Facing the Business Side of Community Broadband

It’s time for a discussion of a topic that gets hinted at, argued about and danced around. Do you run community broadband networks like a typical public service project or a business enterprise? And do advocates of the latter comprehend what a completely different mindset this requires? 

In my 2006 book on muni wireless, I argued that cities have to think like a business if they want to build a network that generates enough cost savings and revenues to sustain network operations. A conservative think tank critiqued my book with the counterargument that this is why governments shouldn’t build these networks; governments are incapable of thinking like a business.

Government administrators are quite capable of adopting a business mindset for broadband projects. But they do have to commit to assigning and hiring people to drive the project who can execute using business principles while achieving public policy and economic development objectives.

I interviewed Michael Johnston, VP of IT and Broadband at Jackson Energy Authority, a public utility in Tennessee, for my last Snapshot Report. The City of Jackson has a population of 75,000. Their fiber network is currently a success story with 16,000 subscribers, but it had a rocky start. Johnston gives a straightforward assessment of why “you need to do a gut check before you go after stimulus money. You can’t be a nice fluffy business person.”

Take this simple example. Your stimulus proposal (any proposal, for that matter) has to prove you can financially sustain the network after it’s built. But have you adequately planned for business success?

“Let’s say we just borrowed $10 million with the assumption we’ll get 100 new subscribers every month for a year. But what about the price of success? If you get 200 subscribers a month, what do you do? You need more customer service people, more technicians. Beating your ‘take plan’ is counterproductive if you can’t get any more ‘free’ government money and you have to go to the bank for real money.”

Recently I commented on the value of partnering, the staple of any business venture. With community stakeholders, these partners are likely on the same page as you in terms of what they want. But the public/private partnership that has become a community broadband orthodoxy also can be the source of great heartburn.

“Partnering with a telco does help because you have to be ready for the different world of telecom operations. The difficulty, however, is that regardless of which telco you partner with you can have completely different goals that are at cross-purposes. The city wants to deliver services in places where it’s currently not offered. The partner needs to make money. There’s a reason that partner isn’t already delivering service in your area.”

Though easier said than done, I suggest you spend a lot of time in frank conversation so both parties thoroughly understand how the other’s business works. Such a discussion opens your eyes to where potential troubles lie that could lead to irreconcilable differences.    

You have to think about your business model as relates to partners. UTOPIA, the municipal network in Utah, took on debt and didn’t provide anything but the Internet pipe. Providers deliver services directly to consumers. UTOPIA makes money on fees from providers based on how many of their customers use the network.

“This kind of arrangement should be a winner, but it doesn’t always work. ‘My plan says if I add 100 customers/month, I pay off the bond.’ But what if the partner doesn’t add that many customers. The city has no leverage because partners want the least number of customers for most profit. Acquiring more customers costs money that cuts into profits. If the city insist on getting their fee anyway, the partner leaves, so obviously the city can’t raise fees.”

As the broadband stimulus grant process appears to be unfolding, it’s going to be smaller local service providers stepping up to partner with municipalities to build networks, and these providers are limited on what costs they can carry. So you need additional revenue options than monthly subscriptions from individual consumers.

Business strategy includes how you’re going to price services. The school district wants to be a customer. The city wants to ensure all citizens get the best education. So you offer the district service 10 times faster and at a price 70% lower than the incumbent’s bid. Perhaps you can do this and still cover network operations costs. Should you? Heavens no! Don’t gouge them, but institutional customers expect – and budget – to pay more for premium service that delivers better value. Trust me, one day you’ll need the money.    

And speaking of competition, does your grant proposal reflect the future competitive landscape? What, you think that incumbents won’t jump in just because they initially refused to build the network?  Put your business hat back on!

“People are assuming their competitors are going to stand still. They think ‘we’re going to go in and take 60% of the market away.’ Take away 60%, the competition doesn’t sit there and say ‘oh well.’ They fight back. ‘I’ll give you free cable for a year, Mr/Ms Muni Customer, if you just come back.’ Municipalities have to match these kinds of offers or lose customers, and typically they don’t think about this.”

This leads to the battle of churn. You have a couple of options. One is to play this game, but that requires an aggressive marketing mindset and sizeable monetary resources. From years of marketing experience, I recommend *not* playing that battle. I suggest creating services that incumbents can’t easily match, or can’t match at all for several years, and sell them to institutional customers at premium prices.

I also suggest reading my column on sustainability.

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