purple motes

The city of Burlington, Vermont is providing communication services for its residents over a new, advanced municipal fiber optic network. Burlington is a city of about 40,000 persons. The city department that builds the network, operates it, and sells communications services is called Burlington Telecom (BT). BT had been designed and operated to be self-sufficient. BT receives no city budget or special tax revenue.

BT has been much more successful than other new communications services providers. Construction of BT's fiber network began in 2005. BT provides wholesale services on an open access basis to other communications service providers, and it provides telephone, cable television, and broadband Internet services to retail customers. BT signed up its first customer in 2006, went cash-flow positive for operations in 2007, and is projected to cover its debt and be profitable about 2009.[1] The network is intended to offer long-term, advanced communications services to every resident, business, and institution in the city. By the end of 2008, the network will be sufficiently extensive to do that.

One important factor in BT's success has been the expertise and leadership of Tim Nulty. After an impressive career working for the United Auto Workers, the U.S. government, the World Bank, and a private capital fund addressing telecom start-ups in Central and Eastern Europe, Nulty came out of retirement to provide key direction for the Burlington project. Unfortunately there's only one Tim Nulty. But other cities have good leaders, and they can learn from what Nulty has done.

Nulty emphasized a "build the barn you can afford" approach to building BT's network. BT first built a network for Burlington city government organizations, which served as anchor tenants. The network was then extended to selected large businesses. Subsequently it was expanded to serve residential customers.

BT benefited from relatively low cost of capital. Koch Financial Corp., an organization of private investors, provided $20 million dollars for the project at 5.17% interest.[2] The physical network itself, rather than municipal guarantees, provides the backing for the loan. However, as municipal finance, the interest is tax-exempt. Tax-exempt municipal bond financing provides capital much more cheaply than private equity finance.

A factor less widely understood is that providing retail services has been critical to making BT financially sustainable. BT's retail services include differently priced bundles of telephone, Internet, and cable services similar to what commercial service providers offer. Since BT offers wholesale services on an open access basis, commercial services providers could out-compete BT at the retail level and confine it to wholesale service provision. Given that city departments typically do not excel in complex, competitive retail services, that probably would be a desirable long-term outcome.

However, beginning a municipal network with retail services makes good financial sense. Establishing a municipal network necessarily requires mobilizing the population to support it. Commercial service providers, in contrast, need to make huge expenditures on advertising and marketing to gain popular recognition and to attract customers. Moreover, pre-established popular support for a municipal network makes customer uptake relatively predictable and scalable. BT has had a take rate of about 30% of houses passed.[3] At the recent Freedom to Connect conference, Nulty emphasized that not allowing a municipal network to provide retail services is a sure way to kill it.

Update: See also the East Central Vermont Community Fiber Network.

Update 2: Burlington Free Press article on Burlington Telecom. Tim Nulty's response. More on the Vermont E-State and the East Central Vermont Community Fiber Network clash with the Vermont Telecom Authority. Summary: technology is easy compared to the interaction of human egos.

Notes:

[1] From Tim Nulty's presentation at Freedom to Connect, 2008.

[2] This was for Phase 3 and 4 of the project. A $2.6 million loan for the initial phases was at 5.63%. See p. 3. of Christopher Mitchell, Burlington Telecom Case Study.

[3] Ibid.

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OECD broadband rankings have become a leading indicator of progress in communications development. Broadband subscribers per 100 inhabitants for the United Kingdom, France, Japan, the United States, and Germany are 21.6, 20.3, 20.2, 19.6, and 17.1 (Dec. 2006 figures). These statistics depend on reporting from a large number of bureaucrats in private telecommunications companies. For private sector statistical reporting, 90% accuracy is typically good enough, and 95% accuracy usually is not cost effective. That means that true broadband subscribership per capita figures for France, Japan, and the U.S. probably fall within the same range of reasonable possibilities, while the U.K. may be slightly higher and Germany slightly lower. Some much smaller-sized economies have perhaps 50% greater broadband subscribers per capita.

