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Thoughts On Community-owned Broadband

"Open access", Google's prices, network building expertise, organization and financing, profitability, and community network competitive advantages.

March 14, 2015

The flaw in the "open access" business model

In the "open access" model, as promoted by many consultants and business interests, the City builds the infrastructure and leases access to multiple private providers who offer services to end users. The premise is that retail competition will lower prices. The problems with this approach are several:

  1. There is little to compete on when everyone is selling the same base commodities (Internet, phone, TV), purchased at the same wholesale price, and delivered over the same network.
  2. It does not generate the lowest possible prices to the community due to the redundancy in management, equipment, and facilities costs of multiple resellers, the poor economy of scale of a highly divided market (i.e., few customers per reseller), and the combined wasted dollars in advertising wars. A single provider can operate much more efficiently. And if that provider is community-owned and serves the public interest, The lowest possible prices would be realized.
  3. The city invests all the big money up front to build the network. It must then attract qualified service providers who it must rely on for revenue, a major risk which has proven to be a major problem. Service providers will have only modest "skin" in the game, will cherry-pick customers (no community-wide coverage guaranteed), and can bail out of the business easily if business sours.
  4. The fatal flaw -- Eventually, one provider will have more success, will gain a majority of the market, and with better economy of scale will be able to lower prices somewhat and win-over the rest of the market to become the sole provider, at which point will raise prices again, and the community will be back where it started: facing elevated prices controlled by a private company. Moreover, during this time, the established incumbent provider could easily run all the public network resellers out of business by lowering its prices, leaving the public network to take over the retail side, or sell the network—most likely at a significant loss.
  5. It is not likely that if a sole reseller raises its prices, other resellers will enter the market and cause prices to fall again. Potential competitors will learn from the failure of others, and will stay away unless they have devised a quite revolutionary way to compete. But, if they should succeed in winning the market, they will do as their predecessor and raise prices. Any lower prices the public may see from private sellers will invariably be modest and transitory.
  6. It has been tried without success in the USA (UTOPIA; I think two others tried, but, after seeing the approach failing early on, switched to being full providers). It is used in some European countries, where monopoly providers were forced to "unbundle" services and wholesale them at cost; but this arose only under complex regulatory environments and historical conditions that do not exist in the USA. To emulate that here, today, would be to, e.g., require Time Warner Cable to wholesale its services at cost to independent resellers (not create a new public network). Good luck with that. In any case, there is no evidence that it is the most efficient way to provide cheap, fast, and high quality broadband services to the public (See (2) above).

    There is a U.S. example of "open access" in telecom industry history. In the 1980s, AT&T was broken up into seven "baby bells". They, in turn, had to provide wholesale access to independent resellers. In time, the independents died off and the bells themselves were reconsolidated—doubly so with cable—into a handful of providers, each operating almost always as a monopolist in their territory (even swapping properties between them to make that possible), and now consolidating even more (e.g., Time Warner Cable / Comcast merger). The result of this exercise is that we have cable and cell phone bills that are 2x-3x what they reasonably should be. The very reason communities are considering building community owned and controlled broadband networks is precisely due to the failure of the "open access" model to provide cheap, fast, high-quality service.

Real open access networks

Open access should not be about private providers reselling the same base commodity services (Internet, phone, TV). This only divides the market, reduces economies of scale, increases costs (multiple managements, equipment, facilities, advertising), and leads to unnecessarily high retail prices. Real open access should allow independent providers of unique or specialized network services access to the physical network as may be needed to implement the service. That said, with the advent of ubiquitous 1Gb/s service to the premises, almost all services that used to require access to a network's central office can now be offered directly from one's home or business. A community-wide 1Gb/s service to all premises is inherently open access.

The idea that a community owned network cannot operate as efficiently as a privately owned one

The quality of an organization depends upon the quality of its members. The larger the organization the less physically efficient it is, regardless of whether it is public or private. Large multi-billion dollar companies are not physically efficient. They have certain types of economies of scale, but these efficiencies are often lost to their large bureaucracies and distant decision-making. On the other hand, a scrappy community (like a scrappy startup company) can be highly motivated (to improve their own lot) to develop efficient, low-cost, community-specific solutions.

