Thinking Outside the Box to Fund a Fiber Build, With Fred Johnson

Fred Johnson, CEO of Farmers Telecommunications Cooperative, discusses how FTC expanded into surrounding cities to help fund the fiber build in its cooperative service area.

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Rural Broadband Today is a new podcast focused on one of the most important issues facing Rural America. It tells the stories of those working to bring broadband internet access within reach of every citizen. This interview-style show presents conversations with elected officials, industry experts and business leaders at the forefront of America’s efforts to solve the rural broadband challenge.

Intro:
Broadband.

We need it for work and for school, for our health and our
economy.

What's being done to bring broadband internet access within
reach of every American?

Let's talk about it now on Rural Broadband Today.

Here's your host, Stephen Smith.

Stephen Smith:
And thank you for tuning in to another episode of Rural Broadband
Today.

This is your host, Stephen Smith, and I am delighted to have as
my guest today, Mr.

Fred Johnson. Fred, welcome to the show.

Fred Johnson:
Thank you, Stephen. Always a pleasure.

Stephen Smith:
Fred, of course, is the CEO of FTC, Farmers Telecommunications
Cooperative, in actually my hometown of Rainsville, Alabama.

So it's great to have a hometown voice on the show today.

And we wanted to talk about, there's a lot of news about funding
broadband networks, particularly in rural America — a lot of

state, a lot of federal activity.

But that hasn't always been the case.

And providers such as FTC, of course, have had to get very
creative in order to try to get

the necessary services out into their service areas through the
years.

And so I wanted to talk to Fred today about how FTC has really
been thinking outside the box for the past few years in building

their fiber network.

But before we get into those details, Fred, I'd like for you to
sort of give us an overview of FTC's fiber program and how the

board committed to something early on, even though the prospects
for 100% coverage might not have been there.

Fred Johnson:
Okay, Stephen, I'd be glad to do that.

To just kind of go in reverse order if we look at things today,
FTC is operating close to 3,000 miles of

optical fiber in the northeastern corner of Alabama, basically
east and south of the Tennessee River.

And we do have 100% fiber availability to all of our cooperative
service territory and all of our activities in a

competitive environment or competitive territory, .e're always
optical fiber.

So for all practical purposes, we are a full fiber network.

We just are in the process of converting probably less than 100
residences and a few businesses

from copper over to fiber.

But for all practical purposes, we are in every respect, a 100%
fiber network at this point.

The vision for that sort of began in 2007, FTC had essentially
completed

an overall upgrade of its system, getting its copper loop
lengths down to about 12,000 feet in most of our area.

When we became clearly aware of the emerging importance of being
able to offer high quality world class

broadband, in retrospect, we obviously made the right decision.

At the time, it was a lot harder than that, but we were just
fortunate to have some really good insight that if we were going

to make major and substantial moves from a 12K copper network to
any form of other medium,

that copper simply was not the long term solution.

Despite significant pressure to adopt some alternative
technologies with

the promise of better copper speeds, but we just felt like [we]
had good advice and some good long term insight

that if we were going to invest dollars of any significance, it
needed to be in the optical fiber that would essentially be

future proof.

And we were fresh out of the CMRS business, which gave us a
somewhat better understanding of

wireless limitations and wireless capabilities than some folks
might have had.

So we were able to resist some of the hype about wireless
technology and really focus on the need for fiber.

The challenge that we faced is that when we did the detailed cost
estimates, we never really believed that the economics

would justify or enable building fiber to more than about 72% of
our service territory.

When it all shook out, our estimate was that it would take an
amount roughly equal to that which it took to make 72%

to get to 100%, meaning that the cost of the last 28% would be
as much as the cost of the first 72%.

And at the time, you would have had to have been honest in
saying that it was a judged highly unlikely we would ever make

the 100% mark.

Now, for those who are cooperative operators and certainly those
that are publicly funded and have a constituency to answer

to, you'll intuitively recognize that's a tough call to make.

It was to the best of my knowledge, the first and only time this
cooperative has ever made a decision to do for a large portion of

the membership, anything that it didn't think it could
ultimately do for all the membership.

And that's a tough call to make, especially in the cooperative
environment.

