I was wrong about Google Fiber, but this isn’t a golden deal for the city either

After more than a few false rumors concerning Google Fiber in Utah, I dismissed the latest one as being as equally untrue. Boy was I wrong. Like so wrong that I probably can’t express it myself. (That’s okay; plenty of you are doing it for me, some more kindly than others.) I seriously overestimated Provo’s aversion to risk, and it appears they are putting a lot on the line to make this deal work with Google. I’m not convinced that the city is getting a very good deal. I’m also worried that these important details are getting ignored in your excitement to have a big name like Google running what has been a heavily abused asset. (Seriously, you folks who put up with Mstar? My condolences.)

The basic terms of the deal is that Google gets to take over iProvo for $1, effectively giving the $50M network away. The city maintains bond payments of $3.3M per year for the next twelve years as Google will not be assuming the debt. The city is effectively giving them $90M to take over the network in a no-bid process. Google can also walk away when the seven year deal is finished, leaving the city with none of the assets and five more years of bond payments. Google has to spend a scant $18M to provide gigabit services to 35K households. If they get a take rate of just 20% for Internet-only (a ridiculously low-ball estimate), they’ve made their money back in only three years. You can bet that more than a few other companies and providers would have liked to get that deal. For all of the accusations I made of giving the network away in prior arrangements, this one makes them look fair by comparison.

In order for this to break even on the rather immense subsidy being granted, the city will need to earn an average of $12.9M per year in new tax revenue for each of the seven years. Based on the city’s 2012 filing with the State Auditor’s Office, this would equate to an almost 35% increase in total tax revenues. Given that the amount of land left to be developed in the city is relatively small, I can’t see a way in which the city actually accomplishes this. Google is making easy money at the city’s expense.

So what are you getting for your money? For a one-time fee of $30 (assuming you already have the connection in your home), you can get 5Mbps service for seven years, the length of Google’s commitment. (The standard packages of $70/mo for gigabit Internet or $120/mo with TV will be available.) City facilities get gigabit for free for the seven-year period. Each household will effectively be paying $368.57 per year in bond payments and the loss of the asset, so jack those prices up about $30.71 per month.

Is it a good deal? That remains to be seen. A lot of you are rightly excited to be getting the kinds of speeds that UTOPIA customers have been enjoying for almost a year now. But this isn’t a bailout. This isn’t a free lunch. You’re paying a pretty goodly amount for this arrangement, and you should be asking if it’s worth it. I know I am.

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33 Responses to I was wrong about Google Fiber, but this isn’t a golden deal for the city either

  1. Jon says:

    You really can’t stand Google Fiber can you? I understand you’re lobbying for their competition, but man…

    Let’s see, so $70 to Goog, $31 to Provo, $100! Wow, that’s a lot. Then again, Utopia offers the same connection for $300. So, which one is still worth it?

    • Jesse says:

      I take issue with putting on blinders to what the deal really is. All told, I think the city can do better at the negotiating table on this one. As it currently stands, I’d give it about a 50/50 chance that the city loses money on it.

      If you think I “lobby for the competition”, you’re definitely new here. UTOPIA does not and has never competed in an iProvo service area. You’ll also find plenty of vitriol for Comcast and CenturyLink. But hey, believe what you will.

      It’s a really good deal for service for those who can get it. And maybe Google will stick around longer than their seven year commitment. I don’t know. Neither do you. There’s already been a dampening effect on network investment from people who would rather wish upon the Google star than build the network now.

      • Jon says:

        Also, the people of Provo have been paying for the network via the Telecom Debt Charge on their electric bill since 2011.

        http://secure.provocitypower.com/Schedule%2021.pdf
        http://www.heraldextra.com/news/local/central/provo/provo-s-utility-rate-increase-fee-set/article_45ae703b-1480-5923-89c5-683397046899.html

        And they’re going to still be paying it, Google Fiber or no. So, which is the better deal? No Google, no increased revenue, no national spotlight, no increase in business and home attraction, etc, etc, etc, or, all of that?

        • Jesse says:

          I’m perfectly aware of the utility bill charge. In fact, I wrote about it at the time: http://www.freeutopia.org/2011/08/09/where-iprovo-is-going-from-here/

          You’re presenting a classic false dichotomy here, that it’s either Google or the status quo. It may be that Google is the best offer the city can get. It may work out pretty well. Again, as I have stated, it’s not a perfect offer. There’s a high cost involved, and the city is making a lot of concessions betting that it will pay off. You can’t even acknowledge that possibility?

