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Can Big Broadband Inspire Innovation?

10:00 AM -- ASPEN, Colo. -- TPI Aspen Forum -- If you bring gigabit-per-second connectivity to a community, will the residents drink from the pipe? Will they pay for the privilege?

The question of how best to facilitate the development of superfast networks -- usually defined by their ability to support download speeds of 1 Gbit/s or more -- raised a small bit of friction during Tuesday’s panel session at the Technology Policy Institute’s Aspen Forum. The issue at hand was: should we simply build gigabit networks in prime locations and see what happens, or should we wait until consumer demand asks for -- and is willing to pay for -- a fatter pipe?

On one side of the tussle was Blair Levin, who sandwiched a telecom analyst career between stints at the Federal Communications Commission (FCC) as chief of staff for Chairman Reed Hundt and more recently as staff director of the National Broadband Plan. Now a fellow at the Aspen Institute, Levin is also executive director of an entity called Gig.U , a coalition of 29 U.S. universities who want to bring high-speed networks to their campuses and surrounding communities, as a testing ground and incubator for applications and future businesses.

Gig.U is meeting with service providers, businesses, nonprofits and any other interested parties to flesh out plans to:

  • Get some private investment to build out the high-speed networks in college towns, where much of the necessary underlying infrastructure probably exists
  • Bring the high-speed connectivity to dorms, houses and businesses in the surrounding community
  • See what kind of entrepreneurship emerges


“Let’s bet on the ingenuity of Americans," Levin said.

Since Gig.U doesn’t yet have any idea on how the service might be priced, it’s hard to say if the idea is at all attractive. Fellow panelist Kathy Brown, Verizon Communications Inc. (NYSE: VZ)’s senior vice president for public policy, said even where high-speed access is available, customers today aren’t buying the super-fast connectivity.

“We put FiOS [Verizon’s fiber to the home network] in areas where there are big universities, and we invested in the networks to offer speeds of 100 Mbit/s or more -- but nobody’s buying,” Brown said. (Verizon is advertising a FiOS package that delivers 150 Mbit/s download and 35 Mbit/s upload for $199.99 a month.) “Our customers are mostly content with [download speeds] of five or 10 megabits per second,” Brown said. “What are the applications [for a gigabit network]?”

Levin says innovation is a chicken-and-egg problem, and that Gig.U doesn’t really have a business plan per se. But he also thinks that there needs to be an ongoing pursuit of different methods of building faster networks, rather than simply waiting for existing service providers to build them, or relying on projects like Google (Nasdaq: GOOG)’s fiber-to-the-home network experiment under development in Kansas City. (See Google's 1-Gig Fiber Winner: Kansas City, KS.)

“There’s not a business model yet for gigabit connectivity, but there are already places where doctors are using gigabit [networks] to do things like look at MRIs in real time,” Levin said. “I’d just like to see it [fast networks] in more places than just Kansas City for people to play around with it.”

— Paul Kapustka is the founder and editor of Sidecut Reports, a Wireless analysis site and research service. He can be reached at [email protected]. Special to Light Reading.

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rjmcmahon 12/5/2012 | 4:55:07 PM
re: Can Big Broadband Inspire Innovation?

Hi Seven,


I don't think $15 per month would enough.  I also don't think "triple play" is the solution as broadcast media already has cheap distribution channels and voice really is mobile.  For "wired" it's really a pure "internet play" which means an overbuilder would have to substantially improve on both "speeds" and "feeds" (bw and connectivity). 


I'm also saying I'd be more impressed by a local municipal leader that said, "Hey we can spend $1B on a new football stadium and that get us not much but if we invested in a modern comm infrastructure that would be a much wiser choice.  Let's don't raid our public electric utility to build yet another overpriced stadium but use the money instead for true infrastructure improvements."


As far as take rates, I'd grant the first overbuilder a limited monopoly for real broadband assuming certain metrics are met.  And from the federal level I'd protect all progressive municipalities from the lawsuits that will be coming by the incumbents as they know they only can lose if it is ever built.