But the reality of it was, I am grateful to have had a board
that looked at the whole and came to

the conclusion that if the cooperative did not step up and make
certain that the community we serve had a world

class backbone, at least a world class backbone, that the
ability of the

community to support economic development compared to what it
could do if it had that infrastructure.

Necessitated our best efforts, even if that meant we would not
get 100% to everybody.

We could honestly say that we believed that 100% would benefit
from it.

Meaning the economic infrastructure being in place to support
economic development, even if we were not able to actually serve

them with fiber.

At the end of the day, that was probably the trigger that made us
go ahead and execute on the plan.

Short version of a long, long 15-year story is that as we begin
to do this,

and as we begin to learn how to be more efficient in the way we
deployed the fiber, engineered it

and learned how to take things in meaningful bite size
approaches.

Along with what I'm sure we'll discuss in just a second about our
expansion outside the traditional area, we

were able to pull those factors together.

And as of December of 2022, we successfully plowed fiber past
the last location in our

traditional regulated territory.

So it took 15 years, but we made it happen and affected an
outcome that

15 years ago was highly in doubt, so it's quite a success story.

Arguably, we are clearly proud of it, but it took a lot of
really committed men and women and intelligent decisions along

the way on the part of those folks that were engaged at ground
level to make it happen.

But we're delighted that it did.

There you have it. That's the short version.

Stephen Smith:
So describe for our listeners that certainly that last 28% was
difficult in and of

itself, but as you whittled away at that, I'm sure those areas
became even more difficult as

you attempted to engineer a network out there.

Describe that portion of your service area and what made it so
difficult to serve.

Fred Johnson:
Ok. You're exactly right.

And if you graphed it, if it were possible to graph it, it would
look like a hockey stick in terms of the difficulty of

reaching the last few.

But there are some important things to remember about that.

Now to keep it simple, you can imagine probably one of the last
drops we plowed was several miles long.

Not really a drop, but one of the last taps, if you will, was
probably several miles long.

But at the end of that several miles, which obviously was
probably one of the most

expensive segments per customer if you're looking at it on cost
per location basis.

It was probably one of the most expensive in the network.

But at the end of it is a camp, a facility that serves a lot of
people.

Ok, it's a significant business.

Well, at the end of a lot of those similar long connections, the
last ones that we did seven, eight,

nine million poultry, a million dollar poultry operations.

So, you know, you can't always look at it as being, okay the
standard length of a drop on our network

might be, you know, 400 feet.

And some of those last ones might have been almost a mile.

But you have to remember at the end of some of those miles are
multimillion dollar agricultural

operations or businesses like this particular camp.

So it's a mixed bag.

It's difficult to get to just because of topography and the way
the locations are distributed across a remote

landscape. But it doesn't always, you know, you may have a very
expensive connection, but that connection may

be generating several hundreds of thousands of dollars a year in
commerce to the local economy.

So you have to look at all of those pictures.

But in the simplest terms, you can assume very sparsely
populated rural areas, isolated locations, the last few

connections where the longest and most expensive.

But again, remember I said a moment ago we learned how to take
things in meaningful bites, manageable

bites, and that's what we did.

And that's why we were able to effectively accomplish that goal.

Stephen Smith:
And one of your strategies was moving into surrounding areas in a
competitive environment.

And tell us about that and the decision to do that, how that
came about and how the finances

worked with that in terms of funding the cooperative.

Fred Johnson:
And this will sound a little bit like a business school lecture,
but it's very important to keep in mind

that sound principles usually lead to better results than
flights of fancy.

We spent a considerable amount of time in the mid-2000s, you
know, going back and revisiting the core principle that you need

to decide who you are and what you are and what your
sustainable, you know, what your competitive advantages are.

And you have to remember the theory behind that.

A competitive advantage is only a competitive advantage if it is
sustainable.

So we ask ourselves very clearly what it is, what is it that
makes us unique?

And and clearly, you know, the answers were easy to come by.

You just had to embrace them, okay.

It's that we provide a superior quality of product: optical fiber
based broadband at minimum speeds of

100 symmetrical service.

And if your service goes out, we're going to fix it, and we're
going to fix it within four hours under normal circumstances.

If you're a business or you have other exigent reasons for
having to remain connected, 24-7, we'll even fix it if it's over

the weekend or at night.

And so, you know, we ask ourselves the question "what defines us
from the competition?

