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.
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:
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.
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.
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.
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.
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.
United States Census Bureau, State & County Quick
Facts, 2012 Population Estimates
* 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.
SOURCE: The Google
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.
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.
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.
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.
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.
Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.
Andrea Albanese is a Manager with R&D Tax Savers.
Andressa Bonafé is a Tax Analyst with R&D Tax Savers.
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