Sonic battles AT&T, Comcast to bring fiber-optic cable to California neighborhoods

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Six years after entering the fiber-optic internet business, Santa Rosa-based Sonic has reached a level of growth that rivals the blazing speed it touts in its advertisements.

“We would like to ramp up everywhere we can as fast as we can,” said Dane Jasper, co-founder and CEO.

The company nearly doubled the size of its workforce last year, hiring 188 people to bring its total headcount to 418, and now serves 100,000 subscribers across California.

“We finally reached a point where we are at scale,” said Jasper, who started the company in 1994 with Scott Doty while they worked at Santa Rosa Junior College’s computer services department. “With that scale comes more customers, more staff, more financing. … I feel really lucky to be in the position we are in.”

The company has evolved through several different business models over the past two decades.

It started off as a dial-up internet service provider, then morphed into a digital subscriber line provider as the technology improved. It then became a telephone company, placing its equipment in exchanges across California to serve 125 cities.

Fiber-optic internet service is its fourth iteration. Sonic is building out its own fiber network, providing download speeds of 1 gigabit per second — 50 times faster than the average download speed in America, enough bandwidth to bring joy to any Netflix binge watcher.

San Francisco has been the focus of Sonic’s most recent expansion. The city offers a ready subscriber base eager for more competition in a dense urban environment that makes installation much more economical.

Sonic’s efforts, however, are up against a stark reality: The $104 billion industry that provides internet and other telecommunications services through landlines is dominated by a handful of large companies. There are also many infrastructure and regulatory barriers that make it difficult to grow.

In essence, Sonic is waging a David versus Goliath battle.

“Unfortunately, internet access is dominated by a duopoly or oligopoly. Or, if you want really fast service in a lot of places, a monopoly,” said Jasper.

Nationwide, AT&T has captured 32 percent of the market for internet service, followed by Verizon Communications at 18 percent and Comcast at 17 percent, according to IBISWorld, a Los Angeles market research firm. AT&T and Comcast have a large presence in Northern California, including San Francisco.

“While it’s difficult, we are seeing more and more regional players trying to compete with the huge players,” said Andrew Krabeepetcharat, an analyst at IBISWorld. The firm projects the internet service provider industry will grow 4.2 percent annually through 2022, driven by fiber-optic service.

Sonic was an early entrant in the fiber-optic market.

The company used downtown Sebastopol as a fiber-optic pilot project in 2011 and then in 2014 entered into a public- private partnership with the city of Brentwood to build an underground network, which is much more expensive than attaching the cable line to utility or telephone poles.

The company has turned to business customers to drive growth in its fiber-optic business. Those customers have greater demand for such things as cloud storage services and more financial resources to pay for the faster connection. Installations are mostly located in business parks, offering a concentration of customers away from downtown cores.

Sonic went into its sixth business park in Sonoma County earlier this year, serving 258 businesses along the South McDowell Boulevard corridor in Petaluma.

For residential service, Sonic targets areas where it has a significant number of current subscribers and neighborhoods where it is easy to run a fiber-optic cable into homes from a nearby distribution hub. San Francisco fit the bill because about 5 percent of the market already received Sonic service and homes are much more concentrated, compared to those in Bay Area suburbs, Jasper said. San Francisco neighborhoods feature a large number of apartment complexes as well as homes that are packed closely together, with widths as short as 25 feet across.

In contrast, installation in Santa Rosa or Petaluma would cost two to three times as much because residences are much more spread out and do not have as dense a population base, Jasper said.

The company started in San Francisco with the Sunset and Richmond districts in 2016. In May, it announced it was expanding into the Mission district and then into the neighborhoods of Noe Valley, the Castro, Dolores Heights, Glen Park, Potrero Hill and Sunnyside.

In its San Francisco push, Sonic was helped by two circumstances that were outside its control. First, there was the growing number of “cord-cutters,” who are ditching their cable TV packages but keeping their high-speed internet service. They use their Amazon Prime, Netflix or Apple TV accounts to watch TV, not Comcast or AT&T cable packages.

Sonic does do not carry cable TV with its service, but offers Dish TV as part of a combination package together with its telephone service.

