Network Models
Requiring more or better broadband does not necessarily mean you need to build or operate your own broadband networks, or even bring in new commercial ISPs. Working with existing ISPs to meet community needs should be the first option where possible and feasible. Which options make sense to consider should be clear from the SWOT analysis.
Basic Options - Pros and Cons
The basic options below are listed in order from least to most municipal investment:
| OPTIONS | PROS | CONS / ISSUES |
| 1A. Encourage existing ISPs to build out their networks to increase coverage |
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| 1B. Encourage existing ISPs to upgrade their networks to improve service quality |
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| 2. Partner with a new ISP to enter market |
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| 3A. Support a third-party to build and operate a network, e.g. municipal broadband network |
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| 3B. Build and operate your own network, e.g. municipal utility model |
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There are many nuanced variations with some of these options, in particular if (and how) you may partner with other players and in what manner. In addition, the costs to the municipality can vary greatly depending on the option and the approach taken. Considering the funding and the financing implications is an important part of the process in deciding what a municipality can and should do.
Generally, the lowest risk and cost option is to work with existing ISPs, or a new ISP when there is no (or very limited) broadband available. The cost can be contained through suitable cost sharing on a partnership basis, where each partner – the municipality and the ISP –bring some investment into the project for mutual benefit. The risk is minimized as a suitable ISP will have experience in building and operating the network as a core competency and avoids any need for the community proponents to take on that role.
What you need to know
- Partner with ISPs if you can
- Build your own network if you must
- Consider building a middle-mile network
- Collaborate with other communities when practical
One of the key barriers to existing or new ISPs in extending or building new networks will be their capital costs of investment. It is safe to assume that if the existing ISPs could see a sufficient return on investment then they would be making these investments in infrastructure. Therefore, overcoming this barrier should be a consideration for municipalities.
One or more of the following options may be considered to help offset the capital cost barrier for ISPs:
- Contribute municipally-sourced funding to offset some of the capital investment costs.
- Contribute “passive infrastructure” beneficial to broadband deployment that is under control of the municipality, which may include access to facilities such as towers for wireless service, rights-of-way, coordination of permitting, and even human resources for planning and coordination.
- Build a municipal middle-mile network infrastructure.
The network options listed above cover two main approaches. One approach is to work with existing or new ISPs to provide broadband services. The other is to build your own broadband network. These two approaches are not necessarily mutually exclusive.
While encouraging existing or new ISPs to offer sufficient quality broadband services to all residents and businesses in the municipality is the preferred approach, this may not be possible due to insufficient revenue incentive for the ISPs. The availability of a robust middle-mile network provided by the municipality can ease the path and costs for ISPs to upgrade, extend, or implement new networks to deliver last-mile services to unserved or under-served areas.
A well-designed middle-mile network built by the municipality can provide the infrastructure backbone, with the required speeds and reliability, while offsetting those costs for the retail last-mile ISPs. The costs for building the middle-mile network can be recovered through leasing facilities or capacity to the retail ISPs. The middle-mile network should also bring the last-mile network build closer to potential subscribers and enable the provision of higher speed technologies (e.g. fiber) in the last mile at reduced cost to the ISP. For municipalities, investing in a middle-mile network can facilitate the provision of better last-mile broadband services without the need to operate a retail ISP themselves.
Overlaid on all of these options is the possibility of collaborating or of partnering with other communities to make participation in the broadband initiative more attractive for ISPs and other partners. This also may potentially achieve economies of scale not available to individual communities. Such collaboration can also positively contribute to the ultimate success of the goals and outcomes.
Please refer to Network Options for more information related to the options and for building your own network.
Costs and Financing
The costs of building and of operating a network, or for financing existing network extensions or upgrades, are highly variable and are influenced by:
- Size of network in terms of geographic coverage
- Population densities
- Choice of technologies
- Topology of coverage areas
As part of determining the path forward for the municipality it is advisable to undertake a feasibility study of the options under consideration to get an estimate of the costs involved. These should include both the capital investments – initially and over time – as well as operating costs.
Of primary importance are the initial capital investments that will usually require some form of financing. Whether your plan is to build your own network or to engage with existing or new ISPs to provide broadband service, addressing the initial capital investment will likely be required. In the case of working with ISPs it is important to understand the ISP business case so that you can negotiate to a win-win scenario that will provide the broadband service level and coverage you need.
Understanding the ISP Business Case
There are a number of key dimensions that materially affect the business case for broadband service providers. A market of sufficient size (customer base) will attract ISPs to build networks and to offer services. The extent to which any ISP will invest in a network fundamentally comes down to decisions based on the business case. How does an ISP typically consider how to invest in a broadband network and what may cause them to provide less than full coverage for a municipality?
Typically, an ISP will estimate a number of key factors to determine the viability of their business case in terms of return on investment (ROI).
These factors include:
- Market Size and Growth Rate
- Population Density
- Addressable Market
- Market Demand and Take Rates
- Network Costs and Timing
- Operating Costs
- Sales and Marketing Costs
These factors combine to estimate potential revenues and costs associated with a network build whether this is for a new network, for extending an existing network, or for upgrading a network. The financials are estimated on a year by year basis to develop a pro forma business case over a period of time, usually over five years. Risk analysis would also be applied to evaluate best case, worst case, and expected outcomes for things such as subscription rate forecasts.
What you need to know:
The viability of the ISP business case is mainly influenced by market size and density, which affects:
- Initial capital investment
- ROI and payback period
Understanding the ISP business case can:
- Explain why some areas are currently unserved or under-served
- Aid in discussions with ISPs to address the current broadband issues
The ISP Business Case section provides a more complete overview of the typical service provider business case considerations.
