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Summary:

Forget getting a gigabit in one city in all 50 states of the U.S. The real gigabit challenge is helping the existing ISPs think like innovators, not like utilities.

gigabit-neighborhood

On Friday six cities in North Carolina issued a request for proposal for gigabit connections at a reasonable cost for businesses and residents. The cities have been talking up their efforts which would include new investment from a company, as well as the opportunity to lease the cities’ dark fiber. Just like Seattle, Chicago, Chattanooga and Bristol Tenn., and Kansas City, these North Carolina municipalities are taking their broadband future into their own hands.

As cities around the U.S. look at gigabit connections and see the future infrastructure that they ought to provide to ensure their citizens have access to 21st century jobs and remain (or maybe even become) hotbeds of innovation, FCC Chairman Julius Genachowski has also hopped on board the train. The Chairman, playing the role of chief cheerleader called for a Gigabit Challenge three weeks ago: asking that every state in the U.S. get at least one gigabit city by 2015.

The real gigabit challenge is to change the ISP mindset

But he had it wrong. No matter what the FCC does, there will be gigabit cities in most states by 2015, or those networks will be under construction. The real gigabit challenge is to get the telcos to think like tech companies or to get them out of the way. If we accept that broadband is the silicon of the next fifty years — providing the platform for technological innovation and advancement that chips had done from 1960 on — then we need the providers of broadband to think like tech firms. Intel makes for a great example.

One of Intel's fabrication plants.

One of Intel’s fabrication plants.

The chip giant has consistently pushed for faster and more chips off its manufacturing lines — even when its manufacturing operations cost billions to build. It has never told consumers that its 486 chips would be sufficient, and then tried to control the programs that would run on them. Instead it has pushed its partners for faster software that would require faster and better chips. And it then pushed those chips into new areas such as servers. Intel delivers a commodity of sorts — the x86 platform — but it still raked in profits of $2.5 billion last year, and is even now investing up to $2 billion to change its fabrication methods to produce even more chips on larger wafers.

On the flip side, we have the telcos and the cable guys who generally provide most of the broadband in this country. In different eras and in different ways each has made vast technological investments in networks that can deliver broadband around the U.S. But after their initial investments they stopped looking ahead in many cases, or pushing their envelope. When the telcos saw the success of ISPs they bought them up. As cable providers saw the success of ISPs, they came out with their own broadband services that were faster than the DSL technology the cables had.

The broadband race ended in the mid-2000s

The 90′s and early 2000′s were a great time for broadband. There was competition from various providers, and differing technologies and people responded. Consumers signed up for these new services, and entrepreneurs built products that ranged from eBay and Napster all the way up to the genesis of Facebook. But then two things happened.

First, broadband adoption slowed. Unlike telephone lines, if you had one broadband account in the home you didn’t really need another. During this time the cable companies and telcos focused on their other lines of business, adding HD channels on the cable side and putting money in wireless and additional phone features on the telco side.

Broadband_dialup_over_time

The other thing that occurred was a more hands-off regulatory view of the interent; regulators came to regard competition between cable and telcos as sufficient to ensure that people would get the connections they needed. But unlike a tech firm, which seizes on the absence of regulation to push ahead with a grand vision (such as gather all of the earth’s information), the telcos and cable guys just sat on their networks making money off their investments from the previous five or ten years.

They didn’t pay attention to where the world was going other than to grouse about the profits folks like Google or Amazon were making off of “their pipes.” They wanted to stand still and reap profits because that’s what utilities do. They invest in infrastructure and they maintain it. Along they way they lobby the government to ensure or keep their profits. And that’s why there are grim charts about how the cost per megabit are going up, despite the falling costs of providing a megabit.

Unlike Intel, which puts a lot of R&D in its business and hopes to sell more of its chips in more places, and so invests in technologies that drive the adoption of silicon, ISPs are implementing caps and incentives that are aimed to preventing people from using broadband — or at least second guessing themselves when they do. Should I buy a Dropcam? It uses 60 GB a month of data? Should I download the entire Lord of The Rings trilogy in HD or will that push me over my quota for the month?

A modest proposal for ISPs

If ISPs had been thinking like tech firms they would have realized that their goal was to connect everyone to the internet, deliver the internet everywhere and invest in applications that would drive demand for faster speeds. ISPs should have beat Boingo and Wayport to the Wi-Fi hot spot business. They should look at the internet of things and see opportunities for delivering quality of service and prioritization and create services for that. And fundamentally, they should be playing a game where they want to get to a gigabit, because if everyone wants a gigabit connection, they will have to get wireline connections for home and still have their Wi-Fi and cellular for everywhere else.

So now that the RFP for North Carolina is out, maybe we’ll see an ISP step up to the plate and think like a tech firm. There are plenty of innovations they could help drive to lower the cost of deploying such networks. Or maybe they could take a page from Google and try some social engineering. After all, that document allows the incumbent broadband providers the same ability to participate as it does for a Gigabit Squared or a Google. And if that could help get ISPs to think like tech firms, then it could benefit us all.

