Public-private partnerships and public-centric capitalism: Two potential sides of USF reform?

Craig SettlesI occasionally wonder how thin the ranks of rural and local telcos will be once the waves of USF reform have resided. Have they faced up to their ability to survive the impact of reverse auctions, apparently the FCC's reform tool of choice, distributing $4.5 billion in USF money? Could be time for small telcos to look to a different type of public support.

You know it's springtime In North Carolina when Time Warner rears up on its hind legs and begins breathing fire at community broadband networks. This year the beast has been particularly contentious in a scorched earth campaign trying to wipe muni networks from the planet in the name of their oxymoronic "level playing field" bill in the legislature.

One particular development in this year's battle points to an avenue some rural and regional telcos should consider as a strategy to counter the effects of the FCC's USF reform, a move likely to benefit the big dogs more than the local ones.

Last month communities in the state came together to meet with Time Warner to offer alternatives to nuking community networks that centered on public private partnerships to build and run broadband networks. Unfortunately, according to reports from those directly involved, the "negotiation session" was a sham. Time Warner's lobbyists ran the meeting and predictably public private partnership proponents were bounced to the curb.

Small regional telcos in that state should have hoped for a much better outcome because these partnerships could lead to profitable businesses in the drive to bring broadband to rural areas. Here are a couple of examples of how private sector companies can open new markets by rejecting the current political trend of demonizing everything related to the word "public."

That train's leaving the station

The Universal Service Fund is often seen as a gravy train for rural telcos that's about to make its last run thanks to reform. There are real concerns about waste and fraud in the program. But, as with any story, there are two sides. A Technology Policy Institute survey created some heat by claiming 60 percent of USF money goes to business operations, not serving those without phone service. The local telco industry fired back that the survey greatly exaggerates the numbers. The truth likely sits somewhere in between.

If we look at public private partnerships as practiced by Ontario County, N.Y., here's a way for smaller telcos to possibly have a fighting chance getting some of the "new" USF money. The County created Axcess Ontario to build and operate a massive fiber network. The County gets bond financing with a 25-year payback period. Then they offer providers of all stripes access to the network.

A reverse auction is a polite term for "low bid wins." If you ask a bunch of companies to respond to an RFP in which whoever offers the lowest bid to bring broadband to an un-served community wins, how likely is it that smaller and mid-sized companies will win? Stating the obvious, to have the lowest bid, you need really low operating overhead. Building broadband to rural communities isn't cheap. But if you knock out the cost of buildout, pass it off to an entity that can doesn't need immediate payback, you can come into these bids with a decent price.

It's debatable, well, impossible whether you can be competitive with AT&T or Verizon wireless service purely on price. However, reverse auctions supposedly will factor cost/speed, so you can make a strong case that your cost/megabit is much less than the wireless giants that at best deliver 15-20 Mbps, particularly if you're delivering gigabit services through local partnerships.

Axcess Ontario offers WISPs the ability to greatly increase their wireless speeds for reasonable backhaul costs. An increase in capacity holds true for those providing wireline services. A look at their early customer list is telling. Verizon, TW Telecon and a local telco that receives USF money are braving the world of open access and net neutrality with Axcess Ontario to become more competitive.

County CIO Ed Hemminger states, "It takes a strong telco to partner with us because technically we can compete with them. They're betting they can compete more effectively." This is a safe bet given many communities aren't interested in getting into the service provider business.

Sometimes what it takes is public-centric capitalism

Not all of these partnerships require contractual participation by local government to be successful, but there must be some alternative business thinking that the telecom industry seems challenged to do, as evidenced by Time Warner in North Carolina. Clearwave, a service provider in southern Illinois, firmly believes that public-centric and profit can go hand in hand.

"We're a for-profit business and we're going to make it from business customers. But we're committed to the economic development of the community," says Clearwave VP of Sales and Marketing Mike Phalin. "21 out of the 23 counties we're serving are on the government's ‘Economically Distressed' list. There are communities here that definitely are underserved. Without our middle mile fiber, they'd have no hope for last mile connectivity."

Reflecting the potential outcomes USF money could inspire, Clearwave is using broadband stimulus money to build 740 miles of fiber to connect healthcare providers, 23 libraries, nine community colleges and a number of local K-12 schools. Clearwave's executives also are broadband evangelists, meeting with city councils, community stakeholders and other local folks to sell them on the value of working partnerships with the private sector to deliver broadband. "As a home grown provider, we want to help all the communities in our region make the most of this network," continues Phalin. "The big incumbents have little to no community interests."

Clearwave is realistic when considering the financial realities working with sparsely populated communities. "A public private partnership such as the one in Ontario County could work here in theory, but I'm not sure these communities have enough financial and people resources to pull it off. However, we're doing everything to help communities understand the various ways they may be able to make that last mile possible. Our business model is to continue building and expanding this coverage. So if folks get other funding, then they can connect with us."

The forces of change and USF reform can either swallow up local and regional telcos, or you can adapt and perform by taking a new approach to the old ways of doing business. A much better alternative than scorching the earth. 

Craig Settles is an analyst and business strategist in the broadband industry who conducts on-site workshops and training for companies and communities. Follow him on Twitter @cjsettles

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