a single entity build it and allow various Internet service providers to offer services over it. Instead, the U.S. continues to emulate the failed monopolistic vertically integrated business model of the legacy telephone and cable companies with its neighborhood cherry picking and redlining that have led to the nation's widespread access disparities.

America’s winter of telecom discontent calls for strong, unified federal intervention to bring the spring

The United States faces a long, dark winter of telecommunications discontent if it continues to rely upon the tender monopolistic mercies of the legacy telephone and cable companies. If the light of spring is to come and comprehensive construction undertaken to address the nation’s accumulated telecom infrastructure deficits and build fiber optic connections serving all American homes, schools and businesses, the federal government must take a predominant role relative to its funding and construction. So argues Susan Crawford, who urges a dual pronged strategy utilizing federally subsidized bonds paired with a program to fund and oversee regional infrastructure builds.

Crawford and I are on the same general page here. In my recent eBook, Service Unavailable: America’s Telecommunications Infrastructure Crisis, I call for a federal telecommunications infrastructure initiative to fund universal fiber optic infrastructure as a fully federally funded public works project, not unlike the federal highway construction initiative of the 1950s. Crawford proposes something similar, but also harnessing private investment capital via a regionally administered federal telecom infrastructure development and finance agency, funded by federally subsidized bond proceeds.

Crawford and I agree fiber is the only option for ensuring the nation has the telecom infrastructure it needs now and for the future. We can’t get there trying to subsidize yesterday’s “broadband” speeds or hoping that somehow the laws of physics can be overcome and wireless and satellite will magically offer a cheap workaround. We also agree a unified, federal strategy is needed that also takes a regional approach. 

“[T]o avoid waste and inefficiency, we need to get it right from the beginning — and not just hope we’ll get there with our current patchwork quilt of federal, state, and local government agencies and private utility planners, each with different goals and motivated by different incentives,” Crawford writes. She couldn’t be more correct on that point.

Local governments seek federal preemption of Internet regulation

In the early 2000s as legacy cable companies contemplated offering Internet-protocol (IP) based services including Voice Over Internet Protocol (VOIP), they feared local governments that franchised their decades-old cable television services would demand they offer IP services to all neighborhoods within their jurisdiction. That prospect was very real possibility given their residents had other options for television service including over the air broadcast and satellite, but would need landline infrastructure built out in order to provide universal Internet access as demand for Internet service jumped. Also, by offering voice service via VOIP, cablecos began emulating telephone companies that are required to offer universal service to any premise requesting it.

To head off what to them appeared to be a costly prospect, cablecos heavily lobbied state governments to preempt the locals by giving state public utility commissions franchise authority over IPTV. While nominally limited to video services, for both cablecos and phone companies the move forestalled for many years any local requirements they upgrade and build out their Internet infrastructure since their video services are typically bundled as part of landline premise Internet service.

Now more than a decade later, local governments are getting in on the preemption game. Since their oxen were gored by their states at the behest of the legacy incumbent cablecos and telcos, they are looking to the federal government for relief. An example is the Federal Communications Commission’s order earlier this year to preempt statutes in two states barring local governments from building their own infrastructure. Doing so would allow local governments to get around the state sanction of the incumbents’ redlining practices.

In Arizona, local governments appear to be looking to the feds to resolve a dispute involving the city, a legacy cableco and Google Fiber over the city’s regulation of video services. “The City believes these questions will more likely be resolved more definitively in the future by the Federal Communications Commission or a similar authority,” said Scottsdale Chief Information Officer Brad Hartig in a statement. (H/T to DSLReports).

In California, two legacy telcos are making an argument that would place Internet services in a regulatory non man’s land, subject to neither state nor federal jurisdiction. Frontier and Verizon contend regulation of Internet service falls under federal jurisdiction per the FCC’s order classifying Internet as a common carrier telecommunications service under Title II of the federal Communications Act. But at the same time, they argue that order does not preempt California law giving the California Public Utilities Commission jurisdiction over legacy (non IP-enabled) telephone service but not Internet services. (Item here at Steve Blum’s Blog)

On telecom infrastructure, policymakers must choose between sanctioning market failure or serving their constituents

Rural Tennesseans limited in Internet choices

As time goes on, it’s going to grow increasingly difficult for policymakers to continue to provide protection to legacy telephone and cable companies that want to preserve their partial service area infrastructure footprints. Such protectionist policies amount to government sanctioned market failure.

In the face of market failure, naturally those who live outside the boundaries of those limited footprints are looking to the public sector for help to get landline telecommunications service -- just as they did nearly a century ago for electrical distribution infrastructure. 

