Some builders install fiber-optic networks, then keep ownership, hoping to collect fees in the years to come San Francisco Chronicle | October 17, 2004 print edition | Benny Evangilista For new home builders these days, pre-installed wiring for cable TV and high-speed Internet is becoming as standard as water pipes and central heating. But a few residential developers across the country are going a step further by getting into the telecommunications business, pre-wiring whole neighborhoods with their own fiber-optic cable networks capable of high-tech video, voice and data services. " We are the developer, we are the builder and we are the communications company,'' said Joel Thomas of Cornerstone Construction and Investment of Acworth, Ga., which has become the cable TV and Internet provider in its two residential developments northwest of Atlanta. " We see this as long-term residual income,'' said Thomas, whose company is using the profits for a loftier purpose, helping to fund ministries that help inner city youth and train new missionaries. The trend is more of a trickle than a deluge at this point, as only about a dozen housing developers are taking firm steps to install such networks, said Thomas Reiman, president of the Broadband Group. The Sacramento telecommunications consulting firm is working with about 50 clients similar to Cornerstone that are at least examining the possibility of running their own fiber-optic network to new homes. Still, "it's an interesting twist in terms of development communities,'' said Reiman. He added that the trickle will continue to grow, especially as demand for bandwidth-consuming digital entertainment and communications services increases and as more uses such as security, health care and energy management are added to the network. " That's when fiber to the home means something to (consumers), and it's not just because they get faster Internet,'' Reiman said. Fiber-optic networks are strands of hair-thin glass cables that transmit digitized streams of data at great distances as pulses of light. Because the light speeds through the glass fibers, it moves faster and with less power than electrical pulses through standard copper wire. Experts say that with copper wire or coaxial cable, the bandwidth degrades the farther the signal goes, but with fiber optics, there is virtually no signal degradation for nearly 20 miles. Also, fiber-optic cables are capable of carrying many other frequencies of light at the same time, which also increases bandwidth. Telephone and cable companies are battling each other to be the consumers' choice for a triple play of broadband communications services -- voice, data and video. With Web users already embracing the practice of downloading songs, technology and entertainment companies are developing ways to cash in on delivering services such as video on demand, which requires transmission of large data files that need the fat bandwidth available with fiber-optic cables. Glass, not wire New technologies such as digital and high-definition television and voice over Internet protocol, known as VOIP, are also increasing demands for more bandwidth. "In this day and age, when you move into a new community, you expect to have these kinds of services,'' said Katie Seebold, marketing manager for Alloptic Inc., a Livermore company that makes equipment used to connect fiber networks in developments like the Pinehills, one of the largest of its kind on the East Coast. Therefore, developers, particularly those with larger planned developments, are seeing installed fiber-optic networks as an amenity that home buyers now and in the future will demand. Sunnyvale project Last month, Pulte Homes announced a marketing agreement with Verizon to install fiber-optic lines in four Pulte developments in Southern California. Pulte also announced it had teamed with fiber-opticsmaker Corning Inc. and technology consultant Paxio Inc. to install fiber to homes in its Danbury Place development in Sunnyvale. Pulte pre-wired Danbury Place homes to let residents connect multiple computers, printers and video equipment, but Paxio sells the broadband services and operates the fiber network outside the homes. " It helps with the sale of our houses,'' said Merry Sedlak, a Pulte vice president of marketing. "The whole house is totally smart wired. It's been very well received.'' Fiber-optic cable systems are within reach of about 970,000 homes in North America, a number that has increased dramatically in just the past year, and 146,000 homes are connected, said Mike Render, a principal at Render, Vanderslice & Associates, a Tulsa, Okla., firm that specializes in the fiber- optics market. But he said other developers in Minnesota and Southern California have, like Cornerstone, chosen to own and operate their fiber-optic systems. " If they own (the network), they see a chance for an ongoing revenue stream'' beyond the sale of the last home, Render said. "But communications is a complex business.'' Slow to take off It's so complex that telecommunications companies themselves have only sporadically started various fiber-to-the-home initiatives during the past two decades. Although there have been various demonstration projects and isolated installations such as at San Francisco's Mission Bay commercial and residential complex, the high costs of retrofitting existing copper networks, regulatory issues and slow consumer demand have kept fiber from taking off, Reiman said. Even now, critics are skeptical about plans announced this year by telecommunications giants such as SBC and Verizon Communications to spend billions of dollars in the next several years to extend fiber to existing and new homes. In fact, it was Verizon's unexpected pullout as the fiber-optic provider for an upscale project of 3,000-homes