In the U.S., many persons are obsessed with being number 1. Here at the Carnival of the Bureaucrats, we applaud popular enthusiasm for being a number. But bureaucrats are capable of producing many numbers, each unique and special. What's important is not what number you are, but what that number actually means. We are concerned that some persons may believe that, because they don't get a particular number, it's game over. The game will surely continue.

An important measure of progress is broadband service for persons in rural areas. Bureaucrats in many countries are concerned to cover their digital divides. A recent Pew Internet release, "U.S. Lags behind: Why it will Be Hard to Close the Broadband Divide," observed:

To reach the underserved, policymakers might consider more aggressive and targeted outreach efforts that educate hard-to-reach populations about the benefits of online connectivity.

This month's Carnival of the Bureaucrats features the efforts of an off-duty government bureaucrat to do just that (see video below).

Click To Play Video

Paul Conley discusses upgrading essential IT support services for organizational excellence, employee training programs, and learning-organization initiatives:

A few months ago I asked the managing editor of an email newsletter company what her newsletters looked like on a Blackberry. She didn't know, she said, because the company didn't provide her with a Blackberry. That, in a nutshell, is everything that can possibly go wrong with a journalist. Her curiosity, her pride, her tenacity and her common sense had all disappeared. Don't let that happen to you. If you don't have a Blackberry, borrow one for a minute and check out your publication. If your company won't give you a gorgeous and expensive SLR digital camera, then get yourself a cheap little one that fits in your pocket. If your company won't pay for someone to train you, then teach yourself.

Don't forget to get certification that you've completed that course.

Mr. Juggles at Long or Short Capital describes a Regulatory Efficiency Theorem. This theorem shows that investments in regulatory action have a multiplier effect on economic activity through stimulating further investments in merger and acquisition specialists, lawyers, and lobbyists.

Alvaro Fernandez at the Brain Fitness Blog discusses the importance of cognitive training for an aging workforce. Many companies now advise desk-bound employees to do simple exercise to avoid office-related physical injuries. Companies should also care about keeping their employees' brains working well. A Brain Fitness training program would be one way to do that. Having interesting, challenging work would be another. That latter option, however, may not be feasible in many circumstances.

That concludes this month's Carnival of the Bureaucrats. Submit your blog article to the next edition using our Carnival submission form. Submissions should conform to the Carnival regulations. Past posts and future hosts can be found on the Carnival index page.

Offer Comments

Homes in Japan are rapidly being connected to optical fiber communications networks. Japan's incumbent communications company, NTT, had 6.08 million subscribers to its fiber network at the end of March, 2007. That figure indicates an increase of 2.66 million subscribers from March, 2006.[1] NTT's share of fiber network subscribers in Sept., 2006, was 66%.[2] If that share held constant through March, 2007, total fiber network subscribers in Japan at the end of March, 2007, was 9.2 million.

NTT's plans suggest that all homes in Japan will be connected to fiber networks by 2010. NTT East already has fiber reaching at least 75% of homes in its service area.[3] NTT as a whole seeks to have 30 million fiber network subscribers by 2010.[4] Japan has about 50 million households in total. NTT's plans are thus consistent with, in 2010, it having a 60% share of fiber network subscribers and all households in Japan being connected to fiber networks.

Having ubiquitous fiber networks in Japan in 2010 is consistent with the goals the Japanese Telecommunications Council set in a 1994 report. That report declared a target date of 2010 for "nationwide upgrading of fiber-optic networks":

in response to growing demand, the full-scale development and final expansion of network infrastructure should be promoted toward accomplishment by the year 2010. Fiber-optic cables should be installed at least on feeder lines, up to the distribution points, to promote the creation of a situation where infrastructure can be readily utilized at each stage.[5]

The associated network diagram shows optical network units attached to each house and business.

