Muni Open Access

Principles and objectives of municipal open access broadband solutions

The days of monopoly-like control of telecommunications service delivery over limited bandwidth platforms are coming to an end.  The federal government, through the actions of the FCC, the NTIA, and the National Broadband Plan, is pressing towards open access broadband networks.  Many states are following the federal government’s lead and developing state-wide broadband plans.  Many regions are pooling resources and are moving forward with initiatives that may result in new non-traditional network builds.  The nearly 1,100 municipalities that took the time to respond to the Google fiber RFI, the hundreds of municipal/governmental broadband stimulus applicants, and the new trend of municipal RFIs and RFPs seeking fiber builds demonstrate a growing frustration with incumbent broadband providers’ solutions.  Leaders in these municipalities, counties, regional intergovernmental organizations, and states recognize that advanced telecommunications services are an essential element of their overall economic development plans and a critical aspect contributing to the quality of life residents in their jurisdictions enjoy.  However, they are not seeing adequate broadband progress being made.  More and more these government organizations and community groups are recognizing that in order to get world class telecommunications services for their constituents they must take bold action to provide true choice (that is, real competition) of true broadband (that is, 1 Gbps symmetrical speeds or better); bold action they recognize that is not likely to come unaided from their incumbent providers.

But often, public officials don’t know what action to take or how to take it.  Cities, counties, states, local regions – even homeowners’ associations regularly build and maintain public infrastructure like roads and sewer systems and power lines and libraries and airports and event centers and sports stadiums.  They have even built significant data networks for school and public safety and other government use.  But the world of public telecommunications service delivery has been relegated to those few incumbent providers who carefully guard their franchise or ILEC granted monopoly status.

Unfortunately, cities can’t turn to their local experts in the field – the incumbent providers – for guidance.  In spite of federal pressure and local frustration, incumbents cling tenaciously to the government sponsored private monopoly business models upon which they have built their businesses.  These models have served them very well since Congress appropriated $30,000 to construct the Washington/Baltimore telegraph line in 1838; since Samuel Morse officially opened the first government sponsored monopoly commercial wireline service by tapping out, “What hath God wrought?”  Besides monopoly, historic telecommunications business models depend, in part, on a perception of scarcity.  By controlling supply (that is, available bandwidth) providers control expectations and can eek as much profit out of each capital investment as possible.

These historic business models lead to statements like that made by one of Qwest’s (now CenturyLink) representatives to a City Council considering participating in a public telecommunications infrastructure project that would build fiber to the premises.  The Qwest representative suggested that the city had no need for additional services as the businesses in town were car washes and mechanics shops.  While it did not occur to the Qwest representative that one of the reasons the businesses in town were car washes and mechanic shops was because data dependent businesses couldn’t compete because Qwest didn’t provide them adequate service; the City Council members did understand… they elected to participate in the public fiber project.

Typical incumbent business models depend on the philosophy articulated by Theodore Vail, AT&T’s president in the early 20th Century, as “One Policy, One System, Universal Service.”  One of Vail’s truly brilliant moves was to first demonstrate that telecommunications networks represent a natural monopoly and that they are true network effect systems, then to accept reasonable government regulation required to protect AT&T’s monopoly.  AT&T then extended its protected monopoly into the full spectrum of telecommunications services.  Thus, even through the trust busting of the Roosevelt, Taft, and Wilson administrations, AT&T was able to secure and strengthen a vertically integrated monopoly under their umbrella of local infrastructure and services (in the Bell Operating Companies), long lines infrastructure and services (in AT&T), equipment manufacture and distribution (in Western Electric), and research (in Bell Labs).

Most cable television operators have not built the vertical monopolies AT&T enjoyed until the 1984 divestiture (though Comcast’s acquisition of NBC has set a precedent in that direction).  Nonetheless, multiple system operators (or MSOs) have done what they could to protect their own monopoly service areas.  When possible, they establish protections through their franchise agreements.  Failing that, they use other methods to impose barriers to new entrants – rejecting unbundling, placing infrastructure in such a way that competitors cannot build in their areas, protecting content distribution rights, and otherwise strong arming their way into protected monopolies.

