Seattle's search for a viable FTTP business model

Gigabit Internet access for $45 a month: How Seattle could make it happen - GeekWire: Seattle’s top technology and budget officials say the city can’t bear the cost on its own, if funding for the project comes purely from subscriber fees. But they acknowledge that the city would have a better chance of bankrolling the build-out by adding a property tax to the mix.

A property tax would have several advantages. First, under the financial models used by consultant Columbia Telecommunications Corp., the monthly fee for subscribing to Seattle’s municipal Internet service would drop to $45/month if a property tax were used to subsidize the cost, rather than the $75/month envisioned otherwise.

This, in turn, would make it tougher for Comcast, CenturyLink or any other commercial provider to engage in a price war with the city.

This article is an excellent, comprehensive overview of the financial challenges Seattle faces in pursuing its decade-long goal of building fiber to the premise (FTTP) telecommunications infrastructure for Emerald City residents. Adding public funding in the form of property assessment reduces the so-called "take rate" risk of a purely subscriber paid business model for fiber to the premise (FTTP) such as employed by investor-owned incumbent telephone and cable companies.

As I've blogged previously, from a policy perspective a property assessment makes economic sense because studies have shown a fiber connection to a property boosts its market value just as does a paved road running nearby. It also has the knock on effect for local governments of bolstering economic activity and the tax revenue that such activity generates. Bringing public funding into the mix is also part of the business models of regional FTTP projects including the Utah Telecommunication Open Infrastructure Agency's (UTOPIA) public-private partnership (property fees) and WiredWest in western Massachusetts (municipal bonds supplemented by state grant funding).

But as long as incumbent telephone and cable companies are in the picture to the extent they are in large urban areas like Seattle, even mitigating the take rate risk with public funding doesn't solve all the financial challenges as noted in the article:

In an interview last week about the consultant’s report, Matmiller also cautioned that there would be no guarantee of success with the scenario of a $45/month rate subsidized by property taxes. “We still want a model that puts less risk to the system,” he said.“Even though it’s a cheaper monthly amount, if Comcast or a competitor comes in and uses their pricing power to match it and takes away the consumer argument to switch over, then we are stuck in same boat where now you’re paying a property tax and we have to shut down the system.”

Seattle like other municipalities reserves the nuclear option of inverse condemnation if it wants to push the incumbents out of the way in the name of progress to get FTTP to all city residents in a timely manner given the incumbents have no incentive to move quickly given their monopoly status. But that too comes with major downsides. The city would have to pay fair market value to the incumbents to acquire legacy metallic cable plant, adding more costs and likely years of delay as the condemnation process wound through the legal system.

Regional FTTP initiatives may have better odds of success than municipal projects

Broadband for all: 8 next steps for Seattle | Crosscut: According to the city’s study, Seattle would have to invest $460 million to $660 million in building this network. Seattle would need to get 43 percent of potential customers choosing the service at $75 a month in order to break even. Such a “take rate” is virtually impossible due to the serious competition already in place from Comcast, Wave, CenturyLink, Verizon, AT&T and other services. 

Seattle's situation shows that local government efforts to build universal fiber to the premise (FTTP) telecommunications infrastructure face high financial hurdles in urban areas where there are multiple incumbent providers.

Unlike municipal projects like these, regional FTTP initiatives in less urbanized parts of the United States where incumbent telephone and cable companies have less infrastructure and there are sizable areas lacking any landline Internet connectivity options may face better odds of financial viability. One such example is WiredWest, a cooperative of 44 Western Massachusetts towns that is in the formative stages and picking up speed quickly.

AT&T’s planned “wireless local loop” plant could help it meet its Title II universal service obligation

When AT&T began the regulatory review process of its planned acquisition of DirecTV one year ago, it proposed to offer fixed wireless Internet service to about 13 million residential premises in its service territory not offered Internet service in order to improve the deal’s odds of gaining approval. These premises were never offered AT&T’s legacy ADSL service after it was introduced more than a decade ago. And even if they were today, ADSL would fall far short the Federal Communications Commission’s speed-based minimum standard for Internet service of 25 Mbps for downloads and 3 Mbps up.

Now that the FCC’s rules deeming Internet a common carrier telecommunications service under Title II of the Communications Act are going into effect requiring Internet service providers to “furnish such communication service upon reasonable request” under Title II’s universal service and nondiscrimination provisions, AT&T may be seeking another, more important role for its planned “wireless local loop” fixed wireless plant. 

Specifically, helping it meet its universal service obligations. With so many premises in its service territory refused Internet service for a decade or longer, AT&T could face a potential barrage of complaints and penalties if these premises remain without premises Internet service and it continues to say no to service requests.

However, as arstechnica reports today, AT&T’s fixed wireless service is expected to provide connectivity of up to 20 Mbps – below the FCC’s minimum standard for Internet service. The only way to get more wireless bandwidth is more fiber backhaul bandwidth and/or more wireless transmitters. That means AT&T would likely have to spend more than it would like on its planned “wireless local loop” plant to bring service up to the FCC’s standard in order to keep itself out of hot water with regulators.

‘Quad Play:’ Remedy for the failed "triple play" business model as Title II universal service obligation kicks in?

Are Americans Ready to Pay for ‘Quad Play’? - WSJ: A combination of T-Mobile US Inc. and Dish Network Corp. would merge two companies rooted in different industries.

For consumers, it would merge some of the fastest-growing bills in their budgets.

American households spent more than $191 a month on average for television, Internet and phone services in 2013, according to Labor Department data. That was up 24% from 2007 and about what they spent on health insurance.

