High-speed fiber-optic cable ring impact will be far reaching—part three

In the last two parts of this series, we’ve written about the importance of fiber-optic networks to the nation’s economy and quoted from a number of recent broadband studies to make our case. We’ve found that economists are in general agreement about the future value of fiber infrastructure—one Michigan report estimates that it will be worth as much as $440 billion and 500,000 jobs to that state alone over course of the next decade—but when we started looking into the history of actual broadband investments, we encountered a much more confusing picture.

What can we do to ensure that high-speed connections are available to the businesses in this region? How can we ensure that this happens sooner than later? Generally, it appears, there are three alternatives.

One is to follow the example of world leaders such as South Korea, Japan, and Canada. That is: make fiber-infrastructure investment a national priority. In the U.S., this would mean establishing a program not unlike that of the national highway system, where the government allocates billions of dollars annually for maintenance and new road construction. A gasoline or usage tax would probably be assessed to generate the necessary revenues. (Is it naïve to hope that local money generated by this tax would also be earmarked for local projects?)

The other alternative is to appeal to the private sector and make it attractive for the current providers such as SBC, Verizon, and Insight to invest the money themselves. These companies operate, in effect, as legal monopolies. That’s because utilities require significant, long-term capital investment to earn a payback; and in exchange for this, our government guarantees them a market with little or no competition. This is the only way that a company like SBC can afford to invest in buried cable and control facilities and be able to amortize its expenses over 10 or 20 years.

Local governments grant these monopolies through franchise agreements. The problem, in the present case, is that these agreements generally cover telephone service, not advanced high-speed broadband. In addition, “fiber-to-the-premise”(FTTP) infrastructure competes with current copper infrastructure at the low end of the market. The shareholders of SBC and Verizon could not be less concerned about the needs of Rockford. Their only interest is the near-term value of their stock, and that means having the best returns possible on their investments.

So how do we get an SBC or Verizon to invest in new infrastructure in northern Illinois? The answer, we think, is to raise the threat of competition through the development of a community network such as the one that the City of Rockford is envisioning.

In fact, if we look at successful high-speed broadband initiatives across the country, we find that they’re in places where communities have done just this. Go to Waterloo/Cedar Rapids, Iowa; Chattanooga, Tenn.; Tacoma, Wash.; and (even) Rochelle, Ill., and you’ll find fiber-based networks with connection costs that are less than a tenth of those that exist today in this region.

Many of the communities around the country that have successfully deployed (meaning ubiquitous, low-cost service) are those that already had municipal electric utilities in place. There are more than 2,000 such communities nationwide. Municipal utilities exist because communities uniquely have their own best interest at heart when it comes to investment decisions. They exist because they could not find someone else to own and operate the needed service at the price they need.

Since the Rockford area does not have a municipal electric or telephone company, what about local private investors? This could work, but the build out will be very slow, and the service will go first to the best possible customers, not everyone. The chief issue dissuading private investors is the long-term nature of the new fiber cable infrastructure. Municipalities can successfully sell low-cost, tax-free bonds to fund such long-term investments. That is how our roads, water and sewer systems and fire stations are funded.

We are advocating a public-private partnership to solve the problem. The public entities in the area can raise capital via bonds to fund the long-term infrastructure costs. A widely held, locally owned cooperative can be formed to fund short-term capital needs and to operate the services of the infrastructure. Some of the revenue would go directly to pay off the bonds and fund future investment, and some of the revenue would go to the operations group and back to the local investors. Keeping it local is key to long term success.

This model has been successful elsewhere. It also tends to spur additional outside investors. As SBC and Verizon look to invest, communities that show interest are obviously at the top of the list. The worst thing is for us to do nothing.

From the April 27- May 3, 2005, issue

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