With fiber expansion, Palo Alto prepares for fierce competition | News


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Palo Alto is still at least five years away from expanding its fiber network to every section of the city but 738 residents had already contributed $50 each to show their commitment to the cause, helping the city crowdsource $35,000 for a nonexistent project.

They’re paying for a dream that the city has been chasing for well over a decade: to bring high-speed Internet to every community nook by building out the municipal dark fiber network, which today serves a few dozen business customers. The City Council took a major step toward making that dream a reality in 2020, when it hired a consultant to prepare a plan and a business analysis for the fiber expansion, commonly known as Fiber to the Premise.

On Monday, as council members reviewed the latest survey results, business plans and cost estimates, they found themselves in a familiar position: agonizing over whether the risk is worth the reward. While some highlighted the promise of the new system, most concluded that they would need more information before they could endorse the expansion.

The latest analysis, performed by the firm Magellan Advisors, suggested the citywide system could start making money after about a decade of operations. Just as importantly, it could improve reliability in municipal operations and make internet connection for businesses and residents throughout the city faster, cheaper and more reliable than it is today, John Honker, founder of Magellan, told the City Council on Monday.

“The goal is to reinforce and reinvest in that (fiber) backbone to make it stronger and more resilient for the city and its departments,” Honker said.

For fiber advocates, the rewards are clear. Loren Smith, a member of the city’s Utilities Advisory Commission, recalled the early days of Covid-19, where everyone was trapped indoors and depended on internet service to work, go to school and socialize. Building the network, he said, would create “a provision for future generations so that they will be prepared when we weren’t.”

Andy Poggio, who has been advocating for a fiber expansion for many years, noted that 5G wireless technology, which some tout as an alternative to fiber, can be unreliable during rain and around foliage. Fiber doesn’t have that drawback, he said.

“Fiber is reliable and fast,” Poggio said.

The enthusiasm, while high, is far from universal. Detractors argue that the fiber project is just as likely to leave the future generations with a different sort of legacy: mounting debt incurred for creation of a service that is already provided by two private sector giants: Comcast and AT&T. Resident Bob Smith called the fiber expansion “an unnecessary risk” and said he doesn’t see the point for pursuing it.

In the best case scenario, Smith said, the system makes a little bit of money but its services will be so similar to those offered by incumbents that people won’t notice the difference.

“On the other hand, if you try to build it and fail, that’s a $130-million investment sitting there, probably a lot more by the time you get it done,” Bob Smith said.

The estimated cost of the new system has gone up since the council last discussed it, moving from $120.8 million to $142.9 million. It encompasses two projects. The first is an expansion of the “fiber backbone” to create a dedicated communication network for municipal operations such as smart meters, substations and wireless field communication. The second, far more ambitious one, is Fiber to the Premise, which would expand the network throughout the neighborhoods. The two projects would require 45 miles and 176 miles of fiber cable, respectively.

Magellan estimated that the city can bring the costs down by about $11 million if the fiber backbone expansion and Fiber to the Premise were constructed in parallel due to “network overlap.” Even so, because of the high costs associated with launching the utility, the city wouldn’t see net profits until 2031 (if many functions are outsourced to vendors) or 2032 (if the city keeps most services in-house).

Loren Smith, who served on the utilities commission’s Fiber Subcommittee, said money is not really an issue. The city can rely on a revenue bond and gradually pay off the bond through revenues generated by the fiber system.”

“We’re talking about paying for the fiber network via the revenue the fiber network generates,” Smith said.

The new analysis from Magellan also suggested that the program would have plenty of takers. Its survey found that about a third of existing customers are, to some extent, unhappy with their existing internet service provider and would likely consider making the switch. If the city is able to provide superior service at a reasonable price – necessary conditions in any successful scenario – it could reach a “take rate” of about 40%.

Phil Metz, who serves on the Utilities Advisory Commission, pointed to another promising factor: a survey finding showing that about half of Palo Alto’s customers have already “cut the cord” from cable TV and are relying on Netflix, Hulu and other streaming services for their entertainment needs. That makes things easier for Palo Alto because it obviates the need for the city to offer cable to compete with the likes of Comcast.

“It certainly was a surprise to me and I think it highlights the feasibility of offering broadband service separate from entertainment, which was one of my personal concerns going into this,” Metz said.

Yet Metz and Honker each also pointed to the risks. Competition is at the top of the list. The expanded fiber network would be the first City of Palo Alto utility that is not a monopoly. Incumbents – Comcast and AT&T – may respond by lowering prices and locking in longer contracts. AT&T, which is gradually expanding its own fiber offerings in Palo Alto, may also speed up its deployment schedule, Honker said.

Given stiff competition, some council members said they are not yet convinced that Fiber to the Premise should move ahead. Council member Greg Tanaka said the case for Fiber to the Premise is “not compelling” because the private market already provides 1-gigabit service.

“We have enough trouble just doing what we’re doing right now,” Tanaka said, alluding to recent power outages.

Council members Alison Cormack and Eric Filseth also favored a cautious approach and suggested they would need a stronger business case before they could sign off. Filseth said he was concerned about the risk of the city providing “infinite subsidy” to the fiber utility because the take rate didn’t live up to expectations and the municipal network couldn’t differentiate itself from the Comcast and AT&T offerings.

Cormack said she doesn’t have a clear idea of the problem that Fiber to the Premise is trying to solve.

“I feel really strongly that we do not have a value proposition that’s written out in a way that’s going to make people comfortable making a multi-million-dollar decision and that’s easy to explain to people,” Cormack said.

Council member Tom DuBois was far more optimistic. He said the city’s goal should be to ramp up subscribers as quickly as possible and “start generating revenue to fund the rest of the buildout.” He noted that the city already has experience successfully managing a fiber system. The existing fiber network, which was launched in the mid-1990’s, generates more than $2 million annually. He suggested a marketing effort for accelerating the switch.

“Instead of ‘Shop local,’ it can be ‘Surf local,'” DuBois said.

The council did not have any clear consensus about whether the fiber system should be run entirely by the city or whether operations should be outsourced. The former option would require 25 new full-time equivalent positions and $58.6 million in staffing costs over the next two years; the latter would entail five positions and $48.9 million in staffing and vendor costs. DuBois favored outsourcing for most of the services but having in-house managers overseeing the fiber workforce. Vice Mayor Lydia Kou suggested that having city staff more involved in the system would create institutional knowledge and help gain community confidence.

Mayor Pat Burt suggested that while success is far from certain, Fiber to the Premise could bring significant benefits. He pointed to the city’s strong history of running its utilities and noted that local customers pay far less for electricity than those who are served by PG&E. He also cited the recent reconstruction of the municipal golf course in the Baylands and the council’s decision to take over Palo Alto Airport from the county. Both the golf course and the airport are now generating significant revenue, he said.

“We do have a good history of very good success on these enterprises,” Burt said.

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