Why Innovation is So Hard

If you have ever spent time and effort trying to create something new in the communications business, you know it rarely is easy, simple or uncomplicated to do so, and the larger the organization you work for, the harder it seems to be. That is because all organizational change involves power and politics, and changes will be resisted.  

You might be familiar with the rule of thumb that 70 percent of organizational change programs fail, in part or completely. 

There is a reason for that experience. Assume you propose some change that requires just two approvals to proceed, with the odds of approval at 50 percent for each step. The odds of getting “yes” decisions in a two-step process are about 25 percent (.5x.5=.25). 

source: John Troller 

The odds get longer for any change process that actually requires multiple approvals. Assume there are five sets of approvals. Assume your odds of success are high--about 66 percent--at each stage. In that case, your odds of success are about one in eight (.66x.66x.66x.66x.66=82/243). 

Consider a study by McKinsey on successful organizational change. That study suggests that about 26 percent of all attempted organizational transformations succeed, whether or not change agents have taken at least 24 discrete actions in support of the change. In that study, the suggested actions are not necessarily the same as approval hurdles. But the principle is likely at work.

source: McKinsey

The more hurdles (approvals) required for a change to happen, the less likely the change will happen. Even when the odds of approval at any stage are 66 percent, the necessity of just five approvals will lead to seven of eight change efforts failing. 

Big Companies Good at Innovation are Rarities

Practitioners of innovation almost always believe their chances of succeeding are quite high. They would not make the effort unless they did believe that was the case. But, statistically, innovation tends to be quite hard. Consider venture capital, which is innovation with clear or+metrics for success

A general rule of thumb for venture capitalists is that 75 percent of venture capital startups fail completely. Another three or four return the original investment, and one or two produce virtually all the significant financial returns. 

Also, keep in mind that perhaps one percent of proposals actually wind up getting funding. 

According to Cambridge Associates. Information technology digital media startups from 2001 to 2011 produced uneven multiples of the original investment. In more than 60 percent of cases, the startups did not earn enough to produce a return on invested  capital. About seven percent of all funded companies are able to produce returns in excess of five times the original investment. 

source: jtangoVC 

So outright failure is the case at least 63 percent of the time. Another 30 percent produce an actual return. Less than one in ten are big winners. 

Some studies suggest 74 percent of digital transformation efforts fail. Historically, most big information technology projects fail. BCG research suggests that 70 percent of digital transformations fall short of their objectives. 

From 2003 to 2012, only 6.4 percent of federal IT projects with $10 million or more in labor costs were successful, according to a study by Standish, noted by Brookings. IT project success rates range between 28 percent and 30 percent, Standish also notes. The World Bank has estimated that large-scale information and communication projects (each worth over U.S. $6 million) fail or partially fail at a rate of 71 percent. 

McKinsey says that big IT projects also often run over budget. Roughly half of all large IT projects—defined as those with initial price tags exceeding $15 million—run over budget. On average, large IT projects run 45 percent over budget and seven percent over time, while delivering 56 percent less value than predicted, McKinsey says. 

Beyond IT, virtually all efforts at organizational change arguably also fail. The rule of thumb is that 70 percent of organizational change programs fail, in part or completely. 

Of the $1.3 trillion that was spent on digital transformation--using digital technologies to create new or modify existing business processes--in 2018, it is estimated that $900 billion went to waste , say Ed Lam, Li & Fung CFO, Kirk Girard, former Director of Planning and Development in Santa Clara County and Vernon Irvin Lumen Technologies president of Government, Education, and Mid & Small Business. 

All that accumulated experience helps us understand why innovation so often comes from the young, who have less to lose; from small firms rather than big, established firms; from outside an industry rather than from within it. 

A rational actor in any large, established industry or firm has more to lose than to gain from an attempt at innovation: odds of success are three in 10. A small attacker might well conclude that those odds are worth the effort, especially if the attacker is led by young people who can survive an early failure or two with little long-term damage. 

