Broadband left out of infrastructure goals, and how the FCC wants to fix it
washingtonpost.com
washingtonpost.com
Where's the fiber, Verizon? We (NJ and PA[0]) gave you huge tax cuts 20 years ago for universal fiber service. You and NYC agreed to provide everyone with fiber.[1] Meanwhile, AT&T keeps merging with promises that are meaningless or eventually reneged on.[2]
[0] http://www.huffingtonpost.com/bruce-kushnick/verizon-pennsyl...
[1] https://arstechnica.com/tech-policy/2017/03/nyc-sues-verizon...
[2] https://muninetworks.org/content/atts-many-broken-merger-pro...
That said, the "huge tax cuts" are fictional. Teletruth's idea of a "tax cut" is a company being able to charge any more money than they would have under regulated rates.[1]
The "billions" in "tax breaks" are from the companies charging higher rates to their own customers, alleged cross-subsidizing between various services that were previously regulated at different rates, and accelerated depreciation of infrastructure (which came at a time when major parts of the network infrastructure were upgraded to fiber, even if the last mile remained copper).
It wasn't the government writing anyone a check, or even giving any company a special tax credit.
Also, this bit of conspiracy theorism exactly inspire confidence in the calculation methodology:
> Recently, (April 2015) a TV media company decided to not run an investigation we had worked on together about Verizon’s failure to properly upgrade the networks by 2015. After an interview with Verizon by the company, the word ‘liabilities’ entered their vocabulary and they doubted that there was a tax break that came with the Chapter 30 Pennsylvania broadband plan.
[1] That is, of course, one of the purposes of deregulation. Governments chronically set regulated rates too low. For example, environmental groups estimate that water/sewer rates nationally are about half of what they should be in order to account for the scarcity of water and the need to maintain and upgrade aging infrastructure. But no elected PUC official wants to raise grandma's water or telephone rates.
[2] And if the government does build it, we should ditch the emotional appeals for FTTH and rely heavily on sensible, cost-effect point-to-point wireless.
There are good reasons to expect market failure here. New players very rarely enter infrastructure markets with existing incumbents because having to compete with the incumbent in a natural monopoly market is not expected to be profitable.
And the "accidental duopoly" markets aren't going to do it. Both players try as hard as possible not to compete with each other because they both know that increasing speeds or lowering prices would only provoke the same response from the other and make them both less profitable.
So you're really asking whether a monopoly incumbent would do it, which doesn't have much to do with markets at all -- it turns on whether the cost is more than the increase in monopoly rent it would allow rather than whether the cost is more than the value. And the existing monopoly rent is already high because even slow internet is much more valuable than none.
> And if the government does build it, we should ditch the emotional appeals for FTTH and rely heavily on sensible, cost-effect point-to-point wireless.
FTTH is a one-time expense. The maintenance cost of underground fiber shouldn't be any higher than wireless, and then you don't need to worry about spectrum or wireless line of sight obstructions or interference or any of the other problems with wireless.
Most of the country doesn't bury utilities.[1] Point to point wireless is a lot cheaper than burying fiber, and also a lot cheaper than maintaining aerial fiber that can be torn down by storms/tree branches.
[1] My fiber line hangs free from a telephone pole and is secured in the middle with a bent nail. But hey, that's one of the reasons my neighborhood in nowhere Maryland has fiber, while most of Silicon Valley does not.
Wireless is not always cheaper than fiber. The cost depends on geography and spectrum availability. Wireless is also more expensive per bit. Wireless also has a shorter lifespan than fiber. All these are things that have to be taken into consideration when determining which has the lower total cost of ownership over the lifespan of the asset.
And they waste money in the long run as a result. It's the same situation -- pay once to put utilities underground and then you don't have to pay forever fixing the fallout from every different kind of weather.
My neighborhood, in a part of Maryland where I can get to horse farms in five minutes, has fiber. It didn't even have public water/sewer until two years ago, but it had fiber. Tiny, non-to-code lots, arial power lines, and easy-going permitting authorities played a role in making fiber deployment feasible.
That assumption only holds if the cost of the inputs do not rise with time. In fiber builds up to 80% of the costs are labor. If/when labor costs rise more than the cost of money then you are worse off putting off an inevitable/intended investment.
Furthermore if putting off an investment causes duplicate costs (build aerial, later replace with buried) or causes you to forego OPEX savings (aerial vs. buried facilities maintenance costs), then you are actually worse off by paying later.
Thus the time value of money is not the end all and be all.
