Assertions to the contrary can't alter underlying microeconomics: Advanced telecom infrastructure is a natural monopoly

Editor's Note: Welcome to the Roaring ’20s: Meanwhile, according to RVA LLC, 2019 proved to be a banner year for fiber to the home, and 2020 promises to be nearly as good. Broadband providers have now passed 46.5 million unique U.S. homes with fiber, up more than 6 million since the year before – not bad for a technology that got started just 20 years ago. In addition, nearly 3 million households can choose between two or more fiber connections. Not bad for what was once considered a “natural monopoly.”

Advanced telecom infrastructure remains a natural monopoly market due to high costs of entry that make it difficult for would be private sector competitors to challenge an established provider. If it weren't, most all American households would have had fiber connections at least a decade earlier in the 2000s -- when fiber was hardly a new technology -- and millions would not lacking them today.

Nor would there be a need for publicly and consumer cooperatively owned fiber to the premise infrastructure since competitive market forces would work to ensure nearly all homes were connected by investor owned players. That some providers opt to compete by cherry picking homes in what they consider "high potential" neighborhoods by inefficiently building multiple premise fiber connections doesn't alter the basic underlying economics.

Subsidizing copper "broadband" instead of fiber "silly."

Rural Colorado sees more broadband options, but not quickly: For years, the federal government has offered needy areas grants and loans through the Connect America Fund, which uses Universal Service Fund money collected from consumers in their monthly phone bills.

In Colorado, the largest recipient, CenturyLink, received $107.3 million from the federal program and has helped get service of at least 10 mbps to 31,620 rural households in Colorado by the end of 2018. That’s about 90% of CAF funds distributed in Colorado since 2015. But those households are unlikely to get upgraded to faster broadband, which the FCC now defines as 25 mbps down, 3 mbps up.

“That’s a copper-based network. When you’re trying to build out a future-proof fiber network, it slams so many doors on you for funding. As a national policy, It’s embarrassing,” Smith said. “Why wouldn’t you want your citizens of the United States to have the highest, best network in the world? But you keep subsidizing this old copper infrastructure and copper, to me, is silly.”

Silly indeed. Poor public telecom infrastructure policy. It's hard to advance to the 21st century supporting 20th century technology.

U.S. doesn't have a "broadband subscription" problem. It has an infrastructure problem.

Neighborhood broadband data makes it clear: We need an agenda to fight digital poverty: How would you feel if half of the homes your neighborhood didn’t have electricity? Or if a quarter didn’t have running water? It’s hard to imagine, mostly because the United States benefits from near-universal access to electricity and water.  That’s not the story for another crucial utility: broadband, or high-speed internet service. Digital platforms have transformed most parts of daily life, from how we talk to one another, to how we consume media, to how we travel. But those platforms are only meaningful if you can access them via broadband. In 2018, more than 18 million American households lived without a broadband subscription. This means that today’s digital economy is out of reach for far too many people.

A big part of this problem is continuing to see America's advanced telecom infrastructure deficiencies not as an infrastructure issue but rather a "broadband subscription" problem. As long as that term is used, it's going to be difficult to conceive of it as a "crucial utility" as described here.

It's a critical distinction and words matter. The term "broadband subscription" derives from the legacy incumbent telephone and cable companies that sold "broadband subscriptions" as a optional add on service and NOT as a utility. Moreover, these companies fight hard against classifying Internet service as a telecommunications utility regulated under Title II of the Communications Act of 1934, dubbed in the media as the battle over "net neutrality." Rather, they preferred it remain an optional subscription-based "information service" regulated under Title I of the statute and delivered through their vertically integrated proprietary premise connections and without the Title II requirement they honor all reasonable requests for service.

U.S. telecom infrastructure deficiencies inaccurately described as "rural broadband" problem

Neighborhood broadband data makes it clear: We need an agenda to fight digital poverty: The digital gap between urban and rural parts of the country tends to garner the most attention. However, our analysis of the Census Bureau’s American Community Survey (ACS) data tells another story: The majority of digitally disconnected households live in metropolitan areas, and the gaps are especially large when comparing neighborhoods within the same place. Effectively, some residents live in digital poverty even as their neighbors thrive.

Poor connectivity within metro areas has not gotten the attention it deserves, particularly as their residents seek more affordable housing in more distant suburbs and exurbs that typically lack modern fiber to the premise #FTTP telecom infrastructure. Much of the media narrative instead is based on a circa 1950 version of the United States. At that time, residential settlement was much more binary, divided among urban and rural areas. This has also led to outdated and inaccurate comparisons of poor "rural broadband" to lack of electric power and telephone infrastructure in rural areas in the early part of the 20th century.

Elizabeth Warren’s telecom policy: First FTTP infrastructure, then level of service standard

A major flaw in current U.S. telecom policy is that takes a completely backwards approach. Instead of first establishing an infrastructure standard – fiber to the premise (FTTP) – it begins with a level of service standard: bandwidth. That set the stage for years of unproductive debate over what constitutes an acceptable level of throughput for Internet service, mostly measured in bandwidth but also latency. At the same time, bandwidth demand doubles about every three years. What was deemed sufficient bandwidth not long ago soon becomes less than adequate. Policymakers end up chasing their tails, caught on the downside of the bandwidth growth curve and skating to where the puck was instead of where it’s going.