NTT has invested heavily in its fiber network while being subject to comprehensive unbundling regulations. NTT is required to unbundle copper loops and to allow line sharing (competitive DSL service over the primary copper loop NTT uses to provide plain old telephone service (POTS)). NTT is also required to unbundle fiber loops and interoffice fiber.[6]

Prices for unbundled elements seem to favor copper unbundling much more than fiber unbundling. The per month prices for sharing an unbundled cooper loop and for an unbundled fiber loop are about JPY120 and JPY5,100, respectively. At USD1=JPY117, the dollar equivalents are $1.03 and $43.59 per month, respectively.[7] NTT's market share for DSL subscribers is 39%, compared to 66% for fiber subscribers.[8] Given that the NTT unbundled copper loop charge is much lower than the NTT unbundled fiber loop charge, it makes sense for competitors such as Softbank (Yahoo! Broadband) to focus on providing DSL service over NTT copper. Moreover, given the low copper loop rates, it's not surprising that competitors use NTT copper loops rather than installing their own copper facilities.

NTT asserts that regulated unbundled fiber prices are much lower than NTT's costs of providing those facilities, but relevant data are difficult to interpret. Unbundling can imply a wide variety of charges in addition to monthly loop recurring charges. Ties between charges for using unbundled elements and other charges, such as universal service charges and POTS charges, can be highly relevant for evaluating unbundling economics. With respect to just unbundled loop costs, Takashi Ebhihara, a senior NTT executive, recently stated that NTT's costs for fiber loops were $200 per month, but with increased volume have fallen to $100 per month.[9] Because of economies of scope in laying fiber, costs per subscriber depend strongly on the share of eligible subscribers who actually subscribe. That may be part of the explanation for NTT's reported falling cost.

Even $100 per month costs for fiber loops is high. Verizon reported that its total capital expenditure in 2006 per home passed for its fiber network expansion was about $900, with about an additional $900 per home connected.[10] Fiber is an asset with a long life, and Japanese interest rates are nearly zero. At cost of $100 per month over just five years at zero interest, the present value of the cost is $6000. Moreover, NTT sells FTTH and FTTB at JPY6,700 and JPY3,950 per month (equiv. $57 and $34 per month), respectively.[11] These prices, which are much lower than the quoted loop costs, make sense only if NTT is aggressively seeking to acquire fiber subscribers and expects its fiber network costs to fall significantly in the future.

The two most important factors accounting for the expansion of fiber networks in Japan are probably very low monetary interest rates and institutional policy commitment to provide ubiquitous fiber network. Since the mid-1990s, the Japanese central bank discount rate has been below 1%. In contrast, U.S. Federal Reserve discount rate has been above 5% for most of that period. Cheap access to capital encourages major capital investments.

A ubiquitous fiber network has been a broad policy goal for both the Japanese government and NTT. The 1994 Telecommunications Council Report clearly expresses the importance the Japanese government associated with communications network investments. With respect to unbundled element prices and costs, Ebihara observers, "It's a huge issue. It's very difficult." (watch above video from time 38:20 to 42:10) At the same time, Ebihara clearly believes that investment in fiber networks has general importance for all citizens and for NTT's future. In a poignant conclusion to his presentation, Ebihara stated that he thinks NTT should both continue to lobby the government for higher unbundled fiber prices and continue to invest in fiber (watch video 1:24:40 to 1:32).

Update: Ernst-Olav Ruhle of Juconomy clarified that the rate for an unbundled copper loop cited above is the rate for line-sharing. The current rates for full unbundling for NTT East and NTT West copper loops are JPY 1,311 and JPY 1,393 per month respectively. The current rates for line-sharing for NTT East and NTT West copper loops are JPY 93 and JPY 101, respectively. Note that DSL providers such as Softbank (Yahoo Broadband!) provide voice service via VoIP, e.g. BB Phone. Hence they have no reason to purchase a full unbundled loop other than to avoid technical coordination problems with NTT.

