A long-awaited study says building a municipal gigabit fiber network in Seattle would cost $480 million to $665 million — less than past projections, but still too much for the city to take on without outside financing or a major partnership, say two high-ranking Seattle officials.
The assessment is a setback for advocates of municipal broadband who want to ensure broad Internet access across the community, and business leaders who see strong broadband service as a way to cement the city’s position as a top-tier technology hub.
The consultant’s report, released today, envisions a municipal broadband utility that would develop and operate a pure data, fiber-to-the-premises high-speed network — providing Seattle residents and businesses with a city-owned alternative to Comcast, CenturyLink and other commercial providers.
The 185-page feasibility study by Columbia Telecommunications Corp. examines the potential public benefits and financial risks — such as the possibility of price wars from those incumbents — and recommends several next steps, including exploring potential partnerships and launching a focused pilot project to prove the value of the project.
But in an interview in advance of the report’s release, Seattle CTO Michael Mattmiller cautioned that the financial models show the utility would need a “take rate” of 43 percent to break even with a service that charged $75 per month. That means 43 percent of the city’s single-family homes would need to subscribe to the service to provide the revenue required to pay back the debt needed to build the network.
“Even the most successful municipal broadband utilities don’t achieve that take rate,” Mattmiller said, referencing a reported 33 percent take rate in Chattanooga, Tenn.’s widely-cited municipal broadband network. “When you think about the city trying to enter a competitive market as a third provider, (43 percent) sounds like a very high standard to reach.”
In a memo about the study city budget director Ben Noble cautions that a failure to fund the network with subscriber fees would require the city to tap into its General Fund, potentially reducing funding for basic city functions such as police, fire, parks and human services.
“While a municipal broadband system is an exciting prospect, it would not be prudent to pursue a business model that relies solely on subscriber revenues and a pledge of the City’s full faith and credit to support the necessary debt financing,” he writes. “Such an approach would put the City’s General Fund at significant financial risk should the endeavor falter or fail.”
[Update: Read Ben Noble’s full memo here.]
Mattmiller noted that even if the city falters just 5 percent with its take rate or drops prices slightly below the $75 per month mark, the “loss to the General Fund would be very significant.”
OTHER OPTIONS
The study, which cost the city $180,000 and took seven months to conduct, also examined a financial model that used property taxes to help build and operate the network, while charging customers only $45 a month for service.
However, this would require a public vote and 60 percent approval from Seattle citizens. The study noted that “if the broadband utility were to fail, property owners would still be obligated to the tax payments needed to cover the debt on the initial capital investments made to start the system.”
“We still want a model that puts less risk to the system,” Mattmiller noted. “Even though it’s a cheaper monthly amount, if Comcast or a competitor comes in and uses their pricing power to match it and takes away the consumer argument to switch over, then we are stuck in same boat where now you’re paying a property tax and we have to shut down the system.”
The city also examined what a potential partnership with Seattle’s utility arms — City Light and Public Utilities — could look like. In Chattanooga, the city’s electric company used its smart grid to enable fiber-to-the-home broadband connections.
However, Seattle City Light is already building out its own fiber system and told officials that incorporating a broadband network ultimately would not make sense.
“We worked with City Light for this study to see if there was an opportunity for us to think about fiber that would benefit both purposes,” Mattmiller said. “The answer we got back [from the study] was ‘no.’ We were very disappointed.”
Noble and Mattmiller both leave open the possibility of pursuing federal funding or a public-private partnership to get the project off the ground. But those types of arrangements have their own risks, as demonstrated by the failure of the city’s previous partnership with a private company.
Seattle tried to partner with Cincinnati-based Gigabit Squared in 2013 after the company said it would bring gigabit Internet to thousands of Seattle residents. But that grand vision crumbled after Gigabit failed to raise enough money to implement a high-speed Internet network in 14 Seattle neighborhoods using the city’s dormant dark fiber network. Gigabit, which was ultimately sued by the City of Seattle for an unpaid bill, said it would offer 1 Gbps for $80 per month.
THE INCUMBENTS
Since the Gigabit debacle, Mayor Ed Murray — who took over for Mike McGinn in January 2014 — has laid out a three-pronged strategy to “increase the availability of competitive, affordable gigabit broadband internet access,” which include reducing regulatory barriers, exploring a public/private partnership, and analyzing a municipal broadband option.
The City Council moved forward with increasing competition this past September when it unanimously approved legislation removing “excessive administrative requirements” for telecom companies that want to build broadband utility boxes in neighborhoods. In March, the council also voted to eliminate a longstanding cable franchise district system that required cable TV companies to provide service to all neighborhoods in an effort to spur more competition.
CenturyLink has moved quickly to roll out a gigabit product, which the company says is now available to more than 60,000 households and more than 6,500 business locations in the Seattle area since it was announced in August 2014. The company wants to reach more than 100,000 households by year’s end.
Mattmiller and Noble repeatedly referenced CenturyLink’s gigabit rollout in Seattle during the interview, as well as Wave Broadband’s gigabit efforts, as a sign of more choices for residents.
CenturyLink advertises gigabit Internet service at a promotional rate of $79.95/month in Seattle. However, that rate requires a multi-year contract that bundles broadband service with a monthly phone plan, in addition to other fees that bring the total cost of the package to nearly $130/month.
Wave Broadband is another private company that’s investing in gigabit service around Seattle, offering an $80 per month product.
“To see that reducing regulatory barriers brought not one but two providers to the market who could start building fiber to the home has been very encouraging,” Mattmiller said. “I’ve seen the CenturyLink trucks around the city and am in talks with Wave about how they are approaching their build-out. It’s very encouraging that we are taking the right regulatory approach that still protects the city but allows providers to invest.”
