The d factor: Why publicly owned, financed FTTP may not balance the Crawford equation

Author Susan Crawford in her 2018 book Fiber: The Coming Tech Revolution – And Why America Might Miss It, set out a vision of ubiquitous and affordable fiber connections as with copper delivered voice telephone service in the 20th century.

The United States stumbled in the late 1980s and early 1990s by failing to develop a comprehensive strategy to transition from the legacy copper to fiber to support digital Internet protocol voice, video and data services. Instead, fiber to the premises (FTTP) was left to the market whims of investor owned companies that construct it only where it meets their rate of return and profitability standards. That’s typically densely settled urban and suburban areas.

That leaves much of the nation outside these areas unfibered with uncertain prospects for FTTP amid a multiplicity of siloed federal and state grant programs. Only recently have these programs begun to favor FTTP for subsidization albeit with eligibility still based on marketed “broadband” bandwidth to protect the customer “footprints” of incumbent providers from interlopers.

An open question is can publicly owned and financed regional telecom authorities provide a lower cost work around to the investor owned providers whose business structures require them to generate profits and dividends for their owners and pay income taxes on their earnings?

Let’s call Crawford’s vision the Crawford equation and express ubiquitous access as x and affordability as y. Can these alternative business models solve for both since they avoid the higher structural costs of the investor owned business model?

They may not. It boils down to the same reason for both: residential density. Let’s call it the d factor. For the investor owned providers, building FTTP isn’t likely to pencil out in less densely developed exurban areas with lower d value featuring curvilinear roads instead of suburban and urban grid-style development. These areas typically fall short of the investor owned standard of about 15 homes per linear road mile. That translates to more road miles and a relatively lower number of homes per mile. That leads to higher construction costs and longer returns on investment, diminishing the short term profitability investors desire and more certain revenues debtholders want for debt service.

For publicly owned providers and particularly open access FTTP networks reliant on network revenues to service capital bonds, bond underwriters prefer a sizable number of end users to ensure bonds secured by network revenues obtain sufficient revenue from end user fees. That correlates with d. A higher d factor translates to more end users. That translates to lower default risk since there is more revenue to secure debt service. The y factor -- affordability -- can also be adversely affected by networks seeking to boost the x factor in less densely developed areas.

For ISPs offering services to end users, the d factor is similarly critical. ISPs aren’t going to be interested in leasing network access unless there is a sizable market of end users, particularly since they are likely competing against other ISPs on an open access network.

Bottom line, publicly owned and financed FTTP infrastructure may not solve the Crawford equation for much of exurban America where telecom infrastructure is often substandard and not up the needs of knowledge workers migrating to metro fringes and beyond.

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.

Will Gigapower truly operate as open access network?

A cynical view of the investor owned open access fiber to the premises (FTTP) Gigapower build – AT&T’s joint venture with BlackRock – might hold that AT&T will end up as the sole service layer provider. AT&T will initially serve as the “anchor tenant” ISP riding on Gigapower glass.

That view is justified by the history of the unbundling of AT&T’s copper distribution network assets as well as those of other telephone companies mandated by the 1996 Telecommunications Act. The Act required the telcos to providing access to ISPs to compete with its own services. Since these competitive local exchange carriers (CLECs) were all selling the same thing – dialup access and later DSL over platforms like AOL, CompuServe and Netscape – it was difficult to for the CLECs to differentiate their service offerings from those of other ISPs and the incumbent telcos. That prompted a race to the bottom price war that AT&T and other telcos with their deep coffers would ultimately win, being able to hold out for the duration. In addition, a 2006 U.S. Court of Appeals decision held incumbent telcos were not obliged to provide CLECs access to fiber to the premises (FTTP) that was just beginning to replace the legacy copper in limited builds.