My original points was that none of this is happening because of a combined market failure and govt. failure, both of which only can be fixed when we, as a group, raise our individual standards w/respect to basic self education.  Hence the eco 101 comment that of couse economics is at play but so is self govt.

paolo.franzoi 12/5/2012 | 4:55:07 PM
re: Can Big Broadband Inspire Innovation?

Scott,


Yes, competition or the lack of it is a major part of the problem.  Construction cost is a 2nd component. Verizon determined a long time ago that it would focus itself as an urban company and would like to get to a single fiber based architecture.  It has been dumping lines that do not meet that profile.


Many Qwest properties actually have little competition.  The larger ones do and their the cable guys are doing better.  What the Telcos have been doing an effective job in is capturing the low end of the market.  Without a phone line, I can get DSL for $19.95 per month (768/384).  The economy Internet Service from Comcast (1.5M/384) is $28.95 per month.  I think there is a viable market at the low end (not sure about 768 but hey really is just as easy for them to make it 1.5M).  I think that this is where things are going to head - a split in the market where cable/fiber dominates the high end and wireless/dsl takes the low end.


We certainly don't want Verizon, AT&T, Comcast or any of the infrastructure providers to be Apple (or any of the other growth firms).  We want them to get a solid ROI and spend the money on the network. 


rj,


The real problem with Revenue Bonds for this is that nobody is going to be able to price them in a way that the job gets done.  When the take rate is minimal, then there is no way to get a return.  The mistake is that you have a "if you build it they will come" mindset here.  All that happens is now the City can offer a $299/month package instead of the incumbent.  The take rates are awful and so nobody will fund it.  Now, if you think you can build this out for $15/month then I have a bridge to sell you.


seven


 

rjmcmahon 12/5/2012 | 4:55:07 PM
re: Can Big Broadband Inspire Innovation?

Hi Seven,


If you don't want to participate you wouldn't have to buy the municipal revenue bonds.  I don't think I've ever argued these projects be funded with general obligation bonds.

Scott Raynovich 12/5/2012 | 4:55:07 PM
re: Can Big Broadband Inspire Innovation?

brookseven,


Maybe I was misinterpreted -- I had FiOs for five years and I thought it was great. And then I moved to a location where fiber is too costly, I'm in a Qwest zone, I asked about Fiber and they said: "hahahahaahah!"


Maybe this is part of the problem? Once Verizon hit all the densely packed hi-income areas with aerial plant they realized the rest of the customers were not as economical to reach.


At any rate the other readers comments about Verizon Wireless are instructive. Telcos are too big to move fast and they are plagued with internal fights/politics, so I don't see the bulk of the customers getting FioS any time soon. Cable plants have a legitimate alternative to bandwidth in this case...


Lots of competition, in other words.. and maybe Verizon realized FiOS only works in particular demographics/geographies and have exhausted the "low-hanging fruit"


As for investments... I guess telcos are decent utitilities that pay dividends but if investors are looking for 10X returns they should look elsewhere. Just overlay a VZ/T chart over AAPL.


--Scott

paolo.franzoi 12/5/2012 | 4:55:08 PM
re: Can Big Broadband Inspire Innovation?

 


rj,


So basically you want a fatter pipe so you personally can telecommute from some remote location.  Because you have made no argument here that says that this is a good idea for me to spend my money on. 


seven


PS - Duh - you also missed the change in the workforce in the Verizon business case.  I was trying to be a bit more generic in the discussion than just Verizon. 


 

Duh! 12/5/2012 | 4:55:08 PM
re: Can Big Broadband Inspire Innovation?

Seven,


There are several possible financial screens for potential investments: time to break even, PV/NPV, IRR and so on.  For big telecom projects, time to positive free cash flow seems to be the standard.   Free cash flow is net of depreciation, interest, taxes and amortization, so cost of debt and depreciation of capital equipment is taken into account.   If memory serves, Verizon were looking at something like 5 years from FOA to positive free cash flow.  That's not so bad, although maybe Wall St. would have liked to see better. 


You are right that there are other considerations in the business case, particularly customer retention.  Opex savings and capping off rehabs of the copper plant were apparently factored into the free cash flow analysis.


Again, all of this is archived in analyst presentations on their investor site.  At one point, I think in 2004 or '05,  when Wall St. was getting antsy, they gave a very informative extended briefing on FiOS financials. 

