Recently the press has been out talking about possible funding issues in building the Nations First Responder Broadband Network (FirstNet). President Obama allocated $7 Billion towards the funding of which $2 Billion will be made upfront with the remaining $5 Billion being gained through auctions of spectrum. With the requirement of LTE being the technology of choice it comes with many design, build, operate and maintain expenditures and it is the consensus that $7 Billion is just a drop in the bucket -- especially for a network that may be twice the size of AT&T and Verizon combined. As it stands today there have been various scenarios going around about how to subsidize that $7 Billion, but none fit better that the use of Public Private Partnerships.
Public Private Partnerships (or P3s) are not new to the market. The P3 concept has been around for a long time and has been successfully adapted both nationally and internationally on many vertical market initiatives such as; transportation, infrastructure programs, power builds, etc.. What is new is the adoption of the P3 model when advancing telecommunications within the wireless space.
Since the boom of 1996 when the telecommunication industry started to take off it took the tone of a commercial private enterprise flavor, only to be packaged and sold to various client types, i.e. Carriers, Government, Police, fire, Transportation, etc.. After the collapse of the telecom market in late 1999 to early 2000 things changed in regards to the viability of deploying telecommunications in a holistic fashion as private networks; yet at the same time our dependence on the technology continues to increase through which subscriber based methods of commercial business blossomed. But the demand for enterprise telecommunications continued to increase as well and the cost justification of building the solutions were convoluted with the commercial aspirations of subscriber based billing. Yet the vertical industry clients would continue to believe that the answers to their needs still lay with the telecommunication OEM vendors and the associated contractors who deploy the commercial telco networks. Does that scenario work here?
With the push to build FirstNet came the fact that it will take money to build it. Not only that -- it will take well coordinated requirements to design the right broadband solution that can feed all the elements of First Response. There are a lot of personal definitions of what a “First Responder” is. We need to look beyond the upfront characteristics of just the Police, EMS and Fire and start to include the thought process of owners, investors and infrastructure alignment as well. With a properly outlined P3 you can actually start to see a private model of investment and funding that correlates with the need for a private network. At the same time you can see many advantages of infrastructure trade-offs, business requirement alignments and revenue potential for long term contracts -- long term recurring revenue.
As an example: lets say we are a large State and have many entities in the State both public and private, i.e. Police, fire, DHS, DOD and Utilities. All of these players will require some facet of a communications network, most specifically LTE, to sustain their business objectives for the next 20 years. Each entity has gone through capital budgets many times over in building their own private communication platforms to sustain what their operations need to day. Those platforms were adapted and deployed for specific reasons. Along comes the latest technology that leapfrogs all the technologies deployed to which also comes the message that their existing communication technologies will be “end-of-life” within the next 5-10 years. So the State entities soon realize they need to re-start the cycle of capital budgets to ramp-up the latest and greatest, only to run into a wall. That wall is spectrum. You see the latest and greatest requires specific spectrum that is very limited, but those entities require the technology, because if the don’t adapt -- then they die. Soon realization sets in that here are two options: go with a carrier to provide you with LTE, or, build your own private network if you have the spectrum.
Going the carrier route would be insufficient for any organization that needs to route critical public safety communications to include; Police, Fire and Utilities. The hardening requirements alone will drain the capital budgets of a carrier in order to outfit their entire infrastructure to meet the requirements of Public Safety. This is mainly due to the balance between commercial subscribers and the ability to pay for the infrastructure -- I will cover this more later. But this is just one example. There are many more as in business objectives, footprint over the population base, and ability to cover the rural spaces. Soon the realization sets in that having a private broadband network is the way to go.
Due to the requirements for spectrum comes the need to partner. What better method than a P3 model to establish a state wide partnerships of entities that all require the same technology. But how do you get State entities to play together that have never played together, or have tried unsuccessfully in doing so?
By establishing, at the State level, a centralized P3 model (typically known as a “Special Purpose Vehicle” [SPV]) you can setup a centralized private entity to run the States Broadband Network needs. If I were that Centralized State entity, and I happen to be funded by a major private lender, then I would be most interested in the recurring revenue that will come from this business case. I would also be very interested in potential investors that can sustain long term assets and operations. Do I use a subscriber model? Or do I use a long-term contract model?
As was pointed out above the issue with a subscriber model is the word “subscriber”. You actually need subscribers to help fund and pay back the capital used in the network to build it. Being that the primary clients would be State owned or privately held Utility type organizations there may not be enough subscribers required to make that model viable. Plus, if the carriers face an issue of building and managing their own networks on a subscriber based model, and they have about 80 Million subscribers, what makes us think that it would work for Public Safety that only has a few thousand subscribers.
The only rational alternative would be long-term recurring contracts with fixed entities. In essence, if a Power Utility requires LTE for their SMART Metering program. Typically they would spend a few hundred Million dollars to build their own solution, only to face the same situation when the technology matures into the next generation, thus spending even more money to accomplish the same feat 3-5 years down the line. By setting up as a partner in the P3 the Utility will be able to adjust to a operational expenditure of a fixed yearly amount through a long-term contract of leased bandwidth from the established Centralized Statewide Broadband provider (SPV). This eliminates the Utilities capital needs to build their own and try to stay relevant with the maturing technology at the same time given the Centralized Broadband Provider the needed long-term recurring revenue stream. The yearly fixed payment, or SLA (service Level Agreement), will be a small fraction of the annual expenditure a Utility would typically be facing in its pursuit to maintain its core business operations. This same situation is not specific to just the Utilities; this same concept can easily be adapted to the other State entities, i.e. local Fire, Police who typically have a difficult time in acquiring a budget to build their own technology platforms.
Another interesting opportunity the P3 model presents is the offset of utilizing existing infrastructure from the State entities that already have an installed asset infrastructure of towers, fiber and control centers. For example; a Utility provider can off-set typical leasing revenue it would bring in by leasing space on its towers by augmenting its annual operational expense of leased bandwidth. In essence, if I own a tower, instead of leasing the tower to the State Centralized Broadband Provider I can discount my annual payment to that Provider for my required LTE service.
There is one more advantage. That advantage may be the ability for those same statewide entities to invest in the Centralized Broadband Provider itself. In essence becoming a equity owner of the Centralization of the Broadband initiative itself thus reallocating potential revenues back into the Statewide model to offset Rural Broadband arrangements. Being that the Centralized Broadband Provider will be a privately owned State entity, that only delivers broadband services to approved First Responders, then there wouldn’t be an issue with State laws not allowing State owned entities to play in the commercial market space.
In conclusion, there are many ways to fashion a P3 model that is best suited for the individual State requirements. The important aspect to remember, at this time, is that if you know you will have to do a P3 model anyway; its best to get yourself involved now. The more time you wait equates to an equal loss in positioning power -- which is important on any investment strategy.