Powell, Wyoming, at first glance may appear to be the typical rural community that large and even some small broadband service providers avoid. The town has just over 5,000 residents in a county with a population density of four people per square mile. The last place for a fiber network, right? Wrong! Powell’s community-owned network, Powellink, is one of the great success stories in broadband.
Powell’s network broke even in 18 months and has operated profitably ever since. Two service providers, including the town’s partner, Tri-County Telecom, compete for subscribers of data, voice and video services. And most stunningly, this $5 million project put no taxpayer dollars at risk.
In 2005, constituents and businesses decided they needed better, faster broadband than incumbent providers were willing or able to deliver. Powell already had built a fiber ring around the town in 2000. The next step was to extend this ring with a fiber-to-the-home (FTTH) network. Powell would have been an ideal candidate to apply for a broadband stimulus grant or Google gigabit network – if either had existed at the time. Instead, Powell opted to follow a do-it-yourself path that today provides a valuable lesson for rural communities and small towns everywhere.
Powell’s method is relatively easy to describe; the devil, of course, is in the details. Every community is different and each will need to tailor the approach. Some may even reject it. But here’s how Powellink became a reality.
Careful planning was the first major step toward Powellink’s success. The city’s planning team spent nearly two years tediously plotting strategy, assessing options and anticipating opponent’s moves. As testimony to the team’s effectiveness, Powell endured adversity, but among the more than 130 community-owned networks, it is one of the few that were never sued.
Private-sector thinking was prominent among the project team, which in the beginning consisted primarily of US Metronets, a planning, engineering and management company. A key team member is Ernie Bray, Founder and Chief Technology Officer.
“To have a network that serves the public good, you must create a sound engineering design and use best practices in business and network operations. Furthermore, you have to overcome the biggest argument opponents will throw at you, which is community networks put taxpayers’ dollars at risk.
Bray assembled experts including engineers with AT&T and Verizon experience, legal counsel experienced in telecom law, top municipal bonds counsel, a municipal investment banker, and other business planners. US Metronets was paid a flat retainer to start, but their main fees were paid when their plan resulted in Powellink’s getting financing. Community stakeholders also were an integral part of the planning process, particularly after the financing was secured.
US Metronet’s goal was to create a cost model that would survive intense scrutiny and convince a good service provider with a solid track record to be the network’s anchor (lead) provider. Their design was capable of meeting the stringent performance and service requirements of leading telcos. The business planners ensured that the network’s infrastructure components and the contractors that would build out the network had been accurately sourced and priced. For providers, these upfront elements are key to long-term financial success.
The planning team went a step further. Broadband feasibility studies typical include asking constituents about their level of interest in Internet services. Powell’s team secured firm commitments from institutions such as schools and hospitals that would not only subscribe to the network but entice their customers to subscribe, too. They contacted businesses about moving or expanding operations to Powell.
With agreements and letters of intent in hand, Powell was able to give Tri-County Telecom (TCT) more credible revenue predictions. “We presented our data and potential institutional subscribers,” states Bray. “TCT then adjusted for what their real costs were and described how the buildout was going to look, what the real breakeven was (and based on what assumptions), when certain goals had to be met and how long it will take to reach certain milestones over 20 years.” Bray calls all of the TCT forecasts, “conservative.”
To combat the “taxpayers at risk” argument, a second key step of the planning process involved reviewing in detail Powell’s options for using municipal bonds to cover the buildout costs. A fairly standard approach is to use general obligation (GO) bonds or something similar that obligates a municipality to repay the debt by using tax revenues or raising taxes. However, there are other types of bonds that can be brought into play. This is the reason Bray included muni bonds experts on the planning team. “A community needs to decipher the ins and outs of the rules that are specific to their particular state, then craft an arrangement that legally works around any obstacles.”
The team’s business due-diligence, financial modeling and municipal investment skills intersected for the third step of the process: crafting the bond arrangement. Powell structured its deal so a bond would be issued that covered the cost of the buildout plus a number of related expenses. TCT would go on the line with a “take-or-pay” guarantee: if the network didn’t generate the expected revenue, TCT would pay the shortfall to the town. Powell maintained ownership of Powellink and, according to the contractual arrangement, the provider and the city both share in the profits.
The particulars of the financial arrangement are complex and include additional safeguards for Powell, but the bottom line is straightforward.
For example, suppose the network needs to reach 30% market penetration (also known as “take rate”) three years after it launches. If the take rate exceeds 30% or the network reaches the 30% take rate sooner than three years, this results in free cash flow (gross profit). The planning team did enough thorough and accurate research, sufficient engineering design and financial modeling that TCT had confidence the break-even point was attainable. Since TCT contractually agreed to pay Powell the difference if network revenues were below breakeven, the city wasn’t at risk.
To summarize, planning is crucial. A community cannot scrimp here on time and resources. Small towns do not have much wriggle room in the accuracy of their revenue projections. It also is important to have a reliable service provider with a credible track record as partner. And it is wise to have a well-thought out contingency plan in case the provider is bought or has operational issues later.
Finally, the public/private partnership agreement has to be clearly written and structured so both parties are motivated to succeed. In Powell’s case, the agreement to split the free cash flow with TCT is a great motivator. TCT is driven by the fact that, the greater the profit, the more they get to take to the bank. Powell is similarly motivated to find creative ways to market the network. Powell can work with local TV stations to educate constituents about the network’s benefits to local education, distance learners and senior citizen entrepreneurs. Working with various stakeholders, the town can develop locally focused services on the network that drive up traffic.
Ultimately, it was imaginative thinking and the selection of effective, creative partners that gave Powell its opportunity to make a big broadband impact on its small community. They finished Powellink’s buildout in just over a year, in 2009 and broke even by the end of 2010. Revenue was so strong the city was able to buy back its bond debt. Others should pay close attention to the lessons learned here.
Craig Settles, of Oakland, California, is an analyst and business strategist in the broadband industry.