Why Did Eagle-Net Fail?
There are several reasons why EagleNet failed. This article series will explore my analysis of the reasons for it, and hopefully provide important context for decision-makers currently considering various PPP (Public-Private Partnerships) models.
FORETHOUGHT.net strongly believes there is a role for government to play in expanding broadband availability. However, it will be critical to do PPP right – and to learn from our mistakes – to achieve beneficial results, and avoid wasting the taxpayer’s money. As the private part of public-private partnerships, we believe we have a moral obligation to be good stewards of the people’s money.
First, some background, for those who may not be familiar with EagleNet.
EagleNet was an Inter-Governmental Agreement among school districts in Colorado, to create an entity to foster broadband connectivity to schools. To achieve this goal, they sought and won a $100 Million grant from the federal NTIA, and defined their mandate as connecting every school district in Colorado with fiber broadband internet service.
This was a large grant, and, quickly became politicized, especially when EagleNet started having operational difficulties.
In 2012, when EagleNet started, there was definitely a need in a number of communities for significantly better options. Schools needed reliable, affordable high speed Internet for classwork, and they couldn’t get it – especially in places like Telluride, Norwood, Mancos, Collbran, Silverton – rural communities very poorly served by CenturyLink.
Part 1: Spending where not needed
The first key EagleNet mistake is that they invested heavily in areas that didn’t need it, because there was already existing and competitive fiber. They overbuilt existing fiber, unnecessarily competing with existing private companies.
Partly because of EagleNet’s mandate – to “Serve every school district”, whether the district had a service quality or price problem – EagleNet spent significant time and money building network in the Denver Metro area. Let’s be clear – even in 2012, there was plenty of fiber available, plenty of competitive options, and good pricing in Denver. Comcast had the Denver Public Schools account, a trade for Denver’s grant of a franchise agreement to Comcast. In 2012, there were at least 4 or 5 operating fiber internet providers.
The first school district EagleNet built to and turned up, was the Cherry Creek Schools. Unsurprisingly, one of the richest districts in the state. So let’s be clear – taxpayer money was spent to overbuild numerous local providers in order to service the school district most capable of buying its own fiber service from a competitive landscape. Absolutely everything about this picture is wrong.
So, EagleNet spending heavily in Denver was unnecessary – an inappropriate investment of taxpayer funds in an area where private companies had already done the job.
Of course, the key reason EagleNet went after Denver-area schools, is they figured that’s where the money was. And this inappropriate operation of EagleNet as if it was a traditional for-profit telecom company, rears its head in several other mistakes.
The effect of this was to divert funds from rural areas where they were badly needed, to cities that didn’t need it, greatly diluting any positive impact of the program, and choking out investment in rural areas that really needed the help.
Part 2: Unnecessary Antagonism with existing ISPs
Second, EagleNet went to market demanding that local service providers give up school anchor customers, and this isolated EagleNet from what should have been EagleNet’s prime customer base and network partners – existing local ISPs. Instead of setting themselves up to work with service providers, many of whom were already deeply embedded and supported in their communities, EagleNet set itself up diametrically opposed to local providers, turning them into threats and enemies, instead of partners.
At one point, regarding several school districts that FORETHOUGHT.net already served, EagleNet’s CEO approached us and said – “We ARE taking these schools from you.”
Well, what kind of relationship are we going to have with a government-funded competitor who thinks their business goals are served by steamrolling into communities they have no experience with, and taking customers from ISPs that have been working hard to serve those communities for years?
What EagleNet should have done, is instead of trying to serve school, town and county customers directly, is identified existing local ISPs in each market to partner with. Local ISPs comprised a skilled, experienced, and locally knowledgeable workforce that was already in each of these communities. Instead of centralizing the services at retail, EagleNet should have decentralized and focused on wholesale relationships.
The ISPs could have put far more bandwidth on the EagleNet network than just schools. The local ISPs would have brought their residential and business connections to the network.
But because EagleNet took the confrontational approach with ISPs, many ISPs chose simply not to do business with EagleNet. That leads us to the third major issue.
Part 3: Failure to consider or expect competitive response
A third major issue that caused EagleNet to fail, is apparently nobody involved in it considered the competitive response from other carriers, and did not require EagleNet participants to buy services only from EagleNet.
CenturyLink in particular, simply dropped pricing to maintain business.
And, because EagleNet did not require EagleNet members to do business with EagleNet, many districts simply took the easier path and renewed with CenturyLink at much lower prices.
Established market operators always have an advantage over new market entrants in telecom. New entrants have to spend a lot of capex on construction and marketing.
Existing participants made the capex years ago, and in many cases, because of the reach of their existing network, adding customers is substantially less expensive even in cases where a build is required.
So in short, after expending significant capital to build fiber to a school district, that district was under no obligation to actually buy service from EagleNet. And many didn’t.
Part 4: Insufficient staff to properly serve whole state at retail
Colorado is big. Really big. EagleNet never had the staff necessary to properly serve retail customers in 181 school districts in every corner of the state. Even today, resolving western slope service issues involves, frequently, dispatching contractors from Denver. Imagine how much down time a Denver to Montrose round trip implies.
