Are Google, FCC initiatives overkill?

It should be affordable; every American should have access, and its ubiquity is critical for the nation’s future. Health care? No, broadband, and very high-speed broadband at that, according to two recent proposals from the FCC and Google.
Amid claims of untapped applications and business potential and a poor showing by the U.S. against other countries on the broadband penetration curve, those campaigning for aggressive bandwidth expansion have gained much media attention. But market realities, including costs and demand factors, leave others wondering what the urgency is all about.
Although there’s little to no evidence of a great consumer clamor for ultra-high-speed broadband, Google has clearly touched a nerve at the community level with its plans to build 1-gigabit-per-second optical fiber networks “in a small number of trial locations across the country.” The project would bring fiber directly to homes.
Google’s Request for Information attracted responses from 600 communities by the March 26 deadline, including Columbia (where 98 percent of the population has access to broadband Internet, defined by the FCC as 0.8 megabits per second or higher. Dial-up access uses a 56-kilabit modem.)
Meanwhile, the FCC’s National Broadband Plan advocates regulations that would give at least 100 million households “affordable” access to at least 100 megabits per second downstream and at least 50 mbps upstream. Schools, hospitals, government buildings and other so-called “anchor” facilities in every American community would have access to 1 gbps.

“Affordable” and “competitive price”

The FCC’s proposal uses “affordable” 45 times, and Google says its service would be offered at a “competitive price” — all vague, relative terms. Google and the FCC didn’t respond to multiple interview requests, so it’s difficult to determine whether there are formulas behind those terms or whether they’re just well intentioned placeholders.
“I don’t think the commission has in mind some specific amount,” said Harold Furchtgott-Roth, a former FCC commissioner.
More likely, some said, the FCC would follow the 1996 Telecom Act, which has several provisions addressing affordability as well as comparability between rural and urban areas.
The fastest U.S. residential broadband services on offer in the U.S. come from two medium-size cable companies: Suddenlink’s 107 mbps, which costs $120 per month outside of a bundle, and Mediacom’s 105 mbps service, priced at $150. It’s anyone’s guess how much a 1 gbps service would retail for, but it would probably be significantly more unless the operator can sell enough services over that pipe to price access as a loss leader.
That strategy almost certainly will be put to the test because, based on ScreenPlays’ interviews with some of the communities bidding for Google, many potential customers are unwilling to pay more than $100 per month for 1 gbps.

$1,000 per subscriber?

Of course, the cost of building and operating a super-fast network — whether it’s 100 mbps, 1 gbps or somewhere in between — is another major influence on the retail price. Those costs vary by technology.
For example, scratch-building a Gigabit Passive Optical Network costs about $1,000 per subscriber, and DSL (Digital Subscriber Lines) implemented on an existing copper-pair network costs about $300, according to Tellabs. When wiring a neighborhood for FiOS, Verizon currently has a target of about $750 per home.
“Actually connecting a home to the network when a consumer orders the service is about $600,” said John Schommer, Verizon’s director of consumer broadband product development. “Much of our cost is associated with labor surrounding actual placement of the fiber.”
Some analysts said Tellabs’ $1,000 estimate is in line with what they’re hearing from operators and other vendors.

Cart before the horse?

Today, only about 11 percent of consumers said they’re willing to pay more than $40 to $45 per month for faster service, according to In-Stat’s periodic surveys. The low take rates for today’s 50 mbps services confirm those findings.
“Time Warner Cable in New York City has something like 400,000 to 500,000 cable modem subscribers, and their DOCSIS 3.0 50 mbps service has been available for maybe six months,” said In-Stat’s Paxton. “They’ve had 2,000 people sign up.”
Operators who currently offer 50 mbps or faster services said there’s currently no killer app driving upgrades.
“Some customers are high users of peer-to-peer services, [and] some are early adopters of over-the-top video,” said Verizon’s Schommer. “Many simply use the higher bandwidth for work at home.”
Why aren’t more consumers upgrading? It’s not an academic question. Instead, it goes to the heart of the main assumption behind the FCC and Google proposals that many, if not most, people want super-fast broadband but can’t get it. The paucity of 50 mbps and 100 mbps subscribers indicates there are price barriers to adoption that an aggressive built-out strategy might not be able to overcome.
Besides price, the other factor holding back adoption is that the vast majority of consumers aren’t using apps and services — such as HD movie downloads — that require more than the 5 to 10 mbps they currently have. So the next question is whether they will be using those services by the time the FCC and Google proposals become reality.
“This probably is a product that’s not ready for the residential world quite yet,” said Tom Larsen, vice president of legal and public affairs at Mediacom, which offers 50 mbps and 105 mbps consumer and business services in several markets. (In Columbia, the 50 mbps service costs $99 per month in the first year and then $124.)
“Our take rates are going to be higher, at least for the first few years, in the business sector,” Larsen said. “By and large, the demand is coming from the small-business owner. I just don’t see the average household needing this much bandwidth today.”
Others liken the situation to the initial migration from dial-up to broadband, which seemed like expensive overkill until apps and services such as VoIP, Hulu and YouTube made it justifiable.
“People would say the same thing: ‘I’m paying $9 for Internet. Why would I pay $60?’” said Rich Swier, Jr., co-founder of The HuB Sarasota, a tech and creative incubator that worked with its city on a Google proposal. “It is chicken and egg. Many people don’t understand the value because there’s no value to be had yet.
“I think what Google is starting to do is seed the market and get people excited, [do] some test markets and then deploy a slew of applications that would demonstrate the power of having it.”
Other companies are seeding the market, too. One example is the growing selection of TVs with built-in broadband capabilities that make it easier to watch over-the-top video.
As the installed base of those sets grows, so does the likelihood that more OTT content providers will increase their selection and video quality. A household with one or more TVs tuned to OTT video could strain its broadband connection to the point that upgrading to a 100 mbps or 1 gbps seems justifiable, especially if the OTT selection is good enough that the household can drop the video portion of its bundle and apply that savings toward faster broadband.
“At some point beyond five years, I expect the major consolidators of sports programming — whether it’s the NFL, NBA, MLB or the NCAA — will cut out the middle man and say, ‘Our programming is for sale on the Web,’” said former commissioner Furchtgott-Roth. “And if you want the highest quality video, you’re probably going to need at least 20 mbps to enjoy it.”
Network technology comes into play here, too, in terms of how quickly and cost-effectively an operator can upgrade to meet the bandwidth demands of emerging apps — or to counter a rival’s courtship of that new market.
None of those upgrades is cheap, but they’re incremental compared to, say, replacing copper with fiber.
“The question becomes, do you deliver speed and consistency prior to the demanding applications or build applications that drive the need for more bandwidth?” said Ken McMahon, vice president and general manager for CenturyLink’s North Missouri business unit.
In that respect, operators are in the same position as their customers: When and how much they’re willing to spend on upgrades depends on whether they see value in the extra speed.

Boost upstream first?

Some business users, including those who are helping their communities court Google, said they’re generally satisfied with today’s downstream speeds. They’re more concerned with upstream, which struggles to handle, for example, 5-gigabyte video files that firms sends to clients.
The killer app for 100 mbps or 1 gbps networks might be in the upstream rather than the downstream. The same might apply to the residential market, especially as consumers upload more and more video.
[A longer version of Tim Kridel’s article originally appeared in Screenplays, a broadband information resources magazine. www.Screenplaysmag.com]