Next Generation Broadband for Western North Carolina
Regional Broadband Roundtable
Asheville, North Carolina
January 22, 2018
(as prepared for delivery)
Many thanks and Happy New Year.
I don’t want to argue with the title of the most famous book ever written by a regional native son but I am happy to prove you can go home again.
Because some three decades ago, I had the great joy of being bond counsel for Asheville. At that time, the city and region were still recovering from 50 years of limited public investment, owing to municipal bankruptcies during the Great Depression.
I worked on several financings, including the Wall Street parking lot. Parking lots are not exactly the sexiest things young lawyers work on but it was clear then that the parking lot, and other municipal investments, were the foundation stones for a recovery, one that’s exceeded everyone’s dreams.
No one then imagined Asheville as one of the top cities to live, retire or visit or one of the best food or music towns. But it has made all those lists. And last year Lonely Planet named Asheville as the number 1 destination for travel in the United States.
Does that parking lot deserve all the credit?
But it helped.
And our challenge today is exactly the same as when I met with the local and regional leadership to discuss that parking garage: how does this area invest to build a foundation for continuing prosperity?
Apparently we still need more parking. But we also need something else.
Bandwidth. Lots of it.
In this global information economy, every community should aspire to assure that their bandwidth never constrains economic growth or social progress.
Indeed, it is not too dramatic to suggest that every community will soon find itself in a game of gigs in which you upgrade or you die.
You understand that, which is why you’ve already taken the steps you have.
Today I would like to address five questions related to further steps along that journey:
- What is the impact of next generation broadband?
- Why not just wait for current market forces to deploy such networks?
- Why not just wait for the federal government to help?
- What are some models for communities to act to accelerate deployment?
- What other steps are useful for expanding the value of the gigabit ecosystem?
So what has the impact of next generation broadband been to date?
We’re in the early innings but recently, North America experienced record growth in fiber, reaching about 30 million homes, with 2016 year over year growth of 16%, tying the previous record.
The accelerated growth rate is not surprising given the value people place on better broadband. A recent study showed that more than 90% of respondents said quality broadband was “very important” in choosing a community in which to live — second only to “safe streets.”
They are right to do so. Consider the benefits, including:
- Economic growth and better jobs. Early gigabit adopters, like Chattanooga and Kansas City, are enjoying tremendous growth in entrepreneurial activity and jobs associated with their networks. As Tom Friedman said “by coming together to make (Chattanooga) an attractive place to live and getting both parties to agree to invest in a fiber-to-every-home-and-business network in a 600-square-mile area, Chattanooga replaced its belching smokestacks with an Amazon.com fulfillment center, major health care and insurance companies and a beehive of tech start-ups that all thrive on big data and super-high-speed Internet,” one that has taken “a slowly declining and deflating urban balloon, to one of the fastest-growing cities in Tennessee.”
But we don’t have to rely just on anecdotal evidence. A 2014 study showed that communities with widely available gigabit access enjoy per capita GDP that is 1.1 percent higher than communities with little to no availability of gigabit services. In dollar terms, the 14-gigabit broadband communities studied enjoyed approximately $1.4 billion in additional GDP. Conversely, the 41 communities in the study that didn’t have widely available gigabit broadband experienced forgone GDP of as much as $3.3 billion.
A more recent study concluded that it is particularly important for the fast growing segment of home businesses, where fiber averages about $73,000 in revenues, significantly higher than the second place network, cable, with $43,000.
- Increased property values. High speed broadband has been shown to add nearly $10,000 in value to a $300,000 single-family residence. It is the number one amenity sought by MDU homeowners and the number two amenity sought in single-family homes.
- Lower prices for broadband services. Where gigabit service is introduced, the cost of slower tiers drops significantly. When gigabit is available, tiers of 100 Mbps or faster drop in price by as much as $27, while pricing for the lower-priced 25 Mbps service decreased between $13 and $18 monthly.
And when prices go down, so does the digital divide, as affordability goes up for every level of service.
These are far from the only benefits. Next generation internet also enables communities to enjoy all kinds of next generation education, health, and public safety-related services.
And those services are going to become more and more dependent on data and therefore the ability to move data quickly.
How much more?
Consider the following three periods of time:
- It took our species approximately 40,000 years to advance from cave paintings to written words.
- It took us less than 66 years to go from the Wright Brothers first 12-second flight to landing on the moon.
- Our data-based revolution will go even faster. According to IBM, 90 percent of all the data ever created by humans was created in the past 24 months.