What makes us more valuable to our communities than others that
may cherry pick or try to be of

service?" And once we clearly identified who we were, then we
asked a simple question "What do we have

to do to stay this way?" Because we all know the business and
the industry is changing.

We all know that plain old telephone service, as we've always
known it was going away.

We all knew that broadband was the emerging product.

So what do we have to do to maintain that competitive advantage
and that uniqueness?

And the answer is as the traditional fixed cost of the regulated
telephone plant was spread

over fewer and fewer people.

We had two choices.

We could either grow the enterprise and replace that revenue, or
we could shrink the company and become exactly

like all of our other competitors.

But if we wanted to remain unique and retain what I like to
refer to as the character of the cooperative premier

service provider model that we aspired to, we had to grow the
organization and that required

selectively, intelligently and in a very intentional, deliberate
fashion,

expanding outside the traditional cooperative footprint which we
did through a wholly owned subsidiary.

The reason for that was very simple.

We wanted to make sure that we could look our members eyeball to
eyeball and say the returns we are gaining from outside the

cooperative territory represent capital flowing back to be used
for the benefit of the members of the cooperative who put up the

capital to do that expansion to begin with.

Very much clear business theory.

We have clearly defined rate of return requirements on that set
by our board reviewed annually.

And so we could simply, you know, look our members eyeball to
eyeball and say the answer to your question, and it was a very

frequent question, why are you going here when you're not even
taking care of me yet?

We would look them square in the face and say, "Because we need
the cash we're generating from that enterprise outside the

traditional territory to help fund the expansion to you so you
don't have to pay it out of your pocket." Most rational people

understood that.

A very few did not, but most rational ones did, even if they were
sometimes frustrated by how long it took to make it

happen. But the reality of it is, and I tell people this all the
time, and if folks are considering this business model, you just

have to come to this realization.

If you try to do it any other way, you will fail.

That's not a [inaudible] fact.

If we had not done that, we would have failed.

We would have never gotten 100% fiber to all of our members,
that's what it took.

That was the only way to do it, and that's the way we did it,
and we were very successful at it.

Stephen Smith:
How did that work out financially in terms of compared to your
projections of what type of what level of

revenue that that would be bringing into the cooperative?

Fred Johnson:
We significantly and substantially exceeded all expectations
after having learned in the first year

or two that the phrase "if you build it, they will come" is pure
fantasy.

That is not true in a typical broadband expansion role, despite
the fact I recognize that statement is a little bit

controversial.

You could say it this way. "If you build it, some people will
come." But if you think if you build it, everyone will come, you

are simply, you're simply smoking something besides Marlboros.

The reality of it is the business is way too competitive.

There are too many substitutional products out there that while
not nearly as good as terrestrial optical fiber

based broadband band are certainly good enough for those that
cannot afford a premium level of service.

Or who are forced to choose between internet service, that's good
enough and nothing at all.

And so we had to learn to become very, very intentional about
the way we expanded the network.

Made sure that we had core tenets that would help us fund the
backbones and

expanded off of that backbone only as customer demand
essentially

called for it.

Fortunately, we didn't go too far down the building will come
role in the first couple of years to get ourselves in trouble,

but we learn real quick that you have to be very intentional
about your expansion and make sure that it essentially pays

for itself as it goes.

And there again, if an organization defines itself as

unique in terms of quality of product and quality of support,
you'll outdo the typical players out there

and especially in core key and business markets so.

We exceeded all expectations.

And for the future, the implication is is that those select
areas, those competitive areas, will continue to be profitable

and continue to support the the operation of the parent
cooperative in areas where the economics will

always be challenging due to sparse population, low density
numbers and a somewhat uncertain future of federal

policy support long term.

Stephen Smith:
So what type of customers made a good core target for really
providing that

financial foundation for you moving into these select areas?

Fred Johnson:
Clearly, the business community that that needs highly reliable
service and support outside, you know, the traditional normal

business hours.

As you know, we're victims of our own success, and that's a good
thing some most days.

But we, for example, have a number of customers that because we
have offered them a

very high quality broadband connection.

And let me just say this about that.

I don't just mean that the connection between our network and
them is a good one, is a solid one.

But you know, when you're serving customers that have a
worldwide presence on the web, they need to be sure that they can

reach the web at all times.

So we've invested very heavily in providing redundant and
resilient connections to the internet backbone.