The large traditional multi-state cable and telephone companies should be expected to fight the loss of monopoly control and their ability to create and manage bandwidth scarcity.  After all, their business models are built upon these foundation stones.  To protect their models they may say government regulation throttles their will to innovate; they may claim any effort by the government to implement telecommunications utilities represents unfair competition that discourages capital investment; they may argue that if the market demands more bandwidth or better service they will provide it.  Yet, they will only innovate and make infrastructure investments and improve service if quarterly returns justify it or competition forces it.  The incumbent network owners can be expected to protect their monopolies and manage bandwidth scarcity to maximize profit – not because they are malicious but rather because doing so is simply what the market and their shareholders demand.

Begin with the End in Mind – Municipal Broadband should Support Public Policy

The public sector does not enter into new ventures lightly. Public servants recognize that in their ability to tax and levy fees, they are stewards of public funds and of the public trust. Elected representatives and their professional staffs must base their decisions on the public policy objectives of the communities they serve.

Often a community’s public policy objectives are driven by the need to resolve natural monopolies, market failures, or provide for the common good. Broadband development satisfies need in each of these public policy areas.

Natural Monopoly

Broadband infrastructure represents a natural monopoly in two ways. First, the cost of competitive entry – that is, the cost of building new infrastructure in competition with existing infrastructure – is prohibitive. Generally, only one or two entrants can sustain infrastructure. Secondly, even if multiple entrants were competitive, the public utility easement space where wireline networks are built has limited available space.

Public sector development of shared infrastructure can help overcome the natural monopoly characteristics of broadband delivery. By building shared infrastructure, public sector entities reduce the cost of entry and minimize competition for limited public utility easement space.

Market Failure

Charles Ferguson describes the many ways broadband represents a market failure in his book, The Broadband Problem: Anatomy of a Market Failure and a Policy Dilemma. In sum, Ferguson demonstrates that advanced broadband services require significant infrastructure investment and that infrastructure investment designed to meet demand for broadband undermines scarcity pricing. In other words, market forces reward only limited private sector investment in broadband capital infrastructure.

On the other hand, market forces reward applications that are able to take advantage of abundant bandwidth where it is available. So, the network owner who is responsible for the capital expenditure to improve broadband sees diminishing returns for increased investment while those who use the network to deliver applications reap the rewards of abundant bandwidth.

Public sector development of shared infrastructure can help relieve the market failure characteristics of broadband delivery. Public sector network owners are not driven by the need to maximize profits. The public sector must behave in a financially prudent manner. However, what is financially prudent for the public sector is different than the private sector’s need to meet quarterly earnings pressure. The public sector can easily accommodate return on investment cycles that take decades instead of only quarters.

Common Good

Broadband development represents the common good. Each community’s needs are very specific to its own circumstances. Nonetheless, broadband development directly supports the broad categories of economic development, public safety, infrastructure development and maintenance, building a sense of community, education, quality of life, and others.

The 2010 National Broadband Plan recognizes critical broadband needs across many of these same categories, specifically singling out economic opportunity, education, and other more state or federal focused areas like healthcare, energy and the environment, and government performance. In all areas, telecommunications service levels considered more than adequate just ten or fifteen years ago (think about a 28.8 baud modem) are now considered archaic and prohibitively slow.

Select a Business Model that Meets Public Policy Objectives

With public policy objectives in mind, select a business model that will best meet the needs. There are innumerable possible broadband development models. We break them down into four basic categories:

Status Quo

The status quo represents the same way we have done broadband development since congress appropriated $30,000 for Samuel Morse to build the first telegraph line from Washington DC to Baltimore.

Pros

  • Takes advantage of the efficiencies present in market systems
  • Represents little risk to the municipality
  • Avoids additional public sector burdens of cost or responsibility

Cons

  • Results are generally not going to change – the status quo is the status quo
  • Gives the public sector little control over how broadband development is used to meet public policy objectives

Broadband Friendly Policies

In May of 2013, the Fiber to the Home Council (now the Fiber Broadband Association) produced a guide to “Becoming a Fiber-Friendly Community”. The guide lays out recommendations for helping to spur private sector investment in fiber networks.

