Wanted: A Few Big Broadband Customers

For a broadband network to be built and stay in operation requires commitment from major institutional customers. Craig Settles explains how small towns must think big.

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The value of broadband to rural communities often gets depicted with visions of individuals getting online: retirees downloading pictures of their first grandkids or students doing homework more effectively via the Net. And, of course, these are values that broadband access can deliver. But I’m convinced that institutional not individual subscribers are key to getting rural America wired.

It’s important to understand that while it costs a lot of money to create a broadband network, over a five-to-ten-year period, it costs even more to operate that network than to build it. Say it costs $1 million to build a wireless network. During the municipal wireless heyday, it was estimated to cost 20% of buildout expense to operate the network annually – to pay for customer service, maintenance, upgrades, etc. That’s $200,000 a year.

Whether a community or a service provider takes the lead with a broadband network, any owner will have to generate enough revenue to cover buildout (commonly referred to as “CapEx”) and operating cost (known as “OpEx”) as well. Furthermore, service providers have to generate enough revenue to make a reasonable profit.

With the broadband stimulus grants, you can pay for 80% of the CapEx. The grant applicant has to pay for the remaining 20% of CapEx, plus prove it can pay for the OpEx for at least several years. The latter part of the equation – revenue to cover 20% CapEx and all of the OpEx – becomes problematic when you expect individual subscribers to sustain most of the OpEx.

Assume we’re going to cover a town for $1 million (hypothetically). Every year you’ll need to have signed up nearly 560 individuals or homes at $30/month. If your rural area only has 2,000 people, are you really going to get 30% as subscribers? If you don’t reach that number in year one, then you’re carrying debt while you build a customer base, because the network has to continue operations during this time, and you have to spend a lot to generate individual sales. If you have more people to serve, or the people you have are scattered over a larger geographical area, network costs will be higher and thus you’ll need more subscribers.

Everyone planning to build a broadband network needs to reconsider the equation. Making the network less expensive isn’t a particularly practical solution. You’ll hit a point where it can’t provide fast enough service or service in enough areas to generate sufficient revenue to cover operating expenses. Then, you’ll have to increase revenues, and that’s best done by finding customers you can motivate to spend a lot more money for network services.

Institutional customers, including large companies, are one segment of the community that fits the bill. Imagine if you can get your five largest companies plus the local college, the hospital and three nonprofits each to buy highspeed broadband services totaling $2,500/month. That’s $300,000 annually towards OpEx.

Business customers of all sizes are another target market. Business broadband services cost more than individual subscriber services, usually starting at $79/month, with higher charges for premium services. If you have 100 various retailers, doctors’ offices, service professionals, and others paying $79 a month, that’s $94,800 more towards OpEx. Jackson, Tennessee, has 75,000 people and 16,000 subscribers (21% of population) on its successful fiber network. However, 20% of those subscribers are businesses.

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Residential customers are the “gravy” in a broadband network once business and institutional customers sign on.
Your broadband network strategy needs to be all about building a customer base first with institutional and business subscribers; then you rely on individuals and home subscriptions as OpEx gravy. With these institutional customers supporting most of the network, then you can afford to offer low or free services to low-income residents.

Here’s how you identify and convert institutional customers.

First look to town and county government to be your primary network customer. The amount of money local governments can save by streamlining current communication infrastructure with fiber networks, and providing applications for their mobile workforce via wireless networks, is huge. Show them how investing in broadband can save enough to justify subscribing to, or owning the network.

Santa Monica, California, had a legacy PBX phone system and slow connection circuits from incumbents. The city pooled money it was already paying for voice and data services, using this capital to build a fiber network and implement new communication technology.

City CIO Jory Wolf states, “By switching to fiber we realized a $500,000 savings in data circuits and $250,000 savings in voice circuits, all of which stayed in our fund. Ongoing savings enabled us to provide our police with video streaming in their vehicles. We have excess bandwidth, so we provide (a) large number of sites with free wireless access.” Wolf said that the city is also selling companies fiber lines that haven’t yet been turned on. “Our network budget is self-sustaining,” he said, “and I have $2.5 million in capital.”

Santa Monica with 88,000 people is large compared to rural towns, but on par with a lot of small and rural counties. This gives you a general idea of the potential to underwrite operating costs by having your towns and county assess their office and mobile government operations, and then determine how much money broadband can save them.

Next take stock of your potential institutional customers: education, healthcare, nonprofits, larger companies. How can they contribute to sustaining your OpEx? Generally, these organizations can identify specialized broadband services they need and for which they will pay a premium as long as there are significant benefits — such as replacing costly but slow old communication technology like T1 lines, or opening up new global business and marketing operations. 

Pulaski (TN) Electric System
Since Pulaski County, Tennessee, installed a fiber-line broadband network, the local hospital can communicate with medical centers in Nashville and a printing business operates smoothly with headquaters in Los Angeles.

Dan Speer, Executive Director of the Pulaski-Giles County (TN) Economic Development Council, declares that “the World Wide Wait is over in Pulaski. There’s a printing operation here that has to send large graphic files all the time to their corporate headquarters in Los Angeles. One company with offices on the north side of community and the manufacturing plant on the south side use the network to send large data files back and forth. Broadband makes this possible.”

Speer says that with broadband local hospitals can upload and download files such as x-rays, MRIs, and CT scans immediately, communicating this information among hospitals and with doctors 75 miles away in Nashville. “Patients don’t have to be transferred there, saving lives and money,” says Speer. He adds, “None of this can happen without broadband.”

He says that the State of Tennessee has added another year of math and science to the high school curriculum, but Pulaski County has not been able to recruit enough teachers to offer the new classes, “especially in rural areas. Broadband allows us to work with the University of Tennessee to deliver these classes.”

In most rural communities there are institutional customers who have similar needs. Identify them, ascertain how broadband can help them, and determine the potential financial impact to their operations. These will become the 20% of subscribers who generate 80% of the revenue you need to cover your OpEx and maintain your local broadband network.

Craig Settles, based in Oakland, California, is an industry analyst who helps public and private organizations develop their business plans for using broadband. Follow him on Twitter (cjsettles) and his blog, Fighting the Next Good Fight.

 

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