Quite the opposite is true for older leaders who have risen to the top precisely because they know how the legacy business runs, and benefit from it. A professional manager who expects to remain in the top post for less than a decade has much more to lose than to gain by any serious effort to transform the existing business model. 

When the person at the top of any big organization is three to five years away from retirement, what else would you expect, other than behavior that is basically “do not mess it up?” 

The upshot is that innovation is risky, destined to fail seven times out of 10. “Letting someone else take the risk of attempting innovation” therefore can appear a wise strategy. The exceptions often occur when a firm’s core business model is unraveling. Then the risk of trying to innovate is less than the risk of staying a failing course. 

There seems to be far less research done on how successful firms are at rescuing themselves from failing business models. Impressionistically, the odds are even worse than seven out of 10, as the common remedy is a sale of the asset to some other entity, assuming outright bankruptcy is avoided.

SoftBank, Deutsche Telekom Reach Fundamental Agreement on T-Mobile US Buy

With the caveat that antitrust review and clearance from the Federal Communications Commission is required, and by no means certain, SoftBank and Deutsche Telekom apparently have reached agreement on the broad outlines of a Softbank deal to buy the assets of T-Mobile US.



That would merge Sprint with T-Mobile US, the number three and number four national U.S. carriers.  



Under the plan, Softbank will buy more than 50 percent of T-Mobile US shares through Sprint, directly from Deutsche Telekom, which owns 67 percent of T-Mobile US. The deal is valued at about $16 billion.



The chances of regulatory approval are highly uncertain at the moment, though. Some might rate the odds of success as high as 70 percent. 



Others rate odds of success at about 55 percent. And some think the  odds of success are no better than 10 percent. 

Actually, AT&T Did Quite Well in Content and Video Subscription Businesses

Many will criticize telco failures to "innovate." Many will pan diversification efforts such as that made by AT&T into content ownership and entertainment video services. By one reckoning, AT&T actually did quite well.

Many will criticize telco failures to "innovate." Many will pan diversification efforts such as that made by AT&T into content ownership and entertainment video services. By one reckoning, AT&T actually did quite well.

It actually took only a handful of attempts before AT&T was able to emerge as a significant provider of video content, video subscriptions and internet access. In fact, it did not actually take many tries before AT&T and Verizon actually created roles for themselves in content and video. 

On June 24, 1998, AT&T acquired Tele-Communications Inc. for $48 billion, marking a reentry by AT&T into the local access business it had been barred from since 1984. 

Having spent about two years amassing a position in local access using resold local Bell Telephone Company lines, AT&T wanted a facilities-based approach, and believed it could transform the largely one-way cable TV lines into full telecom platforms. 

That move was but one among many made by large U.S. telcos since 1994 to diversify into cable TV, digital TV, satellite TV and fixed wireless, mostly with an eye to gaining share in broadband services of a few different types. 

By some accounts, TCI was at the time the second-largest U.S. cable TV provider by subscriber count, trailing only Time Warner. TCI had 33 million subscribers at the time of the AT&T acquisition. As I recall, TCI was the largest cable TV company by subscribers. 

For example, in 2004, six years after the AT&T deal, Time Warner Cable had just 10.6 million subscribers. In 2000, by some estimates, Time Warner had about 13 million subscribers. That undoubtedly is an enumeration of “product units” rather than “accounts.” Time Warner reached the 13 million account figure by about 2013, according to the NCTA. 

Since 1994, major telcos had been discussing--and making--acquisitions of cable TV assets. In 1992 TCI came close to selling itself to Bell Atlantic, a forerunner of Verizon. Cox Cable in 1994 discussed merging with Southwestern Bell, though the deal was not consummated. 

US West made its first cable TV acquisitions in 1994 as well. In 1995 several major U.S. telcos made acquisitions of fixed wireless companies, hoping to leverage that platform to enter the video entertainment business. Bell Atlantic Corp. and NYNEX Corp. invested $100 million in CAI Wireless Systems.

