Levers to Intensify Broadband Competition -- Part II Telco Upgrades

Blair Levin, who oversaw the development of a National Broadband Plan, recently spoke at length on broadband competition. We're sharing excerpts of his remarks. Today, Blair’s third question: Given the current market, what are the appropriate government levers to intensify competition at this part of the cycle?

Improving the economics of telco upgrades

Given the current market, what are the appropriate government levers to intensify competition at this part of the cycle? Earlier, I explored spectrum policy.

Now let’s look at the second leverage point; improving the economics of a telco upgrade.

We made a number of proposals at the national level in the National Broadband Plan, but frankly, cities have greater leverage to improve the math than the federal government.

This has become clear through the Google Fiber effort. Google has turned out to be the cop that has caused the greatest level of defection.

The project, which came out of discussions with the Plan(1), has been the principal driver of the “game of gigs.”(2) Everywhere Google Fiber announces, the telco announces a matching upgrade.(3) Further, everywhere Google Fiber announces, the prices of others go down to match Google.(4)

Google is highly unlikely to cover the entire country(5), but the project inspired other activities such as the Gig.U project. As discussed in the handbook we put out this summer, over 25 of our communities have moved in ways that have accelerated the deployment of next generation networks. Further, even some rural communities, which have more difficult economics, have found ways to use smart dig-once and dark fiber policies to stimulate public private partnerships to bring new choices for their residents.(6)

Some are now Google Fiber communities, but most have done so through other means. The lessons are the same in terms of generating a positive competitive response. Indeed, there are a variety of adjacent market entrants beyond Google, including electric utilities, municipalities, small ISPs, and non-profits, all of which have had the same positive affect.

The lessons are also the same as to how cities have changed the capital allocation equation through three key strategies.

  1. Asset utilization and improvement.(7)
  2. Regulatory flexibility to accommodate new business models.(8)
  3. Demand Aggregation(9)

The handbook provides details on all the tactics communities have used to support these strategies.

But this is not to let the federal government off the hook. It was interesting to see Google and AT&T’s filings to the Broadband Opportunity Council. Many of their proposals mirrored proposals we made with the plan that had not yet been implemented. Further, certain legislative efforts, such as the Dig Once bill(10) just introduced by Representatives Walden and Eschoo is consistent with and improves on the recommendation in the Plan.(11) The recent hearing on broadband deployment, widely praised on all sides, included many ideas I recall with great fondness from the Plan.(12)

But there were also new proposals on topics such as pole attachments.(13) The Plan made several proposals on pole attachments, but I have learned it is an even bigger issue than I thought then. Indeed, if there were one thing that I think would accelerate competition more than anything else, it would be cities updating their as-builts.(14)

From a federal perspective, the most helpful change would be a rule that amended the pole attachment rules to reduce delays associated with pole attachments and conduit occupancy.(15) In the category of ‘good problems to have but must still be solved’, we are actually seeing delays caused by the fact that we have cities with multiple parties upgrading at the same time. The more successful federal, state, and local governments are in creating the conditions for investment in new networks, the more we are going to see multiple competitive network builds, which, under the current regime, is handled by a queuing system that basically blocks simultaneous construction. We are already seeing that in some markets, and that should focus attention on reform of make-ready policies.

Another area of interest is access to video programming. Google Fiber wanted to offer a pure broadband service but found the economics didn’t make sense without a video offering. At the same time, the company has found the difficulties in obtaining programming have limited the pace and expanse of its Fiber effort. Google has proposed a number of adjustments to the current rules to enable smaller broadband players to obtain the programming they need to invest and compete.(15) Another cost to deployment is related to access to multiple dwelling units and inside wiring rules.(17)

If you want to have a serious discussion about intensifying competition, it requires acting to lower capital expenditure

These policy adjustments to our current pole attachment, programming and other regimes are, to most folks, boring. They are not nearly as much fun as blaming incumbent providers for limited bandwidth.(18) But based on the experience of Google Fiber and Gig.U, if you want to have a serious discussion about intensifying competition, it requires acting to lower cap ex by, for example, improving the economics of make ready work for poles.

These first two levers address the issue noted by the Broadband Plan’s Slide 4.G and provide telcos two incentives to upgrade: better economics for deployment of upgraded networks and the threat of new competition. Both of these levers help put greater competitive pressure on cable to upgrade.

