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Delivery Models

Bringing affordable broadband to rural communities in America has proven to be a difficult task. Leaders in many rural communities look to their local telephone company (Verizon, AT&T, Alltel, Qwest, etc.) or local cable company to deliver the service. These providers often respond that they have no plans to upgrade their system because of the low population densities or demand for broadband services will not pay for the investment required to deliver the service. With such a high initial investment, private Internet providers are not able to recover their costs in a reasonable time frame.

In short, there is little financial incentive for the large private companies to extend high speed Internet to many rural communities. In many communities local entrepreneurs deploy wireless broadband networks to fulfill the need.

Community leaders faced with the inability to obtain broadband service through the phone or cable company look to two other models, municipal (local government) delivery or public private partnerships to bring the service to the community.

Understanding the business structures and financial models for these three delivery models will provide invaluable insight to individuals interested in identifying and implementing projects in communities to increase the availability of affordable broadband service.

Private Sector Broadband Delivery Model

Traditional private sector providers such as telephone and cable companies are profit driven. Private sector providers only make infrastructure investments in communities where there is a reasonable return on investment within a short period of time to support stockholder value. In 2000, the National Exchange Carriers Association estimated that it would cost $10.9 billion to upgrade the 3.3 million rural telephone lines that would not already be capable of carrying broadband by 2002 (Bell et al., 2004). There simply is very little financial incentive for telecommunications or cable companies that deliver services over cables to upgrade or extend their infrastructure in many rural communities.

The incumbent telephone providers also operate as regulated monopolies. These companies face additional requirements to provide universal telephone service and meet other requirements of state and federal laws and regulations. The FCC and state Public Utility Commissions regulate only the video content delivered by cable companies. As of early 2006, the FCC does not regulate broadband and telephone (Voice over IP) services delivered by cable companies.

The challenges associated with improving the rural telecommunications infrastructure have given rise to two alternative delivery models, each of which is designed to overcome some of the problems faced by private providers. These include the municipal model and public/private partnerships.

Municipal Broadband Delivery Model

Municipal governments get involved in the provision of advanced telecommunications services when the private sector fails to deliver or when the cost of service is appreciably higher than in other locations. Local governments attempt to fill the gap by leveraging community resources such as right of ways, infrastructure, and other government property.

Municipal broadband is normally delivered through a municipal utility or authority. The local government builds, owns, and operates the utility to deliver broadband service to customers within the government's or authority's geographical boundary. Municipal utilities can either be operated by a single municipality or by several municipalities on a regional level.

This service delivery model is typically found in large cities or in smaller municipalities that provide electric or telephone service. The municipality owns the customer and the infrastructure and competes directly with the private sector. Anecdotal evidence suggests that municipalities with a history of delivering utility services are more likely to be successful deliverers of advanced telecommunications services, largely because of experience with billing and the organization of delivery departments.

Most broadband municipal authorities operate much like the traditional private sector models with the key difference being that they often have access to other revenue and can justify a longer term return on investment than the private sector. Sources of revenue available for government broadband projects include bonds and grants. Government utilities may also have the luxury of having more time to pay off debts as compared to the private sector. Governments often select wireless options such as fixed wireless or Wi-Fi because the start up costs are much lower than connecting wires to each and every home.

Municipal delivery models face a number of potential obstacles.

Private sector providers consider public sector competition to be unfair. As of mid 2011, eighteen states have passed legislation that prohibits or limits public sector delivery of broadband services. The Community Broadband Networks website (http://www.muninetworks.org) provides up-to-date information on current and pending state and national telecommunication policies.

Municipal utilities or authorities also face problems associated with high startup costs and low population density, especially if delivery is limited to a small population within municipal boundaries. In this situation, municipalities, like their private counterparts, find it difficult to amortize the cost of facilities and make the return on investment necessary to sustain and upgrade facilities.

Public-Private Delivery Model

Traditional public-private partnerships are contractual arrangements where the resources, risks and rewards are shared between the public and private sectors to provide greater efficiency, better access to capital, and improved compliance with a range of government regulations regarding the environment and workplace. Through this agreement, the skills and assets of each sector (public and private) are employed to deliver a service or facility for the use of the general public. Public-private partnerships can take a wide variety of forms. Definitions of the various forms of public-private partnerships can be found on the General Accounting Office website.

In addition to sharing resources, each party typically shares in the potential risks and rewards associated with the delivery of the service and/or facility. The public's interests are fully assured through provisions in the contracts that provide for on-going monitoring and oversight of the operation of a service or development of a facility. Examples of telecommunications public private partnerships are found across the country.

The following links provide specific examples for the following states:

While each of these partnerships involve state or large city governments working with incumbent broadband providers, there are a growing number of projects being implemented in rural areas including the Regional Fiber Consortium and Fiber South Consortium in west central Oregon Oregon Rural Fiber Network - http://www.connectingoregon.org/.

Groups including the Yankee Group, In-Stat, Forester and Jupiter are promoting a newer public private partnership model. Under this public private partnership the public sector builds, owns and operates the transport network and provides open access to ISP's, cable providers and other service providers in the private sector. Examples of this type of partnership include:

  • UTOPIA in Utah is building an open access fiber optic network in member cities throughout the state and private sector partners are delivering services through this transport network.
  • Rural Allegany County, Maryland delivers transport services to public organizations (government offices, schools, police, fire departments and ambulance services) via a licensed wireless network. Private sector partners use the transport network to deliver services to businesses and consumers.

Resources: Government Technology - http://www.govtech.com