WASHINGTON, May 22, 2014 – In a Wednesday webinar, the Fiber to the Home Council invited broadband planning firm Magellan Advisors to discuss their ways of advising communities seeking to build advance broadband networks.
Guest members included Magellan Advisors President John Honkers and Vice President Kyle Hollifeld. They described their firm as a ‘turnkey’ that offers aid from initial planning stages to implementation of networks, and even helping operators manage networks once they’re established.
“We like to think of ourselves as the guys in the field who see what’s happening every day and bring that back to the consulting side,” said Magellan President John Honkers said. “[We look at] what things work, what don’t work, and how to really manage these projects on a long term basis.”
When constructing broadband and fiber networks around the country, Honkers said that municipalities. private operators, and public organizations have to balance sustainability with community needs.
“[Communities] who have longer return of investment are more difficult to achieve,” he said. ”It’s expensive to get into small business because the revenues they generate [are] not significant enough to sustain a project on its own. On the other hand, shorter returns of investment are more sustainable, but we’re missing out on community needs from a public organization’s perspective.”
Honkers stressed the need for a marriage between those two types of projects – and that private sector operators and public organizations have to be in alignment for a project to work. The parties need to consider the needs of service providers, capitalization issues, and access to funding like grant and loan opportunities.
Honkers said: “One of the key things we’ve been witnessing recently is, what existing networks and assets do communities have that can be leveraged to expand fiber and lower the cost of it?”
Hollifield described different types of business models as belonging to “a chain.” The farther up one moves along it, the greater the risks and rewards are for the community. These business models can take on a variety of flavors such as municipal-only, where municipal providers take on sole burden; or municipal-open access, where municipalities or public organizations are negotiating open access requirements with their partners. Those partners can be direct providers or providers coming onto a network as wholesalers or retailers.
Five major business models were discussed, including:
- “Partner, no assets”
- “Dark Fiber, single provider”
- “Dark fiber, open access”
- “Lit Fiber, open access”
- “Direct provider”
The first couple of models are less popular and are not very focused on communities taking an active role. The opposite is true for open-access dark fiber and lit fiber, which emphasize cities taking an active role in providing services down to the premises.
“What we see in most communities is cities moving closer to that type of open network by taking an active role in expanding the last mile by bringing it from their backbone,” Honkers said. “Cities are more adept at [reducing costs] if they have existing outside plan operations and are already building last mile operations.”
“They see there’s an obvious advantage because cities and electric utilities have a lower cost of capital that can be used to build and finance this network than could otherwise be done in the private sector,” he added.
He added that public sector network building involves lower costs of capital over a longer period of time. Instead of a three to four-year payback, there’s a 10 to 15-year payback period on municipal financing. This reduces the cost of infrastructure that is later released back out to providers.
Lit fiber networks are also popular in communities that wish to push competition further into their markets, Honkers said. Unlike dark fiber networks, which “partition the network” by only allowing a single provider to service a single customer, lit fiber networks allow multiple providers to serve a network so an end-user – whether a home or a business – can potentially pick whichever service they want through a provider instead of being limited to one.
Hollifeld lastly spoke about direct providers, or municipalities that realize they can provide the greatest service with the greatest benefit all by themselves.
“Their cost of doing business and cost of capitalization is much less expensive than a private enterprise so they can afford to be a direct provider in some cases,” Hollifeld said. “It is a challenge. It has great rewards when it works, and a lot of risk when it doesn’t.”
“Without service providers, there’s not a lot that’s possible,” he said. “When we look at municipal public broadband projects, four out of five are built on an open access, a dark fiber, or some variation of that business model.
Equally important is the political environment.
“We come across this with every project we deal with,” Honkers said. “We’ve gotten to be a lot more political than I ever thought we would be. “Politics plays a huge role in setting policy and also delivering expectations to the community. We have to be wary of how those are going to affect the end results.”
Honkers recounted the story of one of Magellan Advisor’s clients – the city of Palm Coast – which was “pretty underserved when it comes to business broadband service.”
While the city initially began its network building on the premise of telecom cost reduction, the city realized – after building 70 miles worth of fiber throughout town – that a lot of its network resources could be used to advance community benefits.
“So the city quickly just realized ‘hey, we can build to the school districts and we can capture E-rate dollars to build out to these schools at a lower cost,” he said. “The city already had most of the backbone network built, just laterals were needed out to the schools.”
The city ended up bringing 17 schools to the network, providing one Gigabit per second capacity to each school. Before long, the concept was expanded to bring hospitals, counties, and public safety buildings onto the network to create a regionalized broadband network, he said.
Eventually, the decision was made to move beyond local government to businesses by adopting an open-access, lit fiber network.
“Instead of partnering directly with providers, they [Palm Coast] did their needs assessment early on to understand exactly what providers could utilize as incumbent assets and the key to that was plenty of backhaul and plenty of backbone.
“Instead of partnering directly with providers, they did the needs assessment early on to understand exactly what providers could utilize as incumbent assets. [The city of Palm Coast] hosted very little fiber in the ground. in terms of local fiber infrastructure, there’s plenty of backhaul, plenty of backbone.”
“They didn’t have the cost of building fiber,'” he added. “No capital [was] required. The city charged very reasonable local loop costs for access to that network and as a result of bringing that cost down for local fiber, businesses pay significantly less. In this case, it was all a matter of negotiating the deal with service providers to understand exactly what they can bring to the table, what their preferences were, making sure there was alignment with the city’s goals for economic development and bringing that network online.”
The results for Palm Coast were very positive, said the Magellan officials. The city significantly reduced its budget. School, business, and hospital costs decreased by 40 percent. Competition has increased.
The lesson to be learned, said Honkers: “Know your customers.”