Gig City Startups and R&D Tax Credits



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        Fiber-optic networks promise to revolutionize the broadband market. Cities experiencing ultra high-speed internet connection, or "Gig Cities", can already see major economic benefits. Among them is the growing number of startups that have been attracted to these vibrant and supportive communities.

        The present article will discuss the advent of Gig cities and the unique opportunity they represent for startups. It will also assess how Gig city startups can utilize federal R&D tax credits to their advantage.



The Research & Development Tax Credit

        Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent. On January 2, 2013, President Obama signed the bill extending the R&D Tax Credit for 2012 and 2013 tax years.



U.S. Broadband Connection: high prices, slow speed

        When compared to other countries across the globe, U.S. costumers pay higher prices for slower Internet access.

        Published in October 2013, a New America Foundation study entitled "The Cost of Connectivity" compared the prices of basic broadband, TV, and phone packages in different cities. Considering the cheaper 'bundles' available at lower and mid download speeds, the results put the American cities of San Francisco, New York, and Washington DC after London, Paris, Berlin, and Seoul. The following graphic depicts the findings.

Costs Around the World

        A similar study by the OECD supports these results and proves that the disparities persist even when comparing broadband-only prices. U.S. prices are consistently higher for all ten download speeds and capacities analyzed. At high speeds of 45 megabits or more, America ranked 30th of the 33 analyzed countries.

Countries With High Speed Broad Band

        The reason for such disproportionate prices is the relative lack of competition in the broadband market. Despite the existence of various national companies, local markets are often dominated by only one or two providers. Furthermore, ineffective oversight and regulation have favored the consolidation of monopolies and, consequently, enabled the persistence of inflated prices.

        According to a recent report from BBC, two-thirds of American users of Internet get broadband connection via television cables. While DSL (digital subscriber line) services can't compete with cable speeds, other alternatives, such as wireless satellite services, are subject to low usage caps.

        However, exceptions to this scenario begin to arise. Chattanooga, TN, Kansas City, MO-KS, and Lafayette, LA, have all experienced a significant reduction in price and a correspondent increase in internet connection speed. What do all these cities have in common? Fiber-optic networks.



The Gig Cities

        Originally used to refer to Chattanooga, where data can be transferred at one gigabit per second, we here extend the term "Gig City" to other locations where ultra high-speed fiber-optic connection is, or will soon be, available. We also include cities where fiber-optic networks are being considered, more specifically, the potential Google Fiber cities. The table below presents a list of Gig cities and their respective population estimates in 2012.

Gig Cities and Populations

SOURCE: United States Census Bureau, State & County Quick Facts, 2012 Population Estimates. Available online at http://quickfacts.census.gov/qfd/index.html.
* Potential Google Fiber Cities


        Deployed and operated by the city-owned utility, EPB, Chattanooga's fiber-to-the-home network connects more than 150 thousand homes and businesses and offers data speeds 100 times faster than the national average. Likewise, Lafayette, LA and Bristol, VA also enjoy municipally owned fiber-optic networks.

        This is not the case for Kansas City, KS, Kansas City, MO, Austin, TX, and Provo, UT, where privately owned fiber systems are available or under construction. These locations are part of the "Google Fiber", a fiber-to-the-premises service providing super fast broadband connection and crystal clear HD television.

        In February 2010, when Google first announced the project of providing one gigabit-per-second internet connection, it launched a city contest aimed at selecting its first Gig location. Nearly 1,100 communities participated and Kansas City, KS was chosen due to its existing infrastructure and business-friendly environment. Kansas City, MO was later included in the decision.

        In 2013, Google announced the expansion of its Fiber project to Austin, TX. More recently, the company purchased a dormant fiber network in Provo, UT. For nearly a year now, it has been working to upgrade the 'iProvo' system to handle one-gigabit speeds. Throughout Google's Fiber cities, the gigabit internet service costs $70/month while the internet plus TV package costs $120/month.

