December 14, 2009

Should users finance fiber-to-the-home?

By Ed Gubbins

If we’re paying for broadband deployment with federal taxes anyway, should we be able to buy our own fiber connections?

Brigham City, Utah is poised to test out a rare and experimental model for broadband economics: Having end users finance the cost of connecting their homes with fiber.

“I’m not aware of other projects like this,” saidPaul Larsen, Brigham’s economic development director.

Under the plan approved by the city council in November – some of the particulars of which were dictated by nuances in the bonding process funding the project – fiber would be connected to end users willing to pay a one-time fee of $3000 for the connection (independent of any subscription fees paid to service providers on the network), which they could pay upfront or in $25 monthly payments over 20 years, backed by a city bond.

Those paying over time would also pay interest above that $3,000 premium, so their total cost could end up north of, say, $5000 after 20 years (the interest rate wasn’t known as this article was written). For users who move during that time, a lien is placed on the property requiring new owners to continue the payments.

Brigham is opening to the new approach after a series of financial and operational struggles threatening the ambitious multicity public wholesale fiber-to-the-premises (FTTP) project that it joined years ago called Utopia. Under the current plan, Brigham would own the local FTTP network, including the fiber drop to the house, and lease it to Utopia, which would operate and maintain it.

Though novel, the current plan is analogous to the “assessments” that the city already routinely charges to residents for things like street and curb repairs in front of each home, Larsen said. But it has given fuel to critics of the plan, which have circulated fliers with the image of a house with a ball and chain. Still, the city council wasn’t swayed, adopting the plan by a vote of four to one. And by the time measure was approved, some 1600 users had already signed up, nearly a quarter of which had paid the full amount upfront. (Brigham has about 5600 homes and an unknown number of businesses.) That buy-in from residents is crucial, as fiber deployment costs are typically highly dependent on take rates.

“We have instantiated hundreds of FTTP networks across North America, and $3000 per home seems to be very expensive – more than twice what we would expect in a typical suburban area,” said Geoff Burke, senior director of corporate marketing with equipment vendor Calix, who added he wasn’t opposed to Brigham’s approach but doesn’t see others pursuing it. “This model seems to be escalating costs – not reducing them.”

However, proponents of the user-financing model argue that one of its benefits is in taking advantage of the typical consumer electronics cost curve, wherein early adopters help lower the cost by voluntarily paying the higher prices that accompany a new technology.

“[The consumer electronics] investment structure can be contrasted with broadband, where investments depend not on millions of consumers but on a handful of companies,” Derek Slater, a policy analyst for Google, and Tim Wu, a Columbia Law School Professor, wrote in a white paper on user-financed fiber last year. “It is a centralized investment model. Incentives for providers … [focus] on maximizing returns on existing infrastructure.”

Larsen said the city also mulling other options for defraying the cost, such as offering wholesale fiber connections to wireless towers and adding residential utility meter-reading applications, which some other municipalities have used in fiber broadband projects.

The city of Ottawa, Canada, even trialed a 400-home network of user-owned fiber to be bundled with electricity from utility resellers, spreading the fiber deployment cost over five years and charging per energy consumed. But that project stalled due to “lack of competition in Canada,” said Bill St. Arnaud, chief research officer at Canadian research organization CANARIE. “We have deployed the fiber but then were surprised to discover that there are no small retail ISPs left in Canada. They have been squeezed out by the big telcos and cablecos who have no use for this innovative approach.”

Larsen said that won’t be a problem for Utopia, which now has 10 service providers on the network, and is poised to gain more, including a local ISP, Brigham.net.

That competition should keep service prices down as well, especially since service providers don’t have to price their offerings to recoup the cost of having deployed the fiber drops. According to Slater and Wu, in fact, that competition among service providers is crucial to the user-financing model. “For ownership to make a major difference, consumers must be able to use their connection to access a multitude of differently priced services from a variety of service providers,” Slater and Wu wrote. That isn’t always easy to conjure up, as folks in Ottawa have learned.

In their paper, the authors pointed out that user-owned fiber needs to interconnect with more communal facilities at some point. The duo imagined a “trunk cable” aggregating several users’ fiber that could be managed by another party the way user-owned condominiums are contained within a shared communal space managed by a condo association. As an ideal example, the authors point to CityNet’s open points of presence in Amsterdam, where multiple service providers can interconnect with customers as they order each service. That structure could even inspire alternative financing approaches.

“A more practical approach [than Brigham’s model] would be to require a certain percentage of commitment per block or per Ethernet switch/OLT in order to justify the build out, but more importantly, guarantee the [return on investment],” said Teresa Mastrangelo, principal analyst with BroadbandTrends.com.

Slater and Wu proposed a variety of approaches, in which the fiber could be deployed and maintained by carriers, specialized construction firms, municipalities or real estate developers. Some of these models have already been adopted in the construction of new homes, if not existing residences.

Utopia is unique in many ways, so replicating aspects of its economic model elsewhere would be tricky. For example, one factor in play for Brigham is that is has already committed financially to Utopia. The city agreed years ago to back the bond funding the multicity project with its own tax revenue. So if it were to just walk away from the project now, with fewer than 50 of its own homes connected to the network, it would still have to pay roughly $17 million to meet its commitments.

Still, the idea of user-financed fiber deployment may seem less strange now that billions of dollars in taxpayer money is being used to roll out fiber as part of federal broadband stimulus projects, as Britain moves forward with a broadband tax and as Europeans and Australians adopt major public open-access initiatives. (In fact, months before the federal broadband stimulus plan was conceived, Slater and Wu suggested a federal tax credit for homeowners buying their own fiber.) In some respects, even private FTTP services are user-financed in their own way. Still, Brigham’s endeavor is likely to continue to be rare, even if it succeeds.

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