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Reason Foundation

Don't Panic! Fiber Is Coming

High-speed Internet connections are coming to your town

Steven Titch
April 29, 2008

The municipal broadband fad has thankfully peaked as more and more cities see the financial havoc such plans can wreak on their budgets and credit ratings.

So, to the benefit of local taxpayers and their annual budgets, smarter cities have become more wary of mounting competitive broadband service. But what about areas where there is no broadband service at all? In many of these cities, usually with populations of less than 10,000, officials who otherwise lean toward fiscal prudence, say the only way to assure their residents will get broadband is if the city itself takes on the project.

Overlaid on this is the broader debate over fiber-to-the-home (FTTH). Pundits point to Japan and South Korea's commitment to FTTH. If these countries are doing it, shouldn't the U.S.?

True, the majority of U.S. broadband today is offered either with cable modems or copper digital subscriber line (DSL). For both, the latest versions deliver a maximum of 15 megabits per second (Mb/s). Translated into user terms, that means about 20 to 30 seconds to download a three-minute video. FTTH, which can offer 100 Mb/s, is indeed superior.

FTTH is available to only about 10 million U.S. homes, about 10 percent of all the homes in North America, according to an April FTTH Council report prepared by RVA Market Research. Of that group, about 2.9 million households have purchased service. While, penetration is still low, it's rising fast. Some 770,500, or 27 percent, of those 2.9 million fiber homes were added in the last six month, the FTTH Council reports.

Fiber is the future. Private capital is becoming available. The only question is how fast it begins to penetrate mid-level and rural markets. There is no doubt that within 12 to 24 months some consumers will be filling a 100 Mb/s pipe. At the same time, however, there will continue to be a substantial portion of households that will only need 10 Mb/s for the foreseeable future. Balancing the cost of fiber construction against FTTH take rates and ongoing demand for, dare we say, pedestrian broadband is going to be tricky. That's why government officials, from the local level on up to Washington, need to be careful about government-funded fiber.

For starters, despite all the attention the Koreans and Japanese receive for the fiber deployments, we don't know how much it's costing citizens in the long run. Foreign service providers are subsidized and competition is managed. Even though 100 Mb/s per second is being delivered to homes in these countries, we don't know the average bandwidth users are consuming. If it is only 10 Mb/s, 20 Mb/s or even 50 Mb/s, they are underutilizing capacity. This extracts an economic cost, because the Japanese and Korean service providers are not getting full value for their investment. In the end, that translates to higher costs for consumers in those countries, although the actual cost might be masked by subsidies, transfers and taxes.

In the U.S., the lack of rural broadband is a business plan problem. Right now, demand for 100 Mb/s and the cost of providing it do not intersect at a profitable point. There's no reason to expect it will stay this way. The history of broadband shows that demand for bandwidth continues to increase while costs continue to decrease. There's also no reason to think rural areas will follow the same deployment curve the big cities are - several years of cable modems and DSL before FTTH.

In the 1970s and '80s, telephone technology in most rural markets jumped from electromechanical to digital switching, skipping the generation of automatic electronic switches that were used in big markets until the early '90s. The current situation of slow rural broadband development is, at worst, is a failure of creativity, not of the market in general.

The key to speeding rural broadband - and broadband deployment anywhere - is to encourage a climate where investment is welcome and works in tandem with market forces. Already communities in at least 10 states can take advantage of cable franchise reforms the way Fort Wayne, Indiana, did. After franchise reform opened all markets in Indiana to telephone company entry, the Ft. Wayne city government aggressively pursued Verizon to invest $10 million in its FTTH rollout there.

There's no reason to limit thinking to incumbent telephone and cable companies. So-called competitive local exchange carriers (CLECs), such as Covad Communications and Level 3, have the resources to build local fiber backbones. Often they will look to serve an area business first, but that can anchor more growth and stimulate more demand. Local governments and state agencies such as ConnectKentucky and North Carolina's e-NC Authority specialize in helping local communities develop broadband applications and then bringing them together with service providers. Not only do the local incumbents support their efforts, but so do information technology companies such as IBM, Dell, Apple and Cisco, all of whom have a stake in seeing greater broadband deployment, especially on fiber optic platforms.

Still, will there be instances where government is the only option? Perhaps. But, unlike municipal models to date, investments do not have to be speculative. Governments run into problems when in attempting to be service providers. They risk millions of dollars in hopes they can effectively deliver sophisticated, tailored services that the private sector itself often struggles with.

A better approach might be similar what a few states are doing with toll roads. States have begun leasing toll roads to private operators, usually for a substantial upfront fee (see the Chicago Skyway and Indiana Toll Road).

The private operator is completely responsible for maintaining the highway and expanding it as needed. The company charges user fees to recoup its investment. State taxpayers benefit because they pay less in road taxes. Drivers "pay for use," but at a lower net cost gained from having a business, not the government managing the road. The large upfront payments in these leases can then fund much-needed infrastructure projects that the state couldn't have afforded otherwise.

Likewise, it is easy to imagine a scenario in which a small town builds a fiber network, than leases it, again at a substantial upfront cost, to a network management company, which then takes on the responsibility of signing up retailers and ensuring delivery of services. The municipality benefits from recouping its initial investment, through the initial payment and then through regular lease payments which service the remaining debt. Taxpayers end up far less liable, yet the community will end up being served by one, two or more providers who buy capacity on the backbone.

But even then, municipal ownership should be the final option, not the first. In broadband and information technology, nothing stands still. Demand is there and dollars are there. Fiber is coming. Don't panic.



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