Thursday, October 22, 2015

FirstNet -- A Rebuttal to FirstNet's Legal Interpretations. I emphasize the word "buttal".

For those that think about “conspiracy theories” and FirstNet let make it short and sweet – there is only two ways to build the Public Safety Broadband Network:

1.     Partner with a carrier and be restricted to their requirements to make their shareholders happy.
2.     State builds their own broadband company to deliver prioritize Public Safety then allow the carriers to run as an MVNO on their network – as Priority 2.

Option 1 will be limited to the metropolitan areas (42% of the Nation). Option 1 will also grant full, controlling, access for the carriers to the D-Block spectrum. There are many more, but I want to address an article soon. There simply is no downside to a State building their own network – in fact the only downside will be the State having to deal with all the positive that will come of it, i.e. making more revenue than FirstNet; funding its own build without taxpayer money; and having enough revenue to self-sustain itself for the foreseeable future. Plus, Option 2 fits the Middle Class Tax Relief and Jobs Creation Act of 2012 to the “T”; Option 1 does not meet the requirements of the Act at all. No matter how you interpret the law, nowhere does it state that FirstNet should give the spectrum to the commercial carriers.

There is also a lot of downside to the Feds, and the commercial carriers, if the State builds its own network. If a State creates its own P3 (Public Private Partnership) broadband entity, to build and sustain their own statewide Public Safety Broadband Network, the carriers will be positioned as second tier to Public Safety. Plus the carriers will not have direct access to the D-Block spectrum. The only access the carriers will be able to capture will be through an MVNO (Managed Virtual Network Operation) riding on top of the PSBN solution. Outside of the fact that the carriers view themselves as second to no one when it comes to telecoms, there are some folks working for the carriers that see this whole State Opt Out thing as a bad thing, but in reality it’s a good thing.

Let the State create its own P3 broadband entity and let them build their own statewide network; by doing so allows the carrier an alternative to generate services using their existing technology with more hardened infrastructure paid for by someone else. Instead of the carrier being limited to the metropolitan area they will be able to stretch themselves out to all the rural areas without spending a dime in capital infrastructure costs. Plus their operational expenses will be limited to their own operational necessities to administer content services. This is exactly the reason they sold, or are selling, all the fixed towers assets. The carrier is selling its assets so that it doesn’t have to carry them on their books, thus improved profit margins for the shareholders. But, there are some within the carrier space that believe they “have to own” the spectrum. This is a false belief and in fact is just the fear of change creeping in.

What does this mean for FirstNet? If a State creates its own P3 broadband entity, and then build their own infrastructure, this would mean that FirstNet loses any viability to build anything under the control of the federal government.

To illustrate a lot of this thinking you can capture the high-points within a recent article by Donny Jackson entitled,  FirstNet’s latest legal interpretations make opt-out alternative less appealing to states, territories.” (Oct 20, 2015) there are some points I feel need to be made.

The context of the article surrounds statements made by FirstNet itself through their lead attorney as to what they think the Act was intended to do.

Trying to integrate a bunch of opt-out states into the system promises to be more difficult and could have a negative impact on its economic viability.”

For FirstNet’s nationwide solution this is definitely true. It’s never been about how the network will be built, its always been about a business model that works for all, yet protects the Public Safety industry’s needs. The model that FirstNet is pitching with the carriers, in fact, will not be economically viable. Unfortunately, as history has proven, FirstNet (the Feds) must fail in order to see what it’s missing, which in fact may result in damage being done to the opportunity and the taxpayers.

“We must provide an important clarification for anyone reviewing the “opt out” alternative for the first time: choosing the opt-out alternative does NOT mean that a state or territory would actually get out of FirstNet. The “opt out” term is used in the law, but it is not a very accurate depiction of the alternative.”

Neither is their interpretation of “FirstNet”. Do they mean “FirstNet” as in the entity? Or, do they mean “FirstNet” as in the holistic solution of broadband service? Just a simple statement like “I’m working on FirstNet” can mean two different things. I think what they are trying to elude to is that the term “opt out” does not mean the entire concept of FirstNet in whole, I don’t think anybody believes this to be the case. The term “opt out” means the State will take its own initiative to build a standardized solution coordinated by FirstNet. What business model that will be used for the solution will be based upon will of the Governor and under his purview. 

“The path of least resistance is for a governor to accept the plan offered by FirstNet, which then is responsible for all costs associated with the buildout and maintenance of the public-safety LTE network within the state or territory. The alternative is for the governor to choose the “opt-out” alternative, which would call for the state to deploy and maintain the RAN within its borders while continuing to use FirstNet’s LTE network core and 700 MHz spectrum.”

“The path to least resistance” will be for FirstNet to provide the States a framework of a P3 that enables the State to create its own solution based on a standardized framework of approved technical designs (minimalistic) and vendor-approved equipment coordinated by FirstNet. Either implementation of the “Opt In” or “Opt Out” solution was never going to stray from standardized approach of LTE. Even if the State builds its own solution, the State was never going to pay for, or sustain, the P3 entity that runs the State’s LTE broadband solution. Under my P3 model it will in fact be funded and paid for by private investors. The private investor partnership with the State will create the entity that will maintain the solution for the foreseeable future. FirstNet’s solution can’t do that. FirstNet is hoping the commercial carriers will do it, for free, in return they get to own the spectrum. In true form its called a “Bate and Switch”.