If their elected representatives fail to support them, they will face growing political risk come election time, particularly as more stories like this one show they’ve sold out their constituents by taking campaign contributions from the legacy providers.

Market failure – not market competition – spurs community Internet infrastructure projects

A major misconception -- largely advanced by legacy incumbent telephone and cable companies – is local governments build Internet infrastructure because they want to compete with the incumbents. Competitive markets are those characterized as having many sellers and many buyers. That’s not possible with Internet infrastructure due to high barriers to entry and high ongoing operating costs.

Local governments build Internet infrastructure not to engage in market competition with incumbent legacy cablecos and telcos. They do so in response to market failure where the incumbents cannot profitably serve local needs. Lacking sufficient potential profits, the incumbents naturally aren’t going to be inclined to upgrade and build out fiber networks. 

In terms of those left off the Internet “grid,” the scale of this market failure in the United States is substantial. The U.S. Federal Communications Commission (FCC) estimates about 19 million Americans live in homes where Internet service isn’t available.

Net neutrality debate underlies strategic tensions between legacy telcos, cablecos and content providers

Underlying the public policy issue of whether the U.S. Federal Communications Commission (FCC) has legal authority to bar Internet service providers from treating the Internet as a private toll road and charging higher fees for digital express lanes – a policy known as “net neutrality” – are deep tensions between legacy telephone and cable companies and content providers. The courts are now addressing the legality of this policy, with the question to potentially come before the U.S. Supreme Court. But how the tensions between big telephone and cable companies and Internet content and social media services are resolved in the marketplace could ultimately have a much bigger impact than the courts.

The telephone and cable companies maintain they need revenue from content providers to offset CAPex and OPex costs of the infrastructure to deliver the services and as such are entitled to payment for access to their networks. In short, their position is they can charge for access on both ends of the Internet: where services like Netflix enter their “pipes” as then-AT&T Chairman Ed Whitacre famously described them in 2007 and also at consumer premises where they are delivered. From the perspective of the content and service providers, given end users pay for access, they too shouldn’t have to pay to get content on network. And to boot, a network they view as technologically deficient and unable to provide sufficient current and future bandwidth as evidenced by Google’s limited venture into fiber the premise (FTTP) infrastructure via its Google Fiber unit. The incumbent inferiority gap has been recognized by former FCC official Blair Levin, who observes that big telco and cable companies have no plans to meaningfully upgrade and build out their networks.

While the courts will ultimately provide a tactical win to one side or the other on the issue of net neutrality, the strategic market tension between the sides over who owns and operates Internet infrastructure and who pays for it will nevertheless remain. How might it be resolved?

A possible scenario is the formation of an alliance among the big content providers and the Internet backbone transport players with the mission of dislodging the telco/cable cartel and its moribund, slow-moving pre-Internet business model. Call it the nuclear FTTP overbuild option. Given the hundreds of billions of dollars required to build out FTTP in the United States, a strategic initiative on such a massive scale would likely have to be a public-private partnership with private members such as like Level 3, Cogent Communications, Google, Amazon, Netflix, Ebay,Yahoo!, LinkedIn, Twitter as well as entities involved in the telehealth, distance education and the emerging markets of smart homes and the device-driven “Internet of things.” The federal government would be the public partner, providing capital through long term bonds to finance a strategic national Internet initiative to replace lethargic, highly contentious subsidy efforts such as the Connect America Fund that could take decades –if ever – to construct adequate Internet infrastructure serving all Americans.

The 2 key inaction risks facing community fiber projects

Creative risk taking is essential to success in any goal where the stakes are high. Thoughtless risks are destructive, of course, but perhaps even more wasteful is thoughtless caution which prompts inaction and promotes failure to seize opportunity.

  -- Gary Ryan Blair 

Communities contemplating fiber Internet infrastructure projects should keep in mind that there are risks -- negative impacts -- associated both with taking action as well as not taking action.  The latter risk -- termed inaction risk -- is perhaps one of the most threatening and pervasive risks.  For some regions and communities, that risk is being left permanently off the modern Internet grid and unable to realize the benefits it offers for government, public safety, health and education, economic development and transportation demand mitigation. 

Milo Medin, Google's vice president of access services, laid out two major underlying rationales explaining why communities needlessly run the risk of inaction in his address to the 2013 Broadband Communities Summit. 

