California bill would use existing phone surcharge to secure bonds for local government and cooperative-owned fiber to the premise infrastructure

Proposed legislation introduced this month in the California state Senate offers a potentially viable means of financing fiber to the premise (FTTP) advanced telecommunications infrastructure builds owned by local governments and nonprofits such as consumer telecom cooperatives. It does so by creating a financing mechanism to secure bonds to fund FTTP construction with proceeds from an existing California Public Utilities Commission (CPUC) surcharge on voice lines to subsidize advanced telecom projects in high cost areas of the state not served by incumbent landline and wireless internet service providers.

Debt service for the bonds could also be provided by project sponsors since the proposed legislation authorizes the CPUC to require they demonstrate the ability to reasonably finance and implement the projects utilizing the proposed bond financing.

The measure is proposed as an urgency measure that would take effect immediately upon enactment.

AT&T’s residential market shortcomings

 

As AT&T would have it, the telecommunications giant is enthusiastic about serving the residential market and connecting homes to fiber. AT&T Communications CEO Jeff McElfresh told a Bank of America Merrill Lynch TMT Conference in June 2020 the company will increase its investment in fiber connections. "We are laser-like focused on finding the most efficient path to expanding the footprint of our fiber offerings," McElfresh said. "It's a great business. It's got great margins. It's got great returns. There's nothing not to like about it, and we're going to lean into it."

McElfresh’s comments represent a turnabout from a year earlier, when AT&T downplayed its residential fiber ambitions and dismissed hundreds of field technicians after completing a limited build out to meet regulatory obligations attached to its acquisition of DirecTV. "That's behind us now," McElfresh’s predecessor John Donovan told FierceTelecom. "We'll continue to invest in fiber, but we'll do it based on the incremental, economic case. We're not running to any household target."

For single family home neighborhoods, AT&T makes residential fiber available only to discrete pockets, reports industry observer Doug Dawson. AT&T also markets residential fiber to multifamily dwellings that require less capital investment and produce comparatively faster returns. One analyst suggests AT&T is weak at executing fiber build outs, unable or unwilling to focus on the necessary details of neighborhood telecommunications infrastructure deployment. (Jim Patterson, Curing AT&T’s Sickness, 10/12/20) Other analysts point to high debt on AT&T’s balance sheet that constrains its ability to finance a broad move into residential fiber.

In less dense exurban and rural neighborhoods, AT&T is phasing out its legacy ADSL service, halting new connections as of October 1, 2020. In these areas, AT&T offers fixed wireless residential service over its 4G LTE mobile infrastructure but with throughput limited to a small fraction of what a fiber connection could handle. Dawson notes the company has not actively marketed the service (most likely to preserve limited radio spectrum at the same time the company encourages high bandwidth video streaming). Moreover, the company was notably absent among bidders for the FCC’s recently closed Rural Digital Opportunities Fund (RDOF) subsidy reverse auction.

Where AT&T is building fiber to serve enterprise consumers (via dedicated Ethernet) it is not generally investing in premise drops and field distribution equipment to serve adjacent single family home residential neighborhoods. According to an October 2020 report by the Communications Workers of America, the labor union representing AT&T line technicians, and the National Digital Inclusion Alliance, 63 percent of 1,500 line technicians surveyed report that AT&T is not installing splitting equipment to enable home connections even where a fiber backbone exists.

With little focus on residential fiber, AT&T is instead looking to gain revenues in the consumer segment from streaming video and mobile wireless offerings as it experiences a steady decline in linear TV subscribers, legacy and wireline delivered services, according to Zacks Investment Research.

Will a Biden administration back publicly owned advanced telecommunications infrastructure as a means of attaining universal access and affordability?

Should former Vice President Joe Biden be deemed the winner of the presidency and a Biden administration installed early next year, the campaign’s policy positions on advanced telecommunications infrastructure reveal the outlines of how the new administration might proceed.

The overarching policy choice is between continuing the laisse faire policy of the past three decades of regarding Internet protocol-based telecommunications as a commercial market of “broadband” bandwidth. Or recognizing advanced telecommunications infrastructure as essential infrastructure like electric power and roads and highways.

Integral to the latter policy is recognizing the broad socio-economic benefits of advanced telecommunications infrastructure, known in economics as positive externalities. They are described as external because they lie outside the narrow interest of commercial investors to extract profits and rents from selling broadband bandwidth in a natural monopoly landline market. Those external benefits – and the lack thereof considering the nation’s substantial access and affordability challenges -- have become very apparent with the public health restrictions and social distancing accompanying the SARS-CoV-2 contagion that converted homes into offices, classrooms and clinics.

Key to attaining the broader external benefits of advanced telecommunications infrastructure is that it be universally accessible and affordable. As well as public ownership of advanced telecommunications infrastructure that eliminates the inherent conflict between the broader public interest and the narrow interest of investors to build it only where there’s a strong business case. What do the Biden campaign’s positions signal on these issues?