          • Jon says:

            What concessions? The risk to the city is the same as if Google didn’t “buy” the network and tried shelving it off on another provider. I can’t acknowledge something that I don’t see.

            The “high cost”? The main point of your piece was that Provo residents would be paying for something they didn’t own. You even provided false figures. It’s strange that you “wrote about it” before, but didn’t seem to know the break-down of who would be paying for it (commercial takes a bigger slice and industry, BYU really, front’s even more). “Each household will effectively be paying $368.57 per year in bond payments and the loss of the asset, so jack those prices up about $30.71 per month.” That’s a flat out lie, and for someone who’s supposedly familiar with what’s going on, is a bit shocking.

            So if Provo is footing the bill for the bonds (the only guarantee in any situation), losing the asset (yet still garnering economic benefits from it), eliminating any expenditures for upgrades and maintenance, bringing in an internationally renowned company (instead of roping in local ISPs who’d provide lesser services), gaining national attention while upping all kinds of attraction to the city, county, and state, what are the concessions?

            Yes, Google might fail. And Provo will be without ownership of a network they’re paying for, and probably wont have the opportunity to get it back to try to squeeze some form of revenue out of it. That would be a big loss. Which all hinge’s on Google Fiber being as big of a flop as Broadweave and Veracity.

          • Jesse says:

            False figures? What false figures? The value of the network is pretty well-known. The cost of the existing bond debt is spelled out in the papers. There’s 35K households in Provo. It’s not hard to come up with an average from there. Prove the math wrong if you’re going to call me a liar.

            You mentioned the concession yourself: they’re giving away all of the assets and keeping all of the debts. Most sales are a package deal where the buyer assumes both for a fixed cost. If you don’t think that’s a concession, you’re simply not seeing clearly.

            I’m not saying that Google will fail. I’m saying they may get bored and pull the plug. They do that sometimes when they don’t think a service fits their needs anymore. One word: Reader. Immensely popular, a regular treasure trove of data for Google, but they got bored with it and killed it. There’s an entire list of things that Google has sent to the graveyard, and they have an average lifespan of (wait for it)… 7 years. Concern about longevity past that point is based on rationality.

          • Jon says:

            It’s not letting me reply to your latest comment. Must have reached the nested thread limit?

            Anyway:
            “False figures? What false figures? The value of the network is pretty well-known. The cost of the existing bond debt is spelled out in the papers. There’s 35K households in Provo. It’s not hard to come up with an average from there. Prove the math wrong if you’re going to call me a liar.”

            Perhaps you don’t follow links?
            http://secure.provocitypower.com/Schedule%2021.pdf
            http://www.heraldextra.com/news/local/central/provo/provo-s-utility-rate-increase-fee-set/article_45ae703b-1480-5923-89c5-683397046899.html

            Note: don’t confuse someone calling out something you said as false or a lie, as them calling you a liar. It’s the difference between telling someone they made a mess, and they are messy. One can make a mess without being messy, but cannot be messy without making messes. You could comment on what a person did, without commenting on their character.

            Perhaps I didn’t express my recognition of the chance of failure as a concession. I do, I understand that that is a risk. But you said “a lot of concessions,” the “a lot” is what I take issue with.

            Also, you may want to take the time to read the contracts (which are available at provocity.org). Especially those sections regarding the repurchase right of Provo City to the network.

          • Jesse says:

            Yeah, we hit some kind of hard-coded nesting limit. I can’t find anything that lets me adjust it. Kind of lame.

            I’m perfectly aware that Provo chose to asses different fees on different types of buildings. I’d like to think that everyone is aware of that. Like I said, I offered up an average figure. I feel like we’re talking past each other on this one.

            Given that building a gigabit network to 35K residences would probably cost Google in the neighborhood of $90-100M (based on UTOPIA’s install costs of $2750 per household served), getting there for $18M is a steal. The city could sell the network for $50M and it would still be a great deal for Google, AND the city would have $11M on top of the bond payments they’re staying on the hook for. Heck, charge something, ANYTHING. Giving it away is saying that it has zero value. That’s patently false, and it’s a disservice to the taxpayers. (I also question its legality under Utah Code, but IANAL.)

