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.

Fiber to the premise obsoleting net neutrality debate

A ruling this week by a federal appellate court blocking U.S. Federal Communications Commission rules barring Internet service providers from effectively erecting toll gates and speed bumps as revenue enhancement mechanisms is likely to fuel the policy debate on the proper role of the Internet: whether it should be regulated like a public thoroughfare -- the infrastructure of an increasingly digital economy -- or as a private, profit producing asset.

Investor owned, rent seeking providers such as telcos and cable companies will naturally gravitate toward business models that treat digital Internet traffic as a limited commodity that must be broken down, packaged and sold in discrete bundles and flow rates. The more data and the faster the flow rate, the higher the price.

The big problem for this business model is it's being obsoleted by technology. Fiber to the premise (FTTP) infrastructure is the emerging standard for delivering Internet to homes and business customers. It does not have the inherent limitations of metal wire and cable infrastructure, where a rational, technology-based argument can be made for treating bandwidth as a limited commodity. Once FTTP infrastructure is in place, adding more capacity can be accomplished at relatively negligible cost.

Strong parallels between individual health insurance and Internet service markets

Telecommunications providers, consumers and policymakers should be aware of the strong parallels between wireline residential Internet service and the individual health insurance marketplace as it existed prior to the market reforms of the Patient Protection and Affordable Care Act.

Both residential Internet providers – and formerly individual health insurers -- shared a business model whose success is ironically predicated on not selling to all potential customers in their market areas. The underlying principle is risk aversion: vendors believe they cannot adequately manage the risk of loss associated with an expanded market. A smaller, more certainly profitable customer base is better than a larger one notwithstanding the potential for greater revenues.

Before the Affordable Care Act outlawed the practice starting this month, individual health insurers employed underwriters charged with selecting relatively healthy individuals less likely to incur high medical costs, refusing to offer coverage those who didn’t meet specified underwriting standards. Similarly, wireline residential Internet service providers offer service to one address while declining to serve another nearby – even as close as quarter of a mile away or less. As individual health insurers did, these providers reject the latter residences (as well as some small business sites) as more costly to serve and thus less potentially profitable. Their infrastructures are engineered and built to accommodate preferred addresses and redline the rest.

The problem with this business model for individual health insurers is that medical underwriting limited the size of the pool of individuals and families who could pay premiums to cover claims costs. Consequently, the pool and the number of healthy people staying in it shrank to the point it was on the verge of collapse when the Affordable Care Act was enacted in 2010. The federal law intervened to head off market failure by requiring health plan issuers to sell to anyone applying for coverage regardless of medical history or health condition.

The restrictive marketing practices of Internet service providers bring about a similar problem. Just as insurance pools are more viable with more people in them, telecommunications networks are more valuable when more people are on them or able to get on – both for providers and subscribers. This principle is known as Metcalfe’s Law. Those who argue for broader deployment of fiber to the premise (FTTP) Internet infrastructure carry over the Metcalfe principle to economic activity and education. Greater numbers of premises with modern Internet access can lead to more online commerce and business formation. Increased access to information and educational curricula, similarly, lead to a more informed and better educated society.

As time goes on and these broader benefits – and conversely costs of not having affordable premises Internet access – become more evident, it could lead to large scale market reforms such as are now reshaping the individual health insurance market.

FCC Internet metric outdated

   
The U.S. Federal Communications has issued its annual report on how Americans access the Internet and the speed of their connections. What's striking is the report still defines and measures Internet connectivity using outdated metrics better suited to a decade or more ago starting as greater than 200 kbps as a baseline and in tranches of 768 kbps, 3 mbps, 6 mbps, and 10 mbps.  Nowadays, many would regard only the latter number as defining basic Internet connectivity given increasing household bandwidth demand from multiple devices and streaming video content.

The FCC is measuring straws when it should be measuring water pipes.


Links:
Internet Access Services: Status as of December 31, 2012 (FCC, Dec. 2013)
 
FCC releases new data on internet access services (FCC news release, Dec. 24, 2013)

Protectionist policies called greatest regulatory threat to fiber to premise Internet infrastructure expansion

Over the past decade, much of the United States has experienced market failure because incumbent telco and cable companies are unable to serve all premises in their service territories with legacy metal wire infrastructure. They have also been unable to modernize and build out their aging infrastructures with modern fiber to the premise (FTTP) infrastructure able to accommodate expected exponential increases in future bandwidth demand.

