Nathan Rosenberg

How Innovative Cities Are Taking Control of Broadband

Fiber Optic has transformed the Internet, allowing huge amounts of data to travel instantaneously around the world. Nearly every aspect of our lives has been impacted by the growing Internet of Everything. More recently, some communities have been upgrading old copper and cable systems to provide fiber connections directly into business, cell towers and even homes.

Yet many cities lack the infrastructure needed for the advanced technologies of today.

Fiber Powers 21st Century Economic Development

Communities with fiber to homes have higher per capita GDP (Fiber Broadband Association, 2016). In fact, fiber is more in-demand than ever. The most important community amenities are safe streets and very high-speed Internet. Very high-speed Internet is mentioned more than affordable housing, greenspace and parks and reasonable commute times. For apartment renters, very high-speed Internet is the top-mentioned amenity, and many prospective renters are checking cell coverage when they shop. (RVA, LLC, 2016)

Why Service Providers Are Not Investing in Fiber

If fiber helps grow the economy, why aren’t service providers investing more in fiber? Blair Levin of the Brookings Institute puts it well, “In a way, the answer is simple. While the benefits to the community of constructing a gigabit or next generation network may be great, the benefits to private providers are generally less than the cost.”

The service providers do not reap the economic benefits of fiber investments; they only collect our monthly TV and Internet bill. And with cord-cutting on the rise, those monthly bills are declining. Hence, service providers are looking to provide security, wireless, apps, and other services to maintain average revenue per customer.

When weighing an investment, service providers weigh the potential revenues, system benefits, and threat of losses from competition against capital and operating expenditures of fiber. Fiber carries a lower operating expense in the long term, but the capital required to overbuild a neighborhood, not to mention upgrade the core of a legacy network, can be substantial. The good news is for those markets with fiber, the benefits are significant While many cable subscribers pay hundreds per month, Google, AT&T and Verizon all offer gigabit fiber for only $60-80/month.

No Competition

Most service providers – legacy phone and cable companies – face zero or little competition. While America as a whole has many broadband service providers, their service territories rarely overlap.

A U.S. Department of Commerce study found that a majority of American households (63 percent) have only one broadband service provider. And only 9 percent of households have more than two providers. (“Competition Among U.S. Broadband Service Providers,” U.S. Department of Commerce, 2014)

With no threat of competition, it often makes more sense to incrementally upgrade cable and DSL, rather than invest in new fiber infrastructure.

Barriers to Entry and the Successful Failure of Google Fiber

One might think the barriers to entry are regulatory. Historically, phone companies and cable companies were given exclusive franchises for specific areas. However, in many states, these regulatory barriers were removed to spur competition, yet no competition emerged.

In fact, the barriers today are physical. For aerial fiber, new entrants must get pole attachment rights from their competitors. For underground fiber, without access conduit, the cost to build into an existing neighborhood is 4-5 times higher on average than it was when the community was first constructed—a deep moat protecting the incumbents.

New entrants such as Google Fiber have mostly succeeded not because they have overtaken traditional service providers, but because their presence spurs traditional service providers to upgrade to fiber. That is why Harvard Business Review recently called Google Fiber “High-Speed Internet’s Most Successful Failure.” While Google Fiber has encountered all sorts of obstacles and barriers to its own success, its presence has been enough to spur innovation in the markets where it builds.

New Models for Fiber Infrastructure

Many cities, seeing the economic benefit, have begun to pursue strategies to bring fiber to their citizens. This article will touch on two of these models.

The first model often mentioned is Municipal Fiber. In the Municipal Fiber model, the City builds its own fiber, operates the network, and offers broadband services.

Courtesy of iStock

In discussions of Municipal Fiber, Chattanooga, Tennessee, is often cited as the prime example.

A quick search reveals glowing reviews of what the City of Chattanooga and its electric utility have accomplished, and they should be commended. Note, however, that Chattanooga received $111 million from the federal government, and no city since then has been able to secure a similar level of funding. This calls into question the scalability of the Municipal Fiber model.

Municipal Fiber carries significant risks that have hampered similar efforts in Utah, Kentucky and other locations. Building a fiber Internet service provider carries significant construction and operational costs and risks, as Google found out – risks that are only exasperated by floating bonds.

In addition, operating a broadband service provider falls outside the expertise of most municipalities and municipal utilities. While broadband projects usually look attractive on a pro forma basis (just check the financial statements of the large incumbents), broadband is a complex industry that comes with many more opportunities for failure than success.

Moreover, Municipal Fiber brings additional incumbent and regulatory challenges that can slow down, prevent or stop fiber builds, hurting the economics of investment.

The Community-Led Fiber model emerged to mitigate some of these risks. With Community-Led Fiber, the City still builds and owns the fiber but selects a service provider to operate the network and offer broadband services. This public-private partnership allows the city to stay within its area of competence and infrastructure and shares risk with the private sector. This model is being used in various forms in cities across America.

While the future of technology is unknown, cities can be built and upgraded to be ready for whatever comes. Foundational to the technologies of today and tomorrow is having fiber connectivity throughout a city. The interest of incumbent service providers is to limit competition and protect their territory. To upgrade America’s infrastructure and compete in the 21st century, many cities are taking control of their broadband destiny.

Nathan Rosenberg is the Vice President Business Strategy for The Broadband Group. For over 20 years, The Broadband Group (TBG) has focused on city and community-wide integrated broadband planning, empowering land developers, utilities, and municipalities to make and execute informed decisions about telecommunications strategy.