Network Options

This option is most suitable when there are already two or more ISPs operating in the municipality and have a reasonable amount of, but incomplete, coverage. The primary issue is usually that the business case for extending the reach of existing services to reach the entire municipality is not a good one for the ISPs. The cost to build out their networks is not justified on a pure business case for the additional revenue they may acquire from new customers.

What you need to know

• Understand the higher incremental costs to reach the unserved premises
• Ensure that the technology being extended is sufficient to meet broadband needs

If one or more of the existing providers are open to developing a plan to extend their networks to the municipality’s satisfaction, then it is possible to negotiate an arrangement that meets the municipal goals while supporting the ISP business case. Keep in mind that for most technologies the incremental capital cost to reach those last unserved customers is usually significantly higher than for the original network build. Often, the additional revenue opportunity does not justify the additional cost for the ISP.

In many cases, offsetting the costs of capital can be sufficient to make the business case work. The capital cost contribution from the municipality does not necessarily need to be entirely financial. The municipality may have assets, such as towers or real estate that can be offered “in-kind” and human resources (e.g. to assist in promoting and marketing the proposed plans to create demand and to encourage service subscriptions, and to facilitate access to rights-of-way and ease other permit and regulatory issues).

The existing ISP already has a certain level of staff and infrastructure resources in place for their existing network deployment. While there would be incremental ongoing operational costs for the extended network and customers, there should be some economy of scale that would continue to make the operating cost portion of the business case work. In some cases, the incremental operating costs may be higher in the extended reach areas, e.g. higher installation and maintenance costs for lower population density areas or for difficult topographies.

The bottom line is to find ways to make the business case work for the ISP while achieving the needed coverage for the municipality at a competitive service price. Service quality, especially speeds, is also important. If your goal is high-speed broadband (25/3) can the network extensions support that, or get close to it?

If existing ISPs are not willing or not able to partner in order to meet the municipality’s goals then other options need to be considered. It is also possible that the existing ISPs do not have the capability of providing the type and the quality of service, e.g. speeds and reliability that would meet the municipality’s goals.

As in the previous case, this option is most suitable when there are already two or more ISPs operating in the municipality. In this case the issue may not be coverage as much as the level of service quality currently available. The goal here is to work with the existing ISPs, where possible, to invest in network upgrades and to improve the available service levels, e.g. faster speed and/or higher reliability.

What you need to know

• Identify if existing technologies can be upgraded to needed speeds
• Can the ISP generate additional revenues from the upgrades?

It must be said that the ability to improve the quality of service may have limits based on the type of technologies used. Discussion with the ISPs, however, will reveal the issues and identify what is possible. If sufficient service level can be achieved through network upgrades, then the discussion can turn to costs.

As with the network coverage issue, the ISP has likely not invested in network upgrades because the cost is not justified by the revenues available in the municipality. Upgrading network equipment or distribution facilities can be costly and is essentially a new incremental one-time capital investment, which usually needs to be undertaken for the entire network. As with extending network coverage, finding ways to offset the capital costs may be sufficient for the ISP business case to work.

For this option, however, there is likely to be less opportunity for incremental revenues. These revenues would have to come from existing subscribers upgrading their service level at a higher price or by acquiring new customers from the competition. In addition, there is less opportunity for the municipality to leverage in-kind resources since the costs of upgrade lie within the existing network infrastructure.

One additional complication when there are one or more ISPs is that the municipality may not want to be seen as assisting one ISP at the expense of the other ISPs. One solution to this issue is to open discussions with all ISPs to explore what they are willing and are able to do for network upgrades, determine what funding would be required, make that funding available, and then use a RFP process to invite all existing ISPs to make a proposal to access that funding for network upgrades. Even so, there is a risk that over time the losing ISPs may lose market share and may leave the market, thus reducing competition.

This option is most suitable when there is no existing broadband or very limited coverage by an existing ISP. As with the network build out scenario the main issue for ISPs, and why they are not already offering services in the municipality, is that business case is weak.

What you need to know

• Start with a clear set of requirements that meet community needs over time
• Approach as a long-term “partnership” that is a win-win
• Both ISP and community need to contribute their “fair share”

The municipality can follow the RFP process (outlined in Section 7 of this toolkit), to invite ISPs, including existing ISPs (if any), to offer proposals to build a network that meets the community needs. As part of this process the municipality needs to make it clear that the arrangement would be viewed as a partnership where the municipality and ISP would work together for their mutual benefits. The municipality would contribute funding and in-kind resources to the project.

Access to funding should be in place in the anticipation of contracting with a selected ISP, although the exact amount may be negotiated based on the successful ISP proposal.