At the same time, however, they have sought protectionist policies barring public sector providers from doing so with lower cost business models financed by more patient capital that doesn't require a high, short term return on investment. From their perspective, their service territories whether they fully serve them or not are their proprietary franchises. Hence, the need for protectionism to keep others out.

"The incumbents won't upgrade to fiber, Mr. President, because it's an option they cannot choose."

Writing in the November/December 2013 issue of Broadband Communities magazine, Steven S. Ross terms the incumbent agenda for protectionist policies that institutionalize Internet infrastructure market failure "perhaps the biggest regulatory threat to new FTTH (fiber to the home) deployments."

In fact, looking toward 2014, perhaps the biggest regulatory threat to new FTTH deployments is a push by politicians in many states to restrict municipalities and other public entities or public/private partnerships that want to build their own networks where incumbent providers (typically milking old, obsolete systems) refuse to do so.

Click here for the full article (.pdf)

The New America Foundation issued a critical report on U.S. Internet service on January 15, 2014. It urges the U.S. Federal Communications Commission work with Congress and other stakeholders to implement the 2010 U.S. National Broadband Plan’s recommendation that state-level barriers to municipally-built Internet infrastructure be eliminated.

Colorado legislation would redirect high cost telephone subsidies to Internet infrastructure

Two Colorado legislators are developing legislation to repurpose surcharges on voice landline and cell phone service to subsidize landline telephone service in high cost, less densely populated areas of the state to instead defray the cost of building out Internet infrastructure. "By funding land lines and copper-line phones, we're funding buggy whips,” Senator Gail Schwartz, D-Snowmass Village, told the Denver Post.

Rocky Mountain State lawmakers will however face resistance from incumbent telcos who want to preserve the status quo and continue to provide Internet service over their existing copper cable plants to a subset of wireline customers while deeming the rest unprofitable to serve. Throughout much of the United States, the latter cohort are in innumerable small pockets beyond the short range of DSL signals and/or where the existing copper cable is too old and deteriorated to deliver Internet service. First formed around 2000 and still around more than a decade later, they are like thousands of little holes in a big Swiss cheese, comprised of discrete premises, roads, streets and neighborhoods. Rather than “unserved areas,” they are more accurately described as redlined addresses and neighborhoods, typically avoided by both telcos and cable companies. The unfortunate residents are forced to rely on obsolete dialup offered by telcos or satellite Internet more properly suited to remote areas of the planet while the more fortunate may have access to fixed terrestrial wireless service from a local provider.

Incumbent telcos insist rules for government subsidy programs direct funds only to “unserved areas.” But building new wireline premises infrastructure is a costly, large scale endeavor that can make filling in these numerous voids one at a time impractical even with subsidies. In California, for example, incumbent telcos have largely shunned subsidies for premises Internet infrastructure offered through a six-year-old subsidy fund, the California Advanced Services Fund (CASF), similar to that being contemplated for Colorado. They have also challenged proposed CASF wireline projects by arguing the projects would serve premises adequately served by mobile broadband services.

Only a large scale overbuild of the outmoded copper cable plant with fiber to the premise infrastructure makes sense over the long term from both a technological and economic standpoint. State and federal Internet infrastructure subsidy funds should be structured accordingly.

Internet infrastructure outpolls transportation infrastructure in UK

UK People Want Superfast Broadband More than New Airports and HS2 - ISPreview UK

Watch for this sentiment to spread to other nations including the U.S.

Possible alternative to capitalize U.S. FTTP build out emerges in Utah

Building infrastructure of any kind is a costly undertaking, including fiber optic to the premise (FTTP) telecommunications networks. Those high capital costs have crimped FTTP build out in the United States, challenging existing telephone and cable companies as well as newcomers like Google Fiber.

In Utah, a new strategy is emerging involving a global firm that with patient capital that specializes in big dollar infrastructure projects. The Salt Lake City Tribune reports Macquarie Capital Group, an Australian firm that advises and invests in public projects around the world, will launch an engineering and feasibility study to operate Utah's 11-city UTOPIA FTTP network in a public-private partnership: 

Macquarie’s investors — including pension funds, large insurance firms and private endowments — were seeking to develop stable, long-term investment opportunities and were drawn to technology-based projects, Hann said. 

If the feasibility study proves fruitful and Macquarie agrees to take over the network, it likely will entail a deal in which the firm would assume management of the network for 30 years and invest in building out and upgrading the rest of the lines to neighborhood homes, Hann said. 

The network would remain an open-access network and Macquarie would partner with third-party Internet service providers, he said.