Bottom line: if a community wants to thrive in the economy and society of the decades to come, it needs a network capable of carrying that kind of traffic.
But this raises the second question: if such broadband produces those kinds of results, why aren’t current market forces producing the affordable, abundant bandwidth that communities seek and that next generation networks can deliver?
In a way, the answer is simple. All of the benefits I just mentioned are benefits that inure to persons and entities other than the owner of the network.
But the only benefits that matter for the investment case are the benefits that matter to the investors in the networks.
As to those entities, what we saw when we were doing the national broadband plan, was that for the first time since the beginning of the commercial internet, there was no national carrier with plans to build a network with greater capacity than the current best network.
For both the cable companies and the telephone companies, it made more economic sense to harvest previous investments in networks than to invest in networks that would produce affordable, abundant bandwidth. As cable generally had both the better network and the cheaper upgrade path, market segmentation—with cable going after the mid- to high-end customers and telcos going after low-end customers—made more sense than both competing to deliver affordable, abundant bandwidth.
This is not a moral issue. It is simple economic logic.
In illustrating how the benefits to private providers are generally less than the cost, we have found it helpful to break that simple cost-benefit idea into the following equation:
Figure 1: Broadband Cost-Benefit Equation
That is, for all the current and potential providers, the sum of new or incremental Capital Expenditures and Operating Expenses for a next generation network is greater than the new or incremental risk-adjusted Revenues plus System Benefits (the benefits to the service provider’s overall system beyond the local network) plus the Threat of Competitive Losses.
That is, where costs exceed benefits, market forces won’t deliver. And that is what the situation is in most markets, but particularly in rural markets.
This leads to the next question: why not wait for the federal government to come to assistance?
This is a reasonable question.
After all the President recently unveiled two executive orders to help rural broadband and tower deployment on federal land and promised that "Those towers are going to go up and you are going to have great, great broadband."
The FCC just announced $500 million more for rural broadband support.
A bi-partisan coalition of Senators has asked the President to dedicate billions in the pending infrastructure plan to rural broadband support.
So should you just wait for that federal Seventh Calvary to bring you aid?
The race is not always to the swift, nor the battle to the strong, but that’s the way to bet.
And here, the way to bet is that federal aid will not deliver what you need.
I am not here to give a political speech and I hope you will hear the following not as political criticism but as clear-headed analysis.
I applaud the motive’s behind the President’s, the FCC’s, and the Senators’ recent initiatives. But they are not likely to mean much for you.
For example, while putting up towers on federal lands may help in the western United States, most of rural America, such as Western North Carolina, is too far from federal land for such towers to make an impact.
To be fair, the Executive Orders do other things as well, such as a gap analysis of where the broadband needs are or mandating the government to continue to enforce a section of a 2012 law to make it easier to use federal property for broadband.
I think all are good ideas; indeed they were either done or recommended by the National Broadband Plan I helped write. But I am realistic enough to know that these levers don’t change the problematic investment equation.
Neither is the $500 million. It’s progress but it is a ten-year number that represents about a 1% increase in FCC support for rural broadband.
By contrast, the FCC in 2016 estimated that connecting rural broadband is a $40-80 billion challenge.
And while I agree with the Senators, I am skeptical that the current economic and political climate is likely to lead to significant new funding for infrastructure.
Moreover, market trends suggest the urban/rural digital divide is soon to become worse, not better.
By 2020, there will be a small number of markets that have four or more affordable gigabit offerings (Cable DOCSIS 3.1, Telco FTTH, Google Fiber or another over builder, and at least one 5G offering.)
In the middle will be markets with different situations, such as a gig cable offering competing against a telco that may have fiber but may still be offering only DSL. A big question mark is how fast and broad 5G wireless rolls out, but 5G, which requires fiber that is much closer to homes than most cities have, is unlikely to penetrate to all American urban areas, and even more unlikely to ever reach rural America.
And at the bottom, there will be a number of markets, particularly in rural areas, where there are no gigabit offerings and a single, probably cash-strapped Telco, competes with 4G options.
The most underappreciated story in policy circles was the collapse of the stocks of the companies serving rural areas, particularly Frontier (down 81% in the last year), Windstream (down 69%), and CenturyLink (down 17% but it would have been worse without the Level 3 purchase).
What the market is saying is that it does not believe the current incumbent telco models are likely to produce returns, and without such returns, private sector long-term investment through those models is not going to happen.
