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Monticello Fiber Price War Offers Key Lessons for Broadband Competition

Monticello Minnesota may be located 40 miles outside Minneapolis, but it is the center of the planet when it comes to FTTH competition. We have tried and cannot identify another community localed on planet earth with two separate FTTH networks going head to head across the entire community.

We have long written about Monticello, most recently to look at hypocritical criticism of the project (which gives me an opportunity to note a similar dynamic in Lafayette, Louisiana). And we have covered the disappointing news that the network has not produced enough revenue to make full bond payments.

Short explanation for how Monticello came to be unique in having two FTTH networks: Monticello had poor Internet access from Charter and telephone company TDS. Each refused to invest after local businesses and elected officials implored for better networks. Monticello started building its own FTTH network (Monticello FiberNet) and TDS sued to stop the project while suddenly decided to upgrade its slow DSL to fiber. Lawsuit was tossed out and Monticello finished its network.

In most community fiber networks, the DSL provider seems to fade away because it cannot offer the fast speeds of fiber or cable, so the market basically remains a duopoly with the community network replacing the telephone company (which continues to offer cheap, slow DSL to a small number of customers). But in Monticello, Charter and TDS engaged in a price war, which has really hurt the City's ability to generate enough revenue to pay its debt.

Price wars are very hard on new market entrants because they have to amoritze the cost of their investment whereas the incumbents often have already done so. This means incumbents can almost always offer lower prices if they are determined to do so.

In many communities, we have lacked clear evidence of predatory pricing - that is pricing below the actual cost of service to run competitors out of business. This would violate federal law (if any agency bothered to enforce it). Charter gave us that evidence in Monticello.

Since then, the deals have remained amazing in Monticello, far surpassing what cable-funded crazy people in DC pretend is competition between DSL and cable in the majority of the country.

TDS is now offering a deal that far surpasses anything available in the Minneapolis/Saint Paul metro - over 190 channels (including DVR and HD), 50 Mbps Internet (50 down, 20 up I believe), and telephone for $70/month for one year with no contract. The price goes up after year one, but doesn't go back to full price until after year 2 ... at which point you will likely get another deal if there are still more than 2 high speed choices in the market.

TDS Advertisement

TDS is also regularly running full page advertisements regularly in the local newspaper. How many local newspapers would love to see regular big-ad buys like this one? If enough communities build networks, perhaps the resulting advertising bumps will help local newspapers stay in print!

Charter has gone beyond newsprint and static billboards with a big truck advertising Monticello residents a free DVR that will save them $650/year (which is phrased in a way that makes you think they are charging WAYYYY too much for DVRs!).

Charter Advertising Truck

These advertising strategies are in addition to many door-to-door sales people from both TDS and Charter. Both are boosting local employment opportunities for these sales people far beyond what they would do absent Monticello FiberNet.

Existing Charter customers outside of Monticello might be interested in how cable promos in Monticello compare to in their communities where there is no real competition for the cable giant. Here is an 8 page glossy advertisement they have been using [pdf].

Charter is also going after small businesses with a 30 Mbps asymmetrical package for $55/month when bundled with business phone. I can only imagine how many businesses in areas without a real choice would like that deal.

Monticello FiberNet Biz Services

Charter Small Biz Advertisement

However, the Monticello FiberNet business service is far superior, particularly as it is symmetrical and fast upstream makes a huge difference for local businesses. Business services from the city owned FiberNet starts 10 Mbps symmetrical at $41.95 and the list sheet tops out at 100 Mbps for $350/month.

Update: Fibernet Business Services prices have decreased on the faster Internet connections. 30 Mbps symmetrical is $99/month and 100 Mbps symmetrical is $199/month.

We don't have enough information to compare what it would cost a business to connect multiple sites with point to point gigabit links, but we would guess there could be more than $1,000 savings each month from such a service based on FiberNet pricing vs Charter or TDS.

Going through all these deals, a few things have become apparent.

First, DSL and cable are not engaged in real competition. Adding a third player really changes the market in ways that satellite and 4G wireless Internet do not.

Second, most of the competition from the big corporations is aimed at taking subscribers from rivals by temporarily lowering prices rather than attempting to keep their own subscribers happy with their services. Most of the deals are only available to new customers, incentivizing households to regularly switch providers, which is costly to all competitors (churn). Community owned networks by contrast tend not to offer these short term promo deals and invest in keeping existing subscribers happy.

Third, the strategy of TDS and Charter would not be possible if they were not cross-subsidizing from distant, non-competitive markets. They may not be losing money on all the customers that take these deals, but the increased marketing costs and extremely low priced deals are aimed at driving a competitor from the market, not at merely preserving market share. Their ability to cross-subsidize (and the initial frivolous lawsuit) have damaged Monticello's business plan to the point where it has had to transfer public funds from the liquor store and negotiate with bond holders over a significant haircut.

