Economy-of-Scale for Broadband Providers

I’ve worked with a number of small communities that want to explore the idea of having a community-owned broadband provider. My advice to small communities is the same as with all clients – economy-of-scale really matters for providers. Economy-of-scale is the economic term for describing how businesses get more efficient as they get larger. A large percentage of the costs of operating a broadband provider is fixed or nearly fixed. Any fixed cost acts in the same manner as the general manager’s salary. The larger the size of the broadband provider, the easier it is to cover fixed costs and the better the chance of being profitable. It’s possible for a small broadband provider to break even, but doing so requires the operator to be extremely frugal – any unexpected expense can throw a tiny provider into a loss. In building business plans, I’ve always seen the real benefits of an economy-of-scale kick in around 20,000 customers. That’s enough customers to be able to operate a full-functioning broadband provider that can deliver superior customer service. There is enough revenue to hire all of the needed staff and pay them well, including good benefits. Providers smaller than 20,000 have to forego some of the benefits that come with size. Interestingly, economy-of-scale doesn’t scale forever. In my experience in the industry, I see that broadband providers of a certain size start getting less efficient. It’s going to be unique to the specific company, but providers larger than 200,000 or 250,000 start being less efficient. My advice to any provider with under 5,000 customers is to consider how much easier it would be to operate the company if it grew to 10,000 or 20,000 customers.