  1. Does anyone edit anymore? This reads more like a highschool article….

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    1. “high school” is two words. Did you not edit your comment?

      I actually thought the article was well-written.

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      1. You can’t edit your comment after you have published it. In any case, correct spelling and grammar in comments are not as big a deal as they are in the actual articles. I just read two articles on Gigaom (including this one), one after the other, and both of them had silly mistakes that should have been caught by an editor. I am guessing that this is a case of Gigaom editors not working weekends, while their publishers continue to publish articles over weekends also.

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    2. Thanks for calling our attention to this. GigaOM strives to provide our readers with clean copy but occasionally typos will slip by (as AS surmised, this can happen on the weekend when we have scant editorial resources). The typos in this article has been fixed.

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  2. Excellent analysis! Get more info on the broadband efforts of Raleigh and the Research Triangle in this Gigabit Nation radio interview – http://bit.ly/WinMps.

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  3. Comparing apples and oranges. Intel only makes money if you buy a new chip today. ISPs make money every month using the chips they sold/rented you 5 years ago.

    Increasing bandwidth requires a capital outlay. Capital comes from Wall St. Wall St wants an 18 month payback or the hedge funds will drive your stock into the ground.

    Undergound construction can cost anywhere from $7-$20 per foot depending on what needs done… road bores being the highest cost because of the equipment, labor and liability insurance required.

    Now that your outside plant is capable of delivering GigE to the home, you’ll need a hefty increase in your backbone as well, otherwise all your customers will be able to do is enjoy short ping times to the switch at the headend/CO. And that switch will need an upgrade as well. Yes, today’s carrier-class switches are much more efficient at moving bits around than yesterday’s, but yesterday’s is paid for already.

    Finally, you’ll need to get everyone to upgrade their home’s equipment as well.

    And all that for what, exactly? Customers have consistently ignored ISPs home pages, let alone the other applications. Now, if you’re talking about video, that’s a little different, but again, lots of people are giving up on traditional TV in favor of Netflix and other Internet delivery systems. There’s no reason to assume this trend won’t continue as the cable networks continue to increase their rates faster than inflation. And at the same time due to net neutrality rules there’s nothing they can do to prevent a lower cost player (without the infrastructure to maintain) to come in and take customers away from the value added services they might have delivered over those pipes.

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    1. Thinking like a true utility.

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    2. Excuses, excuses, excuses. This is precisely the mindset this whole article is describing.

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    3. The capital costs of putting in a network are large. But, a vast majority of that construction can be amortized over decades. If they go in today for example and put in conduit and then string fiber through it, they are spending big, but can future-proof their network for generations. Upgrading the home equipment — at the termination point and any CPE is a bit tricker. The termination point is honestly the only place they need to invest anymore if they go to an all-IP system. For example Time Warner is using the ROKU box as its CPE in some cases — a cost of maybe $70-$90 per box (That’s what consumers pay, not TWC).

      So, even if you hate the Intel example, although I think the fabs and equipment investment and innovation that Intel pushes are analogous, it’s unrealistic for ISPs to constantly pull out the up front costs for their mindset without a) pushing for more innovation that would lower those costs or b) sharing with us the actual costs per MB for last-mile access.

      Cable for example says it has 90-95 percent profit margins on broadband services, hardly something I’d cry over. Plus, as the chart I included shows their cost of transit is shrinking, so even if they are buying more of it, they are still charging consumers far more per megabit.

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      1. Yes, but the issue is that financing for this infrastructure simply isn’t available. Nobody wants to invest money in a dull boring FTTH company these days — they all want to start the “next facebook” or “next google”.

        That’s why you can fine boutique FTTH companies like Paxio and Sonic but not large ones. There is no source of financing to take a small provider and let them scale up.

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  4. The Intel example is a really bad one ,since it’s way off and makes your point harder to get.
    Intel was forced to push faster chips by it’s competition. When AMD managed to beat them,they started doing not so legal things before they managed to bounce back and have the better product. Nowadays they don’t even push for much more perf anymore, AMD is in trouble so if you want more than 10-15% perf gain/year you got to pay ridiculous prices. They could easily sell a 6-8 cores chip with no GPU at 300$, but if they can bleed us dry,instead , they just do that. On the software side they stopped pushing too,one of the main reasons traditional PC’s are flatlining. Traditional PCs do offer a lot more computational power than tablets and phones but not a lot more functionality for the average consumer and that’s on the industry , Intel included.Their margins keep going up, dies keep getting smaller and their solution is to push ultrabooks. Ultrabooks= less perf for a high price, you pay 600-1000$ for a machine that is slower than a 400$ laptop and Intel can hope that this way refresh cycles get shorter (it’s a rotten deal for the consumer but it’s shiny!) .If you ask me that’s the way ISP’s are thinking now , not the way they should be thinking.
    But you are right, a smarter ISP wouldn’t think short term, scared of Wall Street , carriers are the same but at least Sprint might play a different game there.
    The real problem is not the way they think but what enables them to act that way and that’s the lack of competition.Regulators should be the ones stepping in to fix the problem and if they don’t ,long term , they’ll be forced out or forced to do better.
    It is sad but many listed companies are afraid of risks and think short term and that is made even worse when the political system is what it is in the US and regulators have no power.
    The carriers are even worse ,the cost of data is just insane and they have incredible leverage over device makers.It’s quite unhealthy.
    The future is unlikely to be wired , we need 1 data subscription for all devices , not 40 and wired will start losing customers at some point. A new kind of cord cutters.

