History Repeats Itself
December 1, 2009
Today’s subject is something I have been want to write for awhile and, given the government funding of the “Broadband” NTIA/RUS program BTOP/BIP, it’s time to share a few thoughts.
Do you believe that if you don’t learn from history that history will repeat itself?
If yes, keep reading. If no, get on the next bus to the Beltway.
Regarding municipal Broadband, or Wi-Fi: It is well documented that there were, by factors, more failures than success stories over the past 10-years. Even the King Daddy of them all, a private/public partnership attempted by EarthLink, failed miserably.
So, why such misery? Why the lack of success?
First, let’s try to understand where the spark of an idea comes from for a municipality, or if a municipally owned power company decides to go into the “communications business.” The spark typically has come from someone holding an elected political office–who, after hearing all sorts of complaints about the ILECs putting their community on the backburner for fiber optic connectivity, decides that something has to be done. After all, the rest of America (and the world) is passing your constituents by.
The spark becomes a very populist issue. Who wants to say no to broadband after all? And, if the ILEC or Cable Company is treating us as second or third rate customer, we should take matter into our own hands. And that’s then the mistake begins …
The first thing the political champion of building, owning and operating a municipal-owned communications networks will do is what they always do–call a consultant. (My personal disclosure: I am not a big fan of consultants as they tend to bleed out their clients)
Now, think about this for a moment: You hire a consultant. You tell him or her what you want to do. What do you think the consultant, after some feasibility analysis and fee collection, is going to tell you? They are going to tell you that it is the greatest idea since sliced bread. Why? Answer: because consultants don’t make additional fees by telling someone “that’s a bad idea.” So, in my humble opinion, it’s in the consultant’s interest to make the idea, strategy , and numbers “work” via a feasibility study. Always remember that once the consultant is in the door, they will do what it takes to stay there.
Here’s an open offer–and it’s free: Any municipality or politician reading this who gets the idea to go into “communications” give me a call. My office number is 585-785-5801. I’ll sign an NDA. You tell me what you are thinking and I’ll give you an opinion and a quick report with further questions for you to ponder for free. I have been in communications for over 30 years. I have some pretty good experience and bone marrow in matters such as these. If you are already in deep doo-doo, feel free to give me a call as well. Worse case–I light a candle for you.
Anyhow, back on point. Let’s assume that somehow a politician gets the community to vote to take on such a project and raises capital by issuing municipal bonds. Now, I won’t go down the list of reasons why not, but if I were working with you, this is how this type of project should be approached (which, though not popular, is reality):
First, you do not start deploying a network to residential areas, especially low income. Why? Answer: because you want to generate early cash flows and do something that is going to garner the immediate attention of the ILEC and Cable Company.
The first segment you build a fiber ring to are the local businesses. Why? Answer: They have the greatest need for high bandwidth and you can enter the market with simple data/IP offerings, especially Ethernet. You start taking business away from the ILEC and Cable Company and this will get their attention–not only by what you are doing, but also why. It will also drive them nuts because you are taking a smart approach to deployment by cream skimming their best business accounts to generate cash flows and slowly proving in a model.
At this stage, it is possible that you will get a reaction from the ILEC or Cable Company and they may actually start building broadband in your community. You can then stop the initiative. You got what you wanted them to do. Sell what you have done to another company.
My second segment, if the first has not awoken the giant, is to now extend the network to the high cream areas of the residential footprint. I can hear a few liberals yelling, “but that is red lining!” Once again, if I were your consultant, I am giving you a road map to success not failure. So why do you start in the more affluent areas first versus blighted neighborhoods? Answer: they have higher disposable income and will buy all sorts of bundled packages with high margins. This results in more cash flows into the project. Picking off the low hanging fruit in this area will garner the attention of the local cable company for sure.
My final segment is expanding the network to middle and low income neighborhoods. This is simply a logical progression in my mind with the least economic risk to the tax payers and overall project. By this stage you should have substantiated cash flows, operational efficiencies, processes and high margins now flowing to support the business operationally as you enter a larger, lower margin, bad debt, high churn customer segment.
Doing this as a not-for-profit is the model. A problem or obstacle will be following this model from a political-will stand point. Attracting votes across middle and lower voting classes by promising broadband is one thing, but many doing so have failed by reaching out to this segment first. In the end, the lower income lost, the project failed and taxpayers were on the hook for the debt. My proposed model is what can drive success and get a municipality what it wanted in the first place for residential customers, which is fiber access and competition in the worse scenario of full deployment. However, it may also get the cable company and the ILEC to the table to thwart such a deployment because they know it will work and be profitable while hitting their income statements in a bad way.
If and when the ILEC or Cable Company got serious about upgrading your community, this is the exact path they would take to be ahead of them. It’s about rolling out sectors of network, taking from the rich so you can subsidize the poor. If you start with the poor and go the other way, you will be under-funded and go down the path of failure, as many before have gone.
A few things I would include along the way: get a management team from Telecom that knows local competition to build and run it. Local networks are complex beasts. You can hire people or partner with companies such as mine. Transferring the head of some municipal department to do this won’t work, though it has been tried many times. The ins and outs of Telecom take a good 10-years to learn. Go find a veteran or an established mid-size company with a proven track record. Do not grow this by transferring the head of the Water Department to your new initiative to run it, for example.
Also, forget the “free” model – free wi-fi for everyone. Free basic broadband for everyone. The “free” model does not work. We saw many “free” municipal models fail over the years trying this approach. As I always say, free is a four lettered word starting with F.
Why I am writing about this now? I have been wanting to plus as I watch the funding process by the Federal government for broadband, I worry history may repeat itself. In the process, the Federal government is allowing states to provide feedback or rankings of proposed projects made to the Federal government affecting their states. My concern: many states have come back recommending submissions by their own state agencies pushing aside private/public proposals. If I were at the Fed weighing the states input and receiving only state agencies as qualified, I would question a conflict of interest as well as lack of proven successful experience which is a fundamental requirement of the statute.
Alternatively, say you award a state agency $20 million to do Project X. The state is in financial trouble and decides it is going to “borrow” $15 million from the agency project. Knowing what I know, odds are that money is gone forever. So who at the Federal level is going to criminally and civilly sue at the state level the misuse of funds? Don’t tell me it can’t or won’t happen – a state owned Telecom firm in Vermont recently had its coffers robbed by the state needing cash elsewhere. So state authorities literally transferred (stole) $10 million from the Telecom company to shore up a budget deficiency elsewhere leaving the state owned Telecom firm in a financially distressed position.
If a private company working as a private/public partnership were to use funds inappropriately – you know damn straight people will go to jail. At the state agency level–good luck!
So, BTOP/BIP funding–will history repeat itself? Will NTIA/RUS funds provided directly to states be held to the same standards as a private company?
It’s going to be interesting to watch over the next few years…
Written by Dave Rusin - Telecom Executive
Posted by wbrache | Filed Under Telecommunications industry
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