Competition. Great word. Great concept. Except when youre the sole provider of a particular product, and someone has the audacity to offer the same thing, usually at a cheaper price, right next door.
But, thats the situation more and more cable operators are finding themselves in when municipal-owned utilities decide to take broadband matters into their own hands.
Whats motivating these utilities to crack the telecommunications nut? Any combination of factors go into the decision, but some common themes seem to come up repeatedly.
Primarily, youre dealing with small town utilities, rural electric cooperatives or public utility districts serving a couple thousand people, says Martin Gidron, editor of Utilities & Telecommunications Digest. And theyre doing it because they cant get any kind of broadband service where they are.
Thats why theyre interested in providing such intensive retail services. And they can afford to do it. They dont have to look to the bottom line quite as much as investor-owned utilities do, or theyre not expected to produce returns as quickly.
In todays fast-moving digital world, says Rick Giarusso, manager, communication operations at the Municipal Communications Utility for the City of Cedar Falls, Iowa, the motivation for residents of small-town America often comes down to keeping pace with their big city brethren. Once upon a time, if the railroad didnt come through your town, you were done. And then it was the highway. If you didnt get the interstate to come by anywhere near you, you were done. Now, people are saying, If we dont have this Internet thing here, were done.
Its very easy to see that the investor-owned companies wouldnt come here and do this. It doesnt take a rocket scientist to figure out that we dont have the population center to attract that. But we want it.
Giarusso says that Cedar Falls (population: 35,000) was in the same situation with its incumbent provider (TCI) as many towns around the country are when it decided to take hold of its own telecommunications future. In the early 1990s, Cedar Falls was being served by TCI, and things were not good.
They had an older system, like a lot of these smaller towns, says Giarusso. They werent doing anything to upgrade and they didnt have any intention of doing anything to upgrade it. The service was not that good.
Giarusso says technical and financial feasibility studies showed that the municipal utility could go it alone as the towns communications provider. We had a referendum in 1994 and it passed with a better than 70 percent margin. We had an interfund loan from the electric utility to build the system and that was built in 1995. We turned on our first cable TV customer in January 1996. A year later, we turned on our first high-speed cable modem customer.
The 750 MHz municipal system offers 77 channels, with basic cable going for $8. They count about 12,000 homes passed, with approximately 7,200 cable customers and just over 4,000 cable modem customers. The system also offers WorldGate service. Of course, says Giarusso, the incumbent (now AT&T) responded to the muni overbuild.
Obviously, when we did this, says Giarusso, AT&T upgraded its network for two-way. Theyve been offering their @Home service since August of last year (1999) and theyre offering the digital packages as well.
Giarusso expects the muni system to grow with the times and the competition. Were going to do what we need to do to stay competitive in the marketplace, says Giarusso.
He says telephony, VOD and other interactive services are all within the realm of possibility for Cedar Falls. Thats really where its all going. If we just thought of ourselves strictly as a cable TV provider or a high-speed Internet provider, our days would be numbered. We have to evolve with the technology and the industry.The Great Northwest
One of the more creative muni overbuilds is in Tacoma, Wash. Not only has it gained attention as one of the larger cities (population: 176,000) to do its own thing, its motivations in doing so were also somewhat different.
Diane Lachel, government and community relations manager for Click! NetworkTacoma Power, says the idea of a muni overbuild began germinating in late 1992 when electric deregulation began to surface at the U.S. congressional level. Tacoma Power officials came back to the Northwest resolved to learn from other industries that had been deregulated.
They zeroed in on the banking and airline industries. After careful study, she says, they came to several conclusions. The most important point was that they needed to improve internal voice and data communications.
Serving a 180-square-mile area, that meant multiple facilities, i.e., generation facilities, transmission and distribution plan, substations, the main headquarters, etc., had to be connected. They approached two incumbent wireline providersa phone company and a cable companybut neither one was planning to upgrade their networks. Left with no other choice, Tacoma Power decided to build its own network.
Fortunately, at about the same time, the utility had amassed a $70 million fund from sales of wholesale excess power. According to the companys charter, that money had to be reinvested in the utility. The Click! Network came into being.
Construction began in December 1997. Two years later, it had 775 miles of two-way HFC. We have our big redundant OC-48 backbone, all fiber, say Lachel. It goes to six separate hubs. From the hubs, we have redundant fiber loops out into the neighborhoods. From the neighborhood nodes, we have the traditional trunk/branch coax. The nodes serve 1,000 homes each.
Cable TV service began in July 1998. The network, says Lachel, passes 61,000 homes out of a total of 84,000 homes in Tacoma. It has close to 17,000 cable customers, which represent a 27 percent penetration rate.
High-speed data services to businesses began in March 1999 and residential high-speed data (ISP Advantage) was launched in December 1999. But the residential high-speed data business is configured a little differently by Click! We have a different model for our high-speed cable modem product, explains Lachel. Were the wholesaler. We have five ISPs riding our network today, and its open for others that qualify. We were the first model in the country to offer these types of services.
Today, we have close to 1,200 cable modem users among five ISPs. We put our ISPs through a very specific, critical qualification process because the utility and the Click! Network have wonderful reputations for excellent customer service.
Click! also serves the business community in a similar fashion, says Lachel. Were a carriers carrier. We have partnered with ATG, Advanced Telecom Group. Theyre the CLEC that rides our pipe to a particular building and they provide the value added telephony services. Theyre talking about eventually providing competitive phone service to the residential market.
Naturally, says Lachel, the incumbent hasnt taken Click!s arrival lightly and they, in turn, are determined to stay competitive. Were really looking at numerous products, says Lachel. But were keeping pretty close to our vest because were in such a competitive market. Weve got numerous products in the queue. AT&T is a formidable foe here.
They realized that we were serious. They chose to do a digital upgrade and have 100-plus channels now. They have more services than we do. The prices are comparable. Theyre offering all kinds of free installations and trying to pull people back.Munis redux?
The muni overbuild phenomenon looks like its here to stay for a while. More small communities are demanding to be a part of the wired world and dont want to be left behind. And, according to Giarusso, the economics of the situation is improving everyday as well. We talked to other people who are considering an overbuild, says Russo. We tell them that theyve certainly got an advantage over us when we first did it. There are a lot more options today.
The costs to build a two-way system have come down fairly substantially. But there are other technologies and things to take into consideration that we didnt think about at that time. I think if somebody wanted to build a system right now with more than 125 homes per node, theyd be silly.