And finally, whatever this network may end up costing city taxpayers, it will likely be less than the savings from all of these lower prices and indirect benefits such as not losing employers that could not be competitive when only having last-generation Internet access from unreliable DSL. That doesn't help the City to make its debt payments, but it sure makes Monticello a better place to live.

Is Lafayettte Community Broadband Doing OK or Great?

Lafayette Doing OK, Doubles Capacity for Promotion

John at Lafayette Pro Fiber recently updated us all on LUS Fiber's financials. According to John, LUS Fiber is doing OK, not great, in its FTTH offering (probably the best deal in the nation for fast, affordable, and reliable connections). In reading deeper, it is clear that the impact of the community network on the public is GREAT, not just ok.

From John's writeup:

LUS estimates that the citizens of the community have saved 5.7 million dollars—in part direct saving from LUS' cheaper phone, video, and internet services and in part as a consequence of Cox lowering its prices and giving out special rates. Those special rates were discussed in the meeting with Huval pointing out that Cox had petitioned for and received permission to treat Lafayette as a "competitive" area. That meant that Cox could offer special deals to Lafayette users and, as we all know, has offered cuts to anyone who tries to leave. Those "deals." as Huval pointed out to Patin don't include the rural areas of the parish where Cox has no competition.

But it doesn't end there. LUS Fiber, due to anti-competitive laws pushed through the state's legislature to handicap public providers, is actually subsidizing the City -- providing more benefits to everyone, even those who do not subscribe to the network.

Again it all goes back to the (un)Fair Competion Act. One of the things in that act a concession that LUS Fiber would be able to borrow from LUS' other utilities just like any other corporation could set up internal borrowing arrangements. This is not a subsidy, it's a loan—with real interest. One of the efforts to raise an issue by Messrs Patin and Theriot centered around "imputed" taxes. Those are extra costs that Cox and ATT got the state to require that LUS include in order to force LUS to raise their price to customers (you!) above the actual cost. (Yes, really. See this. The idea was that LUS should have to pretend to pay taxes that it doesn't actually pay when setting its pricing—and include those fake costs when competing against Cox or ATT. PSC regulations (not the law) requires LUS Fiber to send those monies to the larger LUS. So LUS utilities is holding money LUS Fiber earned. LUS utilities loans it back to LUS Fiber—at interest. The net effect of this is to subsidize LUS' other utilities on the back of the new utility, LUS Fiber.

That's the only subsidy uncovered today.

You can't make this stuff up. Only in Louisiana.

Seal of Louisiana

Lafayette is also saddled with unexpectedly high programming costs due to Cox leaning on NCTC to prevent Lafayette from joining the coop. This means LUS Fiber has to pay higher prices than its competitors do to deliver the same television channels.

Even though Lafayette is offering the fastest broadband in the area, they are running an incredible promotion - everyone got bumped up a tier in August and September. If you are paying for 10Mbps symmetrical, you are getting 30. If you pay for 30, you get 50. And you get 100 if you pay for 50.

This is how community-owned promotions run -- they actually deliver the goods rather than only giving you a low introductory price that balloons after 3-6 months (followed by annual rate increases thereafter!).

If you wanted to judge LUS Fiber from the perspective of a private company, it would be OK. But if you account for all the benefits it is delivering to the community, it is doing great.

Digging into H129: Another Bill in NC to Limit Local Authority and Broadband Competition

As we predicted, Time Warner Cable is pushing a new bill in North Carolina to limit competition and local authority to build broadband networks (Save NC Broadband is alive again). H129 purports to be An Act to Protect Jobs and Investment By Regulating Local Government Competition with Private Business - [download a PDF of the bill as introduced].

This bill is another example of state legislators refusing to allow communities to make their own decisions -- imposing a one-size-fits-all policy on communities ranging from the metro area of Charlotte to small communities on the coast and in the mountains. Many of the provisions in this bill apply tough constraints on the public sector that are not applied to incumbent providers, but this analysis focuses only on a few.

Let's start with the title:

An Act to Protect Jobs and Investment by Regulating Local Government Competition with Private Business

There is no support anywhere in this bill to explain what the impact of community networks is on jobs. Nothing whatsoever. There is a claim that "the communications industry is an industry of economic growth and job creation," but ignores the modern reality that that the communications industry goes far beyond the private sector. In fact, the recent history of massive telecommunications providers is one of consolidation and layoffs. It is the small community owned networks that create jobs; larger firms are more likely to offshore or simply cut jobs.