Duh! 12/5/2012 | 4:55:08 PM
re: Can Big Broadband Inspire Innovation?

Scott,


Why hasn't Verizon continued to build out FiOS after the first $23B tranche?  I've been puzzling over that myself.   Possibly because the new management team all comes from the wireless side and has a bias toward wireless projects?   Because there are other financial measures that they don't disclose but don't rise to the level of "material information" that they are required to disclose?      Because they've harvested the low hanging fruit, and few new projects meet financial screens?  Because the areas that are left all have local franchise  hassles?   You're the journalist...  why not set up some interviews and report back to us?


Bandwidth is a commodity... where did I hear this before... a little company called Enron, wasn't it?   But I digress.  Anyway, so what?  Oil and corn are commodities too, but it's not as if Exxon-Mobil and ADM aren't quite profitable at doing what they do.  Broadband apps are Apple's and Netflix' core competencies.  Verizon and AT&T, not so much.  Verizon and AT&T are very, very good at operating network infrastructure to provide bandwidth.  Apple and Netflix, not so much.


The problem - and this gets to the heart of the distraction called "net neutrality" - is how to address the imbalance between value creation and revenue flow in the value chain.  This is what leads you to the conclusion that the telco business model is doomed.  I don't agree.  I do think that fixed monthly rate, all-you-can-eat pricing is doomed.

rjmcmahon 12/5/2012 | 4:55:09 PM
re: Can Big Broadband Inspire Innovation?

Hi Seven,


On Europe CATV - I don't have the GDP numbers in front of me but I'm pretty sure one can make an economic argument that CATV did enhance both U.S. GDP as well as trade vs what occurred in Europe.


I also agree that an access build out that doesn't accommodated carrier neutral colos (long haul competition) is a mistake.


As far as local net traffic vs wan traffic, it's pretty obvious to me that a vast majority is local - i.e. enterprise network traffic - file servers, etc.  So bulk transport to residences can be seen as expanding the enterprise networks giving higher bw (reducing the need to drive to a cubicle to use a computer on a GigE link.)


The "internet" drives connectivity expansion, i.e. Metcalfe's law.


It's a fallacy to say there is no need to improve bandwidth because connectivity sucks equally as it is to say there is no need to improve connectivity because bandwidth sucks.  Both need investment.


In tranpsort the govt. departments are Roads and Airports.  The U.S. transport system invested significally in both simultaneously.  I suspect China is doing the same today.


 


 

paolo.franzoi 12/5/2012 | 4:55:10 PM
re: Can Big Broadband Inspire Innovation?

 


Scott,


I think you missed my point on this.



Yes, Apple has done a really good job monetizing the bandwidth.  But they invest in things that lose money as well (see Apple TV).  So, they get a wide spectrum of returns from their investment.


Verizon will make money on FiOS.  The only question is when they will see positive returns on their investment.  So, their product is a commodity.  So what?  All the development risk is held by their vendors.  Let's use your $2000 number for FiOS and peg say a 15% margin on a line at Duh!'s $145 per line.


This says they will have $21.75 profit per month.  Which means in 92 months at $2000 they will begin to make money.  Is it a terrible investment?  Compared to putting cash in the bank, heck yeah - IF you assume that they would continue to make the rest of the money that they would get.  When we did our work on Telco Business cases for FTTH, we found the biggest lever in the equation was the presumed delta in subscriber base (aka how much less is your line loss) and second was the construction costs.  If you think you are going to lose lots of subs and can cut your construction costs, then FTTH is a great investment.  If you think you will keep your subs no matter what (see Western Europe), then any investment is a bad idea - just ride copper.


seven


 

Scott Raynovich 12/5/2012 | 4:55:11 PM
re: Can Big Broadband Inspire Innovation?

Duh!


Thanks for the updated numbers, very useful. If this is the case than I wonder why Verizon would not accelerate their deployments if the costs are dropping.


But I still question the business model of the modern-day telco. Bandwidth has proven a commodity and I still see no evidence that they have become strong at deploying broadband apps, including content. I mean isn't it Apple and Netflix that have shown a better talent for monetizing the bandwidth?


--Scott

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