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The State Of Broadband: Page 2 of 5

Problem With The Status Quo

In June, National Cable and Telecommunications Association CEO Kyle McSlarrow called America's broadband deployment over the last 10 years "an unparalleled success story," alluding to the rise of cable IP networks and faster and more extensive broadband in the consumer market. He's right by some measures. Among the G7 countries, even though the U.S. is only No. 5 in broadband penetration (see chart on previous page), it's been making headway. But when you look at average broadband prices worldwide, the U.S. doesn't compare favorably--service in the United Kingdom, Sweden, France, Japan, Korea, Germany, and many other industrialized countries is cheaper, on average. And when you look at broadband subscribers per 100 inhabitants, the U.S. is ranked No. 22, slightly above the Organisation for Economic Co-operation and Development average but below the Scandinavian countries, Korea, Canada, France, the U.K., and others.

As with many things, where you stand depends upon where you sit. Tony Patti, CIO for S. Walter Packaging, a century-old manufacturing company in Philadelphia, says that even in the SOHO market, significant bandwidth is for sale relatively cheaply (see chart, below). "People always want more for less, but we're at a remarkable and revolutionary time in the history of the convergence of computing and communications," Patti says. But the two key questions are these: Are you in the provider's service area; and if you are, does the actual speed match the advertised speed? In major markets, the answer is: probably. But talk to someone in smaller cities and rural America, and a different story emerges.

Kris Hoce, CEO of Pardee Hospital, a 200-bed facility in Hendersonville, N.C., says the hospital's telecom lines are "stretched" today, and when the management team looks at tomorrow's challenges, including telemedicine and telemetry, he gets even more concerned.

Until a second competitor, Morris Broadband, entered the market a year ago, the incumbent provider was Pardee's only option. "You'll take whatever capacity they give you, do it on their time schedule, and you'll pay through the nose for it," Hoce says. Since Morris Broadband's entry, Pardee has realized a 10% to 15% reduction in telecom costs, though it can't always get sufficient bandwidth, he says.

chart: Selected rates for business internet service for small and home offices

It's hard for competitors to break in. We spoke with several small telecom providers that had problems getting what's called "egress" from the incumbent provider's point of presence in an area. The problem wasn't getting a circuit to the POP, or building infrastructure to serve a customer a mile or two away. The problem was getting the incumbent to let the competitor run fiber into the building. The incumbent owns the POP and can say what can or cannot be connected to it. The U.S. doesn't have "unbundling" regulations (broadband slang for rules that force providers to choose between being providers of the "highways" versus the "off-ramps") the way that other countries do.

Some large enterprises make the classic build-versus-buy assessment--compare the cost of leasing circuits (high) with the cost of obtaining a fiber IRU (indefeasible right of use, essentially permanent ownership). Then if the incumbent carrier refuses to sell them an IRU, they compare the cost of the leased circuits over time with the cost of putting in their own fiber.

That scenario played out for North Carolina Research and Education Network, a not-for-profit that operates statewide. Leased circuits would have cost NCREN $85.4 million; to build, operate, and maintain that same fiber cost $39.9 million, says Tommy Jacobson, NCREN's chief architect. It's easy to see why it chose to build.

Of course, that scenario isn't realistic for most smaller organizations, or for organizations with a larger footprint than one state. But it does show how the economies of connectivity are out of whack--it shouldn't be cheaper to build out fiber than to buy the bandwidth, even over a long payback period.