Pacific Telesis paid $175 million for Cross Country Wireless Cable in Riverside, Calif.; and another $160 to $175 million for MMDS channels owned by Transworld Holdings and Videotron in California and other locations. 

By 1996 the telcos backed away from the fixed wireless platforms. In fact, U.S. telcos have quite a history of making big splashy moves into alternative access platforms, video entertainment and other ventures, only to reverse course after only a few years. 

But AT&T in 1996 made a $137 million  investment in satellite TV provider DirecTV. 

Microsoft itself made an investment in Comcast in 1997, as firms in the access and software industries began to position for digital services including internet access, digital TV and voice services. In 1998 Microsoft co-founder Paul Allen acquired Charter Communications and Marcus Cable Partners. 

Those efforts, collectively, are well within the “one success in 10” rule of thumb, for any single firm, and close to it for the entire industry. More significantly, the amount of revenue generated by those efforts come well within the “one in 100” rules of innovative success for “blockbuster” impact. 

AT&T, remember, continues to own 70 percent to 80 percent of its former Time Warner content assets. It continues to benefit from the cash flow of DirecTV and its fixed network video services. It continues to drive cash flow from HBO Max.

And all that was achieved with far fewer than 10 attempts. By standard metrics of innovation, that clearly beats the odds.

What most will miss is the difficulty of making successful change in any organization, on a routine basis. As a rule of thumb, only about one in 10 efforts at change will succeed. Quite often, only about one in 100 successful innovations is truly consequential in terms of organization performance.

source: Organizing4Innovation 

That means we must tolerate a high rate of failure before we can hope for successful change. And we must fail quite a lot before we encounter a successful innovation with the power to change a company's or a whole industry's fortunes.

Of all the innovations connectivity providers have attempted--and been criticized for--how many have had industry-altering implications? Not many. Fixed network voice; mobile phones; internet access and possibly entertainment video subscriptions have been transformative.

Deregulation, privatization and competition have been historically transformative. But one might argue that was something that "happened to" the connectivity business, not necessarily an innovation of the industry itself.

Yes, we have seen many generations of business data networking services and business phone systems and services. But few have revenue magnitudes so great they change the fortunes of the industry or whole firms. In 150 years, only mobility and internet access have had clear industry-altering implications.

We all are familiar (even when we do not know it) with the sigmoid curve, otherwise know as the S curve, which describes the normal adoption curve for any successful product. We are less familiar with the idea that most innovations fail, whether that is new products, new technologies, new information technologies or business strategies. 

S curves apply only to successful innovations.

Most new products simply fail. In such cases there is no S curve.  The “bathtub curve” was developed to illustrate failure rates of equipment, but it applies to new product adoption as well. Only successful products make it to “userful life” (the ascending part of the S curve) and then “wearout” (the maturing top of the S curve before decline occurs). 

source: Reliability Analytics

Though nobody “likes” to fail, there is good reason for the advice one often hears to “speed up the rate of failure.” The advice is quite practical. 

Only about one in 10 innovations actually succeeds. Those of you who follow enterprise information technology projects will recognize the pattern: most efforts at IT change actually fail, in the sense of achieving their objectives. 

source: Organizing4Innovation 

“We tried that” often is the observation made when something new is proposed. What almost always is ignored is the high rate of failure for proposed innovations. About nine out of 10 innovations will probably fail. Most of us are not geared to handle that high rate of failure. 

Unwillingness to make mistakes almost ensures that an entity will fail in its efforts to grow, innovate or even survive. 

Those of you who follow startup success will recognize the pattern as well: of 10 funded companies only one will really be a wild success. Most startups do not survive. 

 

source: Techcrunch 

Connectivity providers are not uniquely free from the low success rate of most innovations. Innovation is hard. Most often efforts at innovation will fail. Even smaller efforts will fail nine times out of 10. An industry-altering innovation might happen only once in 100 attempts.

