Karl Edwards: Think small and alternative in 2007

I spend a lot of time conducting focus groups and consulting with municipal and community leaders in small to midsized cities as well as rural counties. Places like Grand Rapids, MI; Decatur, GA; Racine and Rock County, WI.I spend a lot of time conducting focus groups and consulting with municipal and community leaders in small to midsized cities as well as rural counties. Places like Grand Rapids, MI; Decatur, GA; Racine and Rock County, WI.

As many of us know, the majority of the US population lives in Tier 2 and smaller markets. Yet it is interesting that so much of the focus of the municipal broadband industry is on the Tier 1 markets. Obviously, this focus is driven by service providers, hardware vendors and, in some cases, even consultants. Yet, let me pose a question: “Does this focus align with the desire to bring broadband to those who need it the most?”

Yes, you can make the case that broadband may not be affordable in a major metro area. But in most of these cases there are at least two different providers.  I contrast that with areas of Rock County, WI, where there is only dial- up service; or in the rural Northeast where, according to a recent conversation with an economic development official, businesses are beginning to think about relocation if their connectivity needs cannot be met. Why do we continue to overlook these areas? Why is the focus so often on providing cheaper broadband in the metro areas?

I have also noticed a trend recently. More often than not community leaders are more interested in not what is happening in places like Philadelphia and San Francisco, but rather in what is happening in the community or county next door. They are also interested in projects that have been completed as well as the challenges that municipalities are facing in projects that are currently underway.

Thus, I would like to propose the following as pundits, consultants, service providers and integrators move forward in 2007:

1. More focus on need: I know that quite often the tendency is to focus on the large metro deployments. That is what draws attention and a crowd to an industry gathering. Yet where the real need quite often exists is in the rural counties like Rock County, as well as economically challenged urban communities like Maywood, CA, where 95% of the population is Hispanic/Latino origin and the mean income is $35,000.
2. More focus on challenges: As case studies are presented, I would like to hear more about the challenges that cities and counties face in their network deployments. Again, this is a marathon race and we know there will be obstacles. So let’s be open about these issues, so that others can learn and not repeat history.
3. More focus on smaller markets: Many of us live in communities like Decatur, GA; St. Louis Park, MN;  and St. Cloud, FL  and believe that those stories are more applicable to our communities than what is happening in Philadelphia, Chicago or San Francisco.
4. More focus on alternative business models: The business model where the municipality owns the network and outsources ISP functions to a third party is one that (based on my financial analysis) is a very valid option for smaller markets. It also takes the financial burden off of the local or regional service providers, the realistic choice to be the network operators in smaller markets. Financial institutions are out there who are eager to finance municipal networks (contact me for more info). There are also options in terms of federal and state grant funding, tax increment financing, and other funding vehicles that exist today.
5. More focus on alternative broadband technologies: Let’s not forget that there are other broadband options for municipalities besides WiFi: fiber, WiMAX, BPL, etc. Let’s also remember that each municipality and county has its own set of¬¨‚Ć topographic, socioeconomic, competitive, political and regulatory issues which may influence the technology choice.

I have been thinking quite a bit about the business planning efforts underway in municipalities throughout the United States. Part of my pondering is to improve on the work that our company does, but another part is an observation of what is missing in some of these efforts, based on recent conversations with municipal leaders and service providers. It also goes hand in hand with the point that I have made in my presentations at the Muniwireless conferences that the business plan, especially in smaller markets, must be carefully developed.

1. Business Model is not a Business Plan: There appears to be the assumption that all a municipality or county needs to do is to choose the right business model and all the other pieces will fall into place. The challenge with this assumption is that other key elements that a service provider will look at may not be captured in the business model. This is especially relevant if the Public Private Partnership model is chosen, where the service provider will make the ultimate decision about whether or not the business model is sound. Because many of the national service providers have already chosen their target markets, it makes it a bit of a challenge if your municipality is not on their “hit list”.

Thus,  I would propose that a business planning or feasibility study effort should also include the following elements:

• Market demand analysis based on subscriber commitment, not demographic analysis: At the end of the day, if you want to entice a national or regional service provider to build in your city, get real commitments.
• Conversations with service providers: Get them involved in the process before the RFP is released. Run the business model and other elements of the business plan by them to make sure it makes sense.
• Commercial anchor tenants: This can be more of a challenge, but is critical in suburban and rural areas where the household density does not make the business case work.

2. Financial Analysis is Critical: This element appears to be missing from some of the feasibility studies that have occurred recently. I almost get the impression that the assumption is made that if it is a Public Private Partnership Model that this is not necessary since the “City pays nothing”. This could not be further from the case, when you consider the following cost elements:

• Mobile data plans: Unless network service is free or replacing existing service, there will be additional monthly costs which will escalate as the municipal usage ramps up, Our analysis of Tier 1, 2 and 3 markets indicates that this cost will have significant impact beginning in Year 3 if it is not offset by a revenue share, pole attachment revenue or other revenue or cost savings.
• Network integration costs: There may be a significant integration effort with existing public safety, traffic, and utility networks that will require additional hardware and engineering services, which may or may not be part of the scope of work to which the service provider will commit.

The financial analysis may also reveal that other business models are an option. For example,  one of our municipal clients validated its assumption that a business model in which the municipality owned the network infrastructure and outsourced ISP functions to a third party was indeed a valid business model based on the cost and revenue drivers.

The municipality may also risk leaving money on the table. This can happen in two ways. One would be by allowing the service provider that is building the network to choose an architecture that does not allow the municipality to realize cost savings from T1 or leased line replacement. The other would be to not accurately reflect the value of the assets that the municipality is contributing: fiber, poles, rooftops, towers, etc. This should not be considered a “revenue grab” by the municipality, but rather a need to be paid fair value for its assets.

Thus, my challenge for 2007 is to pay more attention to areas where there are no broadband options and to continue to think creatively about business models that do not put the entire burden of responsibility on the shoulders of the service provider.

About the author

Karl is the Cofounder and President of  Excelsio Communications, a wireless broadband consulting group based in Atlanta, GA.  He has overseen the design of multiple wireless area networks to date, as well as consulted with municipalities and counties such as Grand Rapids, MI; Decatur, GA; Alpharetta, GA; Marietta, GA; Rome, GA; Cheyenne, WY; Racine and Rock County, WI that are in various stages of their wireless broadband initiatives. He also developed a financial model for analyzing municipal wireless network deployment opportunities that has won rave reviews from clients and partners.