Notes:

[1] See "NTT broadband fiber optics outshine ADSL," Asahi Shimbun, 04/04/2007. In Korea at the end of Feb. 2007, the Korean incumbent, KT, had 1.69 million fiber optic subscribers, Hanaro, 930,000 thousand, and LG Powercomm, 590,000, giving a total of 3.3 million FTTH subscribers in Korea. KT recently announced plans to bring fiber to every Korean household by 2010. The U.S., in contrast, had an estimated 1.3 million FTTH subscribers in Mar. 2007. Verizon, a leading investor in fiber communications networks in the U.S., had only 687,000 U.S. FiOS (fiber Internet data service) customers at the end of 2006. See p. 16 of Verizon's 4th quarter 2006 earnings presentation. For a review of that data, see Nyquist Capital.

[2] Japanese Ministry of Internal Affairs and Communications (MIC), Dec. 2006, as described on p. 12 of Takashi Ebihara, "The Japanese Broadband Miracle," presentation at the Information Technology & Innovation Foundation, Apr. 4, 2007.

[3] Ebihara, p. 11, citing NTT East data as of Mar., 2006.

[4] See Asahi article.

[5] From unofficial and tentative translation of Reform toward the Intellectually Creative Society of the 21st Century, Report, May 31, 1994, Goals for the Installation of Network Infrastructure. I'm grateful to Frank A. Coluccio for pointing out this report.

[6] Ebihara, p. 21.

[7] See Ema Tanaka, Minoru Sugaya, Sayaka Shiotani, Evolution of IP Network and Convergencein Japan – Impact of Hard law and Soft Law, presentation at ITS Conference in Beijing, 2006.06.13, slides 23-4 of powerpoint presentation. Ebihara, about 38:20 to 41:00, states that unbundled fiber loops cost about $50.

[8] Ebihara, p. 12.

[9] Ebihara presentation video above; watch from time 38:20 to 42:10.

[10] See Verizon Communications' FiOS Briefing Session, Sept. 27, 2006, pp. 24-5.

[11] Ebihara, p. 10.

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Are you wondering why I cleaned my bathroom last week? As a leading communications industry economist, I received advanced notification of Google's TiSP. I plan to install this movingly impressive technology as soon as I receive it.

Offer Comments

At the excellent Freedom to Connect 2007 conference, Vermont Governor Jim Douglas spoke about his e-state initiative. Gov. Douglas wants everyone everywhere in Vermont to have cellular and broadband coverage. Some quantitative goals are a minimum of 3 Mb symmetric bandwidth (upload and download) by 2010 and 20 Mb by 2013. This initiative, if supported and successfully implemented, will make Vermont an even nicer place for living, skiing, surfing the web, and running all kinds of great communication services.

Gov. Douglas proposes creating a Vermont Telecommunications Authority to lead public investment in the necessary communications infrastructure. The Telecommunications Authority will both provide access to relevant state assets and make new investments:

The state can provide the Authority with its moral obligation of up to $40 million in bonds to back projects in the first year of construction and possibly more if needed and sustainable. The initial target is to leverage more than $200 million in private sector investment with the state’s backing. Repayment of borrowing for the projects will be based on revenues generated from leasing access to the infrastructure, such as fiber optic networks and space on towers, or the revenues from services provided over the network. The value of the assets controlled or created by the Authority will also help to secure the value of any bonds.[Vermont Way Forward, p. 5]

The state can credibly commit to open access to the infrastructure and to not moving to capture profitable retail services. That institutional structure creates value that private investment cannot easily duplicate. It provides a good environment for mobile application development platforms like OpenMoko.

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Good, large-sample data on Internet traffic is hard to find. However, an excellent study of Internet traffic in Japan [Cho et. al. (2006)] describes 42% of Japanese (public) Internet traffic for six one-month observations spanning Sept. 2004 to May 2006.