The more failure, the more the chances for eventual success. Many would consider telco initiatives in content and video subscriptions to have "failed." It is more accurate to call them an innovative success, given the relative handful of attempts to lead that business.

AT&T continues to own 70 percent of its former Time Warner content assets. It continues to benefit from the cash flow of DirecTV (about 71 percent ownership) and its fixed network video services. It continues to drive cash flow from HBO Max.

And all that was achieved with far fewer than 10 attempts. By standard metrics of innovation, that clearly beats the odds.

Future Business Models for Fiber-to-Home?

It's pretty easy for those of us who do not have to operate broadband access businesses and networks to give "helpful" advice about new revenues and businesses that can be created around fiber access networks.

In general, we might agree with analysts at Yankee Group that enabling services, communications services, entertainment services and "communications-enabled applications" are fruitful avenues to explore.

The issue is that almost none of the advice anybody ever offers service providers fit into the category of a "killer app," and that is significant. The problem large companies have is that opportunities have to large to justify the investment of time to grow them.

When Cisco says it invests in opportunities, each of which can grow to be a $1 billion a year business, that illustrates the problem. What to do with fiber access networks is that sort of problem. It is hard to point to any discrete business opportunities that have that sort of potential, yet that is what is required to really move the needle in terms of service provider interest.

Yankee Group analyst Benoit Felton, in fact, does not consider "broadband in itself is not a service, since it has no intrinsic value to end-users. In a sense, one can agree with the notion that customer equipment, cables, power supplies, switches, routers and software needed to create networks are enablers of communication services.

Entertainment services will these days make sense to most service providers, since video entertainment is a substantial business with revenue that could easily amount to billions of dollars worth of annual revenue.

Applications that use communications might include home automation, health care or other forms of telemetry or monitoring. Development of such services almost necessarily involves working with other ecosystem partners.

The initiative recently announced by AT&T, Verizon Wireless and T-Mobile USA, working with Barclays and Discover Financial Services for mobile payments is one such example. That's the sort of new business that does have potential to generate "billions" worth of annual revenue, not a "millions."

That said, placing a huge big bets is inherently risky. The argument for placing lots of smaller bets is that the risk of failure is immensely reduced. Working actively with partners creating mobile apps is one way to sponsor lots of smaller initiatives, most of which will "fail to move the needle" in a direct revenue sense.

But that isn't the point. Hidden among those many experiments are a few that might someday become "$1 billion" sized applications and services.

Big, expensive bets, too far away from today's core, will be dangerous, as such moves have proven to be in the past. Carriers aren't terribly innovative, most will agree. Those who are stewards of those assets are right to be cautious, criticism notwithstanding.

But that doesn't mean nothing can be done. Lots of experimentation is possible in fostering the development of mobile-related apps, advertising and commerce. But there will be few such initiatives that can take the form of "big bets." Most will be small, "we can handle the failure" sort of ventures.

We still don't have evidence of large, substantial demand from consumers for many new communications-related apps that stray too far from basic access, voice, texting and video entertainment.

The problem is that many "killer apps" have difficult economics. Email was a killer app for dial-up Internet access, and has been an early killer app for mobile data. But email itself offers almost no significant revenue upside for an ISP. Lots of future opportunities might take that form.

The human needs and valued applications that drive use of communications might be difficult to monetize in a direct way. That won't be so important if indirect revenue models can be created. But its okay not to move too quickly or invest too much in lots of "futuristic" apps and services. The odds of failure are too great, the chances of success too slim.

When critics say ISPs mostly are "dumb pipes," there is some wisdom there. What ISPs can do to build on those pipes is the issue. But there are few "drop dead simple" answers, and stewards of service provider assets always are wise not to pay too much attention to the advice so liberally given them about what they "need" to do. In many cases, there is not much they really can, or should do.

