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May 12, 2004

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Palo Alto Online

Publication Date: Wednesday, May 12, 2004

Guest Opinion: What an average resident needs to know about fiber Guest Opinion: What an average resident needs to know about fiber (May 12, 2004)

by Douglas B. Moran

I have been dismayed by the presentations on the fiber-to-the-home (FTTH) proposal for Palo Alto.

The critical issues have been glossed over or absent in the short presentations and obscured by a torrent of details in the longer presentations. And I have heard no critiques that I judge to be competent and credible.

To spur the type of discussion that residents like me need to help us decide on whether to support fiber, I am going to re-spin the arguments around three basic questions:

First, is there a real opportunity? Do the incumbents -- Comcast and SBC -- have basic problems or failings that can be exploited?

Second, can FTTH differentiate itself from the customer's viewpoint: better products, services and prices?

Third, what are the risks?

Until we have better answers to these questions, we can't address whether the risk-reward balance is appropriate.

The basic problem faced by Comcast and SBC is that demand for bandwidth is outgrowing their networks. Satellite TV is taking customers from cable because it has more bandwidth than cable, allowing it to provide additional channels and better quality pictures (digital and HDTV). However, satellite TV's ability to further expand is hampered by the limited number of good "parking spots" for satellites.

HDTV is the biggest driver of the need for more bandwidth -- one raw HDTV channel takes four times that of a current analog channel. Advances in compression are reducing that, but at some cost to picture quality.

For Internet access, DSL has high operational costs and severe technical limitations. Cable's constraints are market-based: Fiber displaces what could have been additional TV channels, often highly profitable pay-per-view and premium channels.

Fiber, by virtue of its substantially greater bandwidth and its lower operational costs, can provide greatly enhanced offerings at very competitive prices. The basic question is whether this technical advantage can be converted into enough paying customers.

My best analogy for the business plan is a shopping mall. The services provided over fiber correspond to individual stores, and the City of Palo Alto Utilities Department corresponds to the mall management. Retailers pay higher rents to be in a well-managed mall because being there offsets substantial marketing costs (ads and promotions).

A similar efficiency in marketing fiber services could provide customers with lower rates -- plus revenues for the city.

However, while good shopping malls tend have stores clamoring to get in, it is unclear if the pool of service providers interested and qualified to participate in FTTH is large enough to provide competition during bidding and replacements should a provider fail to meet their obligations.

One argument against FTTH is that newer technologies may emerge that make fiber obsolete. Everyone I heard make this argument has made mistakes in basic facts. And people with credible backgrounds in this area dismiss this argument.

The most expensive part of FTTH is stringing the fiber, and the fiber itself will not quickly become obsolete. Consider the history of copper telephone lines. The equipment at the ends has been repeatedly upgraded to provide new services -- touch-tone, caller ID, call waiting, DSL -- without changing the actual wires. Fiber has a massive installed base, and hence upgrades should benefit from economies of scale.

A disingenuous argument against fiber is that it completes with other projects, such as storm drains. This is analogous to arguing against investing in an apartment building because you wanted to remodel your kitchen. The investment is meant to produce income. If it is successful, you may be able to remodel your bathroom as well as your kitchen. The city's credit rating has plenty of room to issue bonds for fiber plus other projects. The problem facing those other projects (libraries, storm drains) has been finding the revenues (primarily taxes) to pay them back.

Additionally, FTTH would provide revenue that -- unlike sales and property taxes -- cannot be "re-allocated" (taken away) by the state. When discussing revenue, it is useful to have comparisons. Ikea produces $3 million in property and sales tax for East Palo Alto. The 300-room Hyatt Rickey's produces $1 million in room tax for Palo Alto. Fiber advocates talk about $6 million in revenues.

Many people feel uneasy about the city competing with established commercial companies, and with good reason. However, notice that once you factor out all the subcontracted tasks and the re-branding of commercial products, the Utilities Department is essentially managing the physical network -- which has long been regarded as a natural monopoly -- and expanding its "front office" and monthly billing service to new utilities.

In summary, FTTH seems to provide a genuine opportunity for better services and better pricing than the incumbents are likely to provide. My concerns are with the viability of the business plan: How well does it identify the risks and contain mechanisms to mitigate them? Seeing the plan stand up to a vigorous critique would promote confidence in it.

Douglas B. Moran is a computer scientist and 18-year resident of Palo Alto. He is president of the Barron Park Association and has been a member of various city advisory groups and committees. He can be e-mailed at [email protected]

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