community broadband networks

Once again, we are witnessing the federal government allowing a few massive telecommunications companies to collude rather than compete. Verizon is about to ally itself with major cable companies, to the detriment of smaller competitors in both wireless and wireline.

One of the reasons we so strongly support the right of communities to decide locally whether a community network is a smart investment is because the federal government does a terrible job of ensuring communities have fast, affordable, and reliable access to the Internet. By building their own networks, communities can avoid any dependence on the big cable or telephone companies that are more interested in consolidating and boosting shareholder dividends than they are in building the real infrastructure we need.

The Department of Justice released a statement on August 16th, that it will allow the controversial Verizon/SpectrumCo deal to move forward with changes. We have watched this deal, bringing you you detailed review and analysis by experts along with opinions from those affected. One week later, the slightly altered deal was also blessed by the FCC.

Many telecommunications policy and economic experts opposed the deal on the basis that it will further erode the already feeble competition in the market. In addition to a swap of spectrum between Verizon and T-Mobile, the agreement consists of side marketing arrangements wherein Verizon agrees not to impinge in the market now filled with SpectrumCo (Comcast, Time Warner Cable, Cox, and Bright House Communications).

Verizon has been accused of hoarding spectrum it doesn't need. The marketing arrangements constitute anti-competitive tools that the DOJ has decided need some adjusting. From the announcement:

The department said that, if left unaltered, the agreements would have harmed competition by diminishing the companies’ incentive to compete, resulting in higher prices and lower quality for consumers.

The deal was considered inevitable when FCC Chairman Julian Genachowski released a statement indicating that his agency had no problem following the DOJ. A PDF of the FCC statement can be viewed here.

In scrutinizing the deal, the FCC and DOJ bisected the analysis, which worked in the parties' favor. Susan Crawford looked at the process:

Bottom line: The companies involved in the transaction can credibly claim that the deal itself is not going to change the facts on the ground for most Americans. Without “merger-specific harms,” and with an impressive display of bureaucratic sleight-of-hand – FCC got the spectrum part of the deal but DOJ got the joint marketing arrangements, and the two agencies have different statutory authority and DNA, leading to lots of finger-pointing and careful behavior – the companies will avoid being interfered with unduly by the feds.

Harold Feld, another strong critic of the deal, recently commented on the issue of FCC authority in this particular review. Feld notes that challenging FCC authority is a growing trend, and not good for telecommunications policy. Those who challenge it are diluting at what many consider an already tepid application. In essence, the "repeat loudly and often and eventually they will believe you" phenomena is creeping in and even FCC Commissioners are buying it. From Feld:

Given all this, it is rather difficult to understand why both Commissioner McDowell and Commissioner Pai likewise question the FCC’s authority to engage in ongoing monitoring in the wake of the agreements.  Given that this transfer involved spectrum, cable, broadband, and even broadcasters (shout out to my NBC peeps! What it is O & Os!), the only way this could implicate more FCC jurisdictions would be if one of the parties owned a maritime radio service.

...

Given that there is no question that the FCC has authority to entertain complaints going forward, and certainly has authority to monitor how the markets under its jurisdiction are developing, it is hard to understand the jurisdictional argument even as the worship of empty formalism.

...

I would think that “we’ll keep an eye on things, anyone with complaints can file over here” would be applauded as the lightest touch possible rather than condemned as regulatory overreach.

Feld goes on:

Which requires me to point out one of the more unfortunate problems in telecom policy (and regulatory policy) these days. There is a huge difference between “it’s bad policy, don’t do it” and “you don’t have authority.” It is unfortunate that those who agree with the FCC on matters of policy increasingly seek to cast their arguments as arguments of regulatory authority. I get that if you don’t like the policy, you would prefer the FCC not have authority to implement it. But just as real lawyers read the footnotes, real lawyers (and non-lawyers) ought to be honest about the difference between policy and authority. Certainly there are times when authority is genuinely contestable, and I will never blame a litigant for making the traditional Hail Mary pass at jurisdiction. But where, as here, the authority of the FCC over reseller agreements is well established, attacks on authority can only be the interpreted as careless or disingenuous.