Comcast, meanwhile, announced last month that it will offer gigabit service to more than 1 million Washington-based customers starting this summer. It also increased Internet speeds across Seattle this past December.
We’ve reached out to Mayor Murray for comment on the study’s implications, and will update this story when we hear back. Update: Here’s a statement from Murray:
“The municipal high-speed Internet study demonstrated there are limited potential options for building a municipal high-speed Internet utility, but we still have work to do to find a path forward that provides consumers with a good value while still covering the significant infrastructure costs. The City will continue work to identify potential business cases, joint ventures, and other funding sources for a high-speed Internet utility that achieves equity and value without risking the City’s general fund.”
We’ve also reached out to Comcast and CenturyLink and will update this story when we hear back. Update: Here’s a statement from Comcast:
“Comcast applauds the goal of ensuring Seattle remains both a leader in the technology economy and a community where all citizens can enjoy the benefits of state-of-the-art broadband Internet regardless of neighborhood, education, or income. This is truly a dynamic time for Internet service, with multiple providers stepping up to compete in the city.
“We will continue to aggressively increase our broadband speeds, as we have 15 times in the past 13 years. Most recently, we announced the introduction of two new speed tiers: 250 Mbps available now to everyone in the metro area and symmetrical 2 Gigabit-per-second service available this summer to residents who live near our fiber network.
“We also will continue to do our part going forward, testing new technologies that will enable us to deliver multi-gig services in the future to all homes that we serve while maintaining our commitment to our Internet Essentials program that already offers low-cost broadband to 20,000 families in the area in order to bridge the digital divide.
“We are committed to compete with anyone to bring the fastest, most accessible, broadband services to the citizens of Seattle and to the other areas of Washington we serve.”
And here’s a statement from CenturyLink:
“We share the City of Seattle’s commitment to providing the fastest internet speeds to populations at all income levels. We believe it is the right thing to do for the community and also makes good business sense. In fact, we already offer 1 Gig internet in Beacon Hill, West Seattle and Ballard, and are starting to expand to Green Lake, Delridge, International District, Central District and Rainier Valley, and we are on track to reach 100,000 households by year’s end.”
WHAT NOW?
Like many other cities, Seattle is in a difficult position on this issue, said Christopher Mitchell, director of community broadband networks for the Institute for Local Self-Reliance in Minneapolis, Minn.
If the city does nothing, it’s relegated to mid-tier status, with standard Internet service for most residents and gigabit service in a few places. If it attempts to build its own municipal fiber utility and become a world-class technical city, it will face cut-throat competition from the established players, he said.
“Neither future is particularly hopeful, unfortunately, but one of those scenarios has Seattle getting the best technology available in the world, and that’s the one in which they take on Comcast and CenturyLink,” he said.
So what should Seattle do? Mitchell says he’s an advocate of an incremental approach, building out a municipal fiber network gradually with the goal of having fiber everywhere in 10 years.
The city is considering a pilot project that would cost $5 million and help officials understand what costs, tasks, and risks may be associated with deploying a broadband network. The study offered potential neighborhoods to conduct the pilot and noted that the test “should focus on proving the value of the network rather than the economics of the model.”
IMPACT ON SEATTLE
Sabrina Roach, who’s helping lead a new grassroots effort called Upgrade Seattle that is campaigning for a city-owned broadband network, told GeekWire that not building a municipal network will put Seattle at a disadvantage to cities who do provide such a service.
“Our greatest innovators are creating startups out of their garages and living rooms,” she said. “To make sure the next big idea comes from Seattle, we need to have the technology to support it, we need gigabit fiber to every home at affordable prices.”
Roach also said that “equity is being left up to the hands of private corporations, who don’t have a good track record of providing actual equity.” She noted that 93,000 Seattle residents don’t have home access to Internet, and that there are already 1,228 people on the waiting list for Seattle Public Library’s new hotspot program.
“The city is working toward providing access to those in the community who need it, but the need is too great,” Roach added.
Chris Devore, General Partner at Seattle-based venture capital firm Founders Co-op, noted that the city has been “pretty slow” to enable technology infrastructure build-outs for the public good. He pointed to the inability to embrace Google Fiber and the failure of Gigabit Squared as examples.
Devore said he also wouldn’t expect the city to “foot the bill for free public infrastructure in perpetuity.”
“I think Mayor Murray’s approach is the right one: clearing the regulatory decks and looking for private partners, but using the threat of municipal broadband to set the expectation for the type of service we need to deploy to make Seattle the leader it aspires to be,” Devore said.
The idea of a municipal broadband network is certainly not new to Seattle. The city commissioned studies in 2005, 2007, 2009, and 2011 that explored the possibility of city-owned Internet, but the financial burden has been a roadblock.
That seems to be the case again in 2015. Mattmiller, the city’s CTO, said he “wishes the report showed different things,” but noted that the capital costs to build and maintain a city-owned broadband network were just too much.
“Municipal broadband is still something we need to better understand — what models can work for us if the market doesn’t step up?” he said. “This model, based on our funding needs, doesn’t appear to be the right model for us right now. But we are going to continue to watch the market and continue to understand that if they aren’t stepping up, what are the ways we can step in? If that encourages providers to continue to build out and serve the city, I’d say that’s a benefit for our public.”
[Editor’s Note: CenturyLink, Frontier Communications, and Wave Broadband are GeekWire annual sponsors; Comcast is a GeekWire advertiser.]
