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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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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.

2 Comments

Providing network infrastructure need not be limited to a choice between the model of public roads and the model of selling soap. The provision of public roads depends on market transactions for a variety of goods (construction worker services, trucks, asphalt, etc). Selling soap depends on a variety of public services (money supply provision, law enforcement, public right-of-ways, etc.). Whether in India, Ireland, or Silicon Valley, initiatives to provide network infrastructure are making interconnections between different organizational forms more complex. Revenue models are expanding from taxes, subscription, and advertising to include a variety of public and private sponsorships, in-kind contributions, and special benefits for anchor users.

Impurity is a traditional human concern. In some circumstances, another name for public-private partnership is bribery and corruption. Failed and wasteful network infrastructure projects that involve governmental entities undoubtedly exist. For-profit network providers, who cannot fail without serious public effects, have made dire business mistakes and squandered huge amounts of money. Government entities' judgments about the services that users value are not likely to be better than those that for-profit network providers have made.

The history of libraries in the U.S. suggests that organizational diversity can have enduring value in information infrastructure. In the American colonies and the United States prior to 1876, most organizations that founded libraries were neither government bodies nor commercial organizations. A wide variety of organizations established libraries (see Table 1). The most commonly created form of library was a social library:

a library owned by an association formed to establish and operate a library intended for its members' use. Usually, the members subscribed for stock in order to purchase the initial collection, which was general in subject matter. Then they were assessed a smaller sum (a "tax") each year to keep up the collection.[1]

Public libraries, meaning libraries that government bodies owned and made open to all or most citizens without a specific-purpose charge, began to grow only from the mid nineteenth-century. As late as 1900, about as many social libraries existed in the U.S. as did public libraries (see Table 2).

Public libraries had different characteristics than social libraries. Smaller populations and more recently settled areas favored social libraries, while larger populations in cities with a longer history favored public libraries. Social libraries had typical lifespans about thirty-five years, with considerable variance.[2] Public libraries tended to be more permanent organizations that endured in organizational form through jurisdictional consolidations. Public libraries had a more secure base of funding and grew in size relatively rapidly. Across the last twenty-five years of the nineteenth century, public libraries came to predominate among the largest libraries (see Table 3). These historical facts are consistent with general comparative organizational characteristics: compared to social organizations, government organizations are more difficult to establish and require more developed government administrative capabilities, government organizations are more enduring, and government organizations are more favorable for organizational growth. Shifts in library organizational forms were in part a response to changing demographic and political circumstances.

Different organizational forms, however, interacted significantly. Social libraries and public libraries coexisted as important forms of library organization for more than half a century. Through at least 1875 and possibly into the beginning of the twentieth century, social libraries were widely regarded as a valuable form of library organization.[3] Some public libraries evolved from the buildings and collections that social libraries established. In the 1930s, more than a sixth of all "public" libraries in cities with population 30,000 or greater were libraries for which "the library society and the town government shared control in a manner that makes it difficult to know how power was divided between the two bodies."[4]

In a long-run international historical perspective, the U.S. has had a relatively highly developed information economy. New organizational forms for book sharing, network infrastructure, and telephone service are not just necessary entrepreneurial experiments in rapidly changing technological circumstances. Diversity in the organizational forms of its information infrastructure has been an enduring characteristic of the U.S. information economy. Organizational diversity may be a key to growth of the information economy.

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Notes:

[1] From "Definition of Types," American Libraries Before 1876, Davies Project.

[2] McMullen (1985) p. 214.

[3] Id. pp. 218-20.

[4] Id. p. 223.

References:

McMullen, Haynes (1985), "The Very Slow Decline of the American Social Library," Library Quarterly, vol. 55, no. 2, pp. 207-225.

McMullen, Haynes (2000), American Libraries Before 1876 (Westport, Conn.: Greenwood Press).

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