The FCC and the DOJ may have tried to lighten the negative impact this deal will have on competition by making slight adjustments. Their efforts amount to putting a band aid on a bullet wound. The decision to allow this deal to move forward was telecommunications business as usual.

Crawford, like many others, sums up this deal for what it is:

"...the SpectrumCo transaction is an outcome, not a cause, of the primitive approach to communications that characterizes this country."

If you are a current or potential Verizon customer, by now you know that you no longer have the option to order stand alone DSL. When the business decision became public knowledge in April, DSL Reports.com looked into the apparent step backward and found existing customers were grandfathered in but:

However, if you disconnect and reconnect, or move to a new address -- you'll have to add voice service. Users are also being told that if they make any changes to their existing DSL service (increase/decrease speed) they'll also be forced to add local phone service. One customer was actually told that he needed to call every six months just to ensure they didn't change his plan and auto-enroll him in voice service.

By alienating customers from DSL, Verizon can begin shifting more customers to its LTE service, which is more expensive. Susie Madrak, from Crooks and Liars, speculated on possible repercussions for rural America:

Rural areas could see the biggest impact from the shift, as Verizon pulls DSL and instead sells those users LTE services with at a high price point ($15 per gigabyte overages). Verizon then hopes to sell those users cap-gobbling video services via their upcoming Redbox streaming video joint venture. Expect there to be plenty of gaps where rural users suddenly lose landline and DSL connectivity but can't get LTE. With Verizon and AT&T having killed off regulatory oversight in most states -- you can expect nothing to be done about it, despite both companies having been given billions in subsidies over the years to get those users online.

The belief is that current DSL customers who don't want (or can't afford) the switch to the LTE service will move to Verizon's cable competition. Normally, losing customers to the competition is to be avoided, but when your new marketing partners ARE the competition, it's no big deal.

Recall that Verizon entered into an agreement with Time Warner Cable, Cox, Bright House (collectively SpectrumCo) to a purchase spectrum. A related agreement, wherein Verizon and the cable companies cross-market each others' services, received approval from FCC and the DOJ. The deal appears inevitable, regardless of concerns from consumer groups, economic and telecommunications policy leaders, and labor.

Madrak makes another critical observation: Verizon Wireless is a non union company, while Verizon Wireline employees belong the the Communicatons Workers of America (CWA).

The CWA has engaged Maryland Senators Barbara Milkulski and Benjamin Cardin to press the FCC and DOJ to move carefully. The pair recent sent a letter to both agencies citing major job loss concerns from CWA and lack of competition concerns from consitutents. From the letter [pdf]:

Our concern is that we are turning former competitors into business allies, that may be violating the concept of open and fair competition.We also are very concerned… [that] it appears to limit Verizon’s incentive to invest in its all fiber FiOS network, potentially depriving consumers of the competitive alternative to cable, broadband and, video services. What this means is that you...could be impacting [72,000] middle class jobs.

Eliminating unions and forcing DSL customers to switch to a more expensive service translates into even more profits for Verizon. How will this strategy affect the broadband situation in America? Madrak summed it up in her coverage:

It's all a very ingenious play by Verizon, though it will have a massive competitive and connectivity impact on the U.S. broadband market that will be studied for decades. What's most amazing is that nobody (analysts, regulators or the press) seems to have really noticed what Verizon's up to: turning a massive swath of the country from a marginally-competitive duopoly with union labor, into an even less competitive and more expensive cable and telco un-unionized cooperative monopoly.

Absent action from communities, the future will be one with less competition to deliver broadband services, not more. Community networks can create jobs, competition, and savings -- a far better alternative than watching Verizon's plans come to fruition.

