Industry debates wholesale open access model

by Meghan Fuller Hanna

The recent sale of iProvo to private operator Broadweave Networks (www.broadweave.com) and the well-documented financial woes of the Utah Telecommunications Open Infrastructure Agency (UTOPIA) have led many to question the viability of the wholesale open access network model in the U.S. In both cases, municipalities financed and built fiber networks, then opened them to third-party providers of voice, video, and data services.

On paper, it sounds like a solid premise. Much like cities and towns build roads and then open those roads to private enterprises — taxi companies, shuttle buses, garbage collectors, etc. — iProvo and the UTOPIA consortium built their networks with the goal of enticing multiple service providers to come in and offer services. Subscribers would benefit from the resultant competition, they reasoned. But thus far, it hasn't worked out as planned. Both have struggled to secure — and retain — service providers. As a result, UTOPIA has been forced to refinance, and the iProvo Network is now in the hands of a private provider. So what went wrong, and what, if anything, can municipalities learn from these early adopters?

To be fair, both UTOPIA and iProvo are encumbered by a state law in Utah that prohibits municipalities from operating as retail providers of service, and this is, by all accounts, a formidable obstacle. "Fate was sort of sealed for them," admits Teresa Mastrangelo, founder and principal analyst of Broadbandtrends.com.

Neither network has had an easy time attracting third parties to come in and offer anything beyond Internet access. "I think anyone will tell you they could probably put 30, 40 ISPs on the network without any trouble," says Mastrangelo. "What they have a really difficult time finding are operators who can offer video and voice services."

According to its web site, only one of the four providers currently providing services over the UTOPIA network offers triple-play services — MStar, which touts data, voice, TV, and business services. The lack of providers has an effect on overall take rates because subscribers do not get the advantages of bundled services, a single bill, promotional discounts, etc. As such, potential subscribers do not have an incentive to switch from their incumbent provider.

Low take rates make service providers even less likely to come in and offer services on the network because there�s simply not enough profit margin to go around. Thus, the networks cannot support themselves, and they are forced to refinance or, in the case of iProvo, sell their fiber assets to a private provider.

Mastrangelo believes timing may also have been part of the problem; both networks commenced building in the 2002–2003 timeframe. "Five years ago," she says, "they had a better shot at it because there weren't triple-play service offerings from the major operators in those markets, but there are now, and they are very attractive. They can offer promotional discounts. As such, third-party operators on the UTOPIA and iProvo networks have a difficult time competing against the likes of Comcast, Qwest, and Time Warner.

Tim Scott, PacketFront's (www.packetfront.com) director of sales for North America, believes flexibility and an understanding of the competitive environment are important attributes of any municipality considering the wholesale model. While PacketFront equipment supports numerous service delivery models, the company has had success with the wholesale model in the Scandinavian region in particular, and it is bullish that such a model can work in the U.S. as well.

A municipality should ask itself key questions, he says. Where are the innovative new services going to come onto the network? How will local services be generated and inserted onto the network? What services might local health care and educational facilities wish to put onto the network? What sort of utility services could run on the network? "The network has to be really different from whatever is available today," Scott advises. "Otherwise, we believe, you'll struggle to get the take rates that you want."

He also says that municipalities should take responsibility for the marketing and promotion of the network and allocate a sufficient portion of their capital budgets to this endeavor. "Don't just rely on the service providers to do the marketing," he says, "because the service provider might market himself, but that doesn't mean he's going to market the actual benefits of the open network. And if people don't understand what the benefits of the open network are, why would they change from Comcast or Qwest or someone else?"

While the wholesale open access network model might prove challenging for municipalities, that doesn't mean an open access network can't work. Vermont's Burlington Telecom is an example of an open access network, but it's not only wholesale. Burlington Telecom provides voice, video, and data services itself but also opens the network to others on a non-discriminatory basis. In this way, the municipality guaranteed services from day one; as a result, its take rates are high enough that the network expects to be cash-flow positive by 2009, just four years after it began offering residential services.

Tim Nulty, former executive director and general manager of Burlington Telecom (www.burlingtontelecom.net) and current project director of ValleyFiber (www.valleyfiber.net) in Vermont takes the fiber-as-a-public-roadway analogy a step further. "Think about Boston," he says. "Boston has public bus service. It has public garbage collection, and it offers them directly to the public and gets money for them. But that doesn't mean the roads can't be used by anybody else on a non-discriminatory basis," he notes. "If you wanted to set up your own bus service, you could do so. There are taxi cabs and minivans to take you to the airport. The private sector comes in and figures out niches, and they are free to do so. Burlington is open access, but it's not wholesale only."

Meghan Fuller Hanna is senior editor at Lightwave.

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