In the three options presented so far the municipality is partnering with, or contracting with, ISPs who would build/extend/upgrade and operate their own networks. They have a vested interest in the success of the network and their investment. At the same time, since the municipality is also making an investment and enhancing the ISP business opportunity it is incumbent on the ISP to make every effort to meet the community needs.

In the event that it is not possible to find a solution to broadband needs by working with existing or new ISPs, then the municipality may want to consider options to build their own network. This essentially means establishing new network infrastructure and operations to deliver broadband services to the municipality.

The primary challenges with this solution are:

1. High capital cost borne entirely by the municipality, and;
2. Building and operating a network is often outside the core competencies within the municipality.

Despite the challenges, this option is selected by some communities and can be successful. There are a number of different models that can be considered, each with their pros and cons, and the choice can depend on the situation and the existing organizations within the community. For example, some communities have an existing municipal utility for energy services, giving them some existing resource capacity and experience in dealing with customers that can be leveraged.

DIMENSION	DESCRIPTION	CONSIDERATIONS
Operating models	How you want to operate as a business in terms of target customers and services offered, e.g. a retail provider, wholesale provider, facilities provider. This will influence what type of network you build and how it needs to be operated, as well as costs (capital and expenses).	Retail – you own and service the end-user and all that entails Wholesale – you sell network capacity to retail ISPs (who own the end-user), e.g. middle mile Facilities – you lease physical facilities, e.g. dark fiber, to other providers.
Network build	Building the physical network – equipment, inside and outside plant facilities, buildings, towers, etc. as per the technology choice.	Initial and ongoing capital investment Design and project management expertise
Network operations	The physical and human resources needed to maintain the network and support customers – Network operations center, installation, maintenance, customer support, billing, sales, etc.	Operating costs and expenses, e.g. vehicles, inventory Staffing and management
Business structure	The ownership and management of the broadband entity – governance, accountability, authority, etc.	Directly own and operate Directly own and outsource some functions Totally outsource to a separate entity with appropriate accountability Partnership model

The network that a municipality chooses to build and the operating requirements are heavily influenced by the ongoing operating model, i.e. will you operate the network as:

1. A retail provider?
2. A wholesale provider?
3. A facilities provider?

As a retail provider the municipality is responsible for all aspects of the operation from end to end and “owns” the customer and all that entails. Furthermore, the municipal network is potentially competing with other retail ISPs in their municipality, whether they exist there now or in the future.

With a wholesale model the objective is to build and operate a network that other retail ISPs can access and use to offer their services to their end customers. The municipality owns the core network throughout the municipality and needs to operate the network, but does not own the customer and does not need to do retail marketing, customer billing and support, etc. That is the responsibility of the retail ISPs that are customers of the municipal network. The retail ISP can also be responsible for the connection from the network facilities to the customer premises. The wholesale model, thus allows the retail ISP to focus on their core business and to enter the market without needing to make large upfront capital investments.

As a third option, some communities may build the network facilities infrastructure, but only sell (lease) capacity, such as dark fiber networks. Other ISPs need to be able to install and to connect their own equipment to “light up” their network and connect to their customers. The network build would need to include a location where retail providers can install their equipment and run their network operations. While this variation can require less upfront investment and ongoing costs compared to the wholesale or retail models, you have little control over what types of services are offered and how much of the community will get connection and access. It also requires more investment and effort by the retail ISP to set up and operate.

Of course, it is also possible to operate as both a retail provider and as a wholesale provider, allowing you to both control availability of services to all potential users in the municipality while facilitating competition and leveraging unused network capacity. This means that as a retail provider you will also be competing with your wholesale customers, but this is not uncommon. There should be appropriate separation between those sides of the business.

Not being in the business as an ISP a municipality would typically contract out the network build, from planning through to implementation. As the contractor, however, the municipality needs to ensure that the design and technology plan meets the needs of the municipality for the long term. There should be a network design stage that utilizes suitable consultants and that will establish a feasible design and cost estimates, with potential phasing of implementation.

Once there is a good design and a plan for funding/financing based on the cost estimates, the municipality can use a RFP process to accept bids for a network build to their specifications. This should also be done using experienced network build consultants, both to prepare the RFP and to review and select the suppliers. The municipality may want to hire an experienced general contractor to coordinate and to manage the entire activity.

Once built and in service, the network requires ongoing operations involving all aspects of the new community/municipal ISP, including network operations center (NOC), installation, maintenance, customer service, technical support, billing, sales and marketing, etc. The municipality needs to decide if they want to take on some or all of these activities or contract them out to firms that specialize in these areas.

Taking on network operations is an ongoing responsibility and requires a long-term commitment. Regardless of who performs these activities, the ongoing costs as well as periodic network upgrades must be included in a business case analysis to ensure sustainability of the network and the operations. The network operating costs can also vary depending on the operating models you choose.