A) They get money from the government
B) They sue local governments that try to do their own networks
C) Then FCC gives more money and profits with less competition and less free markets
In any case, the vast majority of people live in states where municipalities are not banned from building broadband networks. Munipalities don't do it because they have no money. Is Baltimore going to spend a billion dollars building fiber to every household when it's got a billion-dollar pension fund shortfall? Verizon spent over $3 billion to wire up half of NYC. Was New York in a position to do that itself, when it's got a $46 billion pension liability, and a $14 billion liability in the MTA?
Why isn't it self-funding? Issue a bond, pay for the network, lease it wholesale to competing ISPs, use the lease money to pay back the bond over time. Zero tax dollars.
Then there is the politics. It's a political non-starter to issue city bonds to build a network you lease out to private ISPs to sell $70/month internet service that poor people and the elderly can't afford. So some sort of cross-subsidy has to be baked into the deal, and that involves charging higher-income customers more than $70/month. But that makes it harder to hit the 40% uptake rate. And if you can't hit that, you're really screwed because the uptake rate drives your per-household cost.
And then there is logistics. Who do you pay to maintain said fiber network? Cities have no experience or staff capable of doing it. So you have to create a new department, and staff it (at least in Baltimore) a relatively expensive unionized workforce (which makes it harder to hit your 40% operating margin above).
[1], [2] Roughly cribbed from the financials of EBP's network in Chattanooga.
[3] The FiOS network is only 10 years old, and Verizon is about to spend a bunch of money to upgrade from GPON to NGPON-2.
No on the economics, yes on the politics and again no on the logistics.
> Say you build out to the whole city of Baltimore, and get 40% to subscribe at a cost of $5,0000 per subscriber.[1]
How did you get that $5,000 number? It's far more than Verizon paid for FiOS and I can't get it to line up with EPB's numbers either.
> Say you charge $70 for service, and 60% of your revenue goes out the door in maintenance and customer service.
60% is far in excess of what maintenance and customer service costs. A brand new fiber network does not require significant maintenance and customer service is a small fraction of the monthly cost.
> 30-year bonds may be practical for a school building, but not so much for a telecom network where you'll need to make ongoing capital expenditures to upgrade the network.
30 year bonds work just fine for fiber networks. Upgrading active equipment is a minor effort, covered by your operating budget, unlike building the network which is CAPEX heavy.
> It's a political non-starter to issue city bonds to build a network you lease out to private ISPs to sell $70/month internet service that poor people and the elderly can't afford.
Yes, politics is a problem, but the above isn't what's stopping builds.
> And then there is logistics. Who do you pay to maintain said fiber network?
You outsource it like everybody else, unless it becomes cheaper to do it in-house. This is a solved problem.
The network cost $330 million,[1] and has 71,000 subscribers.[2]
> 60% is far in excess of what maintenance and customer service costs.
http://static.epb.com/annual-reports/2016/media/EPB_2016_Fin... ($122.6 million in fiber optic revenues, $78.5 million in fiber optic operating expenses). That is 64% of revenues going to operating expenses.
[1] https://www.washingtonpost.com/news/the-switch/wp/2013/09/17...
[2] http://www.timesfreepress.com/news/business/aroundregion/sto...
Both figures are inaccurate. The $330M includes $111.5M in federal grants which was used for EPB's smart grid. Thus only $220M can be attributed to the fiber network.
EPB fiber also had 83,000 subscribers at the end of FY2016, as per their annual report. 87,000 projected by end of FY2017.
Taken together this gives us $2650 per connected subscriber, almost half of what you claimed. Even with the smart grid grant, it would be less than $4000. Obviously this figure goes down with the number of subscribers.
> $122.6 million in fiber optic revenues, $78.5 million in fiber optic operating expenses). That is 64% of revenues going to operating expenses.
That's not correct. The annual report clearly states on page 11 that operating expenses were $41M, which is equal to 31% of revenues. Furthermore, it should be noted that operating expenses do not equal maintenance and customer service only.
Page 11 shows $41 million in "operation expenses" but there is also other line items for "cost of services" and administrative overhead. Those are "operating expenses" in the accounting sense. The cash flow statement on Page 19 shows that the total "operating expenses" is $78 million.
As to the smart grid project, that was a separate $232M project. https://www.smartgrid.gov/project/epb_smart_grid_project.htm...
Of those smart grid investments, only the Backhaul Communications part could conceivably (in part) be attributed to the fiber network buildout costs. In no way can 100% of the federal smart grid grant be seen as a subsidy to the fiber network. Even if you subscribe to conspiracy theories about the power side secretly subsidizing the fiber side, that 100% subsidy theory just does not survive the collision with reality. Given how litigated this issue has been, there's no way the opponents would let a hundred million dollar misuse of federal grant money slide.