That said, "doing nothing" makes no sense, either. The art of judo always uses an attacker's strength and power to advantage. It is hard to see how that will not be an important principle going forward: relative weakness in some ways can turn to strength by "going with the flow," rather than fighting it.

Partnerships with app providers that can make good use of communications, location, presence, billing relationships, promotion, branding, convenience, portability and stability will be fruitful in many cases.

"Dumb pipes" are a problem only if they are used in "low margin," limited revenue sorts of ways. A high-margin, high revenue pipe business is a great business. High-quality, application-aware and application-optimized pipes are a step in the right direction.

Yankee Group

One Mobile Operator Apps Consortium Dies, Another Gets Ready to Launch

One very large mobile service provider effort to create a stronger Web applications business has given up the chase, while another more-focused consortium is getting ready to launch.

The Wholesale Applications Community, a large consortium of leading GSM-based mobile service providers from around the world, has decided to sell off it sassets and merge the remainder of the effort into a parallel GSM Association effort.


Separately, AT&T, Deutsche Telekom, Vodafone Group, Verizon Wireless and Telefónica, for example, separately are setting up an interoperable way of allowing all of their customers to buy any mobile application available in any member  application store.


As often is the case, very-large consortia can become unwieldy, especially when time to market is a concern, as arguably is the case for any mobile service provider effort to create a viable app store effort able to compete with the likes of Apple and Google.

Apigee, a leading provider of API products and services, has acquired the technology assets of WAC, principally a carrier billing programming interface. for in-app purchases.

WAC was started in 2010 and was backed by 60 operators and suppliers, including Samsung, Intel, Nokia, Ericsson, Qualcomm, Fujitisu, NEC, Hewlett-Packard, HTC, LG and Research in Motion.

The objective was to create a common standard for Web applications usable by all GSM service providers, rather than common mobile applications in a direct sense.

As you might guess, the initiative was intended to create more value for mobile service providers in a world where applications were viewed as rapidly consolidating in the ecosystems run by Apple and Google.

You might say the results have been unspectacular, but that might not be surprising to industry watchers who have been saying the odds of success were high to begin with. The global telecom industry has had a rather mixed record of success creating key standards that drive a significant amount of market success.


ncluding the building of substantial third party and “owned” applications that can use the APIs.

Go Horizontal or Vertical in Acquisition Strategy?

Access services are a mature market in developed countries, and eventually will become mature even in developing markets, even as new revenue sources are created to replace declining legacy services. That has business consequences.

Most large tier-one service providers (cable, telco, satellite) eventually grow more by acquisition than organic growth. That is not the pattern for smaller firms, but you get the point. In any “mature” market, where accounts are essentially saturated, any provider tends to get account growth mainly by taking an account away from another existing provider.

So supplier consolidation is a long-term process in the global telecom industry. The only question is how fast, and how intense, that process is at any moment in time.

But what sorts of acquisitions make sense? The easy answer has been to make “horizontal” acquisitions to gain scale in the existing business. In other words, acquire more access assets.

That is the thinking when analysts float trial balloons such as Comcast buying Verizon, or Verizon buying Comcast or Charter, or when smaller telcos do the same sort of thing.

At least in the near term, doing so is a faster, surer way to boost gross revenue, and boost profit margins, than investing in “long game” moves “up the stack.”

To be sure, in the near term, such horizontal acquisitions are likely to be the main trend in the global telecom industry (in terms of revenue accretion). Moving up the stack takes time, and might often contribute less incremental revenue than a simple horizontal acquisition.

But taking the “long game” route to moving up the stack is possible.

Consider Comcast, which is among the U.S. access providers with the best execution “moving up the stack.” In the first quarter of 2017, Comcast booked $20.5 billion in total revenue. The access part of the company booked $12,9 billion in revenue, while the NBCUniversal portion of the company generated $7.9 billion in revenue.

So the “up the stack” (content) part of the company represented about 39 percent of revenue, access about 61 percent of total revenue.

