Broadband in the Sticks

Market failure ââ?¬â?? two words heard when discussing the spread of broadband to small cities and less densely populated areas. Market failure ââ?¬â?? the chief reason municipal broadband activists give when citing the need for government to fund infrastructure projects like Utah’s UTOPIA. There are some areas of the country, they say, where private investment won’t go. There are some areas of the country, they say, that offer no profitability to attract enterprises. The government, dammit, must step in. Oh, really? In catching up with my e-mail alerts, I came across “Zayo Plans Broadband Success in the Boonies” by Carol Wilson in Telephony OnLine. Seems like one entrepreneurial start-up sees opportunity in small markets.

Zayo Bandwidth is getting its start with the acquisition of a series of regional fiber networks, and founders Dan Caruso and John Scarano have lined up $225 million in funding from major venture capital firms, including Battery Ventures, Centennial Ventures, Columbia Capital, M/C Venture Partners and Oak Investment Partners. Caruso and Scarano are both veterans of ICG Communications and Level 3 Communications and are strategically positioning their new company to cover areas they believe are not well-served today. The initial two acquisitions are PPL Telcom, an Allentown, Penn., company that serves the Northeast via a 4600-route-mile fiber network and Memphis Networx, a 200-route-mile fiber network serving that metro area. In addition, Zayo has definitive agreements in place to buy Indianapolis, Ind.-based Indiana Fiber Works (IFW) and Minneapolis, Minn.-based Onvoy. “Our strategy is to acquire unique fiber-rich assets throughout the country to create a company that provides large bandwidth responsibly, quickly and reliably,” Scarano said in an interview. “We are being selective in the markets we invest in. Where we are buying the assets, there is limited deep metro competition. We generally do not have assets in NFL cities, but mostly in Tier 2 and Tier 3 cities that have ties to NFL cities. By investing in those areas where incumbents have not invested and where other competitive carriers have largely not invested, we will be able to keep up with the bandwidth demands of businesses in those areas.”

For those who have followed the muni broadband controversy, the fact that one of Zayo’s first investments was in Pennsylvania, where state legislators passed legislation preventing municipal government from setting up competitive broadband operations, is particularly significant. And in Tennessee, municipalities face stern tests and voting requirements before they can set up broadband operations. Opponents said these laws would lead to entire regions missing the digital era. Free marketers said laws like these, in keeping governments out of the market, would make states more attractive to a new generation of broadband investors. Let me know when Zayo hits Utah.