Tuesday, August 17, 2004

Are We a Nuisance or a Competitive Threat?

According to a telephony online article municipal telecom utilities are moving from being regarded by incumbent teleco and cable companies as mere nuisances to being recognized as competitive threats. This is the best analysis of the complex emerging issue that Lafayette is embroiled in that I have yet seen and explains, at least in part, the passion we have seen on the part of incumbent companies. (Another part of course is simple money. See Mike's posting on that issue. A 30-40% profit margin? You do the math.)

The Threat
Here is what they have to say about why the attitude toward municipal fiber is changing:
Once considered merely niche players in smaller telecom markets incumbents didn't care about, municipalities are announcing fiber buildouts with greater regularity in increasingly larger markets already served by telcos and cable operators.

Incumbent providers downplay the big-picture threat but are adamantly lobbying against municipal entry into the telecom market at every level of government, with good reason. In addition to philosophical arguments regarding governments competing against the private sector, the last thing the struggling telecom industry needs is to have to match prices with deep-pocketed competitors that have access to cheap capital and — most importantly — no requirement to turn a profit.

Notice how neatly this tracks our experience in Lafayette. The infamous SB 511was
BellSouth's instant response to the impudent suggestion that Lafayette might consider building a fiber utility.

The History
As Joey Durel has emphasized from the begining the appropriate comparison here is the role municipal utilities played in electrification of their communities—and the demonstrated benefits of electrification for the communities that had the courage to take the risk. Their recounting of the same historical moment tracks Durel's closely:
There are “remarkable parallels” between the electrification of America in the 1890s and the transition to “true broadband” in the United States during today's information era, Baller said. In the 1890s, private electric companies focused their investments on urban areas that offered greater profit opportunities. Many municipalities that didn't fit this criteria eventually decided to establish their own electric companies.

Baller said the arguments against the creation of municipally owned electric companies were similar to the arguments posed by critics of today's municipal forays into telecom — most notably, that cities lacked expertise in the field and that the governments should let the free market run its course. History proved those arguments wrong, Baller said. Today, there are more than 2000 municipally owned power companies that have withstood the test of time much better than cities that literally were left in the dark, he said.

“Many cities that waited for the private sector to serve them became dust,”
For even more parallels to Lafayette's situation pay close attention to the discussion of iProvo a municipal project to build a fiber optic network in a college town of 100,000. The telecos and cable companies are especially bitter about municipal networks being built where they are currently making real money. They even called on the same Progress and Freedom Foundation that provided an "expert" for Lafayette's "Academic" Broadband Forum (see our pregame analysis, with special emphasis on the "experts" or indulge in our postgame report) in to declare iProvo's plan as impossible as his colleague declared Lafayette's.

Lafayette. You didn't think they missed us, did you?
On of the things that the private providers claim—and really seem to resent—is that public entities don't have to make a profit. But it isn't really true that private entities don't have to make a profit and they know it. What they mean to say is that public entities don't have to do any better than break-even. Their profit can be small, and the owner-customers of a utility will likely prefer it that way. That is what they really resent. (Again, see Mike's story for the real skivvy on cable profits.) It seems that the "flexibility" (read: willingness to not skin the consumer) that this service orientation leads to really makes teleco's uncomfortable. The reporter catches Louisiana's Oliver in an unguarded moment:
...that flexibility also makes it hard for private-sector providers to compete in a territory where there's an effective FTTP deployment, according to Bill Oliver, president of BellSouth's Louisiana operations.

“It's like, which math course did I miss?” Oliver said of the accounting for some municipally owned telecom ventures. “It looks like they're losing money, and they still haven't paid for a truck to roll or someone to answer the phone.

“It makes it difficult for a private company like BellSouth to compete with a governmental entity that's only goal is to break even.”
Oliver's position here, that it is somehow unfair for other providers not to labor under the same disabilities that he does, is reminiscent of Cox's desire that Arizona tax satellite TV providers into competitive equity with them. Or BellSouth's strange demand, now eshrined in Lousiana law, that municipal providers like LUS be forced to prove to the Louisiana Public Service Commission that they calculate what they charge their citizen/consumers as if they were leasing their own right of ways and poles the way BellSouth does. (See an earlier entry of mine that goes on at length on this strangly anticompetitive attitude.)

Open and Closed Systems

One of the issues that divides proponents of municipal broadband networks is that of whether the new network should be open or closed; whether the municipality should open up the network by leasing access to competing retail providers or whether the local municipality should take a more conservative, closed, route (the same conservative route both cable and telecos take with regard to their networks) and provide services to its citizens directly. The virtue of open systems in the eyes of its advocates is that the consumer will presumably benefit by lower prices and a richer array of new services brought on by competition. The virtue of closed systems in its proponents opinion, is in a word, safety. You own the network, you offer a good service and because you know that profit levels in, for instance, cable are high you know you can both please the public and have room in the pricing to build up a cushion for future development and to deal with unanticipated problems. You also don't have to split your profits with the retailers on your system. Closed systems are arguably the safe, "business plan," model.

Iprovo and its big brother the Utopia project, which links small cities and towns in Utah, are taking the open route.

Lafayette is not:

Huval, the hard-nosed reaction

Huval said there's no timetable for LUS to make a decision, but he said the organization wouldonly make the investment if it offers a voice-video-data triple play. In addition, Huval said he does not believe the LUS would make its network open to all service providers.
“The idea of open access is nice, but does it pay the bills?” Huval said. “The problem with open access is that the driver of [broadband] penetration isn't the entity that has to pay the debt service.”

And whether municipal entities can at least break even on their fiber buildouts remains the biggest question. Incumbent providers are skeptical, but Baller said adoption rates for some community networks offering triple plays have legitimized the UTOPIA projected take rates. But both public and private proponents agree that it's too early to estimate the impact municipally owned networks will have on the telecom market.
I'm an admirer of hard-nosed, realistic plans. And, readers may have noticed, pretty clearly an admirer of idealistic, hopeful plans. I'm torn. A reasonable point that the proponents of open systems sometimes make is that while fiber, and the true broadband capacity it offers are a good bet, the particular services that are offered are less certain. For instance real broadband might end up destroying the cable model--and a leasing plan would offer a more nimble way to switch to video downloading if that is the path the future takes. Maybe. But I am not sure why LUS couldn't mix models. Keep the basic three services, phone, TV, and Internet, and use that revenue to make sure the cost of the build is absolutely secure. Pledge to make a fixed percentage of the bandwidth available to lessees. There will be plenty of bandwidth available, especially if Lafayette goes with an active, ethernet-based system (please!) and forcing yourself to always keep plenty of "spare" bandwidth would not be bad discipline anyway—my guess is that the easiest "business" mistake to make would be, contrary to what the incumbents tell us, to underestimate demand. We simply have no models of what might happen if network effects take hold once true bandwidth is universal and cheap. (Network effects you ask? Discussed here.)

Hey, LUS, if you are out there. You need to start talking with folks about things like this. Before your plan is set in stone.

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