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Utilities and BPL: Betting Against the Odds
Why broadband over power line (BPL) can't stand alone as a high-speed Internet offering.
be greater than this level to merit significant management interest in BPL commercialization for many of the nation's electric utilities. Several utilities have expressed their concerns about straying out of their core areas of business competency, especially in light of failed rounds of utility diversification in the past and the wave of telecom bankruptcies following the bursting of the telecom bubble. The economics of BPL and the overall contribution to enterprise value may change considerably, however, if BPL is viewed as an enabling technology for utility operations in addition to its commercial potential.
Each year, the U.S. electric utility industry spends about $3.5 billion on telecommunications equipment and services for its own internal uses. 13 Further, many utilities have represented the need to drive enhanced bandwidth deeper into their systems to enable advances in their own internal utility operation. As utilities push intelligence further into their systems to realize "smart grid" functionality, 14 greater communication capabilities are required closer to the end-use customer. Allocating a portion of the cost of deploying BPL to the utility improves the economics of the commercial portion of BPL. 15 The utility still will have to make the full investment in BPL, but it will realize rewards in terms of improvements in its core electric utility operations, as well as returns from its BPL business. Here, the utility may view BPL's commercial opportunity as a secondary benefit, as opposed to a primary driver.
The Obstacles to Broadband
It goes without saying that BPL's entry into the commercial broadband market, even under the most favorable bundling circumstances, will be challenging. The battle for broadband customers already is highly competitive. Given the difficult time telephone companies have had capturing market share for high-speed Internet access from cable companies, BPL providers likely will face similar, if not greater, challenges. If the ramp-up in BPL market share is too slow, the cost per customer will be too high (due to lack of scale) to yield a strong return on investment. Conversely, if customers are quite willing to switch to a BPL provider (a necessary condition for a quick ramp-up), they also may be quite willing to switch away just as easily. The resulting high churn in such a scenario would hurt per-customer economics. This situation is exacerbated by the dynamic nature of telecommunications and media markets in general. New technologies and applications have had highly disruptive effects upon even the most well thought-out business plans.
In our view, multiple product offerings (and of course higher ARPU) are required to make BPL an attractive commercial prospect for investor-owned utilities. As BPL's rivals lower the price for the bundle of triple-play services, ARPU will decline and margins on BPL products will be squeezed. For the BPL player, Voice over Internet Protocol (VoIP) over BPL is at least a partial solution to this problem. The addition of VoIP will serve to increase ARPU levels and increase IRR per customer. 16 Failure to expand BPL service offerings from standalone provisions of high-speed Internet access, however, significantly lessens the attractiveness of BPL to both utilities and