Either way, no matter what dollar cost you peg the fiber network buildout costs at, your $5,000 cost per subscriber is plain wrong. The correct figure is closer to $2650, but it's still not even close to $5,000, even if you slap on an additional hundred million dollars in costs.
This obviously also makes your payback times wrong.
To give some context to EPB fiber's costs, ten years ago Verizon paid $850 per premise passed and an additional $880 per premise connected. These are in line with EPB's costs if you assume a 50% take rate for FiOS.
Just to rub it in on how wrong your estimate of $5,000 per subscriber is, the very source your cite yourself states that the average cost to connect a new subscriber to EPB fiber is $1,200.
But, wait, there's more!
Your analysis on the economics of fiber networks just crumble when you look at the annual report of EPB. Here's the punchline:
- operating expenses include debt service!
EPB fiber pays EPB $10M per year for the use of the fiber network. This is enough to cover the costs of the $220M bond. In fact it covers half of EPB's whole debt service. Incidentally EPB fiber's operating income would more than covers the remaining debt service with change to spare.
In other words your assumption of 60% in operating expenses excluding debt service is just plain wrong and all your calculations are wrong.
And that's even before factoring in the fact that service at $70 per month usually does not include cable tv. This in turn means that a large chunk of operating expenses for that service can be excluded, as cable tv rights are a major cost item.
All in all, even assuming debt service is included, 60% operating expenses for a fiber network is not a given.
Right, but sources say the $111.5M was used to build the fiber network that was a part of both the Smart Grid and broadband projects: "In 2009, a $111 million federal stimulus grant offered the opportunity to expedite construction of a long-planned fiber-optic network, said David Wade, chief operating officer for the power company. (EPB also had to borrow $219 million of the network’s $330 million cost.) Mr. Wade said it quickly became apparent that customers would be willing to pay for the one-gigabit connection offered over the network." (https://www.nytimes.com/2014/02/04/technology/fast-internet-...)
> Of those smart grid investments, only the Backhaul Communications part could conceivably (in part) be attributed to the fiber network buildout costs.
Yes, but that's the fiber backbone underlying the residential internet service.
> Either way, no matter what dollar cost you peg the fiber network buildout costs at, your $5,000 cost per subscriber is plain wrong.
Sure, with the newer 83,000 subscribers figue, it's more like $4,000 rather than $5,000.
> To give some context to EPB fiber's costs, ten years ago Verizon paid $850 per premise passed and an additional $880 per premise connected. These are in line with EPB's costs if you assume a 50% take rate for FiOS.
The FiOS uptake rate is under 40% (and during the first decade was under 1/3). Even with your numbers that's $850 / 0.4 + $880 = $3,000 per customer. And those numbers are 2006 projections at the onset of the project: https://www.sec.gov/Archives/edgar/data/732712/0001193125061.... Through 2010, Verizon spent $23 billion on FiOS, and since then spent at least another $3 billion wiring up New York. It has about 7 million subscribers, or about $3,700 per subscriber. See also https://techcrunch.com/2013/04/08/google-fiber-cost-estimate ("As a point of comparison, it was estimated that it cost Verizon, before it halted FiOS buildout, about $4,000 per home to connect it to its fiber network.").
> Just to rub it in on how wrong your estimate of $5,000 per subscriber is, the very source your cite yourself states that the average cost to connect a new subscriber to EPB fiber is $1,200.
It says that's the "Average cost of hooking up new fiber optic customer for EPB." I don't take that to be the cost including construction of the network in the first place.
> - operating expenses include debt service!
Does it?
"Fiber optics revenues are recognized on the accrual basis at the time services are provided. Operating revenues include service sales net of bad debt expense and miscellaneous revenue related to ber optics operations. This miscellaneous revenue includes ad revenue, late payment fees, and rental income. Operating expenses include those expenses that result from the ongoing operation of the ber optics systems. Non-operating expenses consist of interest expense on indebtedness and various miscellaneous expenses."
> EPB fiber pays EPB $10M per year for the use of the fiber network.
Is that for debt service? That could be for shared O&M too.
> And that's even before factoring in the fact that service at $70 per month usually does not include cable tv. This in turn means that a large chunk of operating expenses for that service can be excluded, as cable tv rights are a major cost item.
Television packages are also a major revenue source. In computing the operating margin, if you exclude TV from costs you also need to exclude TV from revenues.
