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Making MDU Broadband Competition Work

Competition at multifamily properties can benefit all parties – as long as property owners are committed to make sure it works. May/June 2012

Competition among broadband service providers in multiple-dwelling unit (MDU) properties has become the norm since the 2007 FCC decision to prohibit enforcement of exclusive service agreements for video providers.

MDU residents have always desired choice among broadband service providers, but only since telephone companies entered the multichannel video distribution markets has competition flourished. Because competition spawns innovation and keeps a lid on prices while creating wealth, it is generally good for the public.

Competition also benefits MDU owners to the extent that an MDU property offering broadband choice is more attractive to prospective residents than a property monopolized by a single provider. In the November/December 2010 issue of this magazine, we argued that the increase in value of a rental unit offering choice may often outweigh the loss of service provider payments for monopoly rights. As providers become more aggressive and consumers become increasingly demanding, we believe this will more often be the case.

Competition’s value to service providers is a function of its value to MDU owners. If most MDU owners require competition, a service provider will have access to more MDU properties by adopting a business model based on coexistence.

In short, where there is effective competition at MDU property, everyone – consumers, management and service providers – can win.

Effective competition involves more than just allowing multiple service providers to coexist at an MDU property. If an owner trying to maximize short-term cash flow signs contracts with multiple providers and then passively withdraws from the scene, one provider may succeed at the expense of the others, and the competition will not last for long. However, an owner that views service providers as partners can give each competitor a full and fair opportunity to thrive.

Making Competition Work

To ensure that each competitor survives, a property owner or manager must make sure that the playing field remains level and that each provider knows it is level. Regardless of whether the property is existing construction or a new build, the level playing field has technical, operational and legal components.

The crucial technical issues relate to wiring. Each provider must have unrestricted, secure access to the in-building wiring. In new construction, the ideal solution is to provide separate home-run wiring for each service provider. However, in many cases, both new and existing construction, only one run of coaxial and one run of twisted-pair home-run wiring goes to each unit, and competing providers must share inside wiring. Because each provider has the incentive and ability to restrict other providers’ access to wiring, sharing includes an inherent potential for conflict and abuse.

Removing providers’ incentives to interfere with wiring access may not be possible, but restricting their ability to do so is possible. The best solution is to install a neutral lockbox, owned and controlled by the property owner, adjacent to service providers’ proprietary lockboxes. All the home-run wires terminate at the neutral box; from there, the wires can be connected to the appropriate providers’ boxes by means of jumpers. This ensures that no provider needs access to another provider’s equipment.

A neutral lockbox places control over the single access point for home-run wiring (the cable demarcation point) in the hands of the property owner, where it belongs. In our opinion, the neutral box is essential to making competition work where multiple providers share coaxial home-run wires. The neutral lockbox concept is explored in the November/December 2011 issue of Broadband Communities magazine.

Operationally, on-site marketing is crucial to service provider success. Therefore, property management must actively provide marketing support without favoring any particular provider. Because the opinions of leasing staff influence customers’ decisions, the first step is to choose providers that offer strong, competitive services so the staff can promote them all with genuine enthusiasm.

Each provider should ensure that leasing staff remains educated about the provider’s latest products and services. Likewise, property owners should ensure that their marketing support teams are well-organized, fairly compensated and motivated to contribute to each provider’s success. Provider payments to leasing staff for marketing activities can lead to bias and should either be prohibited or strictly controlled by management to ensure neutrality in marketing support.

From a legal perspective, the key to effective competition is fairness. Each provider should be allocated equal on-site marketing rights and support and equal, unimpeded access to wiring and space needed to provide services without interference from competitors. Each provider should be responsible for maintaining any inside wiring it uses; however, a provider that disables wiring in the process of switching a customer should be responsible for restoring the wiring to working condition. A property’s on-site staff must often police providers to deter abuses. Contracts should provide sufficient detail to minimize uncertainty, and the parties’ respective duties and obligations should be clearly stated.

