Oct
05
2017

The Ammon Model

The Ammon Model

Fiber Optic cables and UTP Network cables connected hub ports.

Kirkham

Patterson

Electric transmission, the transistor, the computer, the internet. Each was invented in the United States. But in terms of internet speed and reliability, service in the U.S. lags far behind much of the developed world.

One ranking put the U.S. average connection speed 12th, at only about half the speed of the average connection in world-leading South Korea.

And throughout the country, rural areas and small towns face big gaps in broadband infrastructure compared to large urban areas. It’s a problem that broadband companies haven’t solved, often because the large up-front expenses of installing fiber-optic systems in small towns don’t lead to sufficient profits.

Those problems led the city of Ammon to start thinking about building a municipal fiber-optic network about a decade ago. Today, the network, still in its early stages, is up and running, and it’s faster than what’s commonly available in surrounding areas.

“If we didn’t build it ourselves, it wasn’t going to be here,” Ammon Mayor Dana Kirkham said.

The municipal fiber model being implemented in Ammon — about 150 residential customers are hooked up so far, and dozens more are expected soon — was the subject of a full-day conference, hosted Thursday at the city’s operations center.

Prices for internet access on Ammon’s municipal fiber-optic network are lower and are being driven downward by market competition. There are unique opportunities for both public- and private-sector innovation. Taxes and fees have only gone up for individual households that opted into the system, and the city has taken on no debt.

Other cities are taking notice, as are industry experts, academics and prominent national figures. This from a city with a population of 15,000.

The Ammon Model

Participants in Thursday’s conference praised a revolutionary model that uses upfront public investment in order to create a marketplace where residents benefit from intense competition between private internet service providers, competition that’s rarely seen elsewhere in the market.

“Ammon has inspired many other communities around the country,” said Chris Mitchell, policy director of Next Century Cities. “… Ammon has one of the most replicable models (for municipal fiber-optic systems).”

Former Federal Communications Commission Chairman Tom Wheeler made a video appearance where he heaped praise on the city.

The same day, two Harvard scholars, Paddy Leerssen and David Talbot, both specialists in the broadband industry, released a case study examining the Ammon Model of municipal fiber development.

“By providing virtualized fiber network access as a public utility, Ammon has created a platform that allows an extraordinary level of competition, innovation, and experimentation by businesses, local government, and residential users alike,” Leerssen and Talbot wrote. “And Ammon’s model provides very little, if any, financial risk to the city.”

A key technical innovation is the use of “network virtualization.” That basically means network functions that had been governed by rigid hardware systems are instead being handled by flexible software systems. While the details are complicated, the upshot is that the network offers customers more options and puts companies offering services across the network in direct competition.

Dealing with monopolies

Bruce Patterson, the Ammon technology director who was the driving force behind the new model, compared Ammon’s fiber system to a road system. The roads are publicly built and owned, but shipping companies compete over customers to haul freight along those roads.

“We have to look at the wire as a monopoly,” Patterson said. “The competition is over services.”

In general, the broadband market in any given area is dominated by a small number of broadband providers, often only one. It’s a situation economists refer to as a “natural monopoly.”

The situation arises because it’s extremely expensive to make the initial investment to install fiber-optic lines; much of the expense comes from the difficult process of negotiating and purchasing rights of way in which to install the lines. So once the main network is established, the entry costs for any new company that wants to enter the market are usually prohibitive, and customers wind up with limited choices.

Monopolies have a number of bad features because such firms don’t have to worry about losing customers to the competition. Prices are generally higher than in a competitive market and the quality of service is lower.

The Ammon Model gets around this situation by installing fiber as a public works project, just as it does with roads, water and sewer. That means there are very few barriers for a new internet service provider, or a company offering networked services that don’t involve the internet, to get on the market.

The benefits of competition

Without the barriers to entry involved in traditional broadband service, Ammon’s fiber network provides the framework for an intensely competitive marketplace.

Customers can switch providers within a few minutes, so any provider that wants to be competitive on the network has a strong incentive to keep customers satisfied with quality service and low prices. If a provider doesn’t do this, customers will flock to their competitors. Customers also can use multiple service providers if they choose.

Kirkham said early indications are that the model is working as expected. Driven by competition over customers, Direct Communications and Fybercom, the two internet service providers currently offering service on the nascent network, have already dropped their prices.

“We thought this would happen,” she said.

Those who have opted in pay the city monthly fees of about $17 for maintenance and operation of the network, and another $17 in taxes to pay for the build-out. A 100 megabit-per-second internet connection from either of the providers costs another $10 per month. A 1 gigabit-per-second connection costs between $50 and $105 per month.

The Harvard study notes that the highest-priced 1 gigabit connection on Ammon’s network, after adding in taxes and fees, costs less than the $180 charged by CableOne for similar service.

There are also observable improvements in the quality of service.

Most internet service providers advertise the speed of the connections they offer prominently. But run a speed test, and the connection is almost never as fast as advertised. The advertised speed is only what the internet service provider promises to make a “best effort” to provide, the study notes.

But in Ammon’s direct fiber networks, speeds are guaranteed.

Legal innovation

Ammon also used an innovative legal structure to pay for the build-out of the system. It involved creating a new taxing district, a local improvement district. But unlike most taxing districts, Ammon residents only pay higher taxes if they opt in.

If they opt in, they get a fiber-optic connection either for a $3,000 upfront payment or through about $17 per month in additional property taxes to pay the cost of installing the fiber connection over 20 years. Those who don’t opt in immediately can choose to do so later.

Because the district was unusual, the city asked a judge to confirm that existing law authorized them to do so, and the judge agreed that the law did.

“My job was to keep them from wearing orange,” quipped city attorney Scott Hall, referring to the color of prison outfits.

“It’s not my color,” Kirkham laughed.

The network will expand by creating new opt-in improvement districts, Kirkham said.

Asked how she dealt with pushback from local residents, Kirkham said the the network has been very popular. The main question has been: “When are you getting to my neighborhood?”