Indeed, CenturyLink confirmed this with its CFO’s recent comments about where the company will be investing. As he noted to investors, economic logic dictates that “Instead of focusing capital on getting broadband speeds up to 10-20 Mbps, you would focus your money more surgically on areas that have higher population densities and better socioeconomic demographics that are in coexistence with businesses and where wireless infrastructure might be needed to get a better return on capital.”
In other words, it will invest its capital in cities, not rural areas.
Adding to these potential problems, the FCC’s recent orders on Net Neutrality, or Internet Freedom, and on business traffic transport leave the large transport networks largely free from regulation. Without opining on whether these are good or bad overall, they carry a risk that smaller players in rural areas will face increased prices and, therefore, have to pass along increased operating costs to their customers while making it more difficult to raise capital for network investments.
These problems providing rural broadband should surprise no one. As the FCC’s Alternative Connect America Cost Model found, the price for connecting homes goes up 10 to 40 times, on a per home basis, for the last few percent of households. And as the vast majority of these costs involve construction-related labor costs, technology is unlikely to reduce those costs.
We need to honestly confront the challenge and not pretend that a few minor moves will change the game. The truth is that in a few years, there will be a number of different market structures with more or less gigabit offerings, with the gap in price and performance of the best and the worst markets greater than it is today.
No federal program will likely alter that.
If you want your communities to have the affordable, abundant bandwidth you will need to thrive, you better engage in self-help.
So if market forces and/or the federal government won’t be riding to the rescue, what models are useful in thinking through what the Land of Sky region and its towns should do?
Let’s go back to that problematic equation of costs exceeding benefits to the private investor.
That equation can be and has been reversed by many cities. It’s similar to the way that cities often negotiate with private real estate developers and potential facilities locations to make an otherwise difficult investment possible.
At the heart of these negotiations, is a search for asymmetric value creation. That is, what can party A do that costs relatively little but creates a larger benefit to party B, so that party B will act in a way to benefit both party A and party B.
Here, both the local geographic area and a potential provider want to improve the investment opportunity in next generation broadband networks. The question is what can the region or governmental subdivisions do, at a minimal cost to the public, that provides a larger benefit to the partner, that in aggregate reverses that equation by reducing Capital Expenditures, Operating Expenses, and Risk and increasing Revenues, System Benefits and Competition.
Figure 2: Revised Broadband Cost-Benefit Equation
The first step, therefore, is for the region to understand how its policies and practices affect the economics of deployment and what actions it can take, at minimal cost, to improve those economics.
The second, and related, step is for the region to organize itself in a way that improves those economics while also improving its own leverage in a negotiation. To attract any investment into next generation networks, the region has to do a certain minimum in terms of improving the economics for the network. To maximize its ability to negotiate certain terms, however, it has to have leverage in the negotiation. For example, many cities want commitments to serve certain areas or facilities. The more the region has done to lower the costs of deployment or organized demand for the new offerings, the more willing the private provider will be to agree to such requests.
Further, the more the region does to attract competitive offerings, the more likely it is that the region will be able to further its own goals in the negotiation.
So let’s step back and consider the different elements of deploying a broadband service and consider what communities have done with these to accelerate the offering of a service that provides affordable, abundant bandwidth.
These include designing, financing, constructing, equipping a network, and creating, marketing, and serving the product for the customer.
We can break this down even further, for example, by noting that as to the network, it can be designed to provide access to the metro area, access to the neighborhood, or access all the way to the customer end point.
Communities have approached these tasks in different ways, though all involve various kinds of aggregation and partnering.
For example, the Research Park communities in North Carolina wanted the private sector to do all of these tasks but committed to take a number of policy steps to lower the cost of private companies performing many of these tasks. It worked and in a year or so that community will have the most competitive broadband market in the United States.
That effort was done when Google Fiber was actively expanding its fiber efforts. Other carriers believe that effort is dead. I don’t agree, but for your purposes the perceived competitive dynamic is not as strong, and therefore, the tactic is not as likely to work. Recently, however, Riverside, California, did a similar large RFP and appears to be getting competitive interest.
Another example worth noting is Lincoln, Nebraska. There, the city created a public private partnership with the city owning the conduit and the private sector owning the fiber. The system is made up of multiple sizes of pipe using such things as traffic conduit, abandoned water, and wastewater lines. The system now has seven partners and has driven over $150M in private investment since 2013, creating over 300 new jobs in the community, and causing broadband prices to drop dramatically.
