The internet service arrangement for the 94 new apartments at Five55 Pacific caught the team at Cruzio by surprise, they say.

In late 2017, the Santa Cruz-based internet service provider paid the building developer, Swenson, to have a subcontractor build more than $15,000 worth of infrastructure and a telecommunications vault for the building, which would have allowed Cruzio to offer residents their services.

Swenson officials told Cruzio to work with the telecommunications consultant on next steps, says Cruzio CEO Peggy Dolgenos. The consultant was RealtyCom Partners, a San Rafael-based telecommunications consulting firm that specializes in “identifying, negotiating and maximizing new telecom revenue opportunities for real estate owners,” according to its website. The company negotiated terms, but Swenson made the final decision on which proposals to move forward with.

Dolgenos says Cruzio never got to discuss or negotiate terms with RealtyCom. When the business received an update, Cruzio had been cut out of the deal, despite Swenson’s assurances, Dolgenos says. AT&T and Comcast, which each agreed to pay for parts of their own infrastructure in the building, would be the two companies offering internet services to tenants. It rendered Cruzio’s $15,000 investment little more than a sunk cost, Dolgenos says.

“We wasted that money just planning to serve all the apartments in there,” she says.

Cruzio or any other service provider can still pay for its own infrastructure if it wants to serve residents at Five55, says Jeff Huff, project manager at Swenson. Cruzio would need building-owner approval to carry that out and introduce its service. Reached via email for follow-up, Huff says Swenson probably wouldn’t approve the change “at this point, as it would be too disruptive.”

These kinds of arrangements are not uncommon in the wider telecommunications landscape, experts say. San Francisco passed a law in 2016 that says building owners cannot prevent internet service providers from accessing existing wiring in a building or installing their own wiring so they can offer service to occupants who’ve requested it.

When large telecom players started offering deals to developers in Santa Cruz in recent years, Cruzio staff began a conversation about how something like San Francisco’s law could help ensure consumer choice and a more level playing field for internet service competition. It brought the topic to the attention of city officials including Bonnie Lipscomb, economic development director for the city of Santa Cruz, and Lee Butler, the city’s director of planning and community development. Both are recommending the City Council consider a policy discussion on internet service provider competition.

“When the City Council meets to develop priorities for a new work plan, which should occur in the first half of this year, we expect such an ordinance will be one item that the Council may consider as part of that prioritization exercise,” Butler told Good Times in an emailed statement.  

The arrangement at Five55 also prompted discussions between Cruzio and Swenson about how to work together going forward so Cruzio could offer service in new developments, like the one at Park Pacific downtown. In that building, Cruzio, AT&T and Comcast can all provide internet service, and they are each “providing some portion if not all of the infrastructure from the street to the units,” Huff says.

Jesse Nickell III, senior vice president of construction and development for Swenson, says Swenson decided to ensure Cruzio is in the mix on future projects.  

“We respect them,” he says. “We want them not to get hurt.”

The offers from internet service providers to cover costs in new developments are just what is happening in the marketplace right now, Nickell says.

“They are bringing a lot of sugar to the developers,” he says.

Though federal and state laws prohibit access agreements that are explicitly exclusive, as San Francisco noted in its legislation, the amount of money poured into setting up internet connectivity in buildings and stipulations around ownership can create essentially the same result.

“They are doing these package deals to try to get exclusives on the market, and they are giving a bunch of freebies away to get it,” Nickell says. “And by virtue of doing that you push out the small mom and pop like Cruzio.”

COMPETITION CRUNCH

It wasn’t always like this. Typically—at least locally—developers would pay for the infrastructure that brings internet connections to each apartment, condo or office in a multi-unit building. Lately, though, large internet service providers like Comcast and AT&T have offered to pay for that infrastructure themselves. That can amount to tens of thousands of dollars in cost savings for developers trying to add housing stock at a time when there’s already a significant shortage.

When internet service providers pay for the internet connectivity in a building, they might then stipulate that they own the rights to it for a set period of time or in perpetuity. That means they don’t have to let another internet company use those connections even if a tenant would prefer another provider. It also means that smaller internet service providers find themselves competing with what can be high-cost deals from the large players. If they can’t or won’t pay upfront for the infrastructure that provides internet throughout an entire building, they lose out on those potential customers.

“Some developers may get their palms greased in the middle, but we all lose in the end,” says Robert Singleton, executive director of the Santa Cruz County Business Council. Singleton was a marketing consultant for Cruzio and the company’s Santa Cruz Fiber project until early last year.

James Hackett, director of business operations and development at Cruzio, knows that developers feel a lot of financial pressures. Cruzio, he says, supports the growth that developers enable, because new residents and businesses could be future Cruzio customers.

“The last thing we want to do is put barriers in the way of our developer colleagues and friends and say, ‘We see this is something you can take advantage of and can help you with your projects, but here is why you shouldn’t do it,’” Hackett says. “But those are exactly the types of conversations we do have with them.”

Those conversations happen because he says he believes the costs are ultimately passed on to tenants.

“In so many areas affecting the internet, we think competition is critical and it all comes back to that, really,” Hackett says. “Anything that is going to negatively impact competition is going to ultimately lead to poorer service, higher prices and continued monopolies of those big, national incumbents.”

It’s nothing new for those incumbents to use their weight to try to edge smaller competitors out of a growing market, says Steve Blum, owner and president of Tellus Venture Associates, a Marina-based consultancy specializing in broadband. Blum consults on broadband topics for cities across the state, with local clients including Santa Cruz, Salinas and Watsonville.

Both AT&T and Comcast “have a history of focusing their firepower on small, competitive threats,” Blum says, and he’s “seen this in community after community.”

“That is the way it should work,” he adds, “but when you have the level of market control they have, it is not truly a competitive marketplace.”

AT&T and Comcast might be keeping a closer eye on their competitive edge and market share in Santa Cruz since Cruzio began building its own fiber network, on which the city has considered becoming a partner.

Lipscomb wrote in an emailed statement that “other providers began investing in builds and greater access as a result” of those talks.

Representatives for AT&T did not respond to multiple requests for comment about their approach to working with developers on service for new buildings in Santa Cruz.

Joan Hammel, senior director of external communications for the California Region at Comcast, wrote in an emailed statement that “Comcast is always pleased and proud to provide innovative products and services to property owners who choose to have us serve their tenants.”  

WIRE TO WIRE

For now, Santa Cruz offers a two-page document to developers with guidance on “broadband best practices for new construction.” The document is not backed by an ordinance, so the city cannot require that developers follow it.

Hackett says the ideal situation for Cruzio is that developers would own the internet infrastructure inside a building and make it accessible to any provider who wants to use it. If that’s not a cost developers want to shoulder, the next-best scenario might be an arrangement where the infrastructure is jointly built by providers that want to offer internet service in a building, Hackett says. Then they could each serve any tenants who want their services.

He’s optimistic that there’s at least a conversation around internet competition.   

“The local stakeholders all want the same thing,” Hackett says. “It’s just a question of how to get there.”