Certainly all businesses depend on communications to succeed. Unfortunately, they are often limited to very few choices because the of the problem of natural monopoly. This is why many communities have stepped up, including three in North Carolina (two of whom offer the offer the most advanced services in the state).

So what is the result of the community networks on jobs? Community Networks obviously create jobs merely by existing - they hire managers, sales staff, customer support reps, technicians, and etc. They create competition, which market theory tells us will result in lower prices for everyone in the market. And to date, no one has suggested that TWC or any other competitor in these communities has laid employees off. To the contrary, they are likely to hire more sales staff to go door-to-door to retain subscribers.

The effects of this bill will be to lower the number of jobs in North Carolina. Existing businesses will be less efficient because they have fewer choices. Companies like CenturyLink and TWC will have fewer incentives to invest in faster technologies or improve customer service.

A city-owned communications service provider shall meet all of the following requirements:

Provide communications service only within the jurisdictional boundaries of the city providing the communications service

If the purpose of this bill is to protect jobs and investment, it is hard to see how restricting competition will promote those goals. As much of the bill is concerned about cities abusing their inherent power as the local government, it is not clear why it is unfair for them to operate where they do not have of the supposed advantages of a local government.

Shall not price any communications service below the cost of providing the service… The city shall, in calculating the costs of providing the communications service, impute (i) the cost of the capital component that is equivalent to the cost of capital available to private communications service providers in the same locality and (ii) an amount equal to all taxes including property taxes, licenses, fees, and other assessments that would apply to a private communications service provider…

Requirements to impute costs are a goldmine for lawyers -- the costs included here vary and require judgment calls that will undoubtedly be challenged by lawyers employed by those opposed to the project. The entire process is an impractical accounting nightmare that is not meant to restore balance to the market but rather to discourage any community from even trying to comply. The Georgia Public Service Commission explained why this notion is poor policy:

Preventing anticompetitive practices, unfair competition, and abuse of market position does not mean that the Commission must impose conditions on every applicant which has some advantage not shared by every other applicant. The Commission is required to treat all LEC's [Local Exchange Providers – i.e. phone companies] equally, not make all LEC's equal. BellSouth and the large cable companies certainly enjoy better capital costs than a typical small business owner. Does this put the small company at a competitive disadvantage? Of course. Should the Commission determine which LEC has the highest capital costs and require that all other companies impute that amount into their rates to level the playing field"? Certainly not. If Marietta has to comply with expensive open records requirements or expensive municipal bidding requirements, should those costs be imputed into the rates of all private companies? Again, no. Similarly, if BellSouth has a large tax write-off one year, it would be ridiculous to require that they impute into their tax rates the taxes they did not have to pay merely because some other company may not have had a tax write-off that year.

The requirement not to price below the cost of providing the service is similarly hard to calculate - how does one calculate the individual charges in a bundle? Do subscribers have to pay $1500 for the first month to cover the cost of connecting the house to the network pass or can that fixed cost be spread across one year, two years, three years?

Monopoly board game

Requirements like these make the bill's true intent obvious: cripple any competition to TWC. Time Warner Cable is free to charge as it pleases -- it can use predatory pricing against competitors because it cross-subsidizes from its vast customer base (largely in uncompetitive areas) and has the many advantages inherent in incumbency.

A city-owned communications service provider shall not be required to obtain voter approval under G.S. 160A-321 prior to the sale or discontinuance of the city's communications network

This is a stunning overreach. Not only are communities effectively barred from building competitive networks, the community has little power to ensure an irreversible decision actually has public support. It is hard to understand how shutting down a popular network will save jobs.

The provisions of G.S. 160A-340.1, 160A-340.4, and 160A-340.5 do not apply to the provision of communications service in an unserved area.

This is undoubtedly a smart preemptive move against the argument that this bill will prevent communities from building their own networks where the private sector is not interested. The result is perverse -- a community with no private sector provider may choose to build its own network but a community with a deadbeat provider offering expensive, unreliable connections with technology from the last century cannot make that choice.

A city or joint agency subject to the provisions of G.S. 160A-340.1 shall not enter into a contract under G.S. 160A-19 or G.S. 160A-20 to purchase or to finance or refinance the purchase of property for use in a communications network or to finance or refinance the construction of fixtures or improvements for use in a communications network. The provisions of this section shall not apply to the repair or improvement of an existing communications network.

