I thought today the best thing to do would be to explore the most common misunderstanding that happens as part of Net Neutrality. That is the role of the market and why it has not worked as well as we would like up to this point.
I think there is this rather large misconception about this topic, which is why I wanted to start with it. Today, there are generally two wireline Internet Service Providers in any area. They are the local cable company and the local telephone company. Each of them has laid cable directly into the residences in an area.
It is residences that are important for this discussion because for businesses the issues are different. For most businesses, they have a much greater availability of bandwidth. Not necessarily to any specific facility, but through the use of both physical and virtual data centers. They can use a company like Amazon or Equinix to host their high traffic servers that require external access. In doing so, they generally have availability of many carriers and thus the competition drives a reasonable price.
So if we have a duopoly, why doesn’t anybody just build another network? Well, in some cases they do. There are companies that do what is called overbuilding. The most famous of these is Google with their 1 Gbps FTTH product in a few cities. There are other companies that do this, but it is not greatly common. The primary reason for this is that the economic model for being a residential Internet Service provider is not that good.
The reason for that is pretty simple. The actual value of the service is between $15 and $50 a month for most people. What you miss is all the things that the ISP has to do. Not only did they have to build a significant cable plant, but they had to put in a lot of equipment. They had to do so up front before they had any revenue to support it. This means they likely had to borrow money and then have paid it off over time. As the network evolves, they have had to do upgrades. This means the not only have to cost to operate the network but the cost to have funded it.
So, how much does something like this cost. We heard from Verizon that the cost for each home “passed” (could be connected) was around $1000 for the local network. This cost went to about $1500 for each home that was actually connected to the service. This does not include all the costs for all the rest of the network.
So to fiber up the network here in Santa Rosa (and just for the city) might cost something over $50M just to put in the local network. There might be a cost of $10M or more to get the rest of the facilities upgraded to be able to actually operate services for putting them in. The payback for this investment is beyond what a telephone company or cable company would want without competitive pressures.
So, essentially they can’t get their investors to want to fund this. Next week, unless the FCC does something important, I will give you the two levers that do drive these companies to invest.
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