        On February 19th, Google took another step in the expansion of its ultra high-speed internet service. It announced the intention of bringing Google Fiber to 34 cities in nine metropolitan areas. The image below illustrates current and potential Google Fiber cities.

Map of Gig Cities

SOURCE: The Google Fiber Blog (http://googlefiberblog.blogspot.com/).

        This announcement represents a change in Google's modus operandi. Instead of simply promising to install Fiber, as it did for the first three Google Fiber cities, it has now invited the potential locations to do the groundwork before a final decision is taken. This preparation includes providing infrastructure maps, ensuring access to existing infrastructure (such as utility poles), and paving the way for permit requests. The 34 cities should be notified by the end of the year whether they were selected to move forward.



Gig Cities as Startup Hubs

        The overall environment for startups is better than it has ever been. Lean Startup methodologies enable new businesses to launch much faster and with less capital than prior generation startups. In addition, the multiplication of crowdfunding platforms, such as Kickstarter, has significantly improved access to funding.

        New technology is also leading the way for emerging startups. The ongoing migration to Gig cities is a clear example of how higher speed, lower cost internet can contribute to the development of new businesses. The following paragraphs present a quick overview of the startup environment in four Gig cities along with their ongoing efforts to accelerate economic development.

  1. Chattanooga, TN
    According to a recent NY Times article, Chattanooga's high-speed Internet services have attracted a growing population of computer programmers, entrepreneurs, and investors. The city has been referred to as a magnet for high-tech startups. New businesses considering the Gig City can even count on The Company Lab, a startup accelerator that helps entrepreneurs test and launch high-bandwidth business ideas on Chattanooga's fully functional 1 Gbps network.

    Through the annual GIGTANK program, The Company Lab has assisted seed stage startups with the tools, capital, and connections necessary to go to market. In its inaugural year, the program graduated companies building a next generation fantasy sports network, a real-time tracker of public health data, a direct-to-consumer ticketing platform, among others. Now in its third iteration, GIGTANK 2014 focuses on the additive manufacturing (3D printing) , smart grid, and healthcare industries.

    The University of Tennessee in Chattanooga has been an important partner in the consolation of the Gig City as a technological hub. UTC's SimCenter: National Center for Computational Engineering has worked on next-generation technologies in computational modeling, simulation, and design. SimCenter Enterprises, Inc., a non-profit corporation, has helped license and commercialize technologies developed at the University.

  2. Lafayette, LA
    Lafayette's fiber-optic network has also been an important driver of growth. FiberCorps, a non-profit charged with engaging the community to drive digital economic development, has worked as a facilitator and coalition builder for pilot projects. Efforts include the Louisiana Health Information Exchange, aimed at improving healthcare outcomes and efficiencies; the Telemedicine Bridge between Stuller, Inc. and Lafayette General Medical Center that will increase productivity through remote access and collaboration; the AppSquad, aimed at engaging app developers to build community apps; and the construction of a 3D render farm to support the development of the city's digital media workforce.

    The University of Louisiana at Lafayette has also played an important role in recent developments, particularly through its Center for Business and Information Technologies. An ongoing effort aims to make Lafayette a Living Lab for Health Innovation. As a catalyst for advanced programs, new policies, and transformative technologies, the project helps businesses take full advantage of the fiber-optic ecosystem.

  3. Bristol, VA
    Launched in 2003 by Bristol Virginia Utilities, OptiNet was the country's first fiber-to-the-premises broadband network built and maintained by a municipal entity. OptiNet has since expanded about 850 miles from Bristol through eight Southwest Virginia counties, generating jobs and economic development in rural areas.

    Bristol, VA hosts more than 900 businesses and is currently developing two strategically positioned growth areas offering state-of-the-art infrastructure for software development companies and data center operations. Through the consolidation of technologies and traffic types, and the isolation of services, OptiNet has reached great robustness and flexibility. By offering customized, cost-effective broadband services, the city has attracted numerous businesses.