            I’m reading through the painful legalese now. http://provo.org/legalDocs.html Thanks for letting me know they’re available for review. I hope these will be enough time for the public to weigh in before the council is asked to make a final decision. I don’t want to see repeats of the rushed process undertaken with Broadweave/Veracity.

          • Jesse says:

            Thanks for pointing me to the purchase docs. That repurchase right is a very powerful hedge, so it seems to be more a case of the city allowing a free lease so long as Google wants it rather than just giving it away.

          • Jon says:

            Jesse, I must say, I’ve enjoyed our back and forth. I generally use these sort of internet arguments (in the debate sense) as motivation to find information and learn about something. Which is definitely the case here. So thank you.

            Though I may still disagree with you on same basic level, I think we both agree that this is a complicated deal. My outlook is that it’s going to be good, while you’re maintaining what I feel is cautious neutrality. Which, in all honesty, is just fine.

            That legalese, I tried connecting all the dots, and was quite perturbed by the difficulty. “Painful” certainly describes it.

            I think your concern about the rushed nature may be right. City council is voting on Tuesday, and they’re holding plenty of town meetings, but I don’t think it’s nearly enough time for the general public to absorb enough of the information to make an informed choice. I feel like we are pretty well aware of some of the issues, yet doubt the depth of our levels of being “informed” after trying to make sense of those documents.

          • Jesse says:

            I’m glad to have these discussions. They’re sorely needed, and I think there’s implications well beyond Provo (and not necessarily good ones). I’m starting to warm to the idea that this is an okay deal, but Provo could probably do better.

    • srb says:

      Nothing is free. The city will end up paying for this in the long run. So either way it is a bad deal.

  2. Trace says:

    So a few days ago no one would want to bring this service to a wasteland such as Provo. And now, according to you, there are companies lining up to bid on servicing Provo and the city screwed up by going with Google.

    #nocredibility

    • Jesse says:

      That’s an interesting interpretation. I didn’t think that Provo would eat as much risk as they currently propose, and I thought that would put Google off from considering it.

      And, really, what company wouldn’t want to pay $18M to bring a gigabit FTTH network to 35K households? I’m not saying that Google isn’t the best option, but we’ll never know now, will we? It’s got hints of Broadweave but with a bigger name.

  3. Jeff says:

    So if Provo had continued on the current path (leasing the network to a provider), all of those Provo residents who were paying the five dollars per month utilities fee (to pay for the iProvo bond) would get absolutely nothing in return, but now at least for their $5 they can Internet service.

    When you factor in the free Internet service, plus the intangibles like the desirability of Provo to new businesses and residents, it’s hard to see how this will not be a net positive for Provo.

    • Jesse says:

      It just won’t be as large of a net positive as people seem to be thinking. It’s one thing to say that it’s a net positive. It’s another entirely to pretend there are no negatives.

  4. Andrew says:

    Props for handling this professionally Jesse. Way to many comments stemming from emotion or simple one-sidedness (or complicated one-sidedness lol). I wish more people would take time to think about all the sides to a story or atleast read the entirety of one story before making (stupid, uninformed, childish) comments. Before anyone blows up on me I am not necessarily referring to comments above mine; rather I am commenting on the problem that is, for lack of a better term, idiocy.

    As for Google coming to Provo I see a double edged sword. Who really pays for it and what the impact on neighbor cities will be plus a whole ton of other questions. Only time will tell at this point I think.

  5. Rich says:

    gigabit at $70/month would be great!

    Currently, i’m happy with Utopia at $45/month for 100Mb/s thru XMission atm.

    • Jesse says:

      It’s a great deal for the end user, especially without any transfer caps. There’s no question there. The real question is if the city is negotiating a good deal for taxpayers concerning the asset.

  6. HappyCamper says:

    Someone’s being quite the negative nancy.

    • Jesse says:

      I’m keeping the rose-colored glasses off. Provo has a history of using splashy PR to dodge scrutiny of the sale of city assets. Remember the ice rink? Or the Broadweave deal? It is the duty of the council to review the terms to make sure the city is getting a good deal, and citizens bear at least as much responsibility to make sure they do so.

