Endeavour Partners - Blog

When I was a kid I wanted a pet iguana, and the one thing I remember about iguanas from my childhood is that an iguana will grow to the size of its cage. If you want a small iguana, build it a small cage. If you want a very big iguana, build it a big cage. Unfortunately, this fun fact about iguanas turns out to be a myth.

Do iguanas grow to the size of their cages? Do people find ways to use whatever broadband is available?

More recently, in the age of the dot-com bubble (c.1999-2002), I heard the same theory applied to broadband. “If you build it, they will come,” was the mantra repeated by many long haul fiber network, metro fiber ring, and global undersea fiber companies. At my prior firm we termed it The Iguana Theory of Broadband: Build a really big cage, and people will dream up new and innovative (and profitable) ways to fill it. Unfortunately, this also turned out to be false – or at least overly simplistic – and led to a fiber glut and dozens of bankruptcies.

But now we are seeing broadband speeds soar:

• Comcast launched 100 Mbps service in Twin Cities in September
• Cablevision launched 101 Mbps back in April
• Verizon bumped the speeds and added tiers into its FiOS offer back in June – with plans ranging from 15 Mbps to 35 Mbps to 50 Mbps at various price points

At the same time, however, we hear Verizon CTO Dick Lynch proclaim that metered broadband will be the pricing paradigm of the future and that “the concept of a flat-rate infinitely expandable service is unacheivable.” Which is it going to be? Increasing performance at a flat rate? Or metered rates limiting demand?

New technologies are continually being developed to enable increased download speeds and drive down the cost per megabyte delivered. For most customers most of the time this has resulted in a balancing point: DSL, FiOS, and cable modem services have had fairly constant pricing while increasing download speeds over time.

If the iguana theory of broadband holds true, at least for some period of time, then pricing will remain relatively flat. If the iguana theory of broadband proves false and demand outstrips supply, then prices will increase and metered pricing could work. If the iguana theory proves false and supply outstrips demand, then broadband prices will fall, creating a difficult competitive environment for broadband service providers.

The following diagram lays out these three simple scenarios:

For metered pricing to work, demand for broadband data services must outstrip supply

So, which scenario is most likely? What are we trending toward? As we see data points that suggest one path or the other, we will be sure to point them out.

Moe’s update of his insightful analysis of the applications for broadband stimulus funding motivated me to take a look at the numbers for the other underwater bridge to nowhere, the ADAK Eagle project, serving the Aleutian Islands. This seeks ~98% grant-funding of $242m, rather than the 50% of the Kodiak-Kenai project

While we recognize the value of bringing broadband to rural communities, those areas of the United States that are unserved and underserved, we have to ask what is the right technology? How do we balance the costs and benefits?

The Aleutian Islands illustrate this dilemma perfectly. Confronted with the challenge of providing physical connections amongst these far-flung communities, the answer was not to build an interstate highway, it was the Alaska Marine Highway System, choosing an appropriate technology:

The mission of the Alaska Marine Highway System is to provide safe, reliable, and efficient transportation of people, goods, and vehicles among Alaska communities, Canada, and the “Lower 48,” while providing opportunities to develop and maintain a reasonable standard of living and high quality of life, including social, education, and health needs.

The Alaska Marine Highway System has been operating year-round since 1963, with regularly scheduled passenger and vehicle service to 30 communities in Alaska, plus Bellingham, Washington, and Prince Rupert, British Columbia. There are currently eleven vessels in the AMHS fleet, additional ferries have been planned.

During the past ten years the Alaska Marine Highway System has carried an average of 400,000 passengers and 100,000 vehicles per year.

Alaska Marine Highway

It is part of the National Highway System and receives federal highway funding; it has been named as an ‘All American Road’ by the Federal Highway Administration:

The Alaska Marine Highway makes up a large part of our ‘highway system’ and is a route so special it has earned the title of All American Road, the only Byway of its kind

The fiber-based bridge to nowhere seeks $242m in funding to serve <9,000 people, of who about half live in Unalaska. Using the same calculation basis as before:

• a population of ~8,200 people
• an average household size of 2.59
• = about 3,200 households
• assume that about the same proportion of these households will subscribe to broadband as the US average, that is 60%
• = about 1,920 households subscribing to broadband service
• @ $242 million, that’s about $125,000 per household
• even if we take people, it’s still ~$30,000 per person

The state of the art in broadband satellite terminals is the Thrane and Thrane EXPLORER® 700, which retails for ~$6,500. At these prices, we could give every household in Alaska one of these and a voucher for $50,000 in services, and we’d still be way ahead; this would cost about half as much.

Thrane and Thrane EXPLORER® 700

The economics of wireline broadband deployment are fairly straightforward, yet acknowledgment of this reality is usually painfully absent in broadband policy discussions.  Much of the cost to rollout or upgrade a broadband network is driven by the miles of outside plant required, while the revenue opportunity depends on the number of homes passed.  Simply put, densely populated areas are more profitable than rural areas and there is a cut off point below which broadband services are not financially viable without an external economic lifeline, such as a government subsidy.

Data released yesterday in a report from speedmatters.org illustrates this well.  They compiled data on actual download and upload speeds from each state based upon 413,000 speed tests performed over the past year.  We took this data and combined it with geography, population, and income data from the US Census to perform some quick and dirty analysis.

The scatter plot below shows population density (in people/square mile) vs. average broadband download speeds (in kbps) for all 50 states:

Higher broadband download speeds are delivered in states with higher population density

We also looked at median household income and “income density”, but these relationships proved to be not as interesting (income density = household income * # of households / square miles).

As you can see from the chart, the top 6 most densely populated states have much better broadband performance than rest of the country.  New Jersey, Rhode Island, Connecticut, Massachusetts, Maryland, and Delaware all have population densities over 400 people per mile and average 8.7 Mbps in download speed as a group.  The average download speed for the bottom six states, however, is only 3.3 Mbps.  These least populated states all have under 20 people per mile:  New Mexico, South Dakota, North Dakota, Montana, Wyoming, and Alaska.

From my first hand professional experience as both executive and advisor, including recent work on getting broadband stimulus funding, I can tell you that the business case for serving 20 people per mile with DSL or cable is pretty ugly!

In spite of this basic economic fact, public policy debate usually centers on how we are falling behind other countries, and how the problem is corporate greed, monopolistic cable or telco power, or some other nefarious culprit that can be legislated away.  According to Speed Matters’ report, the key benchmark countries we are falling behind are:

• South Korea (1,260 people per mile)
• Japan (870 people per mile),
• Sweden (52 people per mile)
• The Netherlands (590 people per mile)
• Germany (600 people per mile)

Of these, only Sweden is a fair comparison to the US as a whole, which has 80 people per square mile.  I submit to you that the difference in performance between the US and these leading broadband countries is primarily based on real economic costs, not corporate greed.  It is much cheaper on a per household basis to deliver broadband to these markets than it is in the US.