Pros

  • Represents very low risk to the community
  • Has little detrimental impact on market system efficiencies
  • Encourages more broadband development than the status quo

Cons

  • May divert valuable public sector assets to a single private sector user
  • Assets secured by a private sector user may not be used to meet public policy objectives
  • Likely encourages more tenacious monopoly control of the local broadband market

Wholesale-Retail Split

Fiber Community is a strong proponent of a wholesale-retail split model in which the public sector builds infrastructure and makes it available to multiple public sector service providers. This model breaks the natural monopoly barriers, overcomes broadband market failure, and provides for the common good.

An analogy of the wholesale-retail split model can be found in airports.

When cities realize the need to build a municipal airport, they often form an Airport Authority. That organization exists for the sole purpose of building and operating the municipal airport. The Authority builds runways and structures, but it does not fly the airplanes. Instead, private airlines use the infrastructure and compete for retail ticket sales. Because the high cost of the airport is spread over multiple airlines using the facility, the cost to use the airport becomes much lower than if each airline had to build its own airport.

When an airline sells tickets to passengers, the cost of the ticket covers runway fees, gate fees, and other costs which the Airport Authority assesses airlines for use of the airport. These fees operate the airport and pay the debt used to finance its construction. The Airport Authority does not interact directly with passengers – it does not charge the passengers fees, nor does it consider them customers. Instead, the airlines are the Authority’s customers. The arrangement allows the airlines to compete against each other, not against the Airport Authority. This competition helps airlines focus on things like value and services rather than on maintenance of the airport. This benefits customers because airlines become innovative in their approaches to win and keep customers.

Often the Airport Authority will engage with one or more private sector operator companies to manage the physical assets and to recruit and manage airlines.

Similarly, in the public open access network model – the wholesale-retail split, municipalities build and maintain the broadband infrastructure, but they do not engage in selling services to the end-user. Rather, they open the infrastructure to private service providers. Ideally, multiple service providers compete with each other for market share. It is they who become the customers of the municipal network owners. In this model, the private sector still owns the relationship with the end-user subscribers and, being freed from concerns about maintaining the infrastructure, they are able to focus on their service offerings. This stimulates innovation as providers seek to differentiate themselves from one another and it helps ensure that prices remain at an appropriate competition driven market level. Additionally, since government financing for the network can secure lower interest rates and longer terms than private industry can, the cost of debt service is lower than what it would be for private network infrastructure deployment. These cost savings benefit the service providers who end up paying lower access fees. Because their overhead is lower, service providers can price their services at lower retail rates or use free revenue for research and development, thus benefiting the end user.

When a community realizes they need an airport to stimulate economic development and improve quality of life, they don’t call up the airline and ask them to please build runways in their town. Rather, they build an airport. When a community recognizes the need for improved broadband to achieve the same objectives, they shouldn’t be forced to call the private network owners and try to get them to meet public policy objectives. Rather, they may need to build a network.

Pros

  • Best satisfies the need to encourage the benefits of broadband competition
  • Is an effective way to use broadband development to meet public policy objectives
  • May eventually provide the community a new revenue stream

Cons

  • Involves substantial risk to the community
  • The community may have insufficient means to manage the network and service providers and will likely need a third-party network operator

Municipal Entry

Municipal entry occurs when the public sector not only builds the network but also becomes the sole service provider on that network. Some examples of municipal entry projects include Chattanooga, Tennessee, Lafayette, Louisiana, and Longmont, Colorado.

Pros

  • Represents the most control over municipal broadband development towards meeting public policy objectives
  • Represents the best opportunity for the City to generate a new revenue stream

Cons

  • Requires significant public sector resources to satisfy the new business
  • Does not adequately address creating a vibrant marketplace of multiple competitors
  • Does not create the efficiencies found with shared infrastructure
  • Represents significant risk to the community
  • Has only been effectively accomplished by cities able to complement their broadband program with a city-owned power utility