Wednesday, June 02, 2010

Emotion rather than logic drives incumbent opposition to local telecom infrastructure improvements

In a recent email exchange with Craig Settles, I've attempted to plumb the paradox of why incumbent legacy telco and cable companies will as Settles put it "rush in like storm troopers" before local providers can activate their own Internet Protocol (IP) telecom infrastructures. Infrastructure built by local governments and consumer cooperatives because it doesn't pencil out for the shareholder-owned incumbents to construct. The result: a plethora of "broadband black holes" and underserved/overpriced areas due to incomplete infrastructure that extends only as far as the incumbents' business models allow.

The question that vexed me is why the incumbents would come in on the heels of community-based provider deployments when they've already concluded there isn't enough business to make it worth their while to expand and upgrade their plants in the first place. Particularly for take rates south of 30 percent and a shift to Internet-based video content that makes consumers less inclined to purchase pricey 300 channel TV packages that are among incumbents' most profitable service offerings.

Settles explanation: there is no logical, business M.O at work in this circumstance. Telcos and cable companies that normally operate in a logical, numbers driven mode (for example, cable providers don't deploy infrastructure unless it strictly falls within a pre-approved, set ratio of occupied premises per linear mile) suddenly turn illogical when a community-based provider emerges with an alternative and typically nonprofit business model that avoids obstacles that limit the incumbents' ability to expand their footprints.

Since incumbents tend to regard their service areas as proprietary, exclusive franchises regardless of how much -- or how little -- they actually provide IP-based services, they view community-based providers as interlopers invading their turf. That provokes an illogical, emotion driven response.

"It's nothing about logic," Settles explains "It's often paranoia -- if one community builds a better network than what we offer, other communities will follow suit and sometimes a case of whose belt is longer. Incumbents seem to prefer to destroy a community network rather than figure out how to adapt services to leverage that network." In other words, a classic pissing contest in which a large, distant corporation attempts to impose its corporate will upon local residents -- who know their needs best -- for the sake of preserving its own pride.

In this respect, the incumbents aren't actually fighting the local upstarts who would dare challenge their territorial hegemony. They're really fighting the future. The incumbents' perceived enemy isn't so much the community-based providers. It's the alternative business paradigm they represent and which fostered their creation.


Christopher Mitchell said...

I think there are plenty of logical reasons the private sector acts this way. The biggest one is that these massive companies like Comcast make an insane margin on their broadband - 70-80% If communities demonstrate on a large scale that broadband can be much faster and much cheaper than Comcast offers, Comcast will be more or less forced to lower its prices. There was a similar dynamic with electric companies who used the same arguments against public ownership and government loans to coops. The private sector had a massive markup on electricity and had to lower it over time as munis and coops showed how little it could cost.

When 10 million Americans can get much faster speeds at lower prices from the local gov or nonprofit rather than Comcast, Comcast knows the government will respond with sensible legislation... they don't want that model to succeed.

Fred Pilot said...


Such fat margins (the 70-80 percent figure you cite) would change the entire business model and provide lots of room to cross subsidize less profitable infrastructure CAPEX. Can you elaborate how you came up with this figure?

Also, what is the legislative problem/solution to which you refer?

daniel john said...
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