First indication of AT&T withdrawal from residential wireline market

Sensing AT&T's lukewarm commitment to its residential wireline business segment, in 2008 I predicted that AT&T would abandon the segment in the first half of 2010. The telco is still in the residential wireline business as 2013 draws to a close. But a slow withdrawal could now be underway, one state at a time starting with Connecticut.

Bloomberg reports today that AT&T will spin off its Connecticut residential landline unit, including Internet and TV services to Frontier Communications for $2 billion.

AT&T relies on copper cable plant to deliver premises Internet service, scotching plans dating back to the late 1980s developed by regional bell operating companies AT&T absorbed in the 1990s to replace the last mile copper network with fiber optic cable. That reliance has technologically limited the reach of AT&T's Internet-based service offerings since copper was designed to carry analog voice service and not digital Internet signals that can be reliably delivered over only short distances using copper.

AT&T's relationship with Connecticut hasn't been a copacetic one. In 2007, then-Attorney General Richard Blumenthal pressured the telco to make its U-Verse product offering available to all residences in the state. Blumenthal, now a U.S. senator, said this week the deal should be reviewed to ensure it is in the interest of consumers.

Verizon CEO hints at fiber partnerships with local providers

Verizon, which halted build out of its FiOS fiber to the premise (FTTP) infrastructure last year, will stay that course Verizon CEO and Chairman Lowell McAdam said at last week's UBS Global Media and Communications Conference.  McAdam said some "fringe" deployment may occur, but that "deploying fiber in a lot of new markets isn't in the cards."

However, "I think there are more opportunities to partner out of market with companies that are there versus us going in and deploying FiOS," McAdam added.

McAdam's remarks were reported by Fierce Telecom. 

Verizon spokesman Bob Varettoni declined to elaborate on McAdam's comments when asked specifically with whom Verizon might partner to build FTTP infrastructure beyond its current footprint.

Who needs a Gig at home? Half of U.S. businesses | Technology Futures

Who needs a Gig at home? Half of U.S. businesses | Technology Futures

Andrew Cohill makes the excellent point that with the emergence of Fiber to the Home (FTTH) telecommunications infrastructure, the past focus on Internet throughput speeds that was relevant to legacy telephone and cable companies is becoming increasingly less so. Since incumbent telephone and cable companies have to compress data to transport it over metal wire cable plant not originally designed to carry Internet protocol-based signals, from their perspective bandwidth is a limited commodity. This also limits their ability to serve all premises in their service areas. Even more so in the case of mobile wireless technology which provides far less capacity and range. Hence, their business and pricing models treat bandwidth like a metered utility such as water or electricity.

With FTTH, that entire paradigm of bandwidth as a finite commodity goes out the window and with it the incumbents' outmoded business models. This also has implications for now outdated government subsidy programs based on rules written nearly a decade ago when DSL deployed by telephone companies was state of the art Internet technology. Those programs now need to be updated to scrap obsolete references to the speed of available Internet technology and treat any area lacking FTTH infrastructure as eligible for subsidies if incumbent or other providers aren't constructing it or opt not to.

Cheaper equipment to give fast copper broadband a boost | PCWorld

Cheaper equipment to give fast copper broadband a boost | PCWorld: G.fast promises up to 1G bps over existing copper telephone wires, but only over distances up to about 100 meters. The technology is now being designed to work at distances up to 250 meters, and it looks like ITU will have a full set of standards by early next year, according to Johnson.

Here we go again with the nutty idea that copper isn't obsolete for IP-based telecommunications. No matter how much throughput one can achieve with this decades-old POTS (Plain Old Telephone Service) infrastructure, as this story shows it will always be limited by distance.  The faster the speed, the shorter the distance -- not a good trend as customers expect faster connections.  With such short distances of 1 gigabit connections over copper, it has to be fed by fiber connections so close to customer premises that it makes more sense simply to run fiber all the way to the premise. 

Getting to a gig: How CenturyLink is building out its network and why. — Tech News and Analysis

Getting to a gig: How CenturyLink is building out its network and why. — Tech News and Analysis: “But because of densities and scale economics, we as a country are potentially creating regional digital divides that our economy will struggle to tolerate. What’s always been a key enabler for us is that we have always had a fairly broad equal opportunity infrastructure as we did with the highway system, and we as a country must place a high value on the ability to communicate seamlessly. I don’t think we want to place ourselves in the position that we might miss out on the next Google simply because we as a country didn’t want to have a conversation about access and cost. We are going to have to figure that out and no private company can do that.”