We are not dependent upon one, for example, fiber route from the
core of our network to one peering point in, say, Atlanta or

Chicago. We have multiple routes across our network to ensure
that our customers have internet connectivity,

even if we have inevitable fiber cuts in downtown Atlanta or
places like that.

As our customers, as many of our, especially our key customers,
came to realize how resilient our service was, they

became even more dependent upon it.

They invested more heavily in it, and then it became even more
necessary for us to offer

resilient service.

And as you can imagine, that's a big scale from light users to
extremely heavier users, extremely heavy users, but

all needing very reliable service.

And they're willing to pay reasonable prices for that level of
service.

So, you know, we very much keyed on the business market that
needs the level of service we provide and have found that to

be very effective at funding the expansion into areas that that
couldn't bear that cost alone.

So key business markets are obviously very important.

Stephen Smith:
Let's talk about two sides of a coin here.

First of all, what are some things that you have learned about
moving into these competitive areas that really worked for you in

terms of branding, in terms of possibly community partnerships
that you built and positioning your

product in a market that's much more highly competitive than
your local service area.

Fred Johnson:
The reality is that FTC can be very well described as not merely
a co-operative, but more broadly as a community based

provider. I would like to think, and this is our intention
goal, I would like to think that if you were a stranger to this

area and you interviewed any of the economic development
authorities, any of the economic development

organizations, chambers of commerce, folks that are truly tasked
with

working on the economic infrastructure of their various
communities.

If you were to go to them just a complete stranger and say,
"tell me a company that is obviously committed to this community

that is doing everything it can to to help make this community a
better place within the span of its

purpose and mission," I hope that FTC would be the first name
off their tongue or certainly among the first names off their

tongue. I think we are well known as a community based, locally
owned provider that really

understands its mission is to improve the quality of life in the
areas that it serves, and it's committed to those communities.

And obviously, because of our ownership structure, you know,
it's clear that we're not just an investor owned utility that

will make its decisions strictly on the basis of rate of return
and not take into consideration its overall impact on the

community and that sort of thing.

So I'd like to think that we recognized is that.

We certainly are that type of company, and we try to convince
people of it through our actions, not merely our words.

And then to be very candid with you, there were a number of
anchor institutions, electric power providers, for example, that

would much prefer to rely on us to manage their data networks
and try to get into that business themselves.

They have relied upon us heavily, as well as banks and other
institutions that are just like anchor tenants in the,

you know, mixed use developments of today.

Because we serve them, we're able to serve others as well,
because we're spreading those costs

over a much larger business base that truly needs our level of
service.

So those are the kind of partnerships that we really work hard
on.

Stephen Smith:
And likewise, what are some things that sitting where you are
today that you consider lessons that you might share with another

operator looking at making a similar move in a competitive area?

What are some things that they're going to run into, and how did
you address those?

Fred Johnson:
Clearly, clearly the most important one would be best summed up
this way.

Traditional models, whether you're talking about the way
regulated telephone service used to work or electric power

works today or water, gas or sewer — any of those traditional
infrastructure, utility type business

models do not, may I say again for emphasis, do not work in the
broadband

specter. I have been very frustrated at times to hear people
insinuate that

if they build a broadband network, they'll get 100% take rate at
whatever price they charge for it.

That's fallacy. That is not going to happen.

There's just a lack of understanding about how competitive the
broadband arena is.

You've got to understand that if people cannot afford a cell
phone and a 50, 60, 70 dollar a month

broadband service, the vast majority will take the cell phone
option and will consider their internet browsing abilities

off that cell phone to be good enough.

And if you believe otherwise, like I said, you're smoking
something besides Marlboros, because that's the economic reality

of the marketplace.

The service is not as good as terrestrial optical broadband, but
it's good enough for those who can't afford better.

And that that materially impacts take rates and business models
of broadband terrestrial

broadband wired expansion.

The second one is the one I mentioned awhile ago.

Don't assume a build it and they will come mentality.

The ability of broadband providers who are also cable operators
to bundle video as expensive

and irritating as it may be in the traditional cable TV format,
their ability to do that and offer promotional

rates will impact your business plan.

So if you think you're going to go into an area served by a
typical cable operator that's offering pretty good broadband

service in addition to packaging it with video, you're going to
incur a lot of competition, and it's going to materially impact

your business model.