If any other major telco could claim it now earns 39 percent of revenue from “application layer” sources, it would be considered a major strategic success.

In the second quarter of 2017, AT&T earned virtually all its $39.8 billion in quarterly revenue from access services. That will change, assuming AT&T’s acquisition of Time Warner is approved.

In the first quarter of 2017, Time Warner booked $7.7 billion in revenue. In other words, after the acquisition, AT&T would earn just about as much as did Comcast in its most-recent quarter. That would boost content revenue at AT&T to about 16 percent of total.

It might not seem like much, but that would mean AT&T earns significant revenue, for the first time, from “up the stack” sources. AT&T of course will eventually want to do the same in enterprise and business areas related to internet of things, for example. But that will take time, both because the IoT market is nascent, and because the available acquisition targets therefore also are small.

Verizon has made a similar, if smaller move, by acquiring first AOL and then Yahoo, to create a new advertising business. In the first quarter of 2017, Verizon booked $29.8 billion in revenue. Revenue from its telematics unit was negligible as a percent of total, while, revenues from the  “Oath” unit were not disclosed. The point is that Verizon has not yet gotten to a point where “up the stack” revenues are significant.

But you see the point. Moving up the stack is hard, risky and often not able to move the revenue needle quickly. So the an emphasis on horizontal acquisitions is going to be hard to resist. But if you believe the access business is going to be fundamentally challenged, moves to gain scale in businesses “up the stack” is necessary.

The issue is, how to balance horizontal acquisition that boosts revenue and profit now, with investments in “up the stack” growth. Or, in an ideal scenario, can access providers move up the stack now, by acquiring assets that throw off enough significant current cash flow, to move the revenue needle immediately?

Comcast is the model for the U.S. market.

That illustrates an asymmetry for Comcast and Verizon, if you wantt to speculate on where value might lie, even if the odds of such an event are slim.

Comcast might value Verizon’s mobile assets, significantly growing the amount of its access revenues. But if you think a reliance on access revenues, going forward, is problematic, then Verizon gains more in any acquisition of Comcast, as it immediately gains “up the stack” assets, in addition to greater horizontal scale.

That is why some observers might argue that vertical acquisitions, where the synergy is clear, make more sense than horizontal acquisitions that increase scale in the access business.

Some will argue AT&T erred in buying Time Warner. Some of us would argue it is the right move, to move up the stack, when total revenue includes almost no “up the stack” contributions. If Verizon remains a buyer of assets, not a seller, “up the stack” makes more sense than a horizontal acquisition that simply adds more scale in access.

Some would focus on strategic angles, such as a faster path to “fiber deep” or “bandwidth deep” assets.

Others of us might argue that firms such as Verizon and AT&T, if they wish to remain leaders in the future (and not sell themselves), must create much more “up the stack” revenue. It is the only way to reposition their value in the ecosystem and escape a “dumb pipe,” low value, low margin existence.

NextLight Grabs 60-Percent Market Share Competing Against Lumen and Comcast

NextLight, the electrical utility owned internet service provider in Longmont, Colo. says it has gotten 60 percent take rates for its fiber-to-home service, with similar take rates among business customers, after gaining about 54 percent take rates after five years of operation. 

Should many other competitive ISPs achieve such success, incumbent telco and cable operator ISPs could face serious challenges. 

It has been conventional wisdom in U.S. fixed network markets that two competitors are a sustainable market structure, typically featuring one cable operator and the legacy telco, with market shares ranging between a 70-30 pattern (where the telco only has copper access)  to something closer to 60-40 as a rule (where the telco is upgrading to fiber access). 

Telcos hope for market shares approaching 50-50 as FTTH becomes the dominant access platform over time. 

The new issue is additional providers, ranging from municipal or utility-owned ISPs to independent ISPs, including independent ISP operations that cover only parts of a metro area. In a sense, that is the mass market or consumer version of the competitive local exchange carrier strategy adopted decades ago, where suppliers target business customers in major office parks or downtown core areas. 

