California cities and counties don’t have much to say about the service cable companies provide and the prices they charge for it. When the state took control of cable franchises with the 2006 Digital Infrastructure and Video Competition Act (DIVCA), local governments were largely pushed out of the regulatory picture.
But not completely. Cities can still collect a franchise fee of up to 5% of gross video revenue and another 1% to pay capital equipment costs for public access channels. They also have the ability to take cable companies to court if there’s a dispute over whether all service and financial obligations are being met.
The Media Center inappropriately used an annual average of $340,000 of public, education, and government (PEG) fees, or $1.4 million during the audit period, paid by cable television subscribers in the Cable Joint Powers areas, for operating expenses. Neither the City nor the Media Center enforced the federal law that restricts the use of PEG fees to capital expenses associated with PEG access facilities.
On the other hand, AT&T and Comcast were shortchanging the cities…
Comcast and AT&T did not always calculate the fees due in accordance with DIVCA and the municipal code of each of the Cable Joint Powers. As a result, Comcast underpaid about $141,000 in franchise and PEG fees from July 1, 2010, through June 30, 2014, and AT&T underpaid about $76,000 from July 1, 2011, through September 30, 2014.
The auditor’s recommendations can be generally summed up as pay more attention to what the companies, the Media Center and you, the city, are doing.
Not many California cities take as much interest as Palo Alto in exercising what little remaining video franchise authority remains, but the auditor’s report, which includes a lengthy rebuttal from the Media Center, is a good template to use if any want to up their game.
All Google has accomplished so far by including 5 Silicon Valley cities on its list of 34 candidates for fiber build-outs is to prove that California is a land of opportunity for obstructionists and not for broadband. To build on its home turf, Google Fiber has to accept that state and local laws allow anyone with an objection – no matter how trivial – to snarl and delay construction for months or even years.
This process would trigger [California Environmental Quality Act] review, and…[the] decision may be appealed by any member of the public to the City Council, which has the ultimate decision-making authority.
The timeline for minor projects that are appealed to the City Council may extend as far as six months from the date an application for design review is formally considered “complete” per the California Permit Streamlining Act.
The process to satisfy the CEQA analysis has not been determined at this time. The discretionary design review process timeline will be affected by the CEQA process that would apply to the project.
Mountain View’s response only mentioned CEQA in passing. San Jose and Sunnyvale ignored it. And there’s still no public response from Santa Clara. Silicon Valley cities are, in effect, confirming what Google has already said: barriers to broadband in California have to come down before competitive fiber is feasible. Which might have been the point of asking them in the first place.
Christopher Mitchell, the proprietor of MuniNetworks.org and an advocate of public ownership of telecoms networks, called it odd and misleading in a blog post. It’s fair criticism to the extent I didn’t do a good enough job of putting the study in context. My scope of work for the City was narrowly focused because specific questions were being asked. He’s right in saying the business model being considered – an FTTP build-out based on subscribers opting in and paying a pro-rata share of construction costs – has never been tried.
That was the point of the study, mate.
We seem to agree that the user-financed model is a hard, maybe impossible, business case to make. As Mitchell correctly points out, the numbers are ridiculous. Where we part ways seems to be over how markets work.
In the study, I characterised AT&T and Comcast as offering “high levels of service at competitive rates.” Both companies have invested in upgrading their plant in Palo Alto. Not surprising, given all the reasons Mitchell cites for making the pro-FTTP argument there. Consumers and businesses alike care about performance and costs, and not about technology. The bandwidth supply in Palo Alto has risen over the years to meet demand.
Why do I say that? Because of the independent market research the City of Palo has done. I won’t rehash it – it’s well documented in my study – but one point comes through very clearly: people there don’t have much appetite for paying more than they already are, regardless of speed. If an FTTP system offered cheaper service, it would be a different story. That’s not on offer, though.
A municipal FTTP system in Palo Alto would, as in every other competitive market I’ve studied, require taxpayer or utility ratepayer subsidies, given the realities of current consumer demand. That’s a choice for voters and their elected representatives to make. But all cards – demand and supply side – have to be on the table.
The report quotes a BT source as linking the pull back to success with its fiber-to-the-cabinet (FTTC) offerings, which are already touted as being in the 40 to 80 Mbps range and could soon go as high as 100 Mbps. It’s similar to the technology and speed targets AT&T has picked for its Uverse service, where copper lines connect homes to neighborhood fiber nodes, usually located in cabinets installed along the street.
