Palo Alto is at least five years away from expanding its fiber optic network to every part of the city, but 738 residents had already donated $50 each to show their commitment to the cause and help the city raise $35,000 to collect for a non-existent project.
They’re paying for a dream the city has pursued for well over a decade: bringing high-speed Internet to every corner of the community by expanding the city’s fiber-optic network, which now serves a few dozen business customers. The City Council took a big step to make that dream a reality in 2020 when they hired a consultant to create a plan and business analysis for fiber rollout, commonly known as “Fiber to the Premise.”
As council members reviewed the latest survey results, business plans and cost estimates on Monday, they found themselves in a familiar situation: agonizing over whether the risk is worth the reward. While some emphasized the promise of the new system, most concluded they would need more information before they could support the expansion.
The most recent analysis, conducted by the firm Magellan Advisors, suggested the citywide system could start making money after about a decade of operation. Equally important, it could improve reliability in municipal operations and make internet connectivity for businesses and residents across the city faster, cheaper and more reliable than it is today, Magellan founder John Honker told city council on Monday.
“The goal is to strengthen and reinvest this (fiber) backbone to make it stronger and more resilient for the city and its departments,” Honker said.
For fiber advocates, the rewards are clear. Loren Smith, a member of the city’s Utility Advisory Commission, recalled the early days of Covid-19, when everyone was trapped indoors and relied on internet services to work, go to school and socialize. Building the network, he said, would create “a provision for future generations, so that they are prepared when we weren’t.”
Andy Poggio, who has been campaigning for fiber rollout for many years, noted that 5G wireless technology, touted by some as an alternative to fiber, can be unreliable in rainy weather and near foliage. Fiber doesn’t have that disadvantage, he said.
“Fiber is reliable and fast,” said Poggio.
Enthusiasm, while high, is far from universal. Critics argue that the fiber project is likely to leave a different legacy for future generations: mounting debt for creating a service already provided by two private sector giants: Comcast and AT&T. Resident Bob Smith called the fiber expansion “an unnecessary risk” and said he saw no point in pursuing it.
At best, Smith said, the system makes a bit of money, but its services will be so similar to those of incumbents that people won’t notice the difference.
“On the other hand, if you try to build it and fail, that’s a $130 million investment, probably a lot more when you get it done,” said Bob Smith.
The estimated cost of the new system has increased from $120.8 million to $142.9 million since the council last considered it. It includes two projects. The first is an extension of the “fiber optic backbone” to create a dedicated communications network for municipal operations such as smart meters, substations, and wireless field communications. The second, far more ambitious, is Fiber to the Premise, which would expand the network throughout the neighborhood. The two projects would require 45 miles and 176 miles of fiber optic cable, respectively.
Magellan estimates that the city can reduce costs by about $11 million if the fiber backbone extension and fiber to the premise are built in parallel due to “network overlap.” However, due to the high costs associated with introducing the utility, the city would not see net profits until 2031 (when many functions are outsourced to providers) or 2032 (when the city keeps most services in-house).
Loren Smith, who served on the Supply Commission’s fiber-optic subcommittee, said money wasn’t really an issue. The city can rely on a revenue guarantee and gradually pay back the guarantee through revenue from the fiber optic system.”
“We’re talking about paying for the fiber network from the revenue that the fiber network generates,” Smith said.
Magellan’s new analysis also indicated that the program would have many takers. The survey found that about a third of existing customers are dissatisfied to some extent with their current ISP and would likely consider a switch. If the city is able to offer a superior service at a reasonable price – necessary conditions in any success scenario – it could achieve a take rate of around 40%.
Phil Metz, who serves on the Utilities Advisory Commission, pointed to another promising factor: A survey found that about half of Palo Alto subscribers have already “cut off” cable TV and are turning to Netflix, Hulu, and other streaming services abandon their entertainment needs. That makes things easier for Palo Alto because it avoids the need for the city to offer cable to compete with companies like Comcast.
“It certainly came as a surprise to me and I think it underscores the feasibility of offering broadband services separate from entertainment, which has been one of my personal concerns,” said Metz.
But Metz and Honker also pointed out the risks. Competition is high on the list. The expanded fiber optic network would be the city of Palo Alto’s first non-monopoly utility. The incumbents — Comcast and AT&T — could respond by lowering prices and signing longer contracts. AT&T, which is gradually expanding its own fiber offering in Palo Alto, could also accelerate its deployment schedule, Honker said.
Given the stiff competition, some council members said they weren’t yet convinced Fiber to the Premise should move forward. Councilor Greg Tanaka said the case for fiber to the premise is “unconvincing” as the private market is already deploying 1 Gigabit services.
“We have enough problems just doing what we’re doing,” Tanaka said, alluding to the recent power outages.
Council members Alison Cormack and Eric Filseth also favored a cautious approach, suggesting they would need a stronger business case before signing off. Filseth said he was concerned about the risk that the city would give the fiber provider “endless subsidies” because the uptake rate isn’t meeting expectations and the city’s network can’t differentiate itself from offerings from Comcast and AT&T.
Cormack said she doesn’t have a clear idea of the problem Fiber to the Premise is trying to solve.
“I strongly believe that we don’t have a value proposition that’s worded in a way that makes it easy for people to make a multimillion-dollar decision and easy for people to explain,” Cormack said.
Councilor Tom DuBois was far more optimistic. He said the city’s goal should be to increase subscribers as quickly as possible and “begin generating revenue to fund the rest of the build-out.” He noted that the city has previous experience of successfully managing a fiber optic system. The existing fiber optic network, which began operations in the mid-1990s, generates more than $2 million annually. He suggested a marketing measure to speed up the switch.
“Instead of ‘Shop local’, it can be ‘Surf local,'” DuBois said.
The council did not have a clear consensus on whether the fiber optic system should be operated entirely by the city or the operation should be outsourced. The former option would require 25 new full-time positions and $58.6 million in personnel costs over the next two years; The latter would result in five jobs and $48.9 million in labor and vendor costs. DuBois preferred to outsource most services but have in-house managers overseeing the fiber optic workforce. Vice Mayor Lydia Kou suggested that increasing city staff involvement in the system would create institutional knowledge and help gain the trust of the community.
Mayor Pat Burt suggested that while success is far from certain, Fiber to the Premise could bring significant benefits. Noting the city’s strong history as an operator of its utilities, he noted that local customers pay far less for electricity than those served by PG&E. He also mentioned the recent rebuilding of the Baylands municipal golf course and the council’s decision to acquire Palo Alto Airport from the county. Both the golf course and airport are now generating significant revenue, he said.
“We have a very good history with these companies with very good success,” Burt said.