Tuesday, April 13, 2010

What the 1,099 Communities Not Selected by Google by Google Should Do

Boulder Fiber Forever The past month has been crazy ever since Google announced that they are going to build an open access fiber-based network in one or a couple communities from 50,000 to 500,000 in population.  Over 1,100 communities submitted responses to the Google Fiber for Communities Request for Information including my own Boulder and Longmont, Colorado.  Those communities took the time to thoroughly understand how broadband infrastructure could benefit their community.  So what should the 1,099 or so communities that are not selected do?  They should build the open-access broadband network anyway.

Why?  Communities that responded to the RFI realize that a broadband infrastructure will not only offer their citizens greater choice of service providers, but also provide economic growth to their community.  Studies in Europe, Asia, and North America have confirmed the benefits that will come to these communities (link and link).  Some cities conducted their own surveys asking businesses how a broadband infrastructure could benefit their business.  Boulder’s results can be found here and here.  So now that Google has stimulated this awareness of the benefits, why should a community take it on themselves to build the network?  Obviously one of the incumbent carriers will build it eventually, right?

Communities need to realize that incumbent carriers are not going to make any multi-billion dollar investments in infrastructure in the next couple of years no matter how hard they squeeze them during franchise negotiations.  Verizon has publicly announced that they have completed their FiOS buildout passing approximately 18 million homes and gathering 2.86 million TV and 3.43 million Internet subscribers.  AT&T’s U-verse service only reaches 2.1 million subscribers and it based on a FTTN architecture that only provides limited speeds.  Comcast has been the most aggressive with hitting more than 80% of its service territory with DOCSIS 3.0 by the end of the year and reclaiming spectrum for more data use via Project Calvary.  Comcast is offering speeds up to 50 Mbit/s for Internet.  The bottom line is that if you do not live in a major metropolitan areas that these providers already hit, you can only expect incremental or no improvements in service.  Most of these communities will not see Internet speeds greater than 50 Mbit/s or a choice of more than two video providers. 

The economics of building a single carrier infrastructure are not suitable for these companies to undertake.  Verizon spent $23 billion building out its FiOS network which equates to over $7,600 per subscriber.  Ivan Seidenberg, CEO, stated that they would like to achieve at least 7.2 million subscribers;  thereby, cutting the cost per subscriber in half.1  Assuming that the company nets $50 each month per subscriber, which is generous, and that Verizon achieves its 7.2 million subscribers, it will take over 5 years to see a positive return on investment.  Investors in public companies do not want to see payback periods beyond 2 years even though the investment’s lifetime is greater than 20 years.

The economics for a open-access infrastructure are much different because there are multiple service providers utilizing the infrastructure that improve the fill rate and cash flow.  Successful open-access networks enjoy a fill rate of greater than 60%.  Some of the installation issues that plague large companies like Verizon are mitigated in municipal networks.  Smaller carriers have reduced installation costs down below $1,500 and even lower.  Just taking these two factors into account and allocating $30 per month to pay for the infrastructure moves the payback time to 5 years, and that figure does not include the revenue from any business customer that definitely improves the economics.  This article, published on the Gerson Lehrman Group site, takes a look at the economics with a smaller adoption rate but does not separate the service from the infrastructure.  They conclude that the payback time is much less.  Our company, Inphotonics Research, has more detailed case studies that indicate a payback period closer to the 5 year period factoring in all of the expenses and incomes which is far too long except for the patient investor.  On the other hand, the municipal bond investor may see a compelling investment opportunity and communities may even be able to enjoy a net positive revenue flow into their general fund.

Now that communities realize the the economics are feasible and that such a network provides numerous benefits to the community, how will they do it?  The purpose of Google’s grand experiment is to show communities how they could build their own infrastructure.  Their objective is not to build these networks in every community, but share the results so other communities could do it themselves.2  Understanding the formula will get a community started.  It does not give them the expertise to build and operate the infrastructure as well as attract service providers.  Companies exist that will assist communities to plan, build, and operate their infrastructure such as Inphotonics Research.  These companies have the relationships with appropriate industry players to make the project successful for a community.  So if you are one of the communities that does not end up selected by Google, go ahead and leverage Google’s work and build the network yourself.  You can do it with a little help.