A sub-25% market target is consistent with research done last year in Palo Alto, and that I used to model a similar user-financed FTTH feasibility analysis. At a monthly rate in BT’s range – $60 per month – 26% of homes would subscribe if the upfront cost were $1,000, but only 17% at $2,000 and not quite 7% at $3,000. BT isn’t revealing its new FTTH subscriber target, but walking BT’s pricing through Palo Alto’s price sensitivity numbers gives a ballpark take rate in the 10% range.
The key similarity between BT’s territory and Palo Alto – and, incidentally, Provo – is that Internet service in the 10 Mbps to 100 Mbps range is readily available, from BT itself and from AT&T and Comcast in California. Speed and price matter to consumers. Technology, not so much.
The cost of directly connecting a home to British Telecom’s fiber network will be in the thousands of dollars range. BT has released details on the formula it will use to calculate the charge for running fiber from a neighborhood node – fiber to the cabinet in BT’s terminology – to a home or business.
The minimum charge is £700, about $1,075 at today’s exchange rate. BT says that 55% of its customers can fiber up for somewhere between £700 and £1,500 (about $2,300). Nearly all the rest, BT reckons, would cost anywhere up to £4,000 (about $6,125).
That’s not necessarily what homes or businesses will pay upfront. It’s a wholesale charge that Internet service providers will pay to connect a subscriber to BT’s open access infrastructure. ISPs will then figure out how and how much to charge their end users for the connection. The cost might be passed on via higher monthly rates, for example.
Essentially, BT is implementing a user-financed fiber to the premise business model. Analysis done last year by Tellus Venture Associates for the City of Palo Alto found that too few residential customers would pay a significant upfront connection fee to offset construction and operation costs. Only 26% would pay $1,000 upfront and $60 a month (BT’s price range). At $2,000, the take-rate dropped to 17%. Palo Alto is reasonably well served by AT&T and Comcast, which contributed to the low interest.
BT is also targeting a served market. The same fiber nodes are currently used to provide high speed copper-based service, not unlike AT&T’s Uverse service in California. But BT’s business model is different from Palo Alto’s: it’s the national incumbent provider operating, to a large degree, under government direction. It’ll be interesting to see what sort of take-rate BT gets.
I was fortunate enough to be invited as one of the opening speakers. My assignment was to give some background on efforts in the Bay Area and around California to develop our economy by developing broadband infrastructure:
Here in the Bay Area, we are surrounded by the fattest Internet pipes on the planet. We have the world’s greatest concentration of innovative, high technology – revolutionary – talent, companies and jobs.
But we’re just getting started.
Most communities in the Bay Area, most companies and people, can’t touch those fat broadband pipes yet. That’s how it was here, in San Leandro, when the Lit San Leandro project began two years ago. The main lines of the Internet run right through the middle of town. But there was no local access, no onramp here.
Businesses struggled to get any kind of Internet access, affordable or not. Upgrading broadband infrastructure in older commercial and industrial districts is not a priority for incumbent service providers.
One of those businesses was OSIsoft. They’re here today to tell their own story, so I won’t spoil it. But Pat Kennedy saw a solution and worked with the City of San Leandro to implement it. Pat and the Lit San Leandro team made it happen. The City, though, deserves a lot of credit too. The business development team recognized the opportunity and worked across departments and with the City Council to find ways to say yes to it.
That’s the key. Recognizing the opportunity and embracing it. Part of that job is making sure that everyone’s interests are acknowledged and protected. It’s also to move ahead without getting bogged down in the process and move ahead with a clear view of the benefits for all. And that’s what the City of San Leandro did.
Thanks to some far-sighted work by legislators in Sacramento – more of that gets done than commonly recognized – the California Public Utilities Commission created a network of regional broadband consortia across the state. In just a year, those community based groups, groups that pull together public agencies, educational institutions, non-profits and private companies with capital to invest, those groups have generated dozens of new broadband projects.
The East Bay Broadband Consortium is one example. I recently worked with them to assess connectivity in this region. We developed a grading system and came up with a city by city and county by county report card. Two things stood out.
First, in most communities, businesses need help to get the broadband speed and quality at the affordable prices that our centers of high tech excellence take for granted. Whether it’s finding incentives for incumbent carriers to upgrade existing facilities, or partnering with entrepreneurs to build new gigabit fiber networks, or even dipping a toe into the municipal broadband business, cities have a vital role to play and valuable resources to offer. Not the least of which is leadership. As we have here in San Leandro.
Second, the cities with the highest grades are the ones with the deepest history of competition between telecommunications service providers. Central Contra Costa County cities scored A’s and B’s because they have three carriers that compete with each other in a number of ways, including investing in new fiber optic lines, putting private capital into upgraded broadband infrastructure.