A major difference between Main Street and Wall Street is that we view Comcast's lack of competition as a major problem. The prospect of Comcast increasing our rates year after year makes us want to scream. Prepare to scream. Or throw things.

The Lafayette Pro-Fiber Blog alerted us to a piercingly honest analysis from Wall Street. The article on SeekingAlpha.com, titled We-re Big Fans Of Comcast's Cash-Flow Generation captures one of the major policy failures of our time:

Comcast's traditional Cable Communications continues to grow and generate copious cash flow. Video revenue, Xfinity and other cable TV products, grew 2.8% to $5 billion, while High-Speed Internet revenue grew 8.9% to $2.4 billion. We're big fans of the firm's Video and High-Speed Internet businesses because both are either monopolies or duopolies in their respective markets. Further, we believe that both services have become so sticky and important to consumers that Comcast will be able to effectively raise prices year after year without seeing too much volume-related weakness.

Wow.

SeekingAlpha.com, describes itself as "…the premier website for actionable stock market opinion and analysis, and vibrant, intelligent finance discussion."

We want to empower local businesses and communities to control their own destiny. Monopolistic telecommunications companies, with their Goliath market share, Wall Street priorities, and armies of lobbyists continue to attack local control and self-reliance. They are extracting assets from Main Street and shipping it to Wall Street.

Yet we see the FCC, Congress, and many states pretending that the public interest is best served by giving more power to these massive companies. And we will continue to hear industry-funded think tanks claiming that broadband has robust competition and should be subject to less public oversight. Coming soon to an op-ed page near you.

Photo courtesy of JSquish via Wikipedia Commons

In the excitement around Google's unveiling of the $70 gigabit broadband connection in Kansas City, some may be wondering how it is that Google can offer a gigabit for moderately more than what most of us pay for far slower cable broadband connections.

On one side of the equation is the fact that big cable companies (Time Warner Cable, Comcast, etc.) have long been ripping off consumers by pricing their services far above cost -- something they can easily do because they face so little competition. But the more interesting side of the equation is how Google can make its gigabit price so low.

Recall that Chattanooga made major waves with its gigabit service, priced then at the rock-bottom rate of $350/month. A gigabit is not available in many communities and where it is available, the price is often over $10,000 per month. We published an in-depth case study of their approach a few months ago.

But, as Milo Medin -- the head of the Google Fiber project -- is fond of saying, "No one moves bits cheaper than Google." Google has built an incredible worldwide fiber optic network. Let's call this lessons 1 and 2.

Lesson 1: Google built its own network. It isn't leasing connections or services from big telecommunications companies. Building your own network gives you more control -- both of technology and pricing.

Lesson 2: Google uses fiber-optics. These connections are reliable and have the highest capacity of any communications medium. The homes in Kansas City are connected via fiber whereas Time Warner Cable, CenturyLink, and others continue to rely on last-generation technologies because they are delaying investment in modern technology to boost their profits.

Others have already followed these lessons but are not able to offer their gig for such a low prices. To understand why, let's start with some basics. I'm hypothetically starting Anytown Fiber Net in my neighborhood and I want to offer a gig. Whenever any of my Anytown subscribers want to transfer files amongst themselves, the operating cost to me approaches zero because (aside from the capital costs of building the network), the cost of transfering those files is basically the electricity it takes to pulse lasers over the fiber and keep the fans on the routers humming.

Lesson 3: Local traffic on the network is essentially free. A local gigabit is no big deal on a fiber network. (Hat tip to Lafayette Utilities System for being the first to offer local 100Mbps traffic for free.)

We start talking about real operating costs when Anytown users want to connect to networks that are not on the Anytown network. When a user wants to watch a video on YouTube or download a patch from Microsoft, I need to interconnect with other networks that can get me there. For a small player like me, that means paying for transit. I pay Level 3 or some other major national network operator so my user can send a request to YouTube over the Level 3 network.