If you ignore either of those two things, the traditional, if you
try to do it the way we would have traditionally engineered

telephone, electric, water, gas, sewer service or you ignore the
presence of cable operators

. Or, for that matter, even wireless operators in general, let
alone satellite operators, if you ignore that and

don't take that into consideration, you run the risk of
constructing a very invalid business plan.

Competition in the field is very real.

Stephen Smith:
What sort of take rate percentage wise is much more reasonable
for a company moving into a competitive area to base their

business plan on?

Fred Johnson:
This is changing, and it is changing rapidly.

So what I'm about to tell you is anecdotal in nature.

It's not, you know, statistically valid by any means.

We are seeing in areas where there is little to no competitive
cable operation,

we're seeing take rates in some cases as high as 70%.

But those are generally in areas where the income demographic is
not anywhere close to the

poverty level or marginal to it.

In areas where your income demographics have household incomes
more in the $30,000-40,000 per year

range. We're seeing take rates between 40-60%.

If cable is present in any semblance, those will trend to be more
in the 40% range.

If not, more in the 50-60% range.

It's only in the slightly higher income demographics that we're
seeing the 70% take rates.

Stephen Smith:
Now you mentioned video earlier as a the cable company being able
to compete against that.

What would you say to an operator today looking to move into a
competitive area and questioning, do we or do we not provide a

video offering as part of this?

Fred Johnson:
Well, this will be the most cynical you hear me be probably on
this conversation.

If your idea of a good time is to sell a product that somebody
else makes, controls, supports and can price whatever the heck

they want to price it and blame you for every price increase
that they ever enact, video is the business to be in.

Okay, I can think of no more fun way to spend the weekend.

To be very candid with you, I can come up with almost no good
reason why a greenfield broadband operator would want to get

into the video business.

The only possible reason that you could have for doing that
would be to try to compete with a cable operator.

And the reality of it is, if you're going to try to do that,
it's probably going to be a national cable operator who has

inestimably much more leverage to do whatever the heck they want
with pricing and promotions than you will ever have.

So that's that's a nice way of saying, I can't come up — in
today's age where streaming is as prevalent as it is, your

best, in my opinion, your best strategy is to provide an
extremely high quality broadband product at a competitive price

that allows people to stream it.

The only win in this is, and of course, you've got to remember
the cable companies are going to play in this very well as well.

They understand this as good as those of us in the broadband
business does.

The inevitable move is from linear cable to streaming.

And inevitably more and more in the direction of paying only for
what you want and not having to pay a high rate to

take everything.

And it is in that market arena that broadband providers with
extremely high quality service that can support streaming at all

levels have the best chance of competing with national operators
.

To do so on the traditional linear cable model, in my opinion, is
if you're a greenfield operator, is probably a fool's

errand.

Stephen Smith:
So before we zoom out Fred, are there any other points that
operators should consider based on your experience when they're

looking at possibly moving into a competitive area in order to
fund the construction back home?

Fred Johnson:
The only thing that I don't think we've touched on in some way or
another is, you know, I'm sort of

assuming that most of the of the listeners to this particular
podcast, most are probably in the broadband business.

And so they understand the nature of customer support in the
broadband business.

If by some chance haven't helped you, not in the broadband
industry and you don't have the need to support customers inside

their home, then you need to spend some time learning about what
that's like.

What we're seeing is, this is the reality.

We can provide a five nines carrier grade reliable internet
connection to the

optical network terminal in a home.

Five nines carrier grade.

But if the people who live in that home cannot effectively
connect to it and use it, our service is lousy.

They do not judge us by the quality of the connection or the
performance of the network.

They judge us by how well they can connect to the network inside
the home, watch the streaming video on their television,

surf the web on their PC or their laptop or their cell phone if
its own WiFi or whatever.

So again, we're being judged with respect to the quality of our
service by what's actually happening inside the home on

devices that we have absolutely no control over.

If you're not prepared to support that from a customer service
both interpersonally and technically, then you're not prepared to

be in the broadband industry.

Because that's what you're going to have to do and people need to
really understand that.

Stephen Smith:
So more broadly speaking, Fred, how confident are you that the
emphasis that we're seeing today on broadband from the

state level and certainly a federal government, how confident
are you that we're going to solve this rural broadband issue once

and for all?

