For the purpose of this discussion I have created an overly simplified business model to describe how the numbers look based on several assumptions.
First off, let’s take a look at what the pricing looks like as it sits currently.
$25.00/month – telephone – This does not include long distance or optional services.
$15.00/month – Dialup Internet – no allowance for a second line or services like CallWave
$30.00/month – Satellite or Cable TV – admittedly this provides for more than basic service.
$70.00/month – Total for all of the above services.
If we include Broadband in the above equation the numbers would be increased by approximately $20.00/month bringing the monthly total to roughly $90.00/month.
In Vermont our typical population pattern is dispersed in the following manner. We have a small town with a number of homes clustered together in the center and then roughly 10 miles of very few homes per mile until we hit the next town. For the purpose of this explanation I will assume that each town has a population of 200 homes (average) and for every 10 average sized towns we have one “city” with a total population of 1,000 homes/businesses. I beg your indulgence, I know this is not accurate but it does give us a framework to base this business model on. We will also stipulate that in every community this service is deployed in there is very close to a 100% service adoption rate. Considering that Adelphia charges up just under $60/month for high speed Internet access only I can tell you without reservation that I would take this service in a heartbeat if it was available to me.
So, starting in the “city” we connect 1,000 homes/businesses to our fiber at an internal cost of $11,000/mile plus $1,800 per individual building. We will also have to make the assumption that in this city we have a density that equals 20 homes per mile (average) and that this would give us a figure of 50 wireline miles inside the city borders. (Please note – I have assigned these numbers as estimates and are for illustrative purposes only. Since every area will be different I have based these numbers on a worst case scenario, within reason.)
$ 550,000 – fiber backbone for the entire city (50 miles at $11,000/mile)
$1,800,000 – total install cost for last mile (1,000 buildings at $1,800/building)
$2,350,000 – total investment to connect the city
Let’s look at those numbers, shall we?
Using a mortgage calculator based on a 6 percent loan on a 20 year amortization schedule we find the total monthly payment (including interest) works out of be $16,836.13/month or $16.84/month per subscriber to pay off the loan. If we assume that VoIP (not unlimited calling) has a cost factor of $10/month and base Internet has an additional cost of $5/month in bandwidth costs based on a massive oversubscription rate we then have to add in television. I am going to assign a cost for basic television that adds in $10/month but this number is dependent on a number of variables including what we include in the basic service package. If you are willing to accept the numbers I provided, this is what everything now looks like.
$16.84 – debt service.
$10.00 – VoIP costs
$10.00 – Television
$ 5.00 – Internet bandwidth costs.
$41.84 – total monthly cost on basic package.
$59.99 – basic package retail price
$41.84 – monthly cost to provide services
$18.15 – net – however, there is overhead and additional expenses which need to be accounted for. Let’s not forget there are businesses that will be charged a higher monthly fee while the costs will stay close to the same and that a fair portion of residents will also opt for premium services and we can now offer additional services (security, remote backup/data storage, 4.9MHz public safety, advertising supported Hot Spots, VoIP over WiFi, etc.) that will generate additional revenue streams. We also can leverage the ability to supply one $1,800 Customer Premise Equipment for Multiple Tenant Units – where more than one customer is connected using one device because they share the same building. This also changes the numbers in our favor.
Now, let’s look at the numbers when we factor in the smaller towns.
As we defined earlier, each small community is 10 miles away from the next or the city to keep this example simple.
So this would mean we have 10 miles times $11,000 per mile or $110,000 to run the backbone from the city into this smaller town. Additionally, we will set a constant of 5 homes per mile along the way that need to be connected.
This is what the breakdown looks like in this case.
$110,000 – fiber backbone (10 miles at $11,000/mile)
$110,000 – run fiber through 10 miles of the town based on 20 homes per mile.
$360,000 – 200 homes connected last mile
$ 90,000 – 50 homes connected along the 10 mile backbone
$670,000 – total cost to connect this small town
$4,800.00 – total monthly payment for infrastructure based on 20 years at 6%
$19.20/month debt service per customer figured on 250 homes.
Now the model looks more like this in this case.
$19.20 – debt service.
$10.00 – VoIP costs
$10.00 – Television
$ 5.00 – Internet costs.
$44.20 – total monthly cost on basic package.
$59.99 – basic package retail price
$44.20 – monthly cost to provide services
$15.79 – net – with additional expenses not accounted for.
Looking at the totals I have provided here (who knows if this is reality) this is how I see a very small network of one “city” and ten “towns” adding up.
$18,150 – monthly from the city.
$39,475 – monthly from 10 towns
$57,625/month revenue – with some but not all expenses accounted for.
Please keep in mind there is no charge included for installation in this model and I would think this is something that should be factored in – even if the installation fee is financed over several months or years. I can also see a minimal monthly rental for the set top box and the SIP router or outright sale of these items that would add to the bottom line.
Let’s look at some of the specific options and discuss the relative value.
In the above model we allow for each service to be added in as necessary and we will assign a retail pricing for each of the following services at the following rates.
$35.00/month – Broadband Internet service – entry level tier (5 Mbps symmetrical).
$15.00/month – Telephone service – unlimited in-state but limited long distance calling.
$10.00/month – Basic television package to be determined.
Upgrades would be available for services as the customer wishes.
For example, should a customer wish they can decide to drop the telephone service included in this package ($15.00/month) and opt for Packet8 (or a competing company) they would now be able to make unlimited calling anywhere in the US or Canada for $20.00/month (only raising their total monthly bill by $5.00/month) as opposed to Verizon’s Freedom package which costs $59.95/month for roughly the same level of service.
A customer could choose to opt out of the television package and save another $10/month on their monthly service bill allowing them to receive Broadband as a platform to take advantage of competing services at a price that is competitive with industry standards.
However, this would be selling the infrastructure short and ignoring many of the services that might be provided including telecommuting, video conferencing, streaming video, Video on Demand, distance learning, remote medical diagnostics, remote security along with many services that will soon become available if the necessary infrastructure is in place.
Please note- I readily admit that this model is not complete but rather built to demonstrate the validity of the concept. I have tried to present what I see as the underlying financial model that allows this project to work. I also carefully omitted any monies that might be made available through RUS grants or the impact that private investment would bring to this model.
I would like to clearly state for the record that I believe the dynamics of this deployment could be dramatically changed if a hybrid fiber backbone/wireless last foot delivery system was employed. If, for example, we were to employ the newly FCC approved 3650 band for last foot delivery a significant reduction in the investment necessary to connect the end user could be realized where we might be able to drop the installation cost per building connected from $1,800/unit to well below $600/unit.
One final thought, this is not something that I conceived of or invented. This is a business model that is currently in operation and can be duplicated with very well understood cost factors. The business that I “borrowed” this plan from has constructed it in such a way that the company was “Cash Flow Positive” within 90 days insuring that this business is sustainable.