Read Blair Levin's full speech
Or the previous excerpts:
  1. See http://www.cnet.com/news/google-exec-sees-google-fiber-as-a-moneymaker/
  2. For a discussion of the early rounds of the “game of gigs” see http://www.gig-u.org/cms/assets/uploads/2012/12/81714-Gig.U-Final-Report-Draft-1.pdf
  3. For more on the game theory, somewhat akin to a game of chicken, between Google and incumbent ISPs, see https://www.washingtonpost.com/news/the-switch/wp/2014/10/28/google-fibers-playing-a-multibillion-dollar-game-of-chicken-with-traditional-isps/
  4. See, for example, http://www.tennessean.com/story/money/2015/09/29/t-drops-fiber-prices-google-fiber-levels/73023434/. But the reverse is also true. Prices stay higher in non-Google areas. See http://consumerist.com/2015/09/30/att-touts-lower-prices-for-gigabit-internet-still-charges-40-more-if-google-fiber-isnt-around/
  5. Bernstein estimates a maximum coverage of 20 million homes in 6-8 years.
  6. See, for example, http://www.carrollcountytimes.com/news/local/ph-cc-fiber-lighting-ceremony-20150626-story.html and http://www.newsobserver.com/news/local/community/southwest-wake-news/article40803345.html.
  7. The key inquiry is what assets does the city have that can be provided at no or little incremental cost that improve the economics of deployment and operations. This can include: physical assets, like rights-of-ways (ROWs), utility poles, conduit, buildings, etc.; information assets, like information regarding conduit, ducts, and other ROWs; and processes to improve current assets, such as ensuring that make-ready work is done expeditiously, coordinating with new providers to save costs or allowing them to perform work themselves through approved contractors.
  8. The key inquiry here is what rules does the city have that may have made sense in a different time and with a different market structure that in today’s market creates a barrier to an upgrade or new deployment. For example, all the projects with national ISPs, including Google Fiber, have allowed neighborhood-by-neighborhood builds, which significantly reduces capital expenditures and risk through a pre-commitment strategy.
  9. The key inquiry here is how to aggregate demand to demonstrate to existing players the value of an upgrade and to potential new entrants the opportunity in the community. This can be done on both the institutional and residential level.
  10. The current draft of the Broadband Conduit Deployment Act of 2015 can be found at http://eshoo.house.gov/wp-content/uploads/2015/10/10.22.15-Dig-Once-Bill-Text.pdf
  11. See National Broadband Plan recommendation 6.8.
  12. The success of the hearing raises the question of why these bi-partisan ideas did not get aired in Congress immediately after the release of the Plan. Indeed, Congresswoman Eschoo commented, correctly, that “It is so common sense that I wonder why we didn’t come up with this a decade ago”. http://www.rollcall.com/news/lawmakers_push_dig_once_and_other_bipartisan_policies_to_expand_high_speed-244530-1.html. There were a variety of factors but one of them was that the broadband political capital at that moment focused on how the FCC should respond to its loss in the Comcast Net Neutrality case. Comcast Corp. v. FCC, 600 F.3d 642. (2010). Another was a focus on specific issues of the moment, such a West Virginia mind disaster. http://voices.washingtonpost.com/posttech/2010/04/for_senator_jay_rockefeller_d-.html.
  13. See National Broadband Plan, recommendations 6.1, 6.2, 6.3, 6.4, 6.5, 6.6.
  14. Not only would this make those cities more attractive for new fiber investment, it would minimize the risk to their infrastructure from fiber construction, and it would also improve their own plant maintenance capabilities.
  15. Among other things, such a rule should introduce shorter timeframes and establishing higher pole-count thresholds before additional time allowances are triggered, accelerating deployments. Infrastructure owners should be required to negotiate access agreements in good faith with a broadband provider as soon as the provider has begun the process of obtaining necessary regulatory approvals. The rule should allow use of utility-approved contractors to perform all pole attachment and conduit make-ready work. Further, broadband providers should be permitted to use independent contractors if, in their estimation, utility-approved contractors alone cannot meet the deployment timetables.
  16. See Google’s filing to the Broadband Opportunities Council at http://www.ntia.doc.gov/files/ntia/google_inc_boc.pdf, page 8. In the long-run, I am certain such measures will not be necessary, but as Keynes said, “In the long-run we are all dead.”
  17. Id., at pp. 9-10. See National Broadband Plan at Recommendation 4.6.
  18. As I hope is clear, I don’t regard our need for more abundant bandwidth as representing any kind of a moral failure by incumbent providers. Rather, I see it as reflecting economic incentives. I am somewhat perplexed by arguments that go after the character of companies as if they should read David Brooks’ book “The Road to Character” and reform themselves. But then, the Supreme Court appears to think they are people so maybe I am wrong.

By Blair Levin.