EagleNet never had the salespeople necessary to properly serve a state as big as Colorado. It never had the engineering resources or field technicians to do it. And its natural partners, the ISPs who did, were alienated by EagleNet’s “get out of our way” approach.
The low staffing is partly because it was a startup (though it did initially launch with high paid staff and opulent office space). But the major issue derives from the nature of lit telecom services. Lit telecom services are hard. Managing and operating a lit telecom network is extremely resource intensive. When I say “lit”, I mean, the provision of services such as telephone service, internet service, ethernet packet transport service, that sort of thing.
Providing lit services, a provider is on the hook for many things: “my internet is slow”, “I can’t get my email”, “I can’t get to this one web site”. Around the clock, 24/7/365.
It’s also expensive. The cost of the fiber connection is one thing – the equipment needed to light that fiber, especially done the way EagleNet did it (and others are doing even to this day), is even more. In 2012, equipment for a fiber transport node would have cost EagleNet an additional $50,000 to $100,000 over and above the fiber build cost. Because they built it like a big, established carrier would have (e.g., CenturyLink, or Level3).
Of course, even in 2012, lighting fiber at gigabit using simple ethernet switches would have only cost a couple thousand dollars. And some school IT, and many local ISPs, would have been perfectly capable of setting up and operating services on dark fiber using inexpensive equipment.
But the time intensity of operating lit telecom – a 24 / 7 / 365 endeavor, because people want you to fix their broken internet no matter the time of day or night – is very, very costly in personnel.
From a competitive standpoint, because EagleNet chose to get service to communities in the most expensive possible way, they ended up having high prices – completely contrary to the stated mission of EagleNet.
A $100,000 capital cost on a wave transport node implies a minimum, mandatory monthly service cost of $4000 to $5000, in order to make an ROI. And it you don’t make an ROI, then you have to treat it as a throw-away; you can offer service much more cheaply, but then you’re not paying for the cost of maintenance contracts on that expensive equipment, for the engineers to operate them, and you burn through your cash like nobody’s business.
And EagleNet had a warehouse full of this kind of expensive gear. A lot of which sat in that warehouse, never used.
Combine that with Colorado’s expansive geography, and EagleNet never had a chance to become sustainable.
Part 5: So what do we do now?
As I said in the into, it’s true that there are parts of Colorado that need help with better broadband, they’re unable to get it from private companies, and that implies there is a role for government to play.
The question is – given what we learned from the EagleNet debacle, what should that role be?
Here are the key lessons from EagleNet’s failure as we see them.
- Lit services are hard – and expensive. So focus government efforts on dark fiber instead, and governments should absolutely not try to get into lit network operations.
- Stay strictly wholesale. Do not sell to retail end users. Work exclusively with ISPs. Do not compete against ISPs. ISPs will be more nimble, more creative, more efficient, and plugged into more market opportunities. Let them do that.
- Be extremely judicious about where investments are made. Do not spend government money in markets with sufficient competition. At all.
- Setting up a new monopoly middle man gatekeeper “network operator”, will not make that vision come to life. Forcing every other service provider to sit atop the same expensive, multimillion-dollar set of network equipment, will only ensure that the network operator makes a mint, and controls prices to its benefit.
- CenturyLink, Comcast etc. can and will respond if gov’t tries to be a lit services provider. By focusing on dark fiber leases – something CenturyLink refuses to do – that is how you crack that problem.
Our proposal for the ideal PPP that would do the most to foster broadband development in Colorado –
- Identify communities with no existing fiber middle mile, or no competitive fiber middle mile.
- Invest solely in construction of dark fiber. The dark fiber to be leased at a price which pays for maintenance and long-term replacement of the fiber (fiber is now estimated to have up to a 40 year useful life – and, this estimate keeps going up as we continue to gain more experience with fiber.) The goal of the fiber is not for the government to make a profit. It’s to enable private companies to create sustainable businesses in areas that are otherwise too expensive to do so.
- Identify and partner with private service providers. Lease the fiber to them. Let them do the capex with their own money, to light the fiber in whatever ways make the most sense for them.
- Have the fiber be 100% open-access: ANY service provider can access it. NO service provider can take it all. Everyone gets exactly the same pricing. No special treatment. No providers put into special, catbird, monopoly “Gatekeeper” or “network operator” positions. (A notable failure of the ‘network operator’ model just failed in Rio Blanco county).
The analogy here is: the government builds roads, and lets all comers use them. It doesn’t try to be the trucking company, the taxi company, the pizza delivery service. The government road is an enabling asset – government is not directly profiting from it, but it enables many different applications, and by staying out of the ‘lit’ market, it doesn’t interfere with private creativity needed to think up new applications.
These key elements of a workable, sustainable PPP model will foster even-handed competitive landscapes with minimal government and taxpayer risk, investing specifically in communities that need it at the lowest cost to taxpayers.
Fiber optic cable is the key foundational asset government can invest in to enable the next generation of broadband. The fiber itself is not risky. With fiber, government can support private business in creative enterprise – something private companies are good at (risk taking), and governments are not.
Following these ideas, governments and private operators can work together in sensible, sustainable, and free-market oriented Public Private Partnerships, to build a better broadband future for Colorado.