The question is whether Americans are going to take to paying all that to one company. The prospect isn’t so far-out anymore. With satellite broadcaster Dish Network pursuing a merger with wireless carrier T-Mobile US, AT&T Inc. about to close a $49 billion acquisition of Dish rival DirecTV and cable companies experimenting with cellphone plans, many of the services that keep people entertained and in touch are moving under the same roof.

Such providers are betting on so-called convergence—the idea that they will be better off if they can bulk up, as services that used to flow via different wires and satellite dishes all start traveling on the Internet.

It makes technical sense to deliver all these telecommunications services via Internet Protocol (IP). But there's a disconnect between Internet technology and economics. Many homes and small businesses are not offered landline premise Internet service since the economics of the current "triple play" business model (phone, Internet and TV) don't pencil when the costs of infrastructure CAPex and OPex are factored in.

Will bundling in mobile wireless to create a "quad play" offering improve the business case? One might think so when there's ARPU approaching $200 a month. And it might well better once new rules issued by the U.S. Federal Communications Commission go into effect this month classifying Internet as a telecommunications service under Title II of the Communications Act.

Title II subjects Internet service providers to universal service and nondiscrimination requirements and bars ISPs from redlining higher cost neighborhoods not offered triple play services. That in turn increases the pressure on ISPs to consolidate to ensure they can offer these all inclusive service bundles under their preferred vertically integrated business models where they own both the Internet "pipe" to the home and the services delivered over it.

Incumbents' petition to block FCC's Title II rules faces steep legal hurdles, likely dismissal

John Eggerton of Broadcasting & Cable outlines the legal arguments being made by incumbent telephone and cable companies seeking to block enforcement of the Federal Communication Commission's recently promulgated regulations reclassifying Internet services as common carrier telecommunications services under Title II of the Communications Act.

The incumbents' petition is likely to be dismissed. The reason is what's known as judicial deference: courts generally defer to regulatory agencies' interpretation of statutory law requirements. The doctrine holds that regulators have the necessary expertise to discern and apply the finer points of statutes whereas judges, who generally do not, are naturally reluctant to second guess the decisions of regulators or interject themselves into disagreements over statutory law between regulators and regulated entities. Under the doctrine of judicial deference, the appropriate forum to work out disagreements with regulators over application of statutory law is the rulemaking process and not the courts.

In this case, the incumbents face an especially steep challenge because the Communications Act specifically grants the FCC broad discretion to apply Title II of the Act in the first section of Title II. Section 201(b) states that "[t]he Commissioner may prescribe such rules and regulations as may be necessary in the public interest to carry out the provisions of this Act."

Tom Wheeler tells cable industry to stop complaining, start competing | Ars Technica

Tom Wheeler tells cable industry to stop complaining, start competing | Ars Technica: Part of looking forward, in Wheeler's opinion, is boosting competition. With some exceptions, cable companies have generally not competed against each other, letting a single company dominate each region instead of "overbuilding" in each other's territory.

"You don't have a lot of competition, especially at the higher speeds that are increasingly important to the consumer of online video," Wheeler said. This means there isn't the kind of "intense and constant pressure to continue to improve" as there was in the days when DSL posed a serious threat to cable, he said.

The thing is, Mr. Chairman, telecommunications infrastructure doesn't easily lend itself to competition due to the high costs to build and maintain it. It functions as a natural monopoly like roads and highways and electrical distribution infrastructure. We don't build competing thoroughfares to offer motorists the choice of taking Highway "A" and "B" and "C," for example from the same starting point to the same destination. Or multiple power lines serving the same property. Having multiple landline Internet connections passing by premises is similarly overkill and economically wasteful. Just ask any of the legacy phone companies who feel compelled to issue news releases announcing "gigabit fiber" to compete with Google Fiber. It's a helluva lot cheaper to issue a news release than to actually overbuild competing infrastructure and doesn't risk the ire of shareholders averse to big capital expenditures.

The competition Wheeler's FCC and the federal government should be supporting is helping fund the planning and construction of open access fiber to the premise telecommunications infrastructure over which Internet Service Providers would compete to sell services to customer premises. This would also potentially provide greater opportunity for new services than could be offered over a vertically integrated cable provider that owns both the pipe and the services offered over it.

FCC's Sohn: Wired Broadband Competition Lacking | Broadcasting & Cable

FCC's Sohn: Wired Broadband Competition Lacking | Broadcasting & Cable: Gigi Sohn, senior counselor to FCC chairman Tom Wheeler, told a New Haven, Conn., audience Monday that "the simple truth is that meaningful competition for high-speed wired broadband is lacking."

She came not to bury broadband, but to praise the state's 1 gig community broadband project as a way to provide that "lacking" competition.

Viewed in the context of landline Internet infrastructure as a whole, Sohn is correct. It's a natural monopoly due to high cost barriers that keep out potential competitors as well as inefficiencies that make building parallel infrastructures as nonsensical as building multiple competing roads and highways serving the same area. If they were privately owned and operated for profit -- as is most telecommunications infrastructure in the U.S. -- the likelihood of their having a net present value greater than zero is slim to none.

What this story as well as many others lamenting the lack of "broadband competition" fail to mention is how Connecticut's project does offer competition to the consumer for Internet services via open access fiber infrastructure that provides wholesale access to Internet Service Providers (ISPs) as an alternative to the vertically integrated, closed access infrastructures used by the legacy telephone and cable companies as well as Google Fiber. ISPs would then compete to sell their services to consumers. From the CT Gig Project website:

Competition:

The open-access model would introduce true competition into the Internet
marketplace. The idea is to build the infrastructure and then give Internet
providers equal access to utilize it. Your Internet choices should be made
based on price and service, not solely by the town boundaries you reside in.