As you are deciding what type of network you want to build, how you want to get it built, how you want to operate it, and what your operating model willbe, you will also want to consider what kind of business model you want. A business model captures how you want to structure the “business,” and this may be influenced by sources of funding and financing, by current provincial legislative requirements, by applicable municipal by-laws, and by resources available.

A municipality could choose to own and to operate the broadband network as a municipal function under a municipal service board, however, this is typically not done for a number of reasons. First, it is not a good idea to operate a revenue generating business within a municipality that operates from municipal tax revenues. Also, it is better to have clear accountability and governance for the network operation with a separate corporation that is not part of any municipal department. Other considerations include having visibly clear separation of financial operations from any municipal activities and having an arm’s length ownership.

In some cases, where there is a pre-existing municipal utility for gas or electricity, using this organization as the home of a new network operation may be a good fit. This is because the governance separations may already be in place, and there is an alignment in experience for the operation and for dealing with customers. If such a corporation does not exist, then the network operations and business should be set up as a separate entity, most likely as a municipal service corporation (in compliance with local or state regulations).

It is possible that, other than for some funding and support, the broadband initiative is driven by other community organizations rather than the municipality. There are examples of broadband networks set up as not-for-profit organizations and run by community proponents for the benefit of the municipality. In some cases, several municipalities may partner to form a shared network and achieve economies of scale, such as a regional municipal broadband network.

Partnership models may also be possible, which would be similar to the option of bringing an ISP into the market but with the municipality building and owning part (or all) of the network itself. Rather than the municipality contributing to a network build by an ISP, the ISP contributes to a network build by the municipality and then operates the retail side of the business. This would be a variation on the wholesale model but with one retail ISP as a partner.

Adoption is about people – households and businesses – subscribing to broadband services. Service pricing and affordability is a major factor in peoples’ decision to subscribe to a broadband service and specific service level, i.e. speed of connection. This is especially true for lower income levels.

A certain segment of the population will jump on broadband, or better broadband, as soon as it is available. Many people and businesses that have existing broadband services, however, will need a reason to change their service level.

Since many people, including businesses, do not fully understand how they can benefit from broadband It is important to create more awareness and understanding on this topic to clear the first hurdle of adoption. Working with existing service providers to better promote broadband benefits can aid in increasing demand and service uptake.

Once households and businesses adopt broadband services, how they use it for their own benefit (i.e. meaningful use) has a direct impact on the benefits they will achieve and how those benefits accrue to the municipality. For communities making an investment on broadband availability it is important to provide some focus on making sure the network is used effectively to maximize the return on their investments.

Examples of meaningful use for households include using the Internet for education, earning income, teleworking, and access to telehealth services. For businesses, meaningful use relates to using online business practices that improve competitiveness and productivity, such as selling online, using social media, and online customer service.

The potential benefits and impacts from meaningful use both to users (households and businesses), and to the municipality are described in Broadband Benefits.

The initial network capital cost for fiber per home passed have been estimated[1] to be in the range of $700 and increasing with lower population densities as shown in the following table:

Household Density per Sq. Km.	Capital Costs per Home Passed (USD)
5,000	$705
500	$733
100	$873
50	$1,086
20	$2,089

In addition, the cost per subscriber for the initial cost and maintenance is estimated at $1,100.

Note: Network cost estimates can vary considerably depending on the overall scope of network coverage, network design, topology, and other factors. These costs are shown for purposes of illustrating the impacts of population density and should not be used for project budgeting purposes, which should be based on network planning for your specific municipality or region.

The effect of population density on fiber financials is illustrated in the following figure showing an example of total costs and five-year revenues and earnings (EBITDA[2]).

The above clearly illustrates that the service profitability increases as the household density increases, to the point of being negative for the lowest density areas. It is also worth noting that in cases where there is very low population density, there could be situations with negative net earnings. Every municipality will have a mix of population densities. For a new community-wide network that covers a range of population densities, the overall profitability can be sufficient to support the network build. It is important to note, however, that addressing the lower density areas will have a negative effect on the business case.

From an ISP business case perspective, this demonstrates why lower density areas in rural communities may be frequently left unserved. It also shows that one of the key challenges when considering options for extending network deployment to reach those unserved populations in the municipality.

[1] Cost in USD. Source: “The Broadband Availability Gap – OBI Technical paper No. 1” – prepared for the Federal Communication Commission (April 2010) – http://download.broadband.gov/plan/the-broadband-availability-gap-obi-technical-paper-no-1.pdf
[2] Earnings Before Income Taxes, Depreciation and Amortization – essentially net earnings from operations.