Unhappy with slow and congested bandwidth, Americans continually pressure their elected representatives for more bandwidth to support faster throughput, making it one of the top issues for their constituents. Nationwide, the politicians are listening. Hearing their constituent complaints, they proclaim the problem is poor “broadband speeds.” “Better broadband” is the obvious solution. But among them, only Sen. Elizabeth Warren seems to correctly understand the issue. She has put the chips in the correct order in her presidential campaign’s telecom policy. First, it sets forth an infrastructure standard, proposing generous federal grants to electricity and telephone cooperatives, non-profit organizations, tribes, cities, counties, and other state subdivisions to build FTTP reaching every American home. Second, it establishes a level of service standard: symmetrical bandwidth of at least 100 Mbps both directions.

California PUC Report: Worsening landline service from AT&T and Frontier

 

This disturbing San Jose Mercury News story on a California Public Utility Commission survey covering 2010-2017 found rampant residential landline redlining and lack of investment in landline infrastructure by two of the states largest telcos. From the story:

• Deteriorating service quality. The quality of AT&T and Frontier
  voice services has steadily declined over the eight year period, with
  the number of outages increasing and the service restoration times
  getting longer.
• Persistent disinvestment. The depreciation in the value of the
  AT&T and Frontier networks was greater than the companies’ capital
  investments. This was most pronounced in rural and low-income service
  areas.
• Degradation of landline service and support. AT&T no longer
  actively markets “Plain Old Telephone Service,” or “POTS” and is instead
  promoting broadband service to grow revenues.
• Failure to improve the network infrastructure to withstand bad
  weather or fire events. The companies’ engineering, design and
  construction, and maintenance practices are not as robust as they need
  to be.
• Preferential focus on higher income communities. There is an inverse
  relationship between household income and wire center service quality
  performance. For instance, AT&T wire centers that have been upgraded
  with fiber optic disproportionately serve richer communities. Areas
  with the lowest household incomes have the highest trouble report rates,
  the longest out-of-service durations, and the lowest percentages of
  outages cleared within 24 hours.
• Increased focus on the most competitive communities. AT&T and
  Frontier offer the greatest service in regions of the state where
  competition — and potential loss of customers — is greatest.

The story notes California law mandates telcos to restore 90 percent of service outages for telephone service within 24 hours or less, on statewide average. “Yet the largest service providers routinely fail to meet these requirements,” said CPUC commissioner Clifford Rechtschaffen. AT&T has the financial resources to maintain and upgrade its landline network in California, it has not done so, according to the CPUC. Frontier, in contrast, said it wants to invest in upgrades, but lacks the financial capacity, the Mercury News reports, citing the CPUC report.

A note regarding report item on the promotion of "broadband service" instead of POTs. When AT&T first rolled out Digital Subscriber Line (DSL) service nearly two decades ago, that product was promoted during the initial decade. Now that DSL is being phased out as the copper cable plant is placed in runoff mode, that's no longer the case and no successor residential landline product is being promoted for homes not served with fiber connections.

Patient pension capital funding for FTTP could be game changer

The modernization of America’s legacy twisted pair copper plant to fiber to the premise (FTTP) has been inhibited – described by observers as “stalled” and “stalemated”– by the conservative, risk averse business models of large investor owned players that require relatively rapid and assured returns on capital investment while also paying generous shareholder dividends. Several years ago, Verizon scaled back its FTTP deployment. In 2016, Google Fiber paused new deployments. AT&T hit the brakes on its FTTP deployments this year at the same time voters and policymakers want to press the gas pedal.

The sluggish progress has prompted localities to seek alternative business models that can more rapidly build FTTP infrastructure serving all and not just some premises along with rising demand for greater reliability and better value. The task isn’t easy. State and local governments and their taxpayers still feel the trauma of the economic crisis a decade ago. They’re thus risk averse when it comes to taking on debt or assessing new taxes. If localities are to build FTTP infrastructure and operations and maintenance, they will have to investigate new financing models that require less public funding.

One that is emerging and bears watching is localities partnering with operators of open access FTTP networks that tap pension funds as a source of patient capital. The 30-50 year lifespan of FTTP telecom infrastructure is far better aligned with the long term investment horizon of pension funds than the shorter timelines of investor owned ISPs. And now that advanced telecommunications is considered an essential utility (but not by legacy telcos and cablecos who prefer it be regarded as an information and entertainment service) and FTTP as a future proof means of delivering it to homes, businesses and institutions, there’s less uncertainty its ability to generate demand and revenue over the long term.

So far, European pension management firms appear to be in the game. However, it’s possible American pension funds like the mammoth California Public Employees' Retirement System (CalPERS) could jump in. There are plenty of localities just within California that could be potential partners on FTTP projects, particularly given the state’s two thirds voter approval requirement for most new taxes amid indications of tax exhaustion.

AT&T Targets Labor, Wireline Footprint in New Cost-Cutting Effort | Light Reading

AT&T Targets Labor, Wireline Footprint in New Cost-Cutting Effort | Light Reading: Wireline reductions
As for other cost-cutting efforts, Stankey said AT&T would also look into its wireline operations with an eye toward "product rationalization" and "geographic and footprint rationalization."

"There's a huge opportunity for us to look at our wireline business and how our customers are laid out, and start thinking about what we do to take out layers of cost -- based on the geography we serve and the products that we support -- that maybe have run their course in a fairly mature business," he said, but didn't elaborate further.

AT&T has a very conservative stance on building out fiber to serve residential customers. It's about to get even more so, signalling a likely full and final retreat from the residential market.