Fred Johnson:
I think we're going to solve it once, OK?

I don't think we're going to serve it once and for all.

And here's the here's the reason why I say that.

The efforts of the various states, several states, as well as the
federal government to get significant funds out there to

expand broadband accessibility are probably a once in a
lifetime, probably once in

an industry chance for us, and there is going to be incredible
progress made in that regard.

And so simply put, we're going to make the biggest dent in the
problem that we have ever made.

It is going to be substantial.

It's going to be historic and probably a once in a lifetime
opportunity to participate in.

But we're still left with two challenges.

We get the broadband networks out there.

We get them built out there.

They're accessible.

We still got to address the affordability question.

You got to remember that if a governmental entity paid 100%,
which they shouldn't do from a public policy perspective, but if

they did, to fund a broadband network, that's bills it.

But you've got to operate it for decades to come, and the cost
of maintaining and operating a broadband network are substantial

. Sufficiently so that there will always need to be some support,
especially in the most sparsely populated rural

areas of America, for ongoing operational support so that people
can afford to access the networks that public

funds helped build.

And that can certainly be on a sliding scale.

But there needs to be support for accessibility, as well as the
second portion of what I just said helping

operators operate networks that are are economically infeasible
simply because of the sparseness of the customers that they

serve. So we will make great strides in getting the network out
there, but keeping it operational and properly maintained for

decades to come, I think we'll still require some form of public
policy assistance.

Stephen Smith:
So you were there when we were excited to get the blazing fast
56K connections and through

DSL and all these other technological advances.

And here we are talking about, you know, Gig is now, you know,
your top offering, and I'm sure there are faster speeds

on the horizon that we talk about for businesses.

Fred Johnson:
Yeah, actually, Stephen and I've got to keep you caught up here.

Gig is not our top offering.

We have widely deployed, widely deployed, 10 Gigabit
architecture in our system for

probably well over a year now.

Stephen Smith:
Wow. Yes, I was behind on that.

So with all the changes that you have, all the changes you've
seen, what ware you most excited about today to see happening in

this space in?

And also, what are your biggest concerns?

Fred Johnson:
I guess what probably excites me the most, aside from the fact
that we've delivered on an incredible promise to our members as a

cooperative because at the heart of the day, I'm a co-op guy.

Even though I realize a lot of people listening to this are not
co-op, folks.

You've got to understand, us co-op people are co-op people, and
we're real proud when we do things for our members.

But watching what's happening on our state level, the Alabama
Legislature and our own Department of Economic and Community

Affairs, I think are providing something that is probably a good
model for much of the nation to follow.

There are safeguards in the programs to require and incent
experienced effective operators to play in the

game and the distribution of public funds to help in broadband
accessibility, it's being done in a very well-organized

manner. Meaning that we are not giving money to fly by night
operators with no skin in the game to go in and

overbuild existing networks, cherry pick stuff.

But we're directing funds where they are first needed most.

To people who have little or no are certainly in adequate
service.

I'm really proud to see a state government operating on such
sound economic principles in the

way they are incenting providers, experienced providers with
skin in the game, to step up and achieve the public policy

objectives of getting broadband to people that don't have it or
don't have service.

That's good enough, acceptable enough for them.

And I see that being replicated across the several states of our
union.

So I'm very, very, very pleased to be in the industry at a time
when that's taking place.

Now, I dread the inevitable.

I hate to use this term, but it is what it is.

Waste, fraud and abuse that will occur simply because of how
much cash is being thrown at the problem

nationwide. And there are going to be some really bad operators
and actors out there that cause all of us to come under

scrutiny and to then, you know, have to defend ourselves, make
sure that it's clear that we've done things the right

way. I dread that, but it's still an exciting time to be in the
industry and to see broadband being recognized as how

important it truly is to the economic infrastructure of our
country.

Stephen Smith:
Well said. Well said.

We're indeed in the broadband decade, if we ever have been for
sure.

Well, Fred, as always, it's a pleasure visiting with you, and
thanks for joining us on the show today.

And thank you for listening to another episode of Rural
Broadband Today, where we focus on the people and the

organizations who are making a real difference in bringing
broadband to rural America.

Intro:
Rural Broadband Today is a production of WordSouth — A Content
Marketing Company.