If fibre to business communities has payback in months not years, why is it not happening? What is missing?

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I have received interesting feedback to my blog on the way that crapband is crippling the UK's creative industry clusters in Soho and Mayfair, forcing them to relocate to those parts of Shoreditch and Manchester which have fibre to the studio. Simple arithmetic appears to indicate that social and commercial landlords can get rapid, low risk, payback from helping fund fibre networks akin to those in a growing number of communities around the world, to service their tenants. Many such projects are variations on Stokab  the fibre utility network, serving Stockholm. But the different messages from the original academic evaluation of Stockab compared to other municipal networks and that sponsored by Google point to big differences in the underlying business and funding models.

The most significant is the way in which the investors derive benefit, if any. The different models are not new. They were found with the canals and railways.

The biggest beneficiaries were those who helped promote lines in order to transform their businesses (farms, fisheries, factories, mines and quarries) to serve new markets or to exploit the rise in land and property values around the new stations: Metroland was unusual only in that the railway company itself made some of the money from the associated property development.

The biggest losers were those who bought shares in railway companies floated by consortia of businessmen and property developers who were more interested in cheap, reliable services than dividend streams.

Meanwhile UK became the workshop of the world on the back of building railway and steamship lines that enabled, for example,the jewelry quarter of Birmingham to create distribution networks that enabled it to dominate the world market for pen nibs and similar metalware for decades on end.     

When we say that the Internet revolution is akin to the steam age revolution, the parallels are closer than most commentators realise: from how innovation and growth was financed to how early leaders leveraged monopoly positions from one market to another, until they came up against opponents with whom it was cheaper to do deals than to compete. Hopefully, it is only a matter of time before the cartel that runs the US-centric Internet comes up against a Theodore Roosevelt who will put muscle back into the anti-trust movement (as when the US railway cartel stranglehold  on interstate commerce was broken up). 

Now to put this into the context of the business case for landlords to work with their tenants on commissioning community broadband projects (to global inter-operability standards) that they can "contract" to BT, Virgin, Sky, Arqiva or who-ever (large or small) to maintain and operate and exploit on an ongoing basis.

There is growing volume of evidence (UK, EU and US) that fibre to the premises adds between 5% and 20% to property values (surveys average around 10%). According to Rightmove crapband (i.e. anything less than so-called "superfast") can cut 20% off a house price while a Halifax survey last year indicated that 2/3rd of buyers would pay 3% more for good broadband and nearly a quarter would pay 10%. That would put the value of a good domestic broadband connection in the range £5,000 - £16,000

The value for businesses is much higher, depending on the nature of the business. Thus the absence of world class (as perceived by the French and the rest of the EU) local broadband for the start of the Tour de France in Barnsley this year would not only be nationally embarassing but could be measured in tens of £millions of lost ongoing benefit (tourism etc,) for the local economy. According to Sam Knows the date has slipped from "Spring" to end June. I suspect that means the exchange will be ready to handle the news media but not to enable local hotels and restaurants to take advance on-line bookings from visitors from around the world without paying intermediaries in areas with better broadband connections.

The BT price for consumer Fibre to the Premises is now an 18 month contract for £99 per month: £1,782, plus £750 connection charge, plus a distant dependent charge (£200 for up to 200 metres from the exchange, £600 for 200 - 399 metres, £1,000 for 400 - 599, £1,400 for 600 - 799, £1,800 for 800 - 999, £2,500 for 1,000 - 1,499 , £3,500 for 1,500 - 1,999 and by quotation above this), plus some sundries.

This  equates to a connection cost, including 18 months service,  of £2,750 to £6,000.

Many new build providers claim they can significantly undercut this offering which is, in any case, only  available at about 300 exchanges, such as parts of the area served by West Malling, and supposedly coming soon to more, from Croglin (a tiny community in Cumbria in the catchment area of B4RN *, hence the complaints about predatory practice) to Whitehall .

In other words, the business case for new players to enter the market would be a no brainer, were the benefits to accrue to those putting up the funding without intermediaries, including central and local government, regulators, monopolists and others getting in the way.

I have seen many attempts to model the cost and value of broadband roll-out over the past two decades and have advised a fewl. Most were as over-complicated and fanciful as the average PFI deal: combining the worst elements of inefficient outsourcing and over-priced leasing, obfuscated under layers of consultancy and accountancy jargon, drafted by those with little or no grasp of the cost of capital beyond what one might expect from a PPE Graduate, let alone of the technologies and service delivery disciplines involved.

One of my contemporaries at London Business School was a manager in British Rail at the time of privatisation. He was instructed to help prepare the privatisation of the rolling stock, according to criteria dictated by "experts" from the Treasury and their equally expert consultants. He read the pages of analysis with growing disbelief, but was told that the  "policy" could not be questioned by lesser mortals. He asked if a management buy-out might be considered. He was told it might indeed be helpful - because the market was thought to be sticky for such an "innovative" privatisation - but that he and his colleagues would be suspended, on full pay, for the duration of any bidding exercise.

He consulted our mutual tutor at LBS, who informed him that if looked like a duck, quacked and waddled it would probably lay the same type and quality of eggs and taste the same when cooked. Equally helpfully, he introduced him to a couple of fund managers. He then mortgaged his house to get an equity stake but expected to be seriously outbid by cleverer and better funded competitors. To his surprise his team won their bid, based on the simple, risk free, guaranteed minimum life, leasing and maintenance deal which was what the Roscos really were. I8 months later, after the markets realised what they had done, the team was bought out by a group with access to cheaper finance. He became the richest of my classmates (although some of the others later went on to make even more). He and his colleagues made no attempt to defend the deal when it was investigated  by the Public Accounts Committee, other than to say that they had stuck by the rules which they had  advised against. They were the only ones exonerated in the final PAC report.    

I do not expect to get similarly rich advising consortia on how to turn the current morass of misunderstanding, misinformation, ignorance and incompetance to advantage but I am happy to help others do so - provided that their schemes are at least as much in the public interest as the inter-woven mix of property  development and financial engineering that created metroland around a railway that never made a profit.

Meanwhile, those who wish to learn more from those who can help them transform the market should attend the INCA event on the 8th May which I have previously mentioned.  I am told there are still places available.

P.S. Dolphinholme now has a Gigabit to the village hall and I have just been sent a copy of a letter from Hyperoptic to the residents of an up-market housing complex regarding one of their demand agregration exercises in co-operation with the "building management team". It refers to services already provided into over 150 developments in the UK. Their business case appears to be based on an uplift of "up to 5%" in the property value in return for an upfront commitment of £1,750 for a gigabit service for two years (100 megs is £1,140 for two years). 

P.P.S.I am further behind the curve than I thought - George Soros put £50 million into into Hyperoptic last year and a number of funds are currently looking for opportunities, provided they are alongside heavyweights and not just enthusiasts.

* Declaration of Interest: The funds in which I have interests (and advise) currently have investments in Alcatel Lucent, Avanti, B4RN, BSkyB, BT, Colt, IBM, ITV, Netcall, Rocksafe Europe and Vodafone as well as a number of Construction and Property Companies and Utilities that should do very nicely out of a boom in shared infrastructure investment.    

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This page contains a single entry by Philip Virgo published on May 6, 2014 10:21 AM.

City Centre creative Industries crippled by crapband as the rural revolution begins to gather pace was the previous entry in this blog.

A suitable job for a woman: fund raising exercise for Bletchley TNMOC educational programmes is the next entry in this blog.

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