So said Matt Beal, the CTO of CenturyLink, an an interview with GigaOM.  And he's right. Either private providers have to find business models that significantly reduce the cost of labor to deploy fiber to the premise and/or do so with some form of government subsidy or tax incentive. As I've blogged in recent months, even companies with pockets and fiber to the premise ambitions as deep as Google's aren't up to the challenge facing the United States.

Poor internet connections in the countryside are hitting rural property market, estate agents warn - Telegraph

One agent who helps customers buy homes worth more than £1 million told The Daily Telegraph yesterday he was advising all of his clients against looking at properties that have slow internet speeds.

It came as reports in Scotland claimed people dubbed "digital refugees" were now moving from the countryside in search of faster internet speeds in the country's towns and cities. Frank Speir, director at Prime Purchase said: "Slow broadband speeds are having a definite effect on the market. It's becoming a much bigger issue." 

 via Poor internet connections in the countryside are hitting rural property market, estate agents warn - Telegraph

This is bound to become a much bigger issue in America as well.  Notwithstanding some high profile limited 1 Gigabit closed fiber to the premise networks in metro areas, much of the countryside remains without modern Internet connectivity, still served with dial up technology that was state of the art when Bill Clinton was beginning his first term as US president.

Conversely, a property having a fast fiber Internet pipe is more desirable, according to a 2009 study of U.S. broadband consumers, finding 82 percent of homebuyers with fiber to the home ranked it as the leading real estate development amenity.

Telcos engage in nonsensical, circular argument over regulation designed for POTS

IIA Report: Time To Begin Full IP Transition - 2013-10-08 14:53:14 | Broadcasting & Cable: Only 5% of U.S. households rely solely on traditional home phones and that means the current regulatory framework is lagging the marketplace and siphoning off investment from new infrastructure.

That is according to a just-released report from the Internet Innovation Alliance, a broadband adoption and deployment advocacy group whose 175 members include AT&T and fiber-maker Corning.

The report, from analyst Anna-Maria Kovacks, finds a "plethora of choices" for voice, video and data including from wireless devices, cell phones, wired Internet VoIP and Internet applications (Skype), and that 99% of communications traffic is now IP-delivered. She said that despite the speed differentials between wired and wireless — wired is faster — wireless was a legitimate competitor and could deliver even a competitive video service.

From the end users perspective, she said, it would be possible to make them happy with LTE as well as fixed wired broadband.

The legacy telcos are engaged in a disingenuous circular argument.  Their business models don't allow them to revamp their legacy copper cable plants -- over which they offer only outdated dialup Internet access for many premises -- to fiber to the premise (FTTP).  Oddly, however, they wonder why they remain subject to a regulatory scheme designed for POTS (Plain Old Telephone Service) delivered over Public Switched Telephone Networks (PSTN).  The answer is pretty self evident. They only have to look at their own networks and service territories for the answer. If they deployed FTTP networks to all of their customers, then their question would be relevant.

As for mobile wireless, it is not a substitute for premise service (can you spell M-O-B-I-L-E?) since it can't offer sufficient bandwidth capacity to serve various IP devices in the home ranging from video, voice service and personal devices like tablets.  It comes with bandwidth caps for good reason since compared to FTTP, mobile wireless can't even come close in carrying capacity.

UK Internet infrastructure subsidization policy reveals split between citizens and incumbent telco BT

BBC News - Rural broadband: How to reach the broadband notspots

This BBC article goes into good detail on the Internet infrastructure deployment difficulties in the UK. As in America with AT&T, the incumbent telco, BT, prefers to deploy slowly over a period of many years, employing FTTN (Fiber to the Node) network architecture (or FTTC as it's called in Britain -- Fiber To The Cabinet). AT&T's analogue is its U-Verse product, which feeds neighborhood nodes with fiber and uses existing copper twisted pair cable designed decades ago for voice service to bridge the final link to customer premises. However, unlike BT, AT&T limits U-Verse to urban and suburban areas.

British households and small businesses left of the Internet are running short of patience with the slow BT rollout after having waiting about a decade to get some form of wireline Internet connections. Some communities see the passage of time and burgeoning bandwidth demand as having technologically obsoleted FTTC and want Fiber to the Home (FTTH) infrastructure.

Government subsidies are available.  As the article notes, a big question is whether they continue to go toward older but less costly FTTC infrastructure favored by BT or FTTH preferred by the locals who don't want to spend more years waiting for modern Internet connectivity and want a greater degree of control over infrastructure deployment in their communities.