“By law, the decision rests with the governor of each state or territory. The reality is that a governor unilaterally making a decision to opt out—thereby the state or territory to pay network costs in perpetuity—against the wishes of the state legislature and others would be taking a huge political risk, but that is allowed by law.”

I’m sorry, but who is living a “political risk” here? The definition of “political risk” is being defined as we speak (or write) by FirstNet. Plotting “opt out” against “opt in” has been the talk of the game since day one. In fact, the political risk associated with a State Governor to “opt out” diminishes drastically; where as the FirstNet “opt in” just keeps piling on.

The fact still remains that FirstNet, in order to be a success, will still require a 95% “opt in” solution, without that, FirstNet at the federal level, will be a failure. Meanwhile, during FirstNet’s disaster party, the State will be left holding the bag and cleaning up afterwards, thus performing an “opt out” anyway. Need proof, take a look at LA-RICs, the entire scope was curtailed to one third of its original plan because of political in-fighting between the federal government and the County (State), plus the County even had internal political struggles between cities. Who is more at risk here?

“Some saw FirstNet as a chance to generate revenues within the state that could be used to bolster depleted budgets still suffering from the aftermath of the global credit crisis of 2008, but FirstNet officials quickly tried to quash this notion, noting that the law mandates that revenues be put back into the network.”

I afraid to say that the interpretation of the law states the State, and FirstNet, must reinvest any profit; it says nothing about private investment income. In fact the law states that the authority is there to use commercial services to generate cash if desired. Setting up a P3 includes private investment of which represents a share of the entity created. In this case the State brings the land, access to the spectrum, and most importantly the backing of the State. The private investments bring in the cash to build and maintain it for many years to come.  The users of the network will bring the revenue.

Any money made off the network would be split between the owners of the network, through their representative share of ownership, and the State (FirstNet). The State is mandated to put the money back into “Public Safety” needs, which includes the “network”.  Users of the network come in three categories: Priority 1 being Public Safety; Priority 2 State entities and agencies (whomever the governor chooses to be); and Priority three being consumer traffic and commercial services. In this scenario there will be enough revenue to pay for Priority 1 users – First Responders.  

The FirstNet states that their commercial carrier partnership will be fully paid for and that the State won’t have to pay anything. Has anyone ever seen anything put in by the federal government that didn’t require State taxpayer money – specifically in relationship to telecommunications? Any deployment by FirstNet will not actually come from FirstNet. FirstNet will require the local contractor base of tower constructors, fiber installations and datacenter/NOC builders. This is a good thing in that “local” means within a State. It will be the base of State taxpayers that will be left paying for the remainder of the State’s billion-dollar deployment ($300 Million for fiber network + 500 Million for the wireless RAN; and another $200+ (minimum) applications delivery framework. FirstNet only has $7 Billion in the bank, which equates to roughly $125 Million per State. Where will FirstNet get the rest of the money during an election cycle?

In FirstNet’s mind they are hoping that a commercial carrier partner will come in and make the investment to build the network for them. Only problem with this model is that the carriers never build out to the rural areas (60% of the remaining landmass not covered by the FirstNet-Carrier model) because 5 farmers in a rural part of the State don’t generte enough revenue for the carrier’s shareholders. Without that ROI for the carriers, they will simply state that someone else has to pay for it – who will that be? I can guarantee you it won’t be the feds – it will be state taxpayers.   

“But FirstNet’s legal interpretations undermine that idea, removing most of the “reward” potential from the risk/reward equation that governors must weigh. Without getting into a lot of legalese, FirstNet’s position is that densely populated states choosing to opt out must contribute financially to the nationwide public-safety broadband initiative, just as they would had they accepted FirstNet’s deployment plan for the state.”

Here we go with the “share the wealth” statement again. So let me get this straight, a State that makes extra money based on their local public safety entities and local consumers, have to pay for some other State’s solution -- how will that work? What State legislator will bet his political career on that one? What will happen with the profit that the supported State makes? If FirstNet only has $7 Billion then that would mean the State taxpayers would have to flip the rest of the bill…right? I thought the FirstNet carrier model was a “pay nothing” plan for the governors? It may be just me, but am I getting the FirstNet carrier model wrong? Will the carriers come in and pay for their share? Are we stating that we will only get the funding from the federal level? Something just doesn’t add up.

“We need to ensure that any revenue that’s generated—particularly in highly dense, populated areas that will generate significant value for the excess capacity available—that that money is appropriately reinvested back into the network in a way … that benefits the entire nation,” FirstNet Acting Chief Counsel Jason Karp said during the last FirstNet board meeting. “We don’t want the national deployment to, in any way, suffer because a particularly rich state that is able to generate significant revenue because of that population density retains that revenue to create essentially a higher-quality radio access network in their state than we have in other localities around the country.”