This study reports many important facts. The ratio of bytes sent to residential customers to bytes received from residential customers was 1.3 -- remarkably symmetric. Peer-to-peer applications using dynamic port assignment account for most of the traffic. The distribution of bandwidth use by users is a high-powered power law. Most importantly, specific users' positions in that distribution vary over time and are not well identified with demographic and other customer characteristics (other than fiber connection, i.e. bandwidth availability).

The residential traffic growth figures for Japan vary considerably across month intervals. From Sept. 2004 to Nov. 2004, total traffic (aggregated inbound and outbound) grew 180% on an annualized basis. In subsequent 6-month intervals, annualized traffic growth rates were 58%, 19%, and 37%. Data on growth in fiber-to-the-home (FTTH) connections and total connections also shows volatility, but this does not seem to explain the reported traffic growth volatility. Any ideas about what explains it?

According to my calculations, (public) Internet traffic in Japan from Sept. 2004 to May 2006 grew about 60% per year. This figure aggregates inbound and outbound traffic and includes residential broadband customers and non-residential broadband customers (leased lines, data centers, dialup). I estimated non-residential traffic for the 7-ISP sample using the reported residential/non-residential traffic figures from the 4-ISP sample in Nov. 2005, and the non-residential broadband growth rate for the 4-ISP sample from Sept. 2004 to May 2006.

This estimated annualized growth of Internet traffic in Japan is much higher than estimated annualized growth of (non-voice channel) bandwidth in use in the U.S. across the 1990s. From 1989 to 1999, total DDS, DS1, and DS3 channel termination bandwidth in the U.S. grew an estimated 27% per year (see Table P6 in U.S. Bandwidth Price Trends in the 1990s). The difference between a 60% growth rate and a 27% growth rate year becomes huge after only a small number of years.

The Japanese study does not encompass bandwidth deployed in private networks. The ratio of Internet bandwidth to total inter-office bandwidth may have been about 15% in the U.S. in 1998 (see Growth in the "New Economy", p. 6). The Japanese data show much a faster growth rate of non-residential bandwidth than residential bandwith, but the former is only about two-thirds the size of the latter. This is consistent with a large share of non-residential bandwidth not being incorporated into the public Internet.

An important point: the re-organization of network transmission protocols on existing networks tends to occur very slowly. Astonishing fact: in the U.S., about 90% of mobile-phone communications towers use traditional, copper-based TDM backhaul. Legacy networks hang around for a long time.

Reference:

Cho, Kenjiro, Kensuke Fukuda, Hiroshi Esaki, and Akira Kato, "The Impact and Implications of the Growth of Residential User-to-User Traffic," sigcomm 2006.

Offer Comments

All of the 21,000 villages in the Indian state of Andhra Pradesh will soon have 100 Mbps Internet service. The state government sought private-sector bids for the project, contributed about 14% of project equity, provided free right-of-way permissions, and signed on as an anchor customer (40,000 government buildings connected for a fixed annual fee). The total cost of the network: about US$90 million.

Connections within villages to residences and business are left to competing local cable companies. Such cable companies have brought cable TV to about 40% of residences in Andhra Pradesh. The state-wide network is required to make available at the village points-of-presence (POPs) wholesale video distribution, telephony, and internet services at agreed prices. This makes the business plan for village networks simple: bring the services available at the village POPs to individual customers for a mark-up. This seems like a practical implementation of decentralizing local connectivity while standardizing wide-area service distribution (pdf).

Competition among network service provides can have large costs (pdf) relative to the cost of the network infrastructure itself. Government initiatives that promote a good structure for competition can help to make broadband services widely accessible at low cost. The Andhra Pradesh Broadband Project promises to do just that. Other innovative broadband projects, such the Singapore National Broadband Network and municipal broadband projects, have different institutional structures. More comparative institutional analysis would be helpful for informing communications policy.

Randeep Sudan, now at the World Bank, helped put together the Andhra Pradesh Broadband Project. He described the project in a recent presentation at the FCC. With his permission, I have posted his slides here.

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