  4. Kansas City, MO-KS
    Google Fiber has undoubtedly boosted the startup scene in Kansas City. Once seen as a fly-over city, it is now considered a technological hot spot. An example of the thriving community of new businesses is the Kansas City Startup Village, a neighborhood-based hub of startups whose vision is to help solidify KC as a premiere startup city in America. Concentrated in the "fiberhood" of Hanover Heights, the Village hosts a growing number of startups from various fields of activities, from search platforms and biometric verification to 3D printing and healthcare solutions.

    KC is committed to capitalizing on its unique position as the first Google Fiber location. The Greater Kansas City Chamber of Commerce has recently set the goal of making KC "America's most entrepreneurial city". Groups such as KCSourceLink, UMKC SBTDC, and the Kauffman Foundation have all worked to provide access, opportunities, and resources for entrepreneurs. Kauffman Labsí 1 Million Cups movement, now present in 29 locations, started in KC in 2012. Since then, every Wednesday morning, local startups present their companies to hundreds of mentors, advisers, investors, and entrepreneurs over coffee.

    "Launch KC" is yet another example of how the city is supporting its startup community. It consists of a series of initiatives by government and business leaders to attract and assist entrepreneurs by reducing the cost constraints on launching tech companies.

    Google is also collaborating for the development of KC's startup scene. It recently sponsored its second "Startup Crawl", a one-night tour of more than 100 companies, aimed at making KC's startup arena more accessible to local hopefuls, new arrivals, and the community in general.

    The role of ultra high-speed internet in creating new startup hubs is unmistakable. Its imminent presence in already thriving locations, such as Austin, TX and Palo Alto, CA, promises to accelerate growth and maintain these cities in the leading edge of innovation.


Gig.U: The University Community Next Generation Innovation Project

        Thirty leading U.S. research universities have recently come together with the objective of accelerating the deployment of ultra high-speed networks and creating opportunities to lead the next generation of network services and applications.

        The Gig.U initiative advocates that university communities possess specific characteristics capable of both lowering the cost of deployment and increasing the demand for ultra high-speed networks. Upgrading such communities would bring major gains for America's future leadership in research and competitiveness. Engaged universities are committed to working together with policy makers and business leaders to create a favorable environment for next-generation services.



What the Future Holds for Gig Cities

        While most of the nation suffers with the lack of competition and consequent high prices of broadband connection, the advent of optic-fiber networks promises to change this scenario. Austin, TX is a clear example. Since Google announced its intention to bring gigabit internet connection to the city, two other companies followed suit.

        AT&T is expected to complete its network construction later this year, when it will provide gigabit speeds for $70-99/month. Grande Communications, a telecommunications firm based in San Marcos, TX, is already offering one-gigabit fiber-fed broadband service to seven neighborhoods in west Austin. It costs $64,99 a month and stands out as a more affordable and flexible alternative (no contracts or data caps are imposed).

        Austin's example proves that the emerging high-speed broadband market can generate enhanced competition, which is not limited to large, national companies. The race among 1-gig providers promises to benefit American citizens and businesses, startups in particular.

        In addition to enhanced competition, the future of broadband connection may also bring major technological breakthroughs. Google is currently working on technology that will enable speeds of 10-gigabit per second. This unprecedented connectivity would revolutionize the use of software as a service, allowing for critical data intensive applications and creating great room for innovation.



Conclusion

        New ultra high-speed networks create an exciting scene for startups. The emergence of novel fiber-based tech hubs has enabled a favorable and supportive environment for innovation. "Gig startups" can take advantage of R&D tax credits to enhance existing opportunities, increasing their chances of success.

Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Andrea Albanese is a Project Manager with R&D Tax Savers.

Andressa Bonafé is a Tax Analyst with R&D Tax Savers.


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