Here in Alameda County, the cities with the highest grades are Berkeley and the City of Alameda. A private company, Sonic, has invested in building competitive broadband facilities in Berkeley. In Alameda, the city took the lead, built its own system, spurred fierce competition and stepped out of the business when the time was ripe. The infrastructure that was built by the city and its competitors is still there, still serving the residents of Alameda, still providing homes and businesses with some of the best Internet service available in the East Bay.
Other cities have followed their lead. The City of Benicia is working to turn what was a major twentieth century industrial park into a twenty first century job engine by bringing in better broadband infrastructure. In Oakland, there’s an ongoing effort to bridge the divide between businesses and homes that have superior Internet access and those that don’t.
It’s no coincidence that the best and cheapest broadband access in the Bay Area is in Palo Alto and Santa Clara. As new industries – a new economy – grew, those cities built municipal fiber optic networks. As businesses have grown and created jobs, local fiber optic networks have grown to serve them. Resulting in even more business and more jobs. We’re starting to see the same here in San Leandro. And that’s just the beginning.
Chairman Genachowski, for gigabit cities, the future is right here.
Political value: the need for speed at the San Leandro public library.
There’s an argument to the effect that the prices charged for broadband service by telcos and cable companies in urban areas are higher than necessary to provide that service and make a reasonable profit.
It’s not crazy talk. You can make a case that more densely populated areas have lower per household costs – opex and capex – and that more affluent areas have higher profit margins. There are counter arguments too, not least of which is that telecoms network costs should be spread across all users. Personally, I favor the whole system approach – the more people reached, the more valuable the network – but the marginal cost approach has valid uses.
However, it doesn’t follow that an independent competitor in a metropolitan area will be able to charge less for equivalent service or the same for better service. The telecoms business has huge economies of scale: fixed operating costs are high relative to variable costs and large purchases by big companies bring hefty discounts. Particularly for television programming. A local competitor operates at a significant cost disadvantage.
A significant fraction (30%? 40%?) of households passed have to be willing to pay more ($50 per month more is a good placeholder) to either incentivize an incumbent to bring in fiber or support the operating cost and capital requirements of an independent system. The market research I’ve seen says that’s not happening.
People may value significantly better broadband services highly in many senses of the word, but not economically. At least not to the extent that an independent, privately financed metro scale FTTH overbuild in a competitive market is economically sustainable. Not yet.
Something else has to be on the table for an independent FTTH overbuild to work. Construction and operating subsidies, (significantly) below market rate financing, publicly owned assets are examples. In other words, you’re adding political value to whatever economic value is present in order to make a business case.
Whether the political value exists is a legitimate topic for debate, and some communities or state and federal policy makers might conclude that it is. The California Advanced Services Fund (CASF) is one example of policy-driven broadband investment. Leveraging a public owned electric utility, such as in Chattanooga (FTTH) or Palo Alto (dark fiber), is another. So is partnering up public assets and private investment, as in San Leandro. And there are more. And there are counter-examples too.
Claims made by some that ordinary metro FTTH overbuilds are self sustaining investments with no risk to taxpayers are at best distractions. For now, it is as much a political question as an economic one. Debate should be encouraged.
The unveiling of Gigabit Seattle yesterday is just the first step on a long road to building a fiber to the premises (FTTP) service for residents. The City of Seattle and the University of Washington have endorsed a plan by a consulting firm – Gigabit Squared – to “begin raising the capital needed” for a demonstration project.
It’s not small change. The 200 miles of fiber needed to reach 50,000 homes and businesses in 12 neighborhoods will cost something like $50 million to install and light up. In round numbers, the Seattle demo looks remarkably similar to plans for building an FTTP network in Palo Alto: similar mileage, existing city-owned dark fiber network, urban terrain, prevailing wage rules, environmental standards and university-leaning demographics. Depending on the assumptions made, construction costs would be around the $40 to $60 million range.
I did an extensive analysis of the costs, potential revenue and overall FTTP business case for the City of Palo Alto earlier this year. Specifically, I looked at whether or not it could be built and operated solely on the basis of subscriber revenue, including up front charges. The short answer is no. The long answer is hell no.
On the other hand, if you build it with money that doesn’t need to be paid back for a couple of generations, then it’s possible. Not certain, though. Depending on the assumptions, such a network might generate enough revenue to pay operating costs. Or might not.
Either way, the City of Seattle won’t be picking up the tab. “The City’s only costs are for existing staff,” says the FAQ on the City’s website. “There is no additional City money going into this project, and there is no risk to the taxpayer.”
In fact, the City of Seattle is expecting to be paid for the dark fiber it’ll be contributing. It’s up to Gigabit Squared to find the money. And as Esme Vos points out, “they are an engineering and consulting firm, not a traditional ISP” with a track record to show investors and cash flow to smooth out the bumps.
