Saturday, March 22, 2014

U.S. at inflection point on premises Internet infrastructure

The United States is at an inflection point relative to premise Internet infrastructure serving homes and small businesses. The “walled garden” business model of legacy incumbent cable and telephone companies has reached the limits of its reach. Connecting the remaining 20 to 30 percent of premises outside the wall isn’t economically practical as testimony at a U.S. House Small Business Subcommittee hearing this week in upstate New York illustrates.

Mark Meyerhofer, a government relations administrator for Time Warner Cable, said while there has been a change in the national mindset that favors a greater focus on unserved areas, nevertheless “It remains extremely challenging to extend broadband to most rural areas of New York State, where geographic isolation and topographic issues make it economically infeasible for companies to reach these areas,” Meyerhofer explained. “Investments simply cannot be recouped before it is time to reinvest.” Although Meyerhofer was specifically referring to only one part of the country, his testimony applies elsewhere across the nation including many suburban and exurban areas where service gaps exist. That economic reality of the walled garden Internet also applies to Google Fiber, which plans to expand into several metropolitan areas.

The other challenge faced by the legacy incumbent providers (but not Google Fiber) is the ever growing demand for more Internet bandwidth. It’s similar to the problem facing manufacturers of silicon-based microchips that eventually will reach a physical barrier where no additional circuitry can be crammed onto the chip. That will require the incumbent providers to change out their metal wire-based premise service infrastructure with fiber optic connections to accommodate the additional bandwidth demand and stave off technological obsolescence. But barring a revolutionary breakthrough that significantly reduces the cost of constructing fiber to the premise infrastructure, their shareholders aren’t likely to approve of such large capital expenditures that could cut into dividends as shown by Verizon’s 2012 pullback of its FiOS fiber to the premise product offering.

Given the growing consensus that the so-called “last mile” premise Internet infrastructure challenge can’t be met within a commercial framework, it strongly suggests other business models including a nonprofit cooperative or public works approach similar to that used for roads and highways will be necessary in many areas of the U.S.

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