Recalling that I am not a lawyer, this section appears to be an attempt to prevent communities from using public-private partnerships (perhaps with a nonprofit organization) to build a network. Anyone with a better understanding of this section should comment below to clear this up.

handcuffs.png

We received a one-sheet [pdf] explaining the provisions of the bill, which states the bill "permits cities to provide phone, cable and broadband services in competition with private providers, subject to certain requirements…" Unfortunately, those "certain requirements are sufficiently onerous to ensure any community attempting to build a competitive network has the steepest possible hill to climb. Under present law, communities are already disadvantaged due to the inherent advantages of an incumbent. This bill greatly increases the power differential, protecting lazy incumbent providers while handcuffing communities.

Another talking points one-sheet [pdf] has a heading saying "Level Playing Field / Local Government Competition" and starts by saying cities can provide services on "roughly equivalent" terms as private providers. It then lists 4 things communities have to do, conveniently ignoring that the private sector fails to meet each of these. We have tackled the Level Playing Field Canard previously but here we go again:

  • Comply with laws and regulations applicable to private providers -- including the payment of taxes. - Of course, it is hard to calculate exactly how much these private providers actually pay in taxes due to the variety of tax breaks and their use of tax havens to avoid paying the taxes that normal non-massive companies have to pay.

  • Not cross-subsidize their competitive activity using taxpayer or other public monies - If we would ban cross-subsidies, that would be something! But no, this bans a specific form of cross-subsidization that the public sector may use while allowing the private sector to cross-subsidize at will. TWC can lower prices in Wilson while raising prices in Raleigh. AT&T can use profits from its wireless network to invest in U-Verse. But the community networks are limited to resources from their boundaries. Regardless of its merit as a rule, to suggest it levels the playing field is to ignore reality.

  • Not price below cost, after imputing costs that would be incurred by a private providers - Again, the private providers are not limited in their ability to price below cost (predatory pricing) and have little reason not to as they can cross-subsidize from nearby non-competitive areas.

  • Not discriminate against private providers in access to rights-of-way - Once again, we have a rule that should be applied to both sides. No entity should be allowed to delay the other in access to poles. But it is the private providers who have obstructed community networks from the poles.

This legislation will hurts jobs, investment, and the general competitiveness of the state in a digital economy. The General Assembly is doing Time Warner Cable a massive favor by shutting down the only threat of competition and the source of the best broadband networks in the state -- community networks.

I encourage readers to look in on Philip Dampier's long discussion about this bill and Karl Bode's shorter take on it.

Anti-H129 Graphic designed by Eric James. Monopoly photo used under creative commons license, courtesy of Jenn Vargas (foreverdigital) on flickr. Handcuffs also under creative commons, courtesy of nigel view on flickr..

Another Telecom Exec Calls for Less Competition

As part of our continuing effort to shed light on the tendency of privately owned telcos and cablecos to consolidate rather than compete, we would like to note comments from Qwest's Chief Financial Officer. Stop the Cap! has the story:

Chief Financial Officer Joe Euteneuer said the time was right for Qwest to sell operations in the north-central and mountain west region because there were too many competitors in the marketplace. Euteneuer said the telecommunications market needs to resemble the cable-TV business, which has been heavily concentrated into two huge powerhouses — Comcast and Time Warner Cable.

So not only do these executives think there is too much competition (find me a subscriber who believes that!), but believes we should have less and less competition moving forward. These folks are incredibly candid about their plans to diminish what little competition exists -- perhaps because the FCC has made it clear that it plans to take no actions to encourage further competition. The National Broadband Plan pretty much ignores this problem, perhaps its biggest failing.

For those of us who care about the future of broadband and the communities that increasingly depend upon it, the spectre of even larger privately-owned incumbent providers (with increasingly distant headquarters) is daunting. Bigger and bigger incumbents mean it is that much harder to build better networks that will compete with them. These massive companies cross-subsidize their operations to dramatically cut rates in newly competitive areas specifically to drive out new competitors (public and private). Larger companies have greater advantages for securing discounts on key inputs, allowing them to offer lower prices than communities are naturally able.

This is yet more evidence that the private-company approach to broadband infrastructure is bankrupt.

If we are destined to have only a few entities owning the networks on which we depend, those entities must be directly accountable to the communities, rather than focused solely on increasing profits every year.

Leveling the Playing Field

Local governments do not favor themselves on taxes or right of ways or otherwise compete unfairly with incumbent telecommunications and incumbent cable companies. To the contrary, private incumbents enjoy a wealth of state and federal subsidies, guaranteed rates of return, regulated rates for pole attachments, etc. In addition, local telephone companies enjoyed years of regulated monopoly status to build positions of dominance they continue to enjoy. To pretend that these local incumbents, with their subsidies and regulated access, need to “level the playing field” to protect a “free market” against local government systems flies in the face of reality.