An increasing number of US cities are considering a deployment of fiber networks to ensure job creation, economic development, and quality of life for their residents. Community leaders realize that the younger generations and businesses of the future will not accept inadequate broadband access. What they also realize is that the incumbent providers will prioritize their investments to the bigger markets or the densest urban areas where the business case is the most favorable. It’s simply how the market dynamics work. For the US to reach its national broadband target and to stay competitive in an increasingly connected world, cities need to build networks. The right model for community networks is Open Access and this blog post will explain why.
What is an Open Access Network?
First, we need to agree on what the Open Access business model is, since there are more interpretations of the term than one could count. Some people consider a model where a network owner builds a fiber ring in the community and allows multiple providers to tap on to that fiber and build their own last mile network to the actual houses, as Open Access. We don’t encourage that approach since it won’t create enough choice for the end user, which is the very definition of Open Access.
The Open Access model described here is a 2 or 3-layer model where there are subscribers, service providers, an operations company, and a network owner. In the 2-layer model the network owner is also the operator managing their own network, while in the 3-layer model the network owner has contracted an external operations company to manage the day-to-day operations of the network.
The network owner will build the actual fiber infrastructure and maintain it. This is the ideal role for the city or community to be in, and often in mature open access markets this is a utility company since they are used to deploying cables or pipes in the ground. The most important thing to remember is to document the network properly so that it will be easy to locate e.g. a fiber cut in the future or how to do construction work without the risk of cutting the optical cables.
The operations company would manage and often supply the active layer equipment in the network. This means the routers and switches that control the actual internet traffic and keep track of which ports should be open or not, among other similar things. When a subscriber orders a service, it’s the operations company that will make sure that service is properly activated with the service delivered by the service provider that was chosen by the subscriber. Large operators often have systems that could automate this, so that the subscriber could get the service activated instantly.
The service providers are generally private companies who specialize in delivery of IP based services such as Internet access, VOIP (Voice over IP, replacing the traditional phone line), IPTV (replacing traditional TV) and other services getting more common today, such as home security, cloud storage, elderly care services, etc.
The very important difference in the Open Access network compared to traditional networks built by a service provider is that the subscriber has a choice. Since the Network Owner (the city) has built the network all the way to the house, they open the market to any service provider to sell services to the subscriber. If you’re not happy with your current provider you can just switch to another one. It’s even possible to buy Internet from one, TV from a second and VOIP from a third provider.
What about the money?
In the Open Access model the subscriber will buy the services from service providers, most commonly from a marketplace provided by the operations company where all the providers and services are published for subscribers to easily compare and choose what suits them best. Just like an Appstore, where all apps are easily available to the smartphone user. Subscribers would pay service providers directly and receive technical support from them as well. The service provider would in turn pay the operations company a fee for being allowed to deliver services over the network, normally a monthly fee per service. Then, if the network owner is a separate entity than the operations company, there is an arrangement between those two, that normally goes two ways. The network owner is paying the operations company money for operating their network, while the network owner is sharing the revenue from the service providers based on how much utilization (customers) there is on the network.
A pothole some network owners and/or operations companies have come across has been sending bills to the subscriber, for example a monthly fee that’s supposed to cover costs for maintaining the fiber infrastructure. This setup is very costly for numerous reasons. One is the cost for the handling of all those invoices, but the major issue is that it creates uncertainty for the subscriber about whom to contact when they have a problem. Because they get invoiced from multiple entities for their broadband related services, they might contact the network owner or the operations company with issues that should be handled by the service provider, and vice versa. This confusion will cause a lot of unnecessary communication between the different parties, perhaps sending the customer back and forth.
The customer should get one single bill from the service provider and all inquiries should go through the service provider. The operations company will need much less staff and focus on the more technical issues the service providers cannot handle.
Who will connect the farmer?
Everyone can agree that the farmers are quite important, since they provide the food we eat. But the farmers are as affected by the new digital era as everyone else. They collect their orders online, they pay their bills online, and have many high tech devices like milking machines that expect network access. Their kids also need to be able to do their homework which is has moved online. But the costs of building to these areas of low population density make a return on investment challenging. Private companies must make money to survive and in all honesty, would you be happy to see your retirement fund investing in companies who wasn’t trying to maximize their profit? No, many profit-maximizing firms will not build to rural areas. But the community has a different agenda. Communities recognize the importance of investments that create indirect benefits as well as direct benefits.
The above scenario also explains why the “dark fiber middle mile” version of Open Access won’t work. Even with a fiber ring, the service providers would only build where they are able to make a quick return, leaving farmers even worse off because cherry-picking off the middle mile would result in less overall revenue for a business model that would connect everyone. Having local government build an open access fiber network to everyone will avoid this problem.