Network Costs
Network costs will vary depending on the network options considered – building or extending broadband networks – as well as for different types of technologies. Initial estimates should be obtained through feasibility analysis for initial planning purposes and for sizing the potential investments required. Actual cost estimates must be provided by those entities such as ISPs or by network build contractors engaged by the municipality once the decision is made to move forward with one or more options.
In many cases a municipality will be aiming to address coverage of unserved or under-served areas. It is important to be aware that the network costs per subscriber, especially capital costs, generally increase with lower population densities.
In general, broadband network profitability increases as the household density increases. Profitability decreases with lower population densities to the point of being negative for the lowest density areas. For a new community-wide network that covers a range of population densities the overall profitability can be sufficient to support the network build. Addressing the lower density areas, however, will tend to 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. One of the key challenges when considering options for extending network deployment is to reach those unserved populations in the municipality.
Financing Options
Financing of municipal broadband initiatives is an important factor for any option being considered. For the build-your-own network option, a significant level of financing will be required. In working with existing or new ISPs to provide broadband networks, usually the only way to make the ISP business case work is to offset a portion of the initial capital costs. This may be done through a combination of actual dollars and providing access to in-kind services or through assets that can help in capital cost avoidance.
Changing the status quo of existing broadband service availability and quality requires some capital investment in network builds. In the cases of working with ISP partners, the municipal investment generally needs to offset the capital investment by the ISP to ensure that the ISP achieves a sustainable and profitable financial business case.
The municipal investment is incremental to the pure ISP business case financials of costs versus operating revenues (profitability), i.e. what an ISP is willing to invest. When evaluating the municipal investment it is important to look at the social and economic outcomes from the investment over and above the business case financials. How does the municipality justify the investment and view payback on that investment?
The answer to this question returns to the initial goals and outcomes discussed in setting goals which should be based on the social and economic benefits of broadband described in broadband benefits. The payback on municipal investment should be viewed in terms of improving the retention and attraction of businesses and population, in terms of opportunities for economic growth through more competitive and productive local businesses, and in terms of the opportunity for increased job growth and workforce development.
Selecting a Path Forward
Having set some clear goals and outcomes, examined the SWOT, and considered the costs and financing requirements, it should be possible to narrow down the list of options for moving forward. At this stage, if it has not already happened, it is advisable to engage other community stakeholders and potential partners to make a final decision on the option to pursue.
From a network deployment standpoint, undertaking a feasibility study to consider the options and costs can help to refine which options make the most sense for the municipality to balance the short-term issues, long term needs, costs and financing requirements, and the potential need for engaging other partners and organizations in the initiative. Broadband projects, especially for smaller communities, can be challenging in terms of resources (financial and human) and expertise.
Strategies to Address Challenges
- Leverage opportunities and initiatives that may require or may drive investment in broadband, and coordinate them for mutual benefit. For example:
- Broadband initiatives by other organizations or jurisdictions targeting community anchor institutions (e.g. schools, libraries, healthcare, or government services) may provide opportunities to broaden the scope for greater community access with smaller incremental investments.
- New developments (e.g. residential areas or industrial parks) may similarly provide needed impetus that can be leveraged to serve larger areas with some incremental investments.
- Civil works at the municipal or another government level can provide opportunities to “build in” some infrastructure capacity to reduce future capital investments in broadband. These are sometimes referred to as “dig once” policies.
- Establish and adopt municipal policies that inherently facilitate and encourage enabling broadband as part of the municipal planning process.
- Policies that coordinate and integrate planning for land use and infrastructure are important to meet current and future broadband needs, and to ensure the long term viability of related infrastructure investments.
- For example, in making planning or investment decisions, it is important to consider that the financial viability of infrastructure includes not only an analysis of capital costs, but also of the ongoing operation, maintenance, and replacement costs. Life cycle costing is an important part of financial viability and profitability over time. Potential profitability can also be impacted by the density of households in an area. Both of these aspects have direct fiscal implications for municipalities or service providers over time. It is important to consider them upfront, in an integrated way, when making planning or investment decisions.
- Coordinate at a regional level if possible to harmonize municipal planning policies that support and encourage infrastructure investment by telecommunications companies.
Strategies for Small Communities
If the market is too small (i.e. there is just not enough additional revenue potential to justify the additional capital cost investment) then it may be possible to create better economies of scale by collaborating with neighboring communities. This can expand the market size while reducing the capital cost per subscriber.
Communities may consider means of offsetting some of the capital costs through direct financial investment as well as offering useful in-kind services and assets. If the required ISP investment in capital costs is sufficiently reduced, then the ISP business case may improve to the point of being attractive. The municipal investment should not be considered a form of subsidy for helping the ISP but rather an investment in improving the economic and social well-being of the municipality. The ISP may recognize these benefits and become a valued partner, even if these benefits do not show up in their business case financials.
Are you Ready?
The initial planning and preparation process of identifying needs, setting clear goals, evaluating options, and deciding on the most suitable path forward is typically led by a relatively small focused group of broadband champions and experts in the community. Moving to a more formal planning and implementation stage will involve more resources and organization, as well as broader participation across the community. There are a number of dimensions to consider in order to ensure that as a community you are ready to proceed.
The community broadband readiness self-assessment described in the next section provides a method to engage a broad range of stakeholders across the community to evaluate the readiness required to proceed.