So far, the only source mentioned is a $200 million kitty that gigabit Squared says it has raised in partnership with Gig.U, a consortium of U.S. universities. Gig.U is led by former FCC staffer Blair Levin, who headed up development of the National Broadband Plan. That money is intended to be split amongst at least six projects, of which Seattle is the second announced (first was Chicago).
Even though details on the cash are vague, Gigabit Seattle has surprisingly firm plans. Initial engineering work is scheduled to begin in the next two or three months, with project completion by the end of 2014.
That’s for the demo project, which will only reach 12 Seattle neighborhoods out of more than 100. According to the city’s FAQ, Gigabit Seattle has set a benchmark of a 15% take rate. Once 15% of the potential subscribers in the first 12 neighborhoods sign up for service, the network will be rolled out to the rest of the city in phases. That’s not an impossible figure to hit. Palo Alto’s research shows there’s a fair chance of getting to 15% even with a $100 per month price tag.
But first they need to find the cash to build it, and it won’t be easy if they have to show a plausible timeframe for an investment grade return on investment.
A user-financed, municipal fiber-to-the-premises broadband system would be a financial nightmare if launched into a market with mainstream competition, even if it’s subsidized and supported by a profitable city-owned utility.
That’s the finding of a study presented to the City of Palo Alto’s Utility Advisory Commission last night by Tellus Venture Associates. The report assessed the financial potential of user-financed municipal FTTP options, including upfront payments ranging from $1,000 to $5,000, substantial capital contributions by the City and ongoing subsidies of up to $2,000,000 per year.
In a user-financed model, property owners may opt to pay a share of the cost of hooking up to a municipal fiber network, or refuse and remain unconnected.
Very little construction cost savings can be realized by avoiding building lines to uninterested households. A telecommunications network has to be contiguous and a municipal-scale network costs about the same to build whether it serves many homes or just a few.
Upfront fees in the thousands of dollars range proved to be an insurmountable obstacle in a market like Palo Alto that already has two major service providers – AT&T and Comcast – that do an adequate job of meeting the needs and expectations of the majority of residents.
The City’s market research (conducted by RKS Research and Consulting) indicated that less than 10% of residents would be interested in paying $3,000 to connect to a fiber optic broadband network, even if ongoing Internet service was free. When a monthly service fee was included, interest dropped to less than 5%.
Tellus Venture Associates’ modeling showed that even under theoretically perfect conditions, a 24% take rate would be needed to fully pay the cost of construction, and two to three times that many subscribers would be required in any plausible real-world scenario. Even when operating surpluses and tens of millions of dollars in City subsidies were added in, full payback was not possible except in a handful of scenarios where optimistic assumptions were made about initial subscription rates, continuos growth over twenty years and virtually no competitive response from incumbents.
The study concluded that “a fully user-financed citywide fiber-to-the-premise system is not possible to achieve” in a competitive market such as Palo Alto. It could “be built using a combination of upfront user fees and City financing, but there is very little probability of the debt incurred being repaid through operations. Ongoing subsidies would be required”.
The full report is available here, and the accompanying presentation is available here.
Lit San Leandro is putting fiber in the ground. A launch party attracted about a hundred out-of-town development prospects and local business people who heard about the project’s big picture benefits and the specific real estate opportunities it creates. The Hayward Daily Review and San Leandro Patch have good articles on the event. Patrick Kennedy’s Lit San Leandro blog also has good updates and pictures.
This makes three Bay Area cities with municipal dark fiber networks: Palo Alto, Santa Clara and San Leandro. Palo Alto’s is a 41 mile network with about 60 primary customers, and many more secondary users buying lit service from the primaries. Santa Clara has 57 miles of dark fiber, a couple dozen primary customers (the biggest group being major data centers) and many more secondary users.
Lit San Leandro is a private venture with full City backing to build an 11-mile dark fiber loop through commercial and industrial districts. The City is contributing conduit access for 99%-plus of the route. Patrick Kennedy, a local entrepreneur and owner of OSI Soft, a major local software company, is installing the fiber and will run the system on a cooperative basis.
An interconnect to BART’s fiber network is already operational, and several other metro and long haul fiber networks either cross or are within easy reach of the Lit San Leandro system. Low cost, high capacity connections to Tier 1 Internet facilities combined with a large inventory of industrial and commercial properties is expected to attract data centers and other high technology, broadband-intensive businesses.
Tellus Venture Associates advised the City of San Leandro on the project and handled contract negotiations with OSI Soft. The City of Palo Alto is also one of our clients. More information on Lit San Leandro (including contracts), Palo Alto and others is here.