True, but that still does not mean you can attribute 100% of the federal smart meter grant to the fiber buildout. Even if you chose to ignore all the other investments made into the smart metering infrastructure, fiber routes built to service the electric grid (such as routes to substations) cannot be used for providing Internet service. As such it is not reasonable to attribute 100% of the $111.5M grant to EPB fiber's network.
> Sure, with the newer 83,000 subscribers figue, it's more like $4,000 rather than $5,000.
This again assumes 100% of the federal grant being used to subsidize EPB fiber. I don't think that argument has any merit, as both the Feds and the incumbents would have words if that were the case.
> The FiOS uptake rate is under 40% (and during the first decade was under 1/3).
Yes, but we aren't talking about Verizon here. EPB's take rate is somewhere between 50% and 66% (83k subs out of 120k households, but part of those 83k are businesses), so my point still stands that costs are equivalent, given the actual take rate.
> It says that's the "Average cost of hooking up new fiber optic customer for EPB." I don't take that to be the cost including construction of the network in the first place.
No, but it includes the new construction needed to hook up customers in new developments.
> Is that for debt service? That could be for shared O&M too.
"$10 million: Fiber optic system access fees and rents paid to electric system in 2014"
> Television packages are also a major revenue source. In computing the operating margin, if you exclude TV from costs you also need to exclude TV from revenues.
Yes, but TV services are usually a loss leader and a break even proposition at best. Margins would probably improve by dropping TV.
"EPB issued $229 million in revenue bonds in 2008. Of this amount, $162 million was used to build the fiber optic network, which is owned by the EPB's Electric Division and is used for both the smart grid and telecommunications services."
"To date, EPB's Fiber Optic Division has borrowed approximately $50 million from the Electric Division to finance the costs of adapting the broadband network to provide telecommunications services to its customers."
For simplicity, let's ignore the fact that a part of these costs should be attributed to the power company, as the fiber network is also used for smart metering.
At a cost of $212M for 83 000 subscribers, this gives us a cost per subscriber of $2554.
If you add $28M to account for the first three years interest and other financing costs, it becomes $240M for 83 000 subscribers, resulting in $2892 per subscriber.
So there. A far cry from $5000 per subscriber.
https://www.cga.ct.gov/2012/rpt/2012-R-0515.htm
At 4% interest, 83 000 subscribers and attributing none of the costs of the fiber network to the smart meter project the payback period is 10 years and 7 months. A far attribution of costs to the smart meter project would bring the payback period to under 10 years.
How about we ditch the emotional appeals to deploy whatever technology is the flavor of the month, and instead deploy whatever meets the needs and has the lowest TCO over the lifetime of the asset?
> Pai is proposing an ambitious program whereby the FCC could expand corporate subsidies for building networks while scaling back regulations...
Doesn't inspire a lot of confidence.
If you want to do something like this it needs conditions, and the conditions have to have teeth. There needs to be a regulator in charge of making sure the money is actually used to build infrastructure and not to give even larger bonuses to the top management. But that's the antithesis of Pai's agenda, so it is highly unlikely to happen.
The statutory "minimum for universal broadband availability" was "1.544 megabits per second (Mbps)" in 1996 when Verizon claimed it would increase it to 45Mbps. See 6 Pa. C.S. §3002. 1.544 Mbps is a T1 line.
This strongly suggests that universal broadband availability isn't talking about residential mass market, $49.99 dollars a month, but instead, was about about replacing trunk lines. They weren't promising to give every house 45Mbit.
They were promising to upgrade T1 lines to T3 lines, which coincidentally operate at 44.736 Mbit/s.
This is confirmed by the time frame of these claims. 45Mbit for home house would have been seen as insane for 1996. 56k modems hadn't even been released on the market. AOL had just introduced flat rate pricing. Home networking didn't really even exist. I'm not even sure if FttH was a concept then. Fiber termination was still very expensive (still is really).
Given the history of the players involved (e.g. Verizon and AT&T pocketing billions in subsidies to extend service, then paying those billions out in dividends and doing no upgrades at all), this is clearly a case of "fool me once, shame on you; fool me twice shame on me."
Or is this simply purchasing a nice post-government job with the taxpayer's money?
Either way it isn't plan worth supporting, no matter how important broadband expansion is. Or rather, "especially because broadband expansion is important".
This is the reverse of what will be needed in a possible, high-unemployment future: instead of large bills, we need to aim towards extremely low-cost of living(probably by using community owned fiber in this case).
And in general, creating jobs towards that aim, seems like a decent strategy to transition into that high-unemployment world.
All hail our corporate overlords. We give you the offer of more money (in the guise of helping consumers of course).