Thursday, May 08, 2014

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.

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