Huntsville, Alabama, and Westminister, Maryland, present another option. They designed, financed, and constructed dark fiber and leased that fiber to a private party—in Huntsville’s case to Google, in Westminister’s case to a small company named Ting—who then took responsibility to perform the rest of the tasks.
Huntsville had the added feature of involving the local municipal power company. Indeed, power companies have played a critical role in a number of projects as they have a number of assets that can be deployed, at low incremental cost, to significantly reduce the capital costs of a new fiber deployment.
Indeed, electric co-ops hold great promise for rural areas. Co-ops essentially have an economic edge in providing such services as they spread their cost for both electrical and communications services across common infrastructure and similar back office operations. They also have a pre-existing relationship with the customer. In Arkansas, Oklahoma, and Missouri, more than 15 such coops are constructing and operating fiber networks to provide 1-gigabit symmetrical services to their members.
Unfortunately, while North Carolina has 26 electric cooperatives capable of bringing fiber-to-the-home to rural residents, a 1999 state law limits the co-ops’ access to capital for telecommunications projects. Still, it is an avenue that holds great promise and should be explored further.
Other communities have taken on the responsibility of all the tasks, basically going into full competition with existing providers. These communities tend to be smaller, rural communities, many like communities in the Land of Sky Region. While some large cities have looked at this model, none have adopted it.
But communities in North Carolina don’t have all the options that communities in a majority of states enjoy.
I speak, of course, of the unfortunate law, H.129, that prohibits communities in North Carolina from engaging in self-help when that is the best option, and investing in public networks.
To me, it is simple. The primary objective of broadband policy ought to be to stimulate faster, better, cheaper broadband. There is no evidence that that law does so. There is evidence that that law makes broadband in North Carolina slower, worse, and more expensive.
Exhibit A is the fact that as a result of a court decision upholding that law, Wilson had to stop offering Pinetops faster, better, cheaper broadband and it is only by Wilson’s generosity that the service was not cut off.
So I hope your community, and others, speak with a unified voice and tell the Assembly: Tear down the law that prohibits you from providing faster, better, cheaper broadband.
And if they need further information, show them a recent report that offers some critical insights into North Carolina’s broadband situation.
It finds, among other things:
- North Carolina’s private providers are building their fiber-optic networks in a couple metro areas but little is being done in rural regions. RiverStreet is now building in North Buncombe County, so this may be a model for others.
- Only 12 percent of North Carolina’s rural population has a choice in broadband access. The rest have no option or only one option.
Surely the General Assembly should have better things to do than stifling those who want to bring world-class broadband to underserved communities.
But whatever the law, there remain creative alternatives, as we have seen in North Carolina, even if they add costs and increase inefficiencies.
There are creative alternatives in other states as well. For example, South Portland, Maine, did a deal with a private company in which the company undertook all the tasks but the city agreed to use the network for all its own enterprise purposes—effectively becoming an anchor tenant--and also received a 25% interest in the profits of the network.
Developments in next generation fixed wireless and satellite technologies may produce new models. Wireless, particularly for the final link, may dramatically reduce the economic costs. Satellite may help with the most remote areas such as mountain-tops. However, the limitations of satellite means that satellite cannot be the solution for most or your buildings.
In this regard, I urge you to pay particularly attention to the 3.5Ghz proceeding currently pending at the FCC. The FCC is considering a new paradigm of sharing spectrum that I think opens the door to a lot of creativity in how different communities can obtain the affordable, abundant bandwidth they need. While most of the debate has focused on how to use it to provide more capacity in urban areas, the framework also creates an opportunity for some rural communities to use it for a low-cost, high-bandwidth solution.
No one should look for a silver bullet. In addressing rural broadband, no single technology can address the wide range of requirements posed by differences in geography, population patterns, and local needs. In this way, each local area must work with the right set of partners to meet its own needs, while keeping in mind the benefits of working together to obtain the necessary scale.
When it comes to the community models, the fundamental trade-off is between risk and control. The more the community wants to control the outcome, the greater risk the community must undertake. Conversely, the community can lower its risk profile but it will inevitably have to give up commensurate levels of control.
There is no generic answer as to what is right for you. You have different assets, different ambitions, and different demographic profiles than all the examples listed above. You have to do a certain kind of analysis to determine what is best for you. But in doing so I would urge you to remember four things.
First, you really are stronger by finding the right level of aggregation. Scale matters. If only one town in the Land of Sky region were interested, it would be hard to get the attention of potential providers. By virtue of greater scale you will garner greater attention and greater options. But as noted above, this has to be balanced with local needs, assets, and priorities that will differ between communities.