and four golf courses in Plymouth, Mass., that caused its developer to get into telecommunications.By 2002, Verizon had wired 50 Pinehills homes, but it made a corporate decision to pull back on fiber-optic projects, leaving a void in the development's technology plans, said Pinehills President John Judge. "We were faced with a very difficult position,'' he said. "Would we rather create our own data and video company, buy programming, decide whether we have the History Channel or the Golf Channel or both, or were we going to try to find another Verizon to step in?'' Rather than face another disappointment with a new telecommunications provider, "we decided (to) be the masters of our own destiny,'' Judge said. Within three months, Pinehills had created its own technology company, Pinehills Connection. Today, about 98 percent of the 450 completed homes use Pinehills Connection for cable and high-speed Internet service. Pinehills Connection buys cable programming through the National Cable Television Cooperative, a group of 1,000 independent cable operators with 14 million subscribers that is able to negotiate programming prices with the same networks found on major cable operators like Comcast. Judge himself runs into homeowners daily and fields questions about cable service. A continuing concern Judge said Pinehills Connection is on track to become profitable in another two years and outlast the land development company itself. "After 10 years as a land development company, we've just sold the last permit to the last builder,'' he said. "We don't have any more land to sell.'' Render, of Render, Vanderslice & Associates, said the cost per home to install fiber has dropped from more than $2,000 last year to about $1,650 this year. A decade ago, the average cost was $7,500 per home. "It's at the point where it's very attractive economically,'' Render said. "The revenue streams you can get from one of these homes is fairly strong. People who buy these homes are looking at what services than can get now. And when they think about selling their house, this (fiber optics) might be very high on their list (of features) seven or eight years from now.'' Giving something back In Georgia, Cornerstone Construction created a subsidiary called ICornerstone Inc., which has built and runs a fiber-optic network that links about 130 completed homes of a planned 600 for both of the company's developments, the Reserve and Timberland, in Dallas, Ga. ICornerstone generates revenue from the phone and Internet services it provides. "This is another business for us,'' said Joel Thomas, ICornerstone's director of operations. "We can make more off developing land by putting fiber in the ground than by putting it in houses.'' But Thomas said he and Cornerstone Investment owner Michael Ellis didn't start ICornerstone just to pocket a few more dollars. Thomas and Ellis originally met more than a decade ago while volunteering at Blood-N-Fire, a nonprofit Atlanta ministry that helps get inner city homeless youth off the streets. They created ICornerstone as a way to generate revenue for both Blood-N-Fire and for Nehemiah International, a new "boot camp'' organization that trains youth missionaries from around the world. " The basis for this business was (to) create income to support our real passion, which is helping people and rebuilding lives,'' Thomas said. E-mail Benny Evangelista at firstname.lastname@example.org.
Sacramento Business Journal | February 20, 2004 print edition | By Mark Larson More than four years ago Elk Grove resident Dan Kramer, fed up with the antiquated phone system in the booming residential area, organized a committee and told the manager of local phone company Citizens Communications that something had to be done. Citizens, which has since become Frontier Communications, stepped up. It has spent $85 million over the last five years to upgrade Elk Grove's phone network. Now the new city is on the cusp of becoming the most competitive telecommunications market in the country. While Comcast provides cable and Internet connections in Elk Grove, this year the city will get two more competitors touting the "triple play" of phone, Internet and cable all on one line: Roseville-based SureWest Broadband and Frontier itself. While Comcast doesn't offer phone service yet, it is expected to. And sometime this year, Comcast is promising video-on-demand services, which SureWest already provides in some local markets, and which Frontier also promises. Add satellite broadband options, and Elk Grove -- which became a city in 1999 -- has quickly progressed from worst to first in telecom service options, a competitive model that the Telecommunications Act of 1996 was envisioned to generate through deregulation. It's a big change from the not-too-distant days of one cable company and one phone company. "It's wonderful for people who live in Elk Grove," says Kramer, newly seated on his city's planning commission. "It's nice to be loved." Not everyone will win: National broadband consultant Tom Reiman says the competition shaping up in Elk Grove among companies promising fiber-to-the-home is "absolutely the first in the country that I've ever experienced." It's unlikely, however, that this level of competition will last. While Reiman hopes all players succeed, he predicts the market will likely be dominated by the two strongest vendors, and that they'll have to show strong customer service plus compelling broadband features to do well in a competitive field. He predicts performance, more than price, will drive customers' vendor choices. Rich Esposto is executive director of the Sacramento Metropolitan Cable Television Commission, which oversees cable service applications for Sacramento County. Like Reiman, he hasn't seen anything like the rivalry shaping up