Power utilities: Spin-off or middle mile? Making the right choice for your new business model
Broadband is increasingly being seen as a right rather than a privilege, closely aligned to freedom of expression. It is important for economic growth, education, and telehealth in remote communities. Yet, many rural communities remain underserved. Power utilities can change that. Using their presence and infrastructure in the community, they can deliver fast internet profitably.
There are several business models to choose from, but before making any decision, it’s always prudent to understand the regulatory mandates and consult with your legal department. Perhaps, most obviously, the power utility can establish a separate telecommunications company. In this model, the fiber can be owned and managed by the power company, and leased to its service provider subsidiary. Together, the energy company and its subsidiary can provide internet, video, phone, and electricity services as a quad-play model. This may be particularly appealing in countries where the energy market is deregulated, because it gives the power utility an opportunity to establish closer relationships with their retail customers, and creates a stronger sales proposition by bundling communications services with energy.
Creating a separate subsidiary is the most lucrative business model, because all of the revenue from the customer flows back to the utility and its subsidiary. This model is not, however, without risk. There is a tremendous amount of capital investment involved because a video head-end is required to receive satellite TV signals and send them through the network. In some territories, there may be onerous regulations that apply to telcos, and compliance may be costly. To lower risk in the long term, energy companies can maintain separate infrastructure for the service provider side, so that it can be cleanly divested in the future. This model however would negate some of the scale economies the power utility would otherwise enjoy entering the communications business. There are also increased operational costs in delivering and supporting telco services alongside energy services.
But the good news is that it is not necessary to spin off a separate company to deliver communications services. Energy companies can create value and deliver communications services using other business models. An alternative model is the “middle mile”, where the energy company partners with a communications service provider (CSP). The power company then provides fiber to the community, or even to the CSP's Optical Network Termination (ONT) equipment. The CSP then delivers the last mile of connectivity, either wired or wirelessly, and serves internet, video and phone communications to the retail customer. This can be a win-win-win situation. CSPs can enter communities without the huge capital expenditure of establishing middle mile infrastructure. The power utility can generate new revenues to offset their capex costs in the fiber network or to lower consumer rates. Most importantly, rural communities now can benefit from the availability of broadband services.
For the power utility, this model is attractive because it’s lower risk, does not require a huge capex investment and makes use of the existing fiber in the network. It also spares the power utility from the organizational challenges of entering a new regulated space, and skilling up to deliver and support new services.
There may also be opportunities to offer middle mile services to large organizations that want to route their own traffic over the fiber, as well. For example, a hospital could use the power utility’s fiber to distribute large medical images quickly and securely between sites.
The middle mile model is flexible. Utilities can partner with several CSPs to deliver services on the same fiber infrastructure, in what’s known as a “neutral host” model, giving consumers more choice. Fiber capacity can be leased based on wavelength, bandwidth, or customers served. Using a pay-as-you-go model, CSPs can scale up their costs and revenues in parallel.
There may be restrictions on what the power utility is allowed to do, but by working with local regulators, they can find a creative solution that serves the community and works for the power company too. In an extremely underserved area, a regulator might approve of a quad-play service. In a saturated area, the middle mile model helps to lower costs for service providers. To avoid distorting the market, the neutral host model might be preferred.
The team at Nokia Bell Labs can help you to decide which model is most suitable for your business and help you to navigate the regulatory environment. We can conduct a skills gap analysis, so you can better understand the organizational changes required. Nokia also offers managed services, so we can operate the network on your behalf, quickly solving your skills and resources challenges.
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