However, if AT&T were to monopolize Gigapower as the sole and not just the anchor tenant, the business model wouldn’t benefit from lease revenue paid by other ISPs leasing access to network assets Gigapower expects to defray capital and operating costs. But a cynical take there might be Gigapower will operate as a truly open access network for only the first seven to 10 years to help it finance capex and opex costs for fiber delivery infrastructure outside of its current service area that it couldn’t otherwise justify spending on its own. After which it would become exclusively AT&T’s with the Gigapower terminating and non renewing completing ISP service provider contracts.

Sohn: Legacy incumbent telcos, cablecos should see publicly owned open access advanced telecommunications infrastructure as business opportunity and not competitive threat.

Gigi Sohn, executive director of the American Association of Public Broadband, urges incumbent telcos and cablecos facing the significant expense of modernizing their legacy metallic delivery networks to fiber to view publicly owned, open access fiber as a good business opportunity to offer services over the fiber instead of viewing it as a competitive threat.

We are hearing a lot about public-private partnerships now. But Sohn is talking about a true partnership versus local governments merely handing over federal and state dollars to the incumbents as subsidies to build out their infrastructures but not necessarily to provide universal service to all addresses within their jurisdiction.

Here’s what Sohn said on this in a podcast interview this week with Mike Masnick of TechDirt at 47:50:

“Perhaps we should have started with open access to begin with. The facilities-based competition when you have cable competing against telecom competing against wireless, maybe wasn’t the best idea. But it’s the world we live in now and we can fix it by having more open access. I’m always encouraging the incumbents to see community broadband, open access as a business opportunity and not as a competitive threat. And some have approached me quietly and said yes, Gigi, we’d like to find ways to work together and I think that’s really refreshing.”

Facilities-based competition is arguably a wasteful use of high cost infrastructure. “It’s a waste of resources more than anything,” says Carl Åhslund, CEO of Open Infra. “Everyone fights, they have to build their own network if they want customers, but it doesn’t make sense. You don’t have two water lines.”

In potential model for nation, California poised to scale up open access fiber

California is poised to adopt a model of open access fiber infrastructure. The state is initially focusing on “middle mile” transmission infrastructure but could later extend the model that structurally separates end user services from the fiber that delivers them to “last mile” distribution infrastructure connecting customer premises.

The model, financed by a current state budget allocation of $3.5 billion for state owned transmission infrastructure and a similar amount for distribution infrastructure in the form of grants and loan securitization, dovetails with the current federal regulatory regime put in place in 2018 that regards the service layer as distinct from infrastructure, regulating IP services as information services under Title I of the Communications Act of 1934.

It also emerges one year after the U.S. Federal Communications Commission conditionally repealed rules put in place by the 1996 amendment to the act requiring incumbent telephone companies to sell wholesale access to its proprietary infrastructure to competitive local exchange carriers -- CLECs. That heightens the need for open access transmission infrastructure such as that being planned in California.

Both federal policies also pave the way for non-incumbents/CLECs including public sector entities and consumer telecom cooperatives to more widely build out and operate open access fiber distribution networks. Incumbent telcos and CLECs are limited by their business models requiring rapid returns on investment and relatively high ARPU. Consequently, these investor-owned companies offer limited distribution fiber in select neighborhoods most likely to meet those requirements, leaving the majority of homes without fiber connections as legacy copper telephone infrastructure has become obsolete as demand for quality, reliable connectivity rises rapidly.

Instead of mitigating risk by cherry picking select neighborhoods, the open access model separates end user services from infrastructure. It thus spreads the risk of areas that are costlier to build fiber to all doorsteps by aggregating demand across a broad customer base, cross subsidizing the high-cost areas from revenues generated by businesses and institutions. That’s how the Electronic Frontier Foundation (EFF) explained it in comments filed with the California Public Utilities Commission (CPUC) this month. In addition, the EFF recommends the CPUC develop a new license category for transmission infrastructure. In order to obtain licensure, the infrastructure would have to be offered on an open access basis to distribution infrastructure operators at affordable rates and offering sufficient capacity.