The arrangement between me and Level 3 is interesting. I don't pay per bit that my customers use. Instead, I "commit" to a specific capacity. The higher the capacity, the lower my per bit charge. So if I commit to 500Mbps, I may be paying $7 for each Mbps but if I commit to 2000Mbps, I may pay $5 for each Mbps (these numbers are totally invented, not unlike how actual contracts seem to be made). But the interesting part is how it is measured and its implications.

My committed rate determines my cost but not necessarily what I have access to. Let's say I commit to a 500Mbps connection to Level 3 for $7/Mbps. I have to pay for the amount of Mbps that corresponds to 95% of my peak demand. The cost comes down to how high the peaks are, not how many bits are transferred over the course of the month. So if my peak was 550 Mbps, then I have to pay for (550 * .95) * $7, or $3,657.50

On the other hand, if I allowed the combined usage of my users to hit a far higher peak, say 1,000 Mbps, my cost would be $6,650 and I would be kicking myself for not upping my committed rate. Fortunately, I can control the peak with my routers, allowing me some control (at the cost of alienating my users who will see worse performance individually).

Another thing I can do is "peer" with others. For instance, if Anytown Net can get Google to connect directly to us, traffic to Google sites (ahem, YouTube) becomes free (as Google likely wouldn't charge because it wants to encourage everyone to use its services). This is why the Open Connect Netflix announcement is so important.

Allowing users to hit popular sites without increasing the peak bandwidth saves real money. In fact, a sizable community fiber network reported to me that peering with a major source of video traffic dropped their monthly costs by tens of thousands of dollars. This brings us to Lesson 4.

Lesson 4: Scale matters. Big time. Everyone wants to interconnect with large networks and large sources of content. The larger Anytown Net is, the more others will be interested in connecting with me.

Google probably has the most favorable peering agreements with others because they all want cheap access to YouTube and the various other Google services. And Google can peer with others anywhere - they probably have a presence at every major interconnection location (to learn more about those fascinating places, read Tubes by Andrew Blum -- buy it through your local bookstore, not Amazon).

What all of this means is that Google doesn't really have to worry about the cost of its peak because it already has advantageous relationships with the networks hosting the traffic that Google doesn't already have local to it.

Let's go back to Anytown Net. If I offered a gigabit to my users, I would be exposing myself to a major peak in the evenings as most used that connection concurrently. As we now know, the cost to Anytown Net has much less to do with how much is transferred than to a few times when a lot of people happen to all be using a lot of their capacity at the same time.

At present, there are a few other entities that have the kind of scale and relationships that could also do what Google is doing. They have names like Comcast, Time Warner Cable, Verizon, and AT&T. But they have little reason to invest because most of us are locked in to them. My neighborhood has one high speed Internet option - Comcast. We have a cheaper, slower DSL alternative from CenturyLink. This is why communities are increasingly building their own networks and policymakers need to pay attention the Looming Monopoly.

These are the economics of Google's gig and an explanation of why it will be so hard to duplicate -- with one proviso. Dane Jasper of the incredible Sonic.net actually beat Google to the $70/gig. And I have no idea how he does it. If U.S. telecommunications policy were not so tilted in favor of the biggest corporations, perhaps we would see more successful local ISPs that subscribers actually liked.

And let's not forget, though Google is offering a clearly superior product, Time Warner Cable is cutting its prices and locking customers into long-term contracts. It remains to be seen if this project will even be profitable for Google, though it is clearly already creating benefits for Kansas City as a whole.

Though Google has a stated intention of demonstrating how this can be done so others can do it also, the lesson may be there very few can duplicate the full gig availability. But they can do what Chattanooga, Lafayette, and many others have done - build some of the best networks in the nation that are still accountable to the community.

To learn more about the economics of networks, I strongly recommend this roundtable discussion:

Photo of fiber deployment courtesy of Chattanooga EPB