Biden’s campaign calls for “universal broadband access” as part of an initiative to modernize transportation and water infrastructure. Biden also recognizes the socio-economic benefit of universally accessible and affordable advanced telecommunications infrastructure:

“As the COVID-19 crisis has revealed, Americans everywhere need universal, reliable, affordable, and high-speed internet to do their jobs, participate equally in remote school learning and stay connected. This digital divide needs to be closed everywhere, from lower-income urban schools to rural America, to many older Americans as well as those living on tribal lands. Just like rural electrification several generations ago, universal broadband is long overdue and critical to broadly shared economic success.”

However, Biden does not explicitly call for publicly owned advanced telecommunications infrastructure as he has to improve access and affordability for non-group medical plans with a government operated “public option” plan. The Democratic Party campaign platform recommendations that Biden and Sen. Bernie Sanders jointly authored after Biden emerged as the Democratic Party presidential nominee calls for preempting state laws that prohibit municipalities and rural co-ops from building publicly-owned broadband networks and for increased federal support for municipally owned networks.

Should a Biden administration take office in January, it bears watching to what extent it supports publicly owned advanced telecommunications infrastructure as a means of attaining universal access and affordability.

Distinguishing between edge content provider market power and natural monopoly of telecom distribution infrastructure

The Tech Antitrust Problem No One Is Talking About | WIRED: 

After years of building political pressure for antitrust scrutiny of major tech companies, this month Congress and the US government delivered. The House Antitrust Subcommittee released a report accusing Apple, Amazon, Google, and Facebook of monopolistic behavior. The Department of Justice filed a complaint against Google alleging the company prevents consumers from sampling other search engines. The new fervor for tech antitrust has so far overlooked an equally obvious target: US broadband providers. “If you want to talk about a history of using gatekeeper power to harm competitors, there are few better examples,” says Gigi Sohn, a fellow at the Georgetown Law Institute for Technology Law & Policy.

When it comes to antitrust, it's important to distinguish between FAANG edge content providers and commercially owned and operated advanced telecommunications infrastructure. The major difference is the former isn't a natural monopoly. However, landline telecom infrastructure that connects to customer premises functions as a natural monopoly due to high capital cost barriers and long duration return on investment that tends to keep would be competitors out. Moreover, competition among multiple sellers isn't economically rational as Investopedia describes:

Multiple utility companies wouldn't be feasible since there would need to be multiple distribution networks such as sewer lines, electricity poles, and water pipes for each competitor. Since it's economically sensible to have utilities operate as natural monopolies, governments allow them to exist. However, the industry is heavily regulated to ensure that consumers get fair pricing and proper services.

In other words, competitive market forces cannot function to ensure access and value in a natural monopoly market. Both are frequently missing in advanced telecom distribution infrastructure, with uneven access due to sell side market failure.  

Antitrust assumes competition is possible and thus is intended to check a seller from attaining too much market power and promote competition. But it's an impossible undertaking in natural monopoly market like advanced telecom distribution infrastructure where competitive market forces don't come into play.

"Better Than Nothing," Starlink satellite service illustrates bankrupt U.S. telecom infrastructure modernization policy

Texas Schools Partner With SpaceX on High-Speed Internet: After schools shut down in March due to COVID-19, a survey of families in ECISD found that 39 percent did not have internet access in their homes, or had limited internet access. "Right behind me, you are looking at the community of Pleasant Farms that has very limited broadband service. We have children; we have families; we have educators living in this community and having the internet in their home is extremely difficult, if not impossible. But because of Space X and their Starlink technology, they are right now circling a series of satellites above this area and they will beam a high-quality broadband signal to our families, providing high-quality, high speed broadband access so our children can continue the learning process ...," Muri said. Muri said ECISD has worked diligently with the local community and state officials to explore opportunities for students, but also looking long-term. "Short-term solutions are not the answer," Muri said. "We need solutions that provide permanent solutions, permanent opportunities for kids not only in ECISD but across our state and across our nation ..."

Scott Muri, superintendent of a Texas school district, is right. Short term gee whiz approaches like this don't provide the long term telecommunications infrastructure needed on the ground -- namely fiber to the premise (FTTP). It's a logical progression from legacy copper telephone infrastructure that has gone off the tracks, leaving Americans grasping at “Better Than Nothing” solutions as the Starlink satellite service is dubbed.

New eBook: U.S. Telecom Infrastructure Crisis: America’s botched modernization of copper to fiber -- and the path forward

 

In 2020 as public health restrictions due to the coronavirus pandemic suddenly converted millions of American homes into offices, classrooms and medical clinics, the nation’s accumulated deficits in advanced telecommunications infrastructure and related challenges of access and affordability that had been in place for years reached a crisis point.

The root of the problem is a failure of planning and policy over the past quarter century to ensure decades old copper telephone lines that reach every American doorstep were modernized with fiber optic lines to support Internet delivered digital telecommunications. The nation lacks a comprehensive, coordinated transition plan and relies on various underfunded, piecemeal efforts.