The American Association of Public Broadband cites 750 municipal internet service provider networks in operation in the United States, mostly serving smaller communities. Not all have full retail operations, though. 

Chattanooga Electric Power claims 175,000 customers in the Chattanooga, Tennessee area. The next-largest 10 such ISPs have fewer customers, often because they are smaller population centers. 

• City of Salem Electric Department (Oregon): 50,000

• City of Longmont Power & Communications (Colorado): 40,000

• Plum Creek Electric Cooperative (North Dakota): 35,000

• Jackson Energy Authority (Tennessee): 25,000

• City of Holyoke Municipal Light Department (Massachusetts): 20,000

• City of Boulder Municipal Electric Utility (Colorado): 18,000

• City of Dubuque Utilities (Iowa): 17,000

• City of Lawrence Public Utilities (Kansas): 15,000

• City of Lexington Utilities (Kentucky): 15,000

 

And other networks are launching in larger population centers. As with any set of contestants in any other industry, not all suppliers will succeed and not all will likely survive. Managerial skill still seems to matter, as do the other prosaic concerns such as managing debt burdens and picking the right areas to serve. 

Many for-profit ISPs now believe they have better opportunities in rural areas, for example, where a new fiber network can be “first” to serve the market. Up to this point few have attempted to compete in a major big city market. ISPs targeting operations in mid-size cities have generally only chosen to serve portions of their cities. 

The obvious broader issues are the roles and strategies traditional retail service providers can envision as their markets are reshaped by competition, new investors and virtualized or other roles beyond the traditional vertically-integrated model. 

The question naturally arises: how many of these new competitors will succeed, and what are the implications for sustainable market shares over time?

In a market with two significant suppliers, each serving the whole market, an ISP might require  market share of at least 30 percent to be sustainable. That has often been the pattern where a cable operator competes against a telco with copper-only access, where the available telco speeds are quite limited in comparison to a cable operator hybrid fiber coax network. In such cases, there is an order or magnitude or two orders of magnitude difference in top speeds. 

In a market with three significant suppliers, an ISP typically needs to have a market share of at least 20 percent to be sustainable, if competition across the full geography is envisioned. Such ISPs also tend to require more efficient operations. 

In a market with four significant suppliers, where we can assume as many as two of the four compete only in a portion of the metro market, an ISP typically needs to have a market share of at least 10 percent (of the full area potential market) to be sustainable, though ISPs serving only a portion of a metro area also probably need take rates higher than 10 percent in the areas they do choose to serve. 

If an independent ISP cannot get 20 percent to 30 percent take rates in its chosen geographical areas of coverage, it probably is not doing well. 

The best suppliers can take so much share from the incumbents (telco and cable) that severe damage to the incumbent business model is possible, turning those competitive areas into loss-making operations. 

A fixed network operator with sufficiently offsetting performance might survive actual losses in a few geographies. In fact, traditional monopoly fixed network suppliers expected permanent losses in rural areas, breakeven or slightly better performance in suburbs and most of the profits from operations in city cores. 

NextLight seemingly has avoided issues of cross-subsidization of internet access service by the electrical utility ratepayers, separating its financial operations from those of Longmont Power Company.

NextLight has its own board of directors, management team, and accounting system.

NextLight seemingly provides service “at cost,” plus a small margin to cover its operating expenses. The objective is to break even, rather than “making a profit.”

NextLight's network is physically separate from LPC's network, though critics might argue NextLight uses power company rights of way and other benefits of having a sponsor with an on-going business, which could translate to financial advantages. 

Others might argue there is some cross subsidy. There is a no-recourse surcharge on LPC's electric bills, used to fund the construction and operation of NextLight, and it is applied to all LPC customers, regardless of whether they subscribe to NextLight service.