Google Fiber's Kansas City experiment demonstrates need for publicly owned advanced telecom infrastructure

Google Fiber made Kansas City better but didn't transform it | The Kansas City Star: There may be a lesson here. Digital technology has undoubtedly transformed our world, disrupting media, entertainment, politics, retail, money management and more. But the miracle is at the end of the pipeline — the miracle isn’t the pipeline itself. Most Americans now see internet service as a utility, and price remains an important consideration. That could explain why Google Fiber is rethinking its role in getting digital service to the home.

Internet protocol-based advanced telecommunications is indeed a modern utility for residential, commercial and institutional premises just as electricity and telephone service before it. However, what remains unclear is the appropriate business and pricing model. Electricity is correctly billed on a consumption basis. Use more megawatts, pay more. That makes sense because the generation of those megawatts incurs costs directly attributable to their production. But the same cannot be said for the gigabits and terabits that power advanced telecommunications carrying voice, video and data.

The Kansas City Star correctly observes price of this most new utility is a consideration. It's because ISPs bill using a monthly recurring charge as do other utilities. Every household budgets based on its monthly recurring costs such as mortgage or rent payments and utilities. But is that the right pricing model for advanced telecommunications, particularly when the monthly recurring charge is based on bandwidth? While large businesses and data and call centers might be in the market to buy bandwidth, most consumers are not. They merely want reliable telecommunications service that doesn’t distort, slow down or stall and don’t care about the bandwidth that ensures that level of service.

 

The only way to ensure that service standard going forward as the bandwidth requirements of advanced telecommunications services evolve and grow is fiber to the premise telecom infrastructure. It’s the only technology that provides sufficient headroom for whatever services may be coming in the foreseeable future as well as adequately supporting today’s. In that regard, Google Fiber got the technology side of the equation right. But as the Star suggests, the business model essentially copied that used by legacy telephone and cable companies needs rethinking.

A better model would be to treat most telecommunications infrastructure as a public asset like roads and highways, funded by taxpayers at all levels of government – federal, state and local. Google Fiber and other ISPs would have a role to build and maintain those fiber thoroughfares and sell services over them on an open access basis. But they shouldn’t own them. Since they would be selling services, it would be in the economic interests of the ISPs to ensure the reliability of the network.

The current private ownership model of advanced telecommunications service is clearly broken and crippled by market failure in much of the United States lacking infrastructure capable of reliably delivering high quality voice, video and data. As the Google Fiber experiment shows, simply adding another investor-owned ISP isn’t going to solve that national problem. A new path forward is needed.

Obama administration seeks public option for Internet infrastructure - The Washington Post

Obama wants to help make your Internet faster and cheaper. This is his plan. - The Washington Post: Frustrated over the number of Internet providers that are available to you? If so, you're like many who are limited to just a handful of broadband companies. But now President Obama wants to change that, arguing that choice and competition are lacking in the U.S. broadband market. On Wednesday, Obama will unveil a series of measures aimed at making high-speed Web connections cheaper and more widely available to millions of Americans. The announcement will focus chiefly on efforts by cities to build their own alternatives to major Internet providers such as Comcast, Verizon or AT&T — a public option for Internet access, you could say.

The public option is certainly needed given Internet telecommunications infrastructure is to the 21st century what roads and highways were to the 20th. Relying totally on commercial, investor-owned providers won't build that needed infrastructure. There simply isn't enough investment capital to get it done. And to get the choice and competition for Internet services the administration seeks, that infrastructure must be open access fiber to the premise, selling access on a wholesale basis to service providers who compete to offer services to businesses and consumers.

Like building the highways of the 20th century, that infrastructure won't come cheap. For the public option to become a reality rather than aspirational rhetoric, it will have to be backed with billions of dollars in funding to help regions of the United States build fiber to the premise Internet infrastructure on a par with telephone lines in the last century that served all Americans no matter where they made their homes or operated a business.