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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 | 4:55:14 PM
re: Can Big Broadband Inspire Innovation?

"Hey, don't economics matter?"


The answer to your somewhat rhetorical question is obviously yes.&nbsp; It then begs the question as to why the build outs aren't occurring even though, done poperly, they would be a great benefit to society (even beyond economics 101.)&nbsp; I say the lack of infrastructure investment pretty much reveals market failure.&nbsp; So when does that happen?

<h3>Historical example</h3>

Such a process happened in the water industry in nineteenth century Britain. Up until the mid-nineteenth century, Parliament discouraged municipal involvement in water supply; in 1851, private companies had 60% of the market. Competition amongst the companies in larger industrial towns lowered profit margins, as companies were less able to charge a sufficient price for installation of networks in new areas. In areas with direct competition (with two sets of mains), usually at the edge of companies' territories, profit margins were lowest of all. Such situations resulted in higher costs and lower efficiency, as two networks, neither used to capacity, were used. With a limited number of households that could afford their services, expansion of networks slowed, and many companies were barely profitable. With a lack of water and sanitation claiming thousands of lives in periodic epidemics, municipalisation proceeded rapidly after 1860, and municipalities were able to raise finance for investment, which private companies often could not. A few well-run private companies that worked together with local towns and cities (gaining legal monopolies and thereby the financial security to invest as required) did survive, providing around 20% of the population with water even today. The rest of the water industry in England and Wales was reprivatised in the form of 10 regional monopolies in 1989.


&nbsp;

paolo.franzoi 12/5/2012 | 4:55:14 PM
re: Can Big Broadband Inspire Innovation?

The problem with your strawman is that it presumes that ALL infrastructure builds create economic benefit. &nbsp;How about this...What was the economic gain of the buildout of the CATV plant in the US in comparison to Western Europe where this buildout was not done in an equivalent?


The big problem with community buildouts is that they will lack the connectivity to the backbone to get them to be of value. &nbsp;The paradigm shift of locality with the Internet makes this very important. &nbsp;In the telephone days, about 80% of calls were local to any point in the network. &nbsp;In the Internet, about 80% of requests are remote to any point. &nbsp;So building a community access network with no improvement in the connectivity to the Internet backbone is essentially of no value.


On top of that, it is not clear that this is the best investment in infrastructure dollars that could be made. &nbsp;It is not clear that it is even in the top 50%.


seven


PS - Just to really make you mad, you do realize that every virtually every person in the US has access to Gigabit links tied to servers and can develop applications for them every day. &nbsp;So the ONLY thing this could POSSIBLY buy anyone is the bulk transport of data to residences. &nbsp;Cuz the cloud wiped out the need to bring this to homes for Billy or Jane to write applications.


&nbsp;


&nbsp;

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

Duh,


In particular regarding the copper rehab (mostly for those not access folks).&nbsp; The primary cost of the fiber network is construction.&nbsp; If you are spending a significant portion of that money on copper construction, then it would be a relatively straightforward business case to go fiber.


To the point about longevity, this is one of the distinctions between service providers today and equipment vendors.&nbsp; ROI calculations in Service Providers are about WHEN.&nbsp; ROI calculations in Equipment Vendors are about IF.


seven


&nbsp;

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

Scott... go back and have a look at Verizons' analyst calls from the past couple of dozen quarters.&nbsp; If I recall correctly, the FiOS investment went EBITDA positive some time in 2008 and cash flow positive a couple of quarters later.&nbsp; And cost per home passed dropped well below $1000, and per home served was a few hundred (forgot what the last numbers I saw were).&nbsp; Also, most of the CAPEX came from cash rather than debt.&nbsp; And ARPU, last I saw, was $145 per month, much of it admittedly from low margin video services. &nbsp; There may some numbers that they haven't been showing to the investment community, &nbsp; but I've seen no hint that this was not a good investment.


There is also no reason to believe that investment in new fiber access plant won't have a useful lifetime of many decades.&nbsp; The technology seems to have reached a plateau, and there is no doubt that since FSAN and IEEE 802.3 take G.652 C/D fiber as a given, they will find a way to make it work at the next data rate increments.&nbsp; Keep in mind that copper plant has a useful lifetime of perhaps 40 years before it needs to be rehabbed:&nbsp; corrosion and deterioration of sheath and insulation take their toll over time.&nbsp;&nbsp; The question is whether to rehab copper plant at end-of-life, or go to FTTx:&nbsp; I think that any operator who does the former is crazy.

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

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

&nbsp;


Scott,


I think you missed my point on this.



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


Verizon will make money on FiOS.&nbsp; The only question is when they will see positive returns on their investment.&nbsp; So, their product is a commodity.&nbsp; So what?&nbsp; All the development risk is held by their vendors.&nbsp; 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.&nbsp; Which means in 92 months at $2000 they will begin to make money.&nbsp; Is it a terrible investment?&nbsp; 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.&nbsp; 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.&nbsp; If you think you are going to lose lots of subs and can cut your construction costs, then FTTH is a great investment.&nbsp; 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


&nbsp;

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.&nbsp; 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.&nbsp; Both need investment.


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


&nbsp;


&nbsp;

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

&nbsp;


rj,


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


seven


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


&nbsp;

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.&nbsp; For big telecom projects, time to positive free cash flow seems to be the standard.&nbsp;&nbsp; Free cash flow is net of depreciation, interest, taxes and amortization, so cost of debt and depreciation of capital equipment is taken into account. &nbsp; If memory serves, Verizon were looking at something like 5 years from FOA to positive free cash flow.&nbsp; That's not so bad, although maybe Wall St. would have liked to see better.&nbsp;


You are right that there are other considerations in the business case, particularly customer retention.&nbsp; 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.&nbsp; At one point, I think in 2004 or '05,&nbsp; when Wall St. was getting antsy, they gave a very informative extended briefing on FiOS financials.&nbsp;

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?&nbsp; I've been puzzling over that myself.&nbsp;&nbsp; Possibly because the new management team all comes from the wireless side and has a bias toward wireless projects?&nbsp;&nbsp; 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? &nbsp;&nbsp;&nbsp;&nbsp; Because they've harvested the low hanging fruit, and few new projects meet financial screens?&nbsp; Because the areas that are left all have local franchise&nbsp; hassles?&nbsp;&nbsp; You're the journalist...&nbsp; 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? &nbsp; But I digress.&nbsp; Anyway, so what?&nbsp; 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.&nbsp; Broadband apps are Apple's and Netflix' core competencies.&nbsp; Verizon and AT&amp;T, not so much.&nbsp; Verizon and AT&amp;T are very, very good at operating network infrastructure to provide bandwidth.&nbsp; 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.&nbsp; This is what leads you to the conclusion that the telco business model is doomed.&nbsp; I don't agree.&nbsp; I do think that fixed monthly rate, all-you-can-eat pricing is doomed.

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