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    1. My hat’s off to you, sir. You said this better than me.

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  5. Gail M. Roper Sunday, February 3, 2013

    In the Raleigh model the capital outlay is a shared strategy. All of the entities offer up excess assets to reduce capital costs for the gigabyte network. The most innovative aspect of the Google effort is that they filled in the backbone infrastructure needs by asking KCMO and KCK for access to already existing assets.
    The Raleigh initiative aligns with the government focus on public good and this new P3 (Public Private Partnership) takes on a new model. It is definitely a playing in the sandbox business strategy.

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  6. Anibal Damião Sunday, February 3, 2013

    nonesense. ISPs have infrastructure costs that are completely incomparable

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  7. Stacey- You have Price and Capacity labeled incorrectly in the graph.

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  8. Eric_G: great job, shilling for the telecom and cable businesses. No, seriously – great job. PROFITS can be used to invest in infrastructure. Your backbone is just switches and fiber – it’s not rocket science.

    The point made in the article is that the current crop of ISPs are making money off of infrastructure that WE paid for (remember the broadband subsidies of the 90′s and early 00′s), and not reinvesting the profits in upgrading.

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    1. You said it, James! But I agree with Eric’s other points, other than omitting the staggering profits the monopoly ISPs make, which more than compensate for the trouble in acquiring a loan these days. 90-95% profit margin. Think about it. I just can’t feel sympathy for monopoly ISPs which make record profits while jealously hoarding the infrastructure that ought to be nationalized. It’s their only tangible bargaining chip. They also have intangible ones in the cronyism they enjoy with the FCC and legislators. The industry is so shameless, that I even doubt how much the shame of public exposure could affect them.

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  9. As usual, GoogleOm columnist Stacey Higginbotham pushes sponsor Google’s corporate agenda at the expense of integrity and common sense.

    The truth is that ISPs are constantly innovating. They have to, as consumers demand more for less and run apps which attempt to monopolize, abuse, and saturate the network.

    10 years ago, most users had 40K modems (which were falsely claimed to be 56K modems but did not actually run at that speed). Today, in the US, they have broadband with an average speed of 7 Mbps. That’s an increase faster than Moore’s Law.

    And broadband providers have accomplished this despite the fact that their business model is very different. Once a chip manufacturer sells a product, it’s sold and it makes its profit. Broadband providers invest in infrastructure and wait years to realize a positive return.

    GoogleOm won’t acknowledge this, though, because its agenda is that of Google: to complain that the bandwidth that Google wishes to use to provide content to users and spy on every intimate detail of their lives (Note the Google spyware on this page, for example) is not free. Broadband providers are not charities.

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    1. I don’t know what, if any ties Stacey has with Google, but I think she’s to be commended for this article. Her articles are often glowingly sympathetic to the monopoly Internet industry, to the point of leaving out major controversies to avoid offending them. I’m not aware of anything she’s ever written marginally critical of them besides this article, even if it boils down to “you guys are great – and you can be even greater!” lol.

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  10. Stacey, where are you getting your price/Mb/s data from? My broadband speed has more than doubled over the past the decade, but the price of the connection hasn’t.

    “ISPs are implementing caps and incentives that are aimed to preventing people from using broadband — or at least second guessing themselves when they do. Should I buy a Dropcam? It uses 60 GB a month of data? Should I download the entire Lord of The Rings trilogy in HD or will that push me over my quota for the month?”
    - I wrote about this in 2011: https://jdrch.wordpress.com/2011/07/14/isp-bandwith-caps-disincentivize-faster-connections-for-consumers/

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    1. That chart is from a Google presentation. As for your experience, I will say everyone’s will be different in the U.S. owing to how ISPs price their services. My broadband connection has tripled in the last five years to 30 Mbps but my bill has gone from $40 per month to $73 (if i lived in Kansas City I could have a gigabit for that price)

      Some might argue that’s reasonable, but I look at that trajectory and compare it to the computer industry where prices halve every 18 months to 2 years for the same performance (or even better) and I see a roadblock for innovation. Google, Sonic.Net, and I hope others, are proving that it doesn’t have to be that was for broadband.

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