Lafayette Utilities System has filed a complaint with the FCC following what seems to be a rather arbitrary decision by the National Cable Television Cooperative (NCTC) to deny Lafayette as a member. This is a crucial issue for communities that want to build fiber-optic networks, so we will dig in and offer an in-depth explanation. It all starts with the business model. Fiber-optic networks are fantastically expensive and are expected to be financed entirely with revenues from subscribers. Though communities typically want fiber-optic networks for the broadband capacity, they find themselves having to offer cable television services also to ensure they will attract enough subscribers to make the debt payments on the network. Unfortunately, cable television services are the most difficult and expensive part of the triple-play (broadband, telephone, cable tv). A community network has to sign deals with different content providers in order to put together its channel lineup. Even a community network with 100,000 subscribers has little power over the companies with channels like ESPN, the Disney Channel, Discovery, MTV, Food Network, and others. Thus, it will have to pay more for those channels than massive networks like Comcast that have many millions of subscribers and therefore a stronger negotiating position. LUS has noted that video programming is the "largest single on-going cost" it incurs in the network. Enter the NCTC. By forming a cooperative, many small providers (public and private) were able to gain negotiating power over content owners and even hardware manufacturers to cut costs to members by buying in bulk. In recent years, the size of NCTC rivaled that of major national providers like Charter and Cox cable. All three parties stood to gain by bringing Cox and Charter into NCTC in 2009. The addition grew NCTC significantly -- only Comcast has more subscribers currently. The advantages of NCTC are quite significant and worth reiterating because it is a reminder of the ways in which massive private companies have the playing field tilted in their direction. Without access to NCTC, communities have to pay more for the same content and equipment (NCTC savings may start at 15%-20%.

This is a great inside look at how one community built a globally competitive broadband network (probably the best citywide network in the US) and the barriers they faced from incumbent providers Cox and BellSouth. Terry Huval, the Director of Lafayette Utilities System in Louisiana, spoke to the U.S. Senate Committee on Small Businesses Entrepreneurship on April 27, 2010, on the topic of: "Connecting Main Street to the World: Federal Efforts to Expand Small Business Internet Access." Huval's full testimony is available here. Huval's presentation told the back story of LUS Fiber, focusing on the barriers to publicly owned networks in Louisiana.

The FCC National Broadband Plan, on page 153, includes Louisiana as one of 18 states that “have passed laws to restrict or explicitly prohibit municipalities from offering broadband services.” While the Louisiana law did not prohibit Lafayette from providing broadband services, its mere presence provided, and continues to provide, a fertile playground for BellSouth (and its successor AT&T), Cox and their allies to create mischief, resulting in discouraging local governments from stepping in to provide these services even when the private telecom companies refuse to do so.

Louisiana, as with many other states including North Carolina, has powerful incumbents that claim there is an "unlevel playing field" and that local governments have too many advantages in building broadband networks (incomprehensibly, they simultaneously claim that local governments are incompetent and publicly owned networks always fail).

For another real-world example of how companies respond to public entry into the telecom market (as opposed to theoretical arguments about crowding out investment), let's look back down to Lafayette and how cable incumbent Cox responded:

“Cox froze the cable rates in Lafayette, and they didn’t freeze the rates in other areas,” said Terry Huval, director of LUS, a municipally owned utility company which fought major incumbent opposition before building an FTTH network in Lafayette and starting to offer service earlier this year. “We figured our citizens saved over $3 million in cable rates even before we could offer them service.”

I have yet to see a cable company leave a market or reduce investment following the introduction of a public competitor. The opposite tends to happen - they increase investment and often drop prices or leave them lower than in surrounding, non-competitive areas. Often, the rates are not really advertised but if you call from the competitive area, they will offer a better deal:

Trae Russell, communications manager for EATEL, the local telephone franchise in Ascension, La., and some surrounding communities, had seen the same thing happen in his area, when EATEL started offering FTTH-based services in 2006. In fact, EATEL went so far as to take out an ad in the Lafayette newspaper, alerting cable customers there to the discounts that Ascension customers were getting and forecasting similar lower rates in Lafayette once the LUS network was in the works. “It was an incredibly bold move on our part,” Russell said. “Cox came in with an incredibly aggressive promotion for TV service with every bell and whistle you could imagine. We couldn’t figure out how they could even make money on it. So we took out an ad in the Lafayette newspaper that basically said, ‘Hey Lafayette, look at the great prices you are going to get from Cox.’ Cox was not amused.”

This is also a lesson for those who want to build a public network. Don't expect to win just because you have a better service and you offer lower prices from what was available before a competing network is built. The incumbent has often already paid off its network. Additionally, incumbents are often larger companies that pay less for their television contracts, so they can lower prices farther than one might expect initially.