Communities, Not Telcos, Should Define Success of Municipal Broadband Networks

Too often, reports on the feasibility of municipal broadband networks in smaller markets are sponsored by large telecom companies with a financial stake in the game. Many communities with muni networks wonder if these researchers are measuring success the wrong way.

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Supporters in rural communities in particular view municipal broadband networks as a financial lifeline option. Opponents label them financial failures. However, criteria established by over 500 public networks dub these infrastructure projects successes despite well-funded opposition.

A University of Pennsylvania Law School professor and his research assistant recently released “Municipal Fiber in the United States: An Empirical Assessment of Financial Performance.” The report attempts to show that public-owned networks are financial failures, a tactic community advocates say incumbents use to discredit these networks.
AT&T, Comcast, Time Warner and Verizon belong to the Center for Technology, Innovation, and Competition (CTIC), which is a major sponsor of the report. Long-time blogger Philip Dampier (Stop the Cap) often follows the money in corporate advocacy. “Corporate money is available to produce ‘research reports’ in return for a generous ‘award.’ Authors have a strong incentive to figure out what the funders are looking for and create research that delivers those results.”

Among the findings of this report:

  • Of the 20 projects evaluated, 11 are cash flow negative;
  • Of the 9 that are cash flow positive, 7 would need more than 60 years to break even; and
  • Only two — Bristol, Tenn., and Vernon, Calif., — are on track to break even within the life expectancy of the broadband network (30-40 years).

Advocates are debunking analysis, exposing flawed measurement criteria, and reinforcing communities’ criteria for success.

Muni broadband detractors such as Comcast – and this report’s authors – portray Chattanooga’s public utility’s network as a failure. In reality, “EBP [Chattanooga’s utility] continues to grow at a remarkable rate, with more than 90,000 subscribers, well over half of the market,” says Chris Mitchell, a Director at the advocacy group Institute for Local Self-Reliance. “Revenues have been so high on the fiber side that it has retired its debt and its net income has allowed EPB to forego electric rate increases for several years.”

 

Communities define success, not incumbents

Ultimately, network builders and constituents determine whether their investments pay off, not Wall Street.

The authors wrote, “This report applies the conventional tools of financial analysis to determine the likelihood that municipal fiber projects will remain solvent. Specifically, it focuses on Net Present Value (NPV), which provides a more accurate picture of the cash flowing into and out of an organization than do analyses based on a project’s operating profits and losses.”

However, the authors used NPV calculations based for a five-year period, which is suited to a stockholders looking for a quick ROI. Municipalities infrastructure projects, though, acquire loans or pass bond measures that allow for 15-to-20 or longer payback periods. Incumbents live in a financial world of hares, while municipalities and their constituents operate in a world of tortoises.

The report also pans Loma Linda, CA’s network, apparently without interviewing the person who manages the network. They state that it is not expected to “turn positive.” However, the network’s 2005 $3 million initial investment was covered by grants, with additional investment raised from a State Redevelopment Agency loan. The city did not have to repay the loan.

“The network breaks even at about $1.1 million in annual revenue,” states Assistant City Manager Konrad Bolowich. “The network is directly responsible for bringing two hotels to town that generate around $600,000/year in various taxes. It also helped convinced the government to build a VA clinic here that created 1,500 jobs and generates over $500,000 annually in property taxes. So if just one clinic worker eats at a restaurant and produces $1 in revenue to the city, that’s an extra dollar the network has earned the city.”

 

Communities measure success in different ways

For years, incumbents, state legislative allies, and public broadband detractors relied on CTIC and others analysis reports to influence anti-municipal laws, lawsuits, and adverse telecom policies. Communities intend to change the narrative by conveying how they, rather than incumbents, define broadband success.

Generating revenue sufficient to cover on-going operating costs and retiring debt incurred to build the original network is considered financial success. Sebewaing Light and Water (SLW) built a gigabit network in 2014. SLW Superintendent Melanie McCoy stated at the time, “If we can get 500 of our 1800 residents to subscriber to the network, revenue would pay off the $1.7 million investment in the network buildout in eight years.” She reports that the City installed its 528th customer this week.

Glasgow EPB, the public utility in Glasgow, Kentucky, measures success in three ways. They initially invested $5 million, which they recovered, plus ongoing maintenance, upgrades, and expansion costs. “Annually we save residents and businesses $3 million that goes into the local economy,” reports CEO William Ray. “We developed technology apps on the grid that manage peak loads that reduce wholesale electricity costs $480,000 each year. And we save $300,000 per year in operations cost through reduced truck runs and remote disconnects.

A lot of muni networks proposals and plans center on border-to-border infrastructure projects, and the attendant discussions take on an all-or-nothing stance. Communities could weigh the value of partial-reach networks – incremental buildouts spread over several years. Each increment is a smaller project with manageable costs, has its own ROI and might be easier to finance. In both urban and rural areas there are examples of incremental buildouts generating revenue. Remember the tortoise.

The city of Ammon, Idaho reflects this different approach. “Our goal was to provide service to these groups in this following order of importance,” says Bruce Patterson, the city’s Technology Director. “We replaced outsourced services with our infrastructure to connect government facilities and the public utility. Then we built out public safety. We built infrastructure to schools after determining the city can provide 10 Gigabit service at a third the cost of an outside provider. Then we built infrastructure to businesses, and last, residences.”

The city’s $1 million initial investment mostly went into fiber. “Approximately one quarter of that investment still available because revenue coming from these various projects offsets expenses and makes the city’s cash flow positive,” says Patterson. Collectively Ammon draws revenue from infrastructure wholesale sales, dark fiber services, owning and selling data center services, and residential installation and utility fees.

Craig Settles is a broadband industry analyst, consultant to local governments, and author of “Building the Gigabit City.”

 

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