What You’ll Learn

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.

Guest Speaker

Fred Johnson

Show Notes

Transcripts have been lightly edited for clarity and readability.  

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.

Fred Johnson: 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.

Fred Johnson: 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.

Fred Johnson: 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.

Fred Johnson: 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.

Fred Johnson: 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.

Fred Johnson: 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.

Fred Johnson: 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.

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