Case Study: Alexan Metro West

Alexan Metro West is a three-year-old, 392-unit, mid-rise apartment complex in a trendy Atlanta neighborhood. Even during the planning phase, the developer was committed to providing broadband choice for prospective residents. The project was designed to appeal to young urban professionals, who tend to be very demanding about broadband. The developer envisioned a community of renters for whom having a choice among broadband service providers would be a major factor in the choice of a rental home. The developer calculated that any diminishment in door fees or other financial payment would be more than compensated by the increased rental value of units associated with offering consumers a choice among providers.

Represented by the consulting firm Broadband Planning, the developer requested proposals from the local cable operator, the incumbent local exchange carrier and a well-funded satellite distributor (or private cable operator) that offered high-speed data and voice services, informing each prospective provider that, if selected, it would be one of three providers competing for subscribers at the project. The challenge involved convincing the providers that investing in the community would pay off in the long run – and at the same time obtaining door fees that totaled as much as could be obtained through an exclusive agreement with a single provider.

In evaluating each provider’s proposal, it was necessary for the developer to estimate each provider’s anticipated return on investment (ROI). Relying on publically available information the developerused the following assumptions:

  • The cable and telephone companies, which had large capital investments, must be able to make a fair return on 40 percent penetration, or 157 of 392 units. With average revenue per unit of $100 per month, each operator’s expected aggregate monthly revenue would be $15,700, or $168,000 per year.
  • The satellite provider’s infrastructure costs were lower, so a 20 percent penetration level was considered sufficient.
  • Construction costs would be approximately $600 per unit; multiplied by 392 units, each provider’s capital investment would be about $235,000.

To minimize capital investment, the developer offered to pay the costs of installing each provider’s home-run wiring infrastructure, and it offered each provider a 10-year term, more than sufficient to recoup its investment.

The developer used these assumptions to negotiate financial compensation, including a door fee and a revenue-share commitment, from each of the two large providers. Concessions other than financial compensation were requested from the satellite provider, which agreed to pay a commission on each new subscription and to provide free Wi-Fi service to the swimming pool and common areas.

Ensuring Competition at the Alexan

As mentioned earlier, a competitive MDU environment has technical, legal and operational aspects. The developer of Alexan Metro West addressed these concerns as follows:

Technical: A separate run of dedicated home-run wiring was installed for each provider to all units. Although each provider paid for its own wire, the developer paid the costs of installing the wiring. The in-building network was designed to minimize the potential for conflict or interference between multiple providers. All the home-run wires terminate in a network box in each unit, which allows residents to receive bundled or individual services from any of the three operators at any outlet location.

Legal: Each service provider was given nonexclusive but equal access to common areas for marketing purposes, equal marketing support from management and equal access to equipment and space as needed. Contractual rights and obligations were clearly articulated and fairly distributed without overreaching.

Operational: Marketing support by leasing staff was organized and up-to-date. For example, management was required to report move-ins and move-outs and to provide contact information for available customers to each service provider. These reports were to be made available to each provider at the same time so no provider would have a first-mover advantage over any other.

The developer assumed that each provider, if given a transparently equal opportunity to succeed as well as management’s committed support, would compete effectively for customers. This assumption proved valid: The first two years of Alexan Metro West’s operation show that competition is good for everyone. The cable and telco providers each achieved penetration levels that fluctuate between 35 percent and 55 percent, and the PCO maintains a steady base of die-hard sports fans sufficient to remain an important option for the community. All services are making money as of the date of this writing.

The story of Alexan Metro West shows how, with careful, visionary planning, an MDU may be molded into a highly competitive environment in which multiple providers prosper, along with residents and the property owner.

About the Authors

Carl Kandutsch, a former FCC attorney, is in private practice representing property owners as well as broadband service providers on cable television and broadband communications issues. Dr. Kandutsch may be contacted through his website, www.kandutsch.com, via email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or by telephone at 207-659-6247. Richard Price has provided video and broadband options and advice to high-density housing owners and managers for nearly 35 years and is the founder of Broadband Consulting LLC. He can be reached at 678-410-5969 or on the Web at www.broadbandplanning.com

 

All articles published in Broadband Communities magazine (www.bbpmag.com)

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