Santa Cruz belies its laid-back rep with a smart Internet scheme — joining other cities in figuring out that revitalization is under the ground



Santa Cruz, California. (Stephen Dunn/Getty Images) Santa Cruz is a mid-sized city of just over 62,000 lying just half an hour’s drive — over the Santa Cruz mountains — from Silicon Valley. It’s known for surfers, slackers, and sea lions. I haven’t been there for a long time, but I remember a sleepy, pretty town and the blaring sound produced by a bunch of those aforementioned enormous sea lions under the wharf at the sea’s edge. Sleep no more, Santa Cruz. Soon you may be known for something supercharged: a ubiquitous fiber-to-the-home network built by the city and operated by a local ISP that ensures everyone in town has affordable and fast access to the Internet.

As J. Josh Guevara, the Economic Development Manager of Santa Cruz, put it on a recent call organized by the Coalition for Local Internet Choice, “We are paying a lot for inferior speeds and certainly not ubiquitous universal access. If the market can’t handle that, that’s a great role for local government then to say, ‘Okay, well, then let’s make that infrastructure work for the good of the community.’” Guevara doesn’t want to see the Santa Cruz workforce have to continue to travel over the mountains, as more than 20,000 people in the county do today. “We want to keep them here,” he says.

What will enable Santa Cruz to do this is something called dark fiber. Yes, that term sounds unlikely, like the title of a cyberpunk novel you might find in a musty used bookstores in a place just like Santa Cruz. But it’s actually the key to unlocking powerful high-speed Internet access. Santa Cruz is wisely tapping it in a public-private enterprise that fits into an overall city plan to ensure that younger generations stick around. But the Santa Cruz model isn’t the only one: there are several ways to finance and operate a high-speed Internet access facility that relies on dark fiber.

You may be thinking, “What’s dark fiber?” Good question! The hair-thin glass strands that make up a fiber network — each one of which is capable of transmitting ten million different phone calls or 9,600 gigabits of data in one second — need to be “lit” by electronics pulsing light from lasers; information is encoded onto those light pulses for carriage through the glass strand. Fiber that isn’t “lit” is dark; full of potential, but not carrying any information. (Amazing potential, actually: if your phone is getting 2 Mbps of data, think of representing that bandwidth by a two-inch wide water pipe. A water pipe capable of handling 9,600 gigabits of data would need to be 82,000 feet, or about 15 miles, in diameter. Big difference.)

It’s that light, pulsing at a gazillion times a second, that makes a fiber network work for us. But the dark fiber and conduit that surrounds it are “layer 1” of that network, the necessary asset, the street grid on which the cars of our transmissions move. And dark fiber has a useful life measured in decades.

Santa Cruz has decided to finance and build a dark fiber network under its streets. Why underground? The city found out that its poles were in pretty bad shape; although it’s nominally less expensive to build “aerial” rather than underground fiber, the costs and delays associated with getting those poles ready weren’t worth it. And the city wants longterm flexibility. So underground they went.

Unlike Huntsville, Chattanooga, and other places with public electrical utilities whose facilities can be used as the first step towards a fiber network, Santa Cruz doesn’t have a utility on which to piggyback. Nonetheless, the city plans to build this network all the way to houses and businesses (including the “drop” between a neighborhood access point and a home).

Later this year, the city will issue “lease revenue” bonds to finance this project. The bond market will take a look and decide whether it thinks the revenue to be produced from the city’s lease of its dark fiber will be sufficient to pay off the debt. The city calculates that as long as about a fifth of the Santa Cruz market signs up for fiber Internet access (a very conservative estimate), it can cover its debt payments.

Santa Cruz’s own good name is backing up the planned bond offering, obviously, but the city is well-protected from a default. A private, local ISP, Cruzio.com, whose offices are one block from city hall, is promising to fill in 80% of any shortfall in debt repayments. What’s in it for Cruzio? They’re going to be lighting the network, making the connection with big fiber networks running between Santa Cruz and other cities, and selling retail Internet access services to customers. (Cruzio already serves about 15% of Santa Cruz addresses.) In exchange for the privilege of serving Santa Cruz customers using the city’s dark fiber, Cruzio will pay wholesale “passing” and per-subscriber fees to the city that will decrease as the percentage of Santa Cruz-inians signing up increases. Result: Cruzio has an incentive to invest to build its market share.

To cover its debt service and maintain the dark fiber, the city estimates it needs Cruzio to double its market share — to about 34% — which will still allow plenty of room for the existing incumbent Internet access providers to make money. Cruzio is pretty confident things will go well, so that’s why it’s offering to cover that 80% of any debt payment shortfall.

So: the City builds layer one, for about $35 million, and Cruzio does the rest. Guevara is confident that this is the route for providing “innovative infrastructure to match our innovative culture in the city of Santa Cruz,” and he’s clearly focused on reaching every home and business in the city. Timeline: 2016 for the bond offering and two years of construction after that, beginning early 2017.

The Santa Cruz model is closely interwoven with a single private company. That’s different from the public-private partnership being pursued in Huntsville, Alabama — the fourth-largest city in the state, with a population of about 180,000. There, the existing electric utility is extending its fiber network by about 1100 miles for its own smart grid management purposes, while simultaneously setting up points on its network that can be leased by any tenant that wants to be in the business of providing both physical fiber “drops” and actual Internet access services to homes and businesses. Google is the first such tenant, but anyone else could sell services as well.

And Huntsville isn’t borrowing money to do this. Instead, it plans to use the revenue that it gets from leasing this dark fiber to tenants to fund the expansion of its network. Huntsville Utilities has set up a separate cost center for fiber leasing: the fiber system will pay attachment fees to the electric utility; the electric/water/gas systems the utility runs will pay for the fiber they need to monitor and troubleshoot; and the tenants (like Google and the City of Huntsville) will pay for what they need. “It’s a fairly straightforward model,” says Jay Stowe, the president and CEO of Huntsville Utilities.

Yet a third model is being followed by Westminster, MD, a city of about 18,000 that like Santa Cruz doesn’t have an electric utility to ride on — and, like Santa Cruz, is very close to major job centers but not one of them. Westminster is just an hour from Washington, D.C. and 45 minutes from Baltimore. Like Santa Cruz, Westminster’s plans are deeply intertwined with a single private ISP — Ting. Ting, unlike Cruzio, is obligated to share its lit network with other retail players. (Robert Wack, city council president in Westminster, calls this a “retail-level open access model.”)

Westminster’s dark fiber build will be funded by a “general obligation bond” of about $21 million. But Westminster doesn’t have to borrow all of that money at once. If the operation hits a snag or if Ting doesn’t perform for some reason, Westminster can stop borrowing. The city funds, builds, and maintains the dark fiber; Ting leases it and provides services and equipment. Just last week, Westminster opened a maker space with Ting, and the city has started a tech incubator as well. Unlike Santa Cruz, the city of Westminster is proceeding slowly: it won’t spend money unless there is revenue to support debt payments.

So there you have it. Lots of ways to proceed. Banks that understand these steady lease payments are reliable sources of debt repayment. Cities that understand that they may not be the best actors to run active networks and provide customer service. And some futurists willing to see the bright future of dark fiber.

That’s a novel I want to read.