    • srb says:

      I don’t think he is being a negative nancy. We should have looked into this more and taken time to see how this panned out in other cities. Everyone hears the word free and jumps on the bandwagon without looking at long term consequences.

  7. Jeremy Neish says:

    Jesse – I have to say I’m disappointed to be on the opposite side of an issue this time, and I’m surprised that of all the people to be down on this it would be you. Did you join the tea party or UTA recently? (Just kidding!)

    Look I get what you are saying about the numbers, though I believe everybody is underestimating how much it will cost to connect 35k homes to fiber for free, and pay for all the subsequent bandwidth usage for at least 7 years. The final cost to google is going to be much more, but that’s fine, google will certainly turn a profit eventually and then everybody wins. In the real world, this is FAR and AWAY the best thing that could have happened to the network. And I’m THRILLED. Maybe I’m beginning to detect a hint of jealousy on your part. I don’t think you are the only one.

    I listened to the Google rep’s speech about a gigabit future and I’m so heartened to hear somebody saying what I’ve been trying to say for years. It’s not about what we can do on the internet can do today, it’s about the crazy and amazing things the internet can do in the future when bandwidth like this becomes commonplace. When I’ve talked about this over the years, people just glaze over and don’t seem to get it, but Google get’s it and that’s exciting!

    I guess what I’m say is that while numbers are important, they aren’t the end all of this story. What’s really important is what it will do for the city. Our company is now planning to move BACK to Provo as soon as our lease is up, my business partner is going to put his Orem home on the market as soon as possible and move here. This is exactly what people all around the country are thinking, and you can’t put a number on that value.

    • Jesse says:

      You falsely assume I’ve picked a side. I haven’t. I’m trying to provide a counterbalance to the excitement to make sure that this thing doesn’t become a runaway train. No public policy proposal is without downsides, and, ultimately, good public policy has upsides that outweigh them. I’m a policy guy, and I have to consider the implications both to Provo City and neighboring cities when it comes to overall broadband policy and my goal to have a highly competitive landscape of next-generation services. If the deal ends up being good for Provo but back for policy across the state, I’m going to make my case for that. Provo isn’t a bubble (yes, easy setup for a joke) and I can’t consider it as such. It would be irresponsible.

  8. Mike Stevens says:

    Jesse, your assessment of the value of the network is off. There was a wall st analysis of Google Fiber’s economics published a couple weeks ago that concluded Google’s cost in KC was about $630/home passed, and that the $300 connection fee covered the cost of installing a drop.

    Maybe Utah is a lot more expensive, but I think Google is working hard through special agreements with cities and leveraging their purchasing power (Google buys $B of hardware a year) to drive down the cost of building fiber.

    So they would not be willing to pay whatever it cost Provo to build it, but what it would cost for them to build it or maybe less. I suspect it will cost them more money than a greenfield build given the support of the existing users until they are moved over.

    I think the city is getting a great deal – every home in Provo is going to get basic Internet for free (they already pay for the debt service and get nothing for it). This will be a first in America. I venture almost any city would be willing to do this kind of deal.

    The question now is what happens to Utopia? Its a different animal than Provo, but I think all the politicians would love Google to take it and remove this problem for them. But given the amount of debt the cities are on the hook for, do you think they would hand over the keys to Google for $1?

    And unlike Provo there are a bunch of little ISP’s there. If Google takes it over, they all get killed off, which would be a political problem I am not sure Google wants to deal with.

    But if Google doesn’t take Utopia, then what happens?

    • Jesse says:

      Maybe our math should meet in the middle? If Google is dropping $18M to upgrade 35K residences, that works out to around $514.29 per residence. This is consistent with going from the curb to the residence including the cost of a portal, but that would not account for the cost of fiber rings, trenching, a NOC, etc. Maybe using UTOPIA’s costs is a bit high, but I think the costs from KC are WAY too low.

      The questions about Google Fiber and UTOPIA have been hitting my inbox for two years. I initially had higher hopes for a UTOPIA-Google partnership, but their decision to run a closed network is incompatible with UTOPIA’s open access DNA. Provo had no such issue since it tossed the open access model under the bus years ago (along with some very burned providers). I’m not saying they wouldn’t be able to work something out, but I do think this would be a large sticking point in the discussion and, as you noted, create a fair amount of political fallout.

      • Mike Stevens says:

        Jesse, I don’