“The focus is on internet access,” Jasper said of Sonic. “They (customers) don’t necessarily need the $100 to $140 (monthly) typical cable package.”

That cord-cutting trend, sparked by cost-conscious millennials, made Sonic much more competitive, especially as it offers an introductory rate of $40 per month. “It breaks down the threat of the bundle. It really serves Sonic well because we are focused on the internet access portion,” Jasper said.

The other break Sonic caught was when Google Fiber decided late last year to pause its fiber-optic push, an effort that began in Kansas City and spread to about a dozen cities, including some limited areas of San Francisco. In areas where Google Fiber entered the market, the prices from providers such as AT&T and Comcast would go down and they would match the speeds to keep up, said Krabeepetcharat.

That left an opening for Sonic to aggressively capture more of the San Francisco market.

“I can speculate that (Google) found it to be infuriatingly expensive and slow to build fiber. And roadblocks in front of them from a regulatory perspective, or raised by their incumbent competitors, were maybe more of a challenge than they expected,” Jasper said.

Sonic, though, has encountered the same problems. For example, some San Francisco utility poles are too crowded to attach Sonic fiber-optic cables onto them. Yet, neither PG&E nor AT&T have a timetable when those poles will be replaced, Jasper said, leaving areas in certain neighborhoods where Sonic cannot reach potential customers.

There have been advances in placing lines underground, specifically through micro-trenching where cables are installed in a small trench that is typically less than 12 inches deep by 1 inch wide. That would make the cost much more reasonable than tearing up and repaving city streets in a large construction project.

But that type of construction isn’t allowed yet in San Francisco. Supervisor Mark Farrell has sponsored legislation to allow such work, noting that about 100,000 of the city’s 865,000 residents lack internet access.

Once it gets the chance to compete, Sonic finds that it has an advantage as a result of its reputation for providing high-quality customer service in an industry noted for the lack of it, Jasper said. As a sector, internet service providers received the lowest rankings in the American Customer Satisfaction Index last month.

“It’s worse than banks and airlines,” said John Gasparini, policy fellow at Public Knowledge, a Washington, D.C., public interest group. “Sonic is generally rated high by consumers. … They are offering competition. Most people in America don’t have a choice.”

Sonic also has received the top ranking for its customer privacy practices by the Electronic Frontier Foundation, a nonprofit digital watchdog group. Jasper personally lobbied against legislation enacted earlier this year that repealed privacy rules designed to protect the browsing history of internet customers. He also is fighting an attempt by new FCC Commissioner Ajit Pai to roll back so-called “net neutrality” rules crafted by the Obama administration, which allows all web traffic to be treated fairly and prohibits service providers from slowing down or speeding up internet data.

Gasparini said he believes that Jasper’s vocal opposition to the Trump administration’s approach to deregulating the internet will ultimately benefit Sonic in the marketplace. “These are issues that matter very much to Americans,” he said.

To fuel its growth, Sonic earlier this year raised its monthly rates by $10 per month to $50, its first increase in seven years. The privately held company has not taken on outside investors and has used bank lending to finance its expansion, Jasper said, making debt servicing a high priority.

“It’s a very challenging decision. There is no right time for it,” Jasper said of the rate spike, which he claims still makes Sonic cheaper than its competitors by as much as $30 per month for similar internet service.

The goal is to expand its fiber-optic network to areas outside San Francisco as it achieves better economies of scale, including to more businesses and homes in Sonoma County. Outside of Sonic’s network in Sebastopol, no other companies offer fiber-optic service to homes in Sonoma County, Jasper said, though AT&T and Comcast do provide such service to business customers.

Sonic employees repeatedly get asked by residential customers when fiber-optic service will be coming to their neighborhood, especially when they see the company providing such service to nearby business parks. Jasper personally replies via email to such queries.

“The only good answer is that we are working to expand as rapidly as we can and we (first) need good areas where we have the most customers and lower construction costs,” Jasper said. “As that is proving itself and succeeding, we are able to drive further and further.”

You can reach Staff Writer Bill Swindell at 707-521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.

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