The ability to “help support” other States is actually part of a State based P3 (in my model that is). In the model I have proposed, FirstNet would actually be an invested partner in all the State P3’s, thus generating revenue across the board to help, not only sustain the other States, but also for the completely sustain FirstNet itself. You notice that FirstNet's comments still don’t address the rural areas? Who will help support those efforts? I’m assuming by “sharing the wealth” of the revenue generated by a “richer” State it will be shared for the purposes of supported the poorer states metropolitan areas…or rural…or both? I’m afraid that FirstNet may be trying to grasp hold of a large bull while treating it as if it were a lamb. Think smaller, more regional, think State based deployments.

“It’s critical that we are leveraging the high-density, high-revenue-generating areas in order to pay for the deployment nationally. We think that’s absolutely what Congress intended. We think that’s the intent of the act and what the act says, and we reiterate that conclusion [in the final legal interpretations].”

Too simplistic in thought process. You can’t just assume that revenue from high-density areas will be split up to pay for any thing. Revenue is just revenue. What we need to do is convert the revenue into capital budgets so that we can execute a programmatic framework of continued design-build and maintenance operations. How does FirstNet plan on administering construction-based budgets for multiple States and regions on their own?

I may be mistaken, but can someone point out to me where the Act states they are to use “high-density”, “high revenue generating” as a means to pay for the network? Maybe the intent of the Act was to help with “Middle Class Tax Relief and Jobs Creation”?  Or maybe this is just scope creep by FirstNet? In the portion related to the D-Block it states the use of “public private partnership”. My guess would be that congress intended the Act to create jobs by constructing a broadband network that can pay for itself and relieve the taxpayers by generating it’s own revenue. Nowhere in the Act does it say anything, or try to relay anything, where we give the spectrum to the carriers. If I got this right, I think the Act actually states that the D-Block spectrum is allocated to “Public Safety”, not commercial carriers? I may be wrong though.

There is one term used in the Act that needs to be highlighted -- “public private partnership”. Anyone who has a construction background understands how P3s work. The framework is the same for constructing tunnels, railroads, or large dams.  They use P3s in these industries because of the large cost associated with its build and operations. It’s a well-known framework of how we model large builds in many of the other vertical industries. For the PSBN what we are missing is a clear business model as to why we want to build such a large program. All we have here is something I can’t explain. The simplistic definition is that FirstNet is just lining itself up for failure by giving the spectrum to the carriers. In a real P3 all partners are contributing equally to the deal, equally distribute its revenue, thus investing in its build-out and long-term operations. What is FirstNet’s plan?

“What is the risk for an opt-out state? The biggest factor is how much it costs a state or territory to build out, maintain and upgrade the network in its jurisdiction.”

With a State doing its own P3 the risk of cost associated with the build is moot because private investment is funding the entire solution. The FirstNet model has an enormous amount of risk, not only to the success of its deployment, and its long-term O&M, but it will also be a huge risk to the taxpayers and ultimately Public Safety. As it stands today FirstNet is a huge risk in itself. Over $200 Million spent so far with nothing but a possible partnership with a carrier. The real risk is on the remaining $6.8 Billion. At least with a state build-out we can contain the solution within its borders – can’t do that with the carrier model.

“The bad news for states is that no one has any idea how much it will cost to upgrade the network or when upgrades will happen. What we do know is that opt-out states will have to adhere to all of FirstNet’s network policies, no matter how often or when they may be altered.”

Can anyone tell me what FirstNet figures its nationwide solution will cost? How do they calculate a more efficient and less costly solution than a confined State deployment? Anyone who has been in the telecommunications industry for sometime understands the O&M typically runs 10-15% of the total capex program to build it. It’s a known calculation that if a network cost $1 Billion to build it, then it will cost roughly $100-$150 Million to run it -- opex. A typical statewide build-out will run you around $1 Billion easily. If FirstNet’s capex solution is $100 Billion to construct; then it will cost roughly $10-$15 Billion a year to operate -- opex. Where will that money come from? The fact remains that in no way is a nationwide deployment, under one RFP, can ever be more efficient, less complex, and less costly than a statewide deployment. You can’t paint the pants on the ants down in the grass from the roof of the house.  It may be just me, but I would be more concerned with the future impacts on FirstNet’s upgrades and enhancements than I would a statewide deployment. At least with a statewide deployment we have it confined – I think I said that already.

In a state based P3 model all the upgrades, enhancements, and redesigns are under the operational framework of the private entity that operates the network for the State. This means that the private entity is responsible for the all the upgrades and enhancements based on user demands, of which some of those users will be large entities, public safety and consumers. All boats rise with the tide on these rollouts. Once again it is confined to a state jurisdiction, thus much easier to manage and maintain. It is expected that FirstNet script all standards and initial demands for constructability. Based on those standards the State, and its private broadband entity, will have something to design, build and operate against.

To conclude, I found Mr. Jackson’s article, and quotes, to be very informative of how FirstNet is thinking…and it doesn’t look good for them. But, I’m….

Just some guy and a blog…..

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