Google has announced a new competition for super-fast fiber networks. Craig Settles explains what rural communities should consider before going after the megabits.
In mid-February Google announced plans to create several fiber to the home (FTTH) networks in communities as pilot projects to show the world what hundreds of megabits per second of broadband can achieve. As with the federal stimulus program, communities large and small are gearing up for another broadband lottery worth millions.
As explained in this Yonder article, public-private broadband partnerships are complicated because such different entities often have opposing goals. Public and private sector partners both need to understand fully each other’s requirements, addressing potential conflicts from the start. This precaution applies to Google, too.
As communities are jumping in response to Google’s request for information (RFI), should rural areas apply? Sandie Terry, IT Director of Franklin County, VA, for one, is doubtful.
“We have such a limited amount of time and resources we’re thinking twice about how appealing our community will be to Google,” states Terry. “We have a lot of unserved people in mountainous areas and other difficult to reach places. Google says they want to do projects where they can deploy quickly, and that’s not us.”
Rural communities and small towns that do respond to the RFI should be looking at how to maximize their appeal to Google. To summarize the many statements the company has made, Google Product manager Minnie Ingersoll sounds the common theme: “This is a test bed for innovation. We hope to take the learning from this test bed to the world.”
Communities applying for the Google networks, of course, should state why they represent ideal proving grounds for technology innovation, but they should emphasize why their locales are promising “test beds” for business models, too. Galen Updike, Telecommunications Development Manager at the State of Arizona’s Government Information Technology Agency, made an interesting point.
“It’s extremely difficult for private sector companies to financially benefit from many of broadband’s economic development benefits to communities,” Galen says, “because these do not directly impact companies’ bottom line. Therefore, communities have to spend a lot of time with potential partners working on this puzzle, or else face failure by the private partner in the long run.”
Michael Johnston of the Jackson Energy Authority in Jackson, Tennessee, stresses that “private partners want the least number of customers to ensure the most profit. Acquiring more customers costs money that cuts into profits.” This might sound counterintuitive, but it goes to the heart of the private sector’s key business need – one that communities fortunate enough to partner with Google should explore.
More is not always better for business
Do more customers produce more profit? Depends on the type of customer. Due to the cost-to-revenue equation, individual consumer customers are a huge money-sink, and thus a challenging market to tap for a profitable revenue stream.
An examination of some current subscription rates in the Minneapolis wireless market reveals the reality of revenue. US Internet charges individuals about $20/month for a rate of 1 to 6 Mbps downstream, while Clearwire, which has a more national presence, charges $25/month for 1 Mbps downstream and up to $45/mo for 3 to 6 Mbps downstream for unlimited use. Though the specific speeds customers receive vary, this $25 – $50 range of prices holds true for basic services in rural (where broadband exists) as well as urban areas.
A service provider has little latitude to raise the basic rates before people refuse to buy, so providers abandon or avoid certain markets altogether in favor of areas where they have some leeway to raise prices, that is to say areas where disposable income are higher. The cost of winning, servicing and managing individual subscribers motivates providers to seek a limited number of residential customers within a service area.
According to former Verizon executives Tom Terry and Tony Unitas of Terry & Unitas Associates, a technology and business consulting firm, “it costs $100 or more in marketing and sales support to win a residential customer, and about 20% of this amount for marketing to retain customers.”
At $25/month in subscription revenues, it takes four months to recover customer acquisition costs and many months trying to catch up with customer retention costs. What’s more, service and support costs can easily outstrip revenue, particularly in rural areas where people have little or no prior experience with the Internet. One call to resolve a browser or Internet security issues can erase two or three months of revenue.
By and large, community broadband cannot rely on individual subscribers alone to create a financially sustainable business model because there’s no profit there. Oklahoma City, OK, and Seattle, WA, are two cities that believe it’s better to give wireless services away for free because of the customer support costs required for paying customers.
Attacting business customers is key
Communities responding to the RFI must prove how Google or any provider is going to make a profit. The answer rests with local businesses.
The average business customer is willing to pay more for the same service a consumer buys, plus buy yet more expensive services that consumers typically won’t, such as 1 gigabit per second Internet access (just what Google plans to deliver). Furthermore, businesses are less likely to change providers because doing so significantly disrupts their operations and, potentially, their cash flow as well.
Vince Jordan, President of RidgeviewTel has been in telecommunications for over 20 years (full disclosure, he’s also been one of our business partners). Jordan has found that, “dollar for dollar it costs 20 times more to manage and maintain an individual customer than a business customer. With 50 individuals, we’ll get 50 calls with service questions, complaints, etc. With a business of 50 employees, we’re only going to get one call to solve 50 people’s problem.
“In terms of revenue and profitability, having a business customer with 50 employees is similar to having 350 – 400 individual customers. If the federal government didn’t mandate they sign on individual customers, the telecom industry would have abandoned consumers 20 years ago because you can’t charge them enough.”
For rural communities, residents will likely constitute 90% of all customers for a broadband network, so rural RFIs to Google must make a strong case that the study of profitability is equally important as the pursuit of innovation.