The cause of the failure: public policymakers focused on the wrong thing: incremental gains in “broadband” speed instead of replacing the copper with fiber beginning a generation ago. With the enactment of the 1996 Telecommunications Act, policymakers erred in assuming fiber would be just one of several technologies that would compete with copper rather than pursuing a deliberate policy to ensure the timely replacement of copper with fiber.Consequently, fiber reaches less than a third of American homes in 2020. That’s far short of the goal of the Federal Communications Commission’s National Broadband Plan prepared for Congress in 2010 that called for 100 million homes to have affordable fiber-level connections a decade later.

U.S. telecommunications policy primarily serves the needs of for profit companies that lack incentive to rapidly speed construction of fiber to solve America’s advanced telecommunications infrastructure deficits. There’s an inherent conflict between their investors’ focus on short term earnings and the broader public interest of having universally accessible and affordable fiber connections.

This book describes how the crisis is affecting Americans, the factors that brought it about and prolong it, the outlook for its resolution and a framework for the path forward: publicly owned, open access fiber infrastructure passing reaching every home as telephone service did in the mid-20th century.

The audience for this book is public policymakers, telecommunications regulators and the general public. Members of these groups acknowledge the essential nature of advanced telecommunications infrastructure as a utility. That recognition has grown more urgent over time and especially so with the 2020 coronavirus pandemic and sharply increased reliance on home connectivity and working from home.

The book is currently available here on Amazon Kindle and will soon be available though all eBook retailers.

America's haphazard, fragmented approach to telecom infrastructure modernization: Filling in "broadband" potholes

SC begins small broadband internet expansion in 23 counties | The State: More than $50 million worth of broadband expansion projects will start this month in 23 counties around the state to help close the internet service gap exposed by the COVID-19 pandemic. The shovel-ready projects are being made possible, in part, with funding from the CARES Act, federal coronavirus aid that must be spent by the end of the year. The dollars will help internet providers expand service to areas where it may take longer to turn a profit. The broadband projects are a good start, but also a drop in the bucket toward closing the state’s broadband access gap. There are 650,000 South Carolinians and 180,000 households in the state without high-speed internet access.

States have been struggling to adequately fund advanced telecommunications infrastructure needs years before the start of the current SARS-CoV-2 pandemic earlier this year. Public health measures put in place to slow the spread of the contagion have made widespread infrastructure deficits painfully apparent as Americans work and school at home.

States are now rushing to try to address the problem with very little time and money allocated by the federal government via COVID-19 relief funds (CARES Act) that must be expended by the end of 2020. It's emblematic of the nation's short term policy approach of treating the deficits like potholes needing to be filled in.

There's never enough policy and resource commitment to properly pave the roads. Motorists complain incessantly about bad roads and a bumpy ride on Al Gore's circa 1990s "information highway." Federal and state governments respond with a little money for a short term fix for some of the potholes. Drivers continue to complain and the cycle repeats year after year. It will continue until there's a policy commitment to replace the legacy copper telephone connections that reach every home, small business and school with fiber.

Hopes for patient capital investment in open access advanced telecom infrastructure may prove unfeasible

Private Investment in Community Digital Infrastructure: Gaps will continue until localities and investors find viable solutions that better align community needs with investors’ returns on their investments. The critical first step is to pivot to a digital infrastructure approach in which the long-term economic benefits to community growth and business success accrue to the network deployers, leading to a virtuous cycle that increases network revenue opportunities and returns
on investment.

The author, Michael Curri of Strategic Networks Group, correctly identifies a major reason behind advanced telecom infrastructure deficiencies that have plagued the United States for many years. Investor owned companies build infrastructure where it generates the biggest and fastest returns on investment. They lack business or regulatory incentive to do so outside of their discrete "footprints" of cherry picked neighborhoods. 

That private interest to reward shareholders does not align with the broader public interest in having the infrastructure reach all premises. Localities hoping for infrastructure gains by partnering with private providers run the risk of replicating the problem of unconnected neighborhoods since they too require rapid returns on investment and thus are inclined to prioritize only limited areas to attain the fastest return on their dollars.

The solution, Curri argues, is substituting more patient capital held by pension funds and private infrastructure capital firms that doesn't require a return in five years or less. The risk/reward tradeoff is infrastructure is there for the long run and will generate solid returns for many years. Additionally, investment in open access infrastructure will provide broader benefits for their economies and residents  -- what economists refer to as externalities -- that are of little or no interest to investor owned providers.

Curri correctly points out the presence of incumbent investor owned incumbent providers poses a challenge to the ubiquitous infrastructure needed to attain those externalities. Those incumbents have already grabbed those neighborhoods that spin off the most revenues, complicating obtaining sufficient revenues to attract patient investment capital.

The essential problem for Curri is his concept requires premises to subscribe to services, emulating the subscription-based business model of the incumbents other than it calls for open versus closed access infrastructure. Subscription revenue would be supplemented by charges to service providers to offer services over the open access infrastructure as well as mobile wireless backhaul and "specific value-added services and smart-community services."

Potential patient capital investors may well see the presence of incumbent providers who will seek to protect their private monopolies as a key risk factor that would outweigh the many positive aspects of Currie's concept. Unless in the unlikely event those incumbent providers signal a withdrawal, it may prove unfeasible.