Second, the process will involve a complicated relationship with incumbent providers. Relative to the status quo, this process is unlikely to be helpful. But that does not mean they are your enemy. They are driven by investment math and your task is to make the investment math as positive as possible. What we have seen in a number of communities is that when pressed by the change in the equation noted above, they often step up and accelerate the upgrade of their network in ways that achieve the goal of offering affordable, abundant bandwidth. As in any negotiation, both sides will have different points of view but you should work with them as you would work with others to achieve what is best for the county.
Third, this does not happen overnight. Even Google, one of the fastest movers on the planet, took years to build its networks. If you go too fast you are setting yourself up to fail. So you have to have a long-term perspective that includes a 3-5 year time horizon for planning and deploying the network.
Fourth, you can help potential service providers understand the economics by providing them information on your unserved and underserved areas and by helping to aggregate demand in order to mitigate risks.
The effort should not just be about the broadband network. It needs to be about the entire broadband ecosystem.
And this leads to the fifth question: what else should be done to assure that the network actually drives economic growth and social progress?
There are many paths up the mountain. I suspect many in this room have better ideas than I would when it comes to how your region should proceed. But let me offer some thoughts based on my experiences with other communities.
First, get everyone on. Adoption is a vexing problem, combining elements of affordability, literacy, and relevance. But it is also viral; the more members of a community who are on, the greater the incentives for others to get on. And once universality is achieved, it opens the door to all kinds of community improvements not available to those communities half on and half off.
Second, use the platform to better deliver public goods and services. All large enterprises are moving off the old analog platform and moving strictly to the digital platform. If you want to sell them something, if you want a job, if you want information from them, you have to be on line. They don’t do this because they are nerds. They do this because it improves their ability to constantly improve how they deliver goods and services.
Government, because it has to serve everyone, cannot migrate as easily, another reason it is important to get everyone on. But government should also aspire to constantly improve how it delivers goods and services. That means ending the era of lines and paper and making all government services web-based, providing greater transparency, always on, and above all, using more reliable data to improve performance.
Third, help every enterprise to become a networked empowered enterprise. Amazingly many small businesses are not online. This not only undercuts their ability to sell, it makes it more difficult for improved efficiency in buying, operating, and accounting made possible by cloud-based services. Not every company needs to be a web-based company. But every company can benefit from the services now available on the web.
And fourth, make sure your network accommodates the next technology shifts. The next two great networks to be built are the 5G next generation mobile network and the civic Internet of Things, bringing intelligence to the infrastructure underlying our communities. Both will share a need for, and operate over, a good wired network. Now is the time to start adopting the network to those emerging needs.
I began on a personal note and if you’ll indulge me, I’ll end on one as well. Three decades ago, I was also working with a friend, Martin Eakes, who started the Center for Community Self-Help and the Self-Help Credit Union, and which has grown from its Durham roots to help a number of communities in North Carolina, including here in Asheville, where they operate out of this beautiful, iconic building. From the $77 the group raised at its first bake sale, it has grown to put to work over $7 billion for self-help efforts.
From that experience I draw two lessons. First, help begins with self-help. Second, small things can lay the foundation for big things.
As was true for Asheville efforts to help itself that led to the downtown parking garage and catalysts for the city’s renaissance three decades ago, in the near future, the kind of network that you have started working on will be a critical catalyst for addressing the challenges and opportunities of this century and to build a better life for this region, its children, and generations to follow.
Blair Levin is the Executive Director of Gig.U. He also serves as a Non-resident Senior Fellow of the Metropolitan Policy Project of the Brookings Institute. From 2009-2010, Mr. Levin oversaw the development of the FCC’s National Broadband Plan. FCC Chairman Tom Wheeler cited Mr. Levin’s work, noting “no one’s done more to advance broadband expansion and competition through the vision of the National Broadband Plan and Gig.U.” Prior to his work on the National Broadband Plan, Mr. Levin worked as an analyst at Legg Mason and Stifel Nicolaus. Barron’s Magazine noted that in his work, he “has always been on top of developing trends and policy shifts in media and telecommunications … and has proved visionary in getting out in front of many of today’s headline-making events.” From 1993-1997, Levin served as Chief of Staff to FCC Chairman Reed Hundt. Previously, Mr. Levin had practiced law in North Carolina, where he represented new communications ventures, as well as local governments. He is a graduate of Yale College and Yale Law School.