in Elk Grove. "I'm not aware of any other community that would have that kind of choice," he says. "It's unique in the country if it (all) gets built." But he also expects the market will ultimately be able to support only two carriers. If he were ever to put together a presentation on the hotbed of telecom competition brewing just south of Sacramento, Esposto has a ready title. Says Esposto, "I'd call it the brave new world of Elk Grove." Stepping up: Mitch Drake is Frontier's regional manager. Kramer and others credit him with spearheading Elk Grove's telecom renaissance. He listened to the complaints of a citizens advisory committee formed by Kramer and community activists. Drake than went to Frontier Communications and told company brass of the problems, and of the stupendous growth going on in what for years had been essentially a rural town. The brass listened, and over the past five years have been sending on average $17 million each year to upgrade its Elk Grove phone network. Complaints, including one that emergency calls to the fire department weren't getting through, were handled. Now complaints are rare. "Mitch is a testament to how one person can make a great big difference on how a company is perceived," Kramer said. "He did a really good job in a tough situation." Drake remembers the service crisis hit Elk Grove when Internet use really started to take off everywhere. After listening to complaints from Kramer's advisory board in April 2000, Drake smoothed out the technical issues causing call problems, taking $4 million and two months to do so. What he found was that the old phone network was designed to handle phones that were busy only on average of about three minutes an hour. But with new residents using phone lines for Internet activity like stock trading, the network clogged up. With fiber-optic upgrades increasing data and call traffic capacity, Drake then brought DSL (digital subscriber line) service to customers. Now he's got about 13.5 percent of his callers taking the high-speed Internet service delivered over phone lines. Going for a triple play: While the advisory committee originally met monthly to air complaints to Drake, it now meets quarterly, and the tables have turned. Drake now tells the committee of the latest telecom network advancements he's bringing in sometime this year (he won't specify when): a "triple-play" service of high-speed Internet, phone service and cable TV. That broadband service will be delivered in a hybrid combination of fiber-optic cable run along the curbs of homes, and connecting with ADSL, or asymmetric digital subscriber line. That's a souped-up version of DSL, and allows high-bandwidth video transmissions over limited distances of copper phone lines. New subdivisions, however, are expected to get a fiber connection straight into their homes. That fiber-to-the-home technology will also be sold by SureWest Broadband beginning this year. Both companies will deploy the technology neighborhood by neighborhood. Frontier serves 100,000 customers in Elk Grove, about one-fourth of whom have cable modem services, with the rest able to get DSL if they want it. But population growth is raging on. Drake is expecting to include into his phone network another 6,000 or 7,000 homes annually for the next five years. And Frontier will battle Comcast and SureWest for that growing market. "It's going to be a dog-eat-dog world for a while," says Drake. "We're seeing it now in the wireless sector and we'll eventually see it in the telecom sector with the advent of triple play." Echoing Reiman's call of what this feisty broadband service competition means, Drake adds, "It's becoming a marketing and service game." Players will have to distinguish themselves with service quality and features like community contributions. Drake's local crew totals 240; he'll add 15 to handle the growing workload this year. Seeing the changes: Al Livingston, who just stepped down as president of the Laguna West Community Association, worked closely with Dan Kramer in pushing for improved phone service in Elk Grove four years ago. He and Kramer were also instrumental in the grassroots movement leading to Elk Grove's cityhood. When he moved to Laguna West in 1992, his was one of the first 15 houses built there. Last year his neighborhood was built out with 2,200 homes. For now, Livingston gets his DSL and phone service from Frontier and his cable service from Comcast. But that could change. Or not. He'll have a choice. "Unless Frontier comes up with a real good video package, I'll have no reason to leave Comcast. But their prices have gotten higher and higher." And a switch to Frontier would let him get everything on one bill, he notes. Meanwhile, neighbors who use satellite broadcast services, he says, complain "about lousy installs and paying for more than I ever wanted." As for having SureWest in the mix, Livingston adds, "the more the merrier. It can't hurt. But they're going to have to put up a tremendous investment to catch up to where Frontier is. And Frontier is not going to be asleep at the switch. They're a very lean machine now that is responding rapidly to problems and growth." © 2004 American City Business Journals Inc.