That said, NextLight has gotten a legal opinion from the Colorado Attorney General's Office stating that NextLight is not engaging in cross-subsidization, and that the non-bypassable surcharge is a fair and reasonable way to fund the network. 

In fairness, what revenue-generating entity would not look to leverage its current assets to create new lines of business? Cable operators used their video subscription networks to create fully-functional telecom networks; use their fixed network to support their mobile service provider operations; extended their consumer networks to provide business-specific services; used their linear video customer base to leverage a move into content ownership. 

Telcos do the same, when trying to extend their core operations to new services. In the more-regulated era, they had to establish separate subsidiaries to enter non-regulated lines of business. That is less an issue in today’s largely-deregulated markets. 

The city of about 100,000 is about 30 miles north of Denver, so might be considered a suburb by some, a neighboring city by others. Using either characterization, population density varies quite substantially. 

The population density of Longmont, Colorado in its city core is 11,999 people per square mile while the population density of the outlying areas is 1,369 people per square mile  

 

Housing density and population density obviously are key indicators of potential access network cost and revenue possibility. Housing density enables and constrains home broadband market size, while population density is correlated with business revenue potential. 

To a large extent, housing and population density also affect network cost: the lowest-cost-per-passing networks can be built in dense areas while the most costly networks are in rural areas. 

Among U.S. internet service providers, the “average housing density is 400 locations per square mile, with Comcast sitting squarely on that level of density. Smaller telcos tend to serve more-rural areas and have housing densities an order of magnitude or two orders of magnitude less than the largest ISPs. 

Company	Housing Units	Average Housing Density (dwellings per square mile)
Verizon	58.2 million	1,500
AT&T	51.8 million	1,300
Lumen (formerly CenturyLink)	25.7 million	600
Charter	22.9 million	500
Comcast	19.5 million	400
Windstream	14.8 million	300
Brightspeed	1.9 million	40

At least historically, that explains why Verizon was early to invest in fiber to home facilities. It has the most-dense serving areas, so has the best economics. Only recently have many smaller and independent ISPs been able to make a business case for investing in FTTH in rural and exurban areas, though lots of small rural telcos have been doing so for years. 

Housing density	Cost per home passed
40 homes per square mile	$2,000
40 homes per square mile	$800
1,300 homes per square mile	$500

Figures of merit for FTTH construction might range from $1,000 to $1,250 per household at 400 homes per square mile but $1,500 to $2,000 per household at 40 homes per square mile, for example. 

At higher densities of 1,300 homes per square mile, costs might range from $500 to $750 per household. 

The business case also includes less revenue per account potential at lower densities as well. 

All that matters as attacking ISPs and infrastructure investors weigh their odds of success when competing with legacy service providers. To be sure,  FTTH payback models seem to have changed greatly since 2000. 

The economics of connectivity provider fiber to the home have always been daunting, but they are, in some ways, more daunting in 2022 than they were a decade ago. The biggest new hurdle is that expected revenue per account metrics have been cut in half or two thirds. That would be daunting for any supplier in any industry. 

These days, the expected revenue contribution from a home broadband account hovers around $50 per month to $70 per month. Some providers might add linear video, voice or text messaging components to a lesser degree. 

But that is a huge change from revenue expectations in the 1990 to 2015 period, when $150 per customer was the possible revenue target.  

You might well question the payback model for new fiber-to-home networks which assume recurring revenue between $50 and $70 per account, per month, with little voice revenue and close to zero video revenue; take rates in the 40-percent range; and network capital investment between $800 and $1000 per passing and connection costs of perhaps $300 per customer. 

In the face of difficult average revenue per account metrics, co-investment and ancillary revenue contributions have become key. Additional subsidies for home broadband also will reduce FTTH deployment costs. 

The point is that FTTH revenue models, and the ability to sustain a competitive ISP operation, either as an incumbent or attacker, now seem to make possible more competition than was previously thought possible. 

NextLight is a good example.