Why Competition is key to success
As in all industries, competition will drive the price down and quality up and competition is only created if the end customer can actually make a choice between different providers. Research from my home country of Sweden, with the most mature open access approach anywhere, shows that there is a clear correlation between the number of service providers and the price of service. Especially when you go from one to two and three providers, but even the ninth and tenth provider will help to push the price down.
In the lowest cost community networks, a 100 Mbps symmetrical Internet service costs approximately $25. In Sweden the hundreds of Open Access community networks have been key to the vast build-out of high-speed broadband and especially fiber networks. Sweden has a population density of only 57 people per square mile (US has 90) but according to PTS (Sweden’s FCC) still 99.99% of the population has access to at least 10 Mbps broadband, 73% to 100 Mbps and 79% have access to fiber (within 45 yards of a fiber line). These numbers are for 2016 and increasing rapidly as both private and public network owners are now competing fiercely to reach the last customers with fiber first. So at a national level the build-out of strong community networks also pushes the private telecom giants to build more and faster and provide higher speed services at competitive prices, which benefits the country as a whole.
The Open Access model is also an enabler for the city to control the subscriber price on an aggregate level. If the city wants to subsidize Internet services to increase adoption they can simply lower the cost to the service providers to sell services on the network, which due to competition will drive the end customer price down and lead to higher utilization.
Why Open Access is necessary for Smart Cities
Today there is a big trend towards IoT (Internet of Things) where a lot of different devices and machines are connected. It could be everything from the heating system in your house being accessible to control and monitor via an app in your phone, to the utility placing smart meters in every home, or street lights that are connected to be able to allow much more sophisticated management of traffic, enabling free passage for emergency vehicles. All these smart services that will benefit the community and residents will be easy to implement if the city owns a citywide fiber network, but consider what happens when the entire network, or big parts of the network (in the case where the city only builds the fiber ring) is owned by private providers.
Let’s say you have five different profit-driven providers owning the infrastructure. This means you need to negotiate five different agreements to be able to deploy the services and still you might not be able to do a city wide roll-out, since the private providers will only have built their network in areas where they reach their ROI targets. As a city you might be forced to build those “worst” areas just to be able to deliver those smart services to all who need them and thereby force you into being a network operator anyway. With an open access network reaching every desirable end-point you’re ready for any smart service application the future may hold.
Yes, the private service providers will be able to make money
There is a fear that open access would lead to great service for subscribers but push the prices so low that ISPs will not have enough margin to profit. The answer is yes and no. No, those companies who don’t adapt to the competitive nature of the Open Access networks won’t make money. If you don’t deliver capacity and speeds as promised and don’t have excellent customer service (things not as important if you own the infrastructure and the customers have no other provider to turn to) you probably won’t be very successful in the long run. Also trying to lock customers in with long contracts or using data caps will be a hard sell in a competitive environment.
For those providers who focus on delivering high quality of both service and support at a reasonable price, there is the chance to also be very profitable. By focusing on service delivery, customer care and billing and not having to spend resources on capital intensive construction and maintenance of the physical infrastructure, they can build a highly specialized organization.
It’s also easy for new entrants, since there are no large investments as would have been the case if you are to build your own infrastructure. In Sweden there are numerous nationwide service providers who started with just a few guys in a basement, today creating jobs for hundreds of young, service-minded people. Even though the price for broadband in Sweden is lower than in the US, the profit margin among Service Providers on Open Access networks in Sweden is looked upon with envy by companies in other industries.
Open access is the right choice for cities who consider building their own network infrastructure. It’s important that the network is built all the way to the subscribers’ property. This way the digital future of the city is in their own hands. They can decide which providers are allowed to sell services on their network and adopt smart city services as they please. It will also give more power to the subscriber since there is competition at the subscriber level. This will make sure services are delivered with quality and at reasonable prices. The affordable prices will increase adoption and subsequently create the benefits the new broadband enabled services will bring to the community as a whole.
Isak Finer holds a position as Chief Marketing Officer at the software company COS Systems, founded in Umea. Umea is a city in the northern part of Sweden, and is home to one of the world’s first city owned fiber networks (built in 1994) and now home to a number of open access operations companies as well as some of the largest nationwide service providers. Today COS Systems, through the subsidiary COS Systems Inc has most of their customers in USA. Mr Finer is managing the sales and marketing teams bringing to the market two major innovative cloud-based software platforms; COS Service Zones, for demand aggregation and analysis of the expected costs and revenues of fiber roll out in different zones and COS Business Engine, a business and operations support system enabling open access operations companies to efficiently operate multiple networks with multiple service providers. Isak is also regularly invited to speak at Industry trade shows. He holds a MSc degree in Industrial Engineering and Management from Chalmers University of Technology, Sweden, and has further academic experience within economics and entrepreneurship from Stanford University, CA, University of California Berkeley, CA and Uppsala University, Sweden.