1.  The unswerving belief despite more than a decade of market failure that incumbent legacy telephone and cable companies will upgrade and build out their infrastructures to serve all premises.  Here's what Medin had to say on that point:

Part of the reason the U.S. is falling behind is that most cities haven’t been intentional about their broadband infrastructure. Cities know they have to make sure the water system works and scales to support growth, the roads are maintained and built, garbage is collected properly. But often, they think broadband is something that the phone company or the cable company will take care of for them and they can ignore it, or that the FCC will make sure the appropriate incentives are put into place to drive competition and upgrades. Depending on those processes is how we got into the situation we’re in today.

2. The misguided belief that wireless services have obsoleted fiber networks. Medin explains:

Some argue that fiber networks are not really needed because of wireless network growth. As an engineer, quite honestly, this kind of talk makes my brain hurt. Wireless network growth is driven by fiber. All those base stations that smartphones connect to are increasingly connected by fiber because, as speeds go up, fiber is required to carry that kind of traffic. Copper just won’t do for modern wireless networks.

Cisco and others expect wireless data to grow by a factor of 50 in the next few years, and you’re not going to be able to solve that kind of growth by throwing more spectrum at it. You’re going to have to reduce the size of the cells, shrinking them, reducing the number of users that are being served by a given base station. And that means a lot more cell sites and a lot more fiber to feed those cell sites. In the limit, the future of mobile is going to look a lot like Wi-Fi: tons of small cell sites connected by a wireline network, connected by fiber – and that’s just physics, folks.

The full Broadband Communities article excerpting Medin's speech can be viewed here and here (pdf). 

FCC Expands CAF Definition of Broadband Subsidy-Eligible Areas - 2013-05-22 22:48:29 | Broadcasting & Cable

FCC Expands CAF Definition of Broadband Subsidy-Eligible Areas - 2013-05-22 22:48:29 | Broadcasting & Cable

Summed up, this subsidy program designed to underwrite the cost of building telecommunications infrastructure in high cost areas is ineffective.  Telcos won't apply because they don't want to fully serve these areas and complain the subsidy amounts are too low.  And even if they did want the money, they have to fight cable companies ineligible for the funding (derived from a surcharge on telephone bills) that claim the telcos are upgrading their infrastructures in order to steal their customers.

This circumstance only adds to the argument that communities and particularly those with lower population densities can't expect legacy providers to serve them.  They must build their own publicly and cooperative owned and operated fiber networks.

Battling over accuracy of broadband maps plays into hands of legacy providers

Readers of this blog know that I've long regarded so-called "broadband mapping" as well as as focusing on "broadband adoption" as strategies cooked up by the PR shops of the big legacy telco and cable companies to divert attention away from the lack of advanced telecom infrastructure. As long as people are battling over the accuracy of "broadband maps," they aren't taking matters into their own hands and money isn't being invested to construct fiber to the premises telecom infrastructure to fill in the availability gaps the mappers are attempting to document.

The Associated Press reports Vermont Gov. Peter Shumlin is steamed that existing "broadband maps" -- probably including the useless National Broadband Map paid for by our federal tax dollars -- show his home near Putney, Vermont has DSL service. Not true, the guv says. So he's countered with his own state-run mapping program, BroadbandVT.org

Instead of trying to see who can most accurately map broadband black holes -- an exercise about as useful as mapping the celestial variety -- Vermonters should call upon their independent New England spirit and create cooperatives to build fiber to their homes and businesses. That spirit is apparently alive and well in western Massachusetts, where the Wired West announced this week that several towns voted in favor of moving forward to formalize creation of a municipal telecommunications cooperative to build sorely needed fiber to the premises telecom infrastructure.

Local governments, coops better positioned than legacy providers to meet burgeoning bandwidth demand

Check out Lance Whitney's July 21 cnet News article that illustrates the growing conflict between burgeoning bandwidth demands of Internet video content and the incremental billing business models of the legacy telco and cable providers that ration bandwidth.

Faced with the explosive demand for bandwidth, the legacy providers are responding the only way they know how given their business models: charging more money for more bandwidth via tiered service offerings and rationing bandwidth with the use of caps.

This puts the legacy providers in a bad spot since incremental bandwidth pricing and punitive caps will only tick off their customers. What's worse is the legacy providers can't upgrade their infrastructures to accommodate the jump in bandwidth demand and leave room for future growth over the foreseeable. That's because they are owned by shareholders who have been with them for decades and expect a nice safe, utility company style dividend -- money that can't be allocated to capital expenditures.

The take away here is alternative providers such as local governments and consumer telecom cooperatives who don't have to pay those fat shareholder dividends are better positioned to deploy fiber to the premises infrastructure that can easily deliver the bandwidth needed today and leave headroom for tomorrow.