The knowledge to build and operate a fiber-optic network service

There are business/engineering consultants and equipment manufacturers who can assist a company in setting up a new network and service. This is true for opening a restaurant, a hotel, or any other business. Likewise, there are experienced contractors to build the physical network, and vendors to provide the hardware and software solutions. What is important is that company management has reasonable technical knowledge so that it can choose well its contractors and vendors and at the right price.

Google's low pricing is not due to Google's unique knowledge and ability

Google's pricing is not particularly low, at all. $70/mo for Internet and phone, or $120/mo with TV is approximately normal, especially anywhere there is some competition. What Google offers is far better Internet service. But this is due to having a brand new network, and what the current state of technology offers. Anyone who builds a new fiber-optic network can offer the same quality of service at or below Google's prices. In fact, proof of lower prices exist around the world. Moreover, any special concessions communities have granted Google, communities can grant to themselves. A community should not want Google; it should organize to create it's own superior community owned and controlled service.

Community-owned network business organization and financing

Although it may be OK for a municipality to own the physical network, it is most likely a bad idea for the municipality to operate the service. This is because the rules of employment, decision-making, and freedom-of-information access will put a municipality at a serious competitive disadvantage to competing private operators. It is much better if a separate community-owned and controlled entity is created to operate the service. There already exists a form of incorporation designed specifically for non-profit utility services. It's called a 501(c)12 Utility Service, a mutual company, otherwise known as a consumer cooperative. It operates as any private corporation, except that it does not issue stock (it only borrows), and the consumers (customers) have voting rights instead of the stockholders (there are none). Voting includes yearly voting for company officers, at a minimum, but normally is far more generous and would include referendums on major company policies, services, investment, etc. In this way, corporate control cannot be taken away from the community. A 501(c)3 non-profit corporation is not acceptable because it is privately managed and cannot guarantee long-run community control and service purely in the public interest.

As to financing a community-owned network, there are several ways. A standard approach is the issuance of Municipal Revenue Bonds, whereby the revenue from operations guarantees the bonds, not the municipality; it is the way most private utilities have been financed in this country. Another approach is a general corporate bond issue through an investment bank; however, banks may be unwilling, or the interest rate and fees may be much higher. Yet another approach is, basically, crowd-funding, i.e., finance at least part of the network build-out via the sale of promissory notes to the very residents who will benefit from the new network); it could raise a significant amount of financing if the community strongly backs the community network initiative. Perhaps the ideal method of financing would be to crowd-fund as much as possible and finance the balance via a revenue bond issue.

The idea that a community-owned network is unlikely to pay for itself

I think it would be acceptable if a community-owned network didn't pay for itself, as long as it did when accounting for the savings to the community. Most municipal services (school, police, fire, water, public works) generate no revenue, only a benefit (the value). However, I see no reason for a community-owned network not to pay for itself according traditional business accounting. Frankly, I haven't heard a reasoned argument as to why a community-owned network cannot pay for itself. So, I have no criticism to respond to. However, there are some advantages a community-owned network will have over incumbent private providers:

  1. State-of-the-art network. A new network built with the most recent technology that can offer far superior and more reliable service at a lower operating cost when compared to incumbent legacy coax cable TV systems.
  2. It can develop and provide a much more sophisticated and complete in-home network solution built into the standard subscriber premise equipment, which would save households considerable expense and a lot of frustration from lack of technical knowhow. (Incumbents could do this, but they don't—let this be a lesson to us.)
  3. Marketing advantage. A community-owned service is in an excellent position to win-over the allegiance and support of residents with the thoroughly believable commitment to provide the best long-run services at the lowest possible price. This may include: assistance in leg-work or professional expertise during the design phase; neighborhood outreach, education, and promotional efforts; pre-service commitments to subscribe; and even crowd-funding.
  4. Exclusive multiple local content channels, created by the local community to serve local interests, and spirited by the generous public facilities, services, and support of the community owned network.

I see no reason why a medium-sized city with a highest-quality community-owned city-wide network built thoughtfully to the customized needs and preferences of a strongly supportive community cannot pay for itself directly while additionally providing low prices and a savings to the community of $20–$30 million per year. That savings is a helluva return on investment.