City Council vote paves way for major fiber expansion

After more than 20 years of debate, Palo Alto voted on Monday to significantly expand the city’s fiber optics network, a move that could position the Utility Department in direct competition with AT&T.

The expansion would unfold over the next decade and include in its first phase about 7,160 homes and 875 businesses under a scenario proposed by Magellan Advisors, which focuses early growth in areas where construction would be relatively cheap, where the demand is high and where AT&T isn’t yet established. It would cost about $48.6 million, funding that would come from Fiber and Electric reserves.

The approach, which the City Council supported in its final meeting of the year, falls well short of what’s known as “Fiber to the Premises,” a decadeslong dream of hooking up all parts of the city to municipal fiber, enabling universal internet access at gigabit speed. It does, however, give the council a chance to slowly roll out the system and see how well it’s received before committing to next phases. If things go well and residents sign up for Palo Alto Fiber, the expansion that the council approved Monday could become the first phase of a citywide buildout.

“I think this is a prudent and yet a forward approach,” Mayor Pat Burt said just before the vote. “We’re going to make some progress that will serve the city well. … It gives us a foundation that, if we are successful, we can grow it.”

Council members generally agreed that the expansion is a measured risk. AT&T already offers fiber internet in some sections of the city and officials are bracing for stiff competition from the entrenched incumbent. Council member Greg Tanaka, the sole dissenter in the 6-1 vote, suggested that the city is unlikely to prevail in this contest.

“To me, it doesn’t seem like this is a game we should be playing as a city,” Tanaka said. “From the offering, I don’t know how we win here. Because the competition is a moving target, they’re going to get better and better and better.”

Others, however, concluded that the risk, while real, is limited. The council rejected the most ambitious option on the table: universal fiber. Implementing Fiber to the Premises would have cost $142.9 million, according to Magellan, and require the city to obtain a revenue bond at a time when interests rates are continuously climbing. No one on the council thought that was a great idea.

The more modest alternative, which advanced Monday, consists of two major components: a $25.6-million upgrade to Palo Alto’s fiber backbone, which will largely benefit city departments and which will enable subsequent extension of fiber into neighborhoods; and $20 million for the first phase of Fiber to the Premise. The areas that would be strong candidates for early coverage include portions of Downtown North, Evergreen Park, College Terrace, Southgate and Old Palo Alto. Also included is a western section of Midtown and the area around Loma Verde Avenue in St. Claire Gardens.

The vote was more than two decades in the making. The city has been talking about expanding fiber to every home and business since the late 1990s and even advanced a pilot project in a residential complex in 2000. Palo Alto then tried to partner with a private internet service provider to launch a municipal fiber service, an effort that was on the cusp of advancing in 2009 when the economy crashed and the city’s partner withdrew from the deal. All the while, the fiber ring was quietly serving a few dozen commercial customers and generating money. Palo Alto’s fiber fund currently has $34 million.

Council members generally agreed that the risk is worth taking, even as they expressed some reservations about competing AT&T. In supporting the expansion, they pointed to surveys showing strong support for municipal fiber, as well as 743 contributions of $50 deposits for a fiber service that doesn’t exist.

“There’s clearly demand for this in the community,” council member Eric Filseth said. “The real risk here is: Are we going to end up head-to-head in a pitched fight against serious private sector companies that are going be really good at this? I think that’s a real risk.”

Every option that staff presented to the council involved upgrading the fiber backbone, which was constructed in 1997. Magellan CEO John Honker characterized the effort as “a refresh and an upgrade” to give the fiber network more “horsepower” and capacity for the next 30 years.

“That fiber backbone becomes the foundation for anything else that you do with Fiber to the Home,” he said.

Many supporters of the fiber expansion framed it as a question of equity. It’s not about thwarting or defeating AT&T, they maintain. It’s about providing reliable internet to areas that currently lack any options. Palo Alto resident Daniel Dulitz recently launched a new organization called Adobe Creek Networks, which is trying to expand fiber service to underserved neighborhoods. The reason the city’s effort is necessary, he said Monday, is because incumbents are failing to do their job.

“I’m very happy for the people in parts of Palo Alto who have high-quality services from those incumbent providers. … But for the folks in the other parts of city, where the incumbent providers are not doing their job, you can make a difference to them by allocating funds in a wise way in areas where you are likely to get the highest take rates.”

Resident Bob Moss, a longtime supporter of fiber expansion, noted that Palo Alto has thousands of people who work from home.

“Giving them the kind of internet access and data service connectivity that Fiber to the Premises would provide is essential,” Moss said.

Others were far more skeptical. Resident Bob Smith lamented the huge amount of time and money that the city has spent discussing fiber expansion since the late 1990s and urged council members to work with — rather than oppose — AT&T.

“Every time we have a discussion about Fiber to the Home or Fiber to the Premises, it’s less sensible than it was the time before, it’s riskier than the time before. And this is where we keep going,” Smith said.

Council members, however, agreed to press ahead. Vice Mayor Lydia Kou suggested that bringing municipal internet to the entire community would give residents a “competitive edge.”

“I want to make sure everyone in this community does have connectivity,” Kou said. “It is an essential service that people do need.”

The main factor that will determine whether the city’s fiber system is financially sustainable is the “take rate” — the percentage of customers who sign up for Palo Alto Fiber. Magellan estimated that the city would need a take rate of at least 25%. While some in the community are skeptical that the city can hit this mark, surveys conducted by Magellan suggested that the take rate could reach about 40%.

The take rate may also determine how fast Fiber to the Premises spreads to other neighborhoods. Council member Tom DuBois, who made the motion to proceed with the phased approach, suggested that if the take rate in the first phase meets expectations, the city should quickly move ahead with further expansions, even if it means going out for bond.

“I don’t want to see us get stuck in ‘analysis paralysis’ after this first phase. … I want us to think about, ‘What is the data we need? How do we collect it? How do we make a go/no-go decision?'” DuBois said.