Sacramento Business Journal | January 23, 2004 print edition | By Mark Larson Heavy competition for pay-TV subscribers is putting pressure on Comcast Corp. in the region, flattening the cable giant's local TV revenue even as its rates have risen. That was the backdrop for the unexpected departure last week of Ruth Blank, a longtime employee and well-liked regional manager of Comcast's cable operations from Fresno to Chico, including Sacramento, Roseville and Davis. The Central Valley territory includes 750,000 subscribers. Comcast spokesman Bob Smith this week remained mum on why Blank left. He said the position is open and there's no deadline for finding a replacement. Industry observers figure Comcast, which a year ago bought AT&T Broadband's cable operations, has had time to digest the acquisition, and is now focusing on its bottom line by selling cable TV and high-speed Internet services. That's especially so in Sacramento, where Comcast's cable-TV revenue has been flat and it's fighting for subscribers -- mainly to sign up the people moving into the area's thousands of new homes. Competitors include two satellite-TV providers, Dish and DirecTV, and SureWest Broadband of Roseville, which has 11,200 television subscribers and is planning forays into Lincoln, Roseville, Elk Grove, and now Citrus Heights and Antelope (see related story below). Nationally, satellite providers have about 25 percent of the pay-TV market, a share considered to be in the ballpark here. Seeking higher margins: More competition could be a year or so off, when some expect many new housing developments will have their own internal cable-TV systems similar to the one planned for a big development in Lincoln. "The competition is fierce to get to the new homes," Smith said. Comcast isn't backing away. Executives say their companywide goal is to boost cash-flow margins for cable operations to 40 percent by the fourth quarter of 2004. The company expects $2 billion in consolidated free cash flow for the year, fueled by 15-to-17 percent growth in cable operating cash flow and sharply lower cable capital expenditures as it finishes a program of system upgrades around the country. " They're about done with capital expenditures," said Rich Esposto, executive director of the Sacramento County Cable Television Commission. "I expect you'll see Comcast do some mergers and acquisitions this year." " Comcast has to increase cash flow; they're under pressure to do that," said Tom Reiman, a Sacramento-based broadband consultant who is well versed on cable markets nationally. "The whole Central Valley has become very competitive -- a lot more than other regions I've seen." Esposto was at Comcast's local headquarters last week when Blank told him she was leaving. The rest of the staff was told later in the week. " It was a very terse kind of announcement," he said. Flat is flat: In Sacramento County, housing growth represents a "tremendous upside" for new cable-TV subscribers, Smith said. Industry insiders speculate that flat cable-TV revenue in that kind of market may have factored into Blank's departure. In Sacramento County, Comcast's largest service area in the region, the company splits with its customers the cost of paying 5 percent license and franchise fees to the county, based on Comcast's total cable-TV revenue for the local service area. Cable-service fees collected by the county commission over six months in 2003, which indicate Comcast's cable-TV revenue for roughly 380,000 subscribers, were virtually unchanged from the same period in 2002. The county collected $3,751,169 in cable fees for the second and third quarters of 2003, up just $2,352 from 2002's $3,748,817 in fees during the same period. " It's essentially flat year-to-year, even though there had been a rate increase," said Esposto. Rates went up 5.8 percent a year ago for Comcast subscribers with full basic service and a signal converter. Another 6.4 percent increase took effect this month, said Esposto. In two years the increases boosted the mean monthly cable bill from around $40 to above $45. More channels: "We don't look at this as a flat market," said Comcast's Smith. "We look at it ... as something with tremendous upside." While cable-modem Internet connections represent a younger market with big potential for the company, he said, the TVs in new homes are seen as a growth opportunity for the company here and across Northern California. He could not provide an Internet subscriber count. Rate increases are a market reality, Smith said, reflecting a higher value of Comcast's cable fare from years past. " Almost everything we buy goes up," he said. "The important thing is, what do they get for the money? We have over 200 channels of audio/video service. That's dramatically different from a few years ago." Comcast is adding new services this year, starting with video on demand (already offered by SureWest Broadband), and then digital-video recording options for subscribers, Smith said. But consultant Reiman said subscribers now are willing to consider a switch to a competitor in response to a rate hike. " It's a very different marketplace than it was three or four years ago," he said. More changes? When Philadelphia-based Comcast bought AT&T Broadband, it added two regional divisions to the company, bringing the total to six. In November, the company combined the mountain and western divisions (the latter includes Sacramento, Roseville and Davis) into one. They're now run from Comcast's Denver office. In a Jan. 15 newsletter to Northern California Comcast employees obtained by the Business Journal, where Blank's departure was announced, senior vice president Rick Germano wrote: " Following the recent division reorganization, we determined that a change in leadership in Central California was necessary. As a result Ruth Blank will be leaving the company at the end of this week." No other executive changes are planned, Smith said this week. " Over the past several weeks I have visited many of our employees in offices throughout the Bay Area and Central California," Germano said in the newsletter. "One theme that has come across in all of those meetings was the need for strong internal communications." He promised more e-mailed newsletters to keep employees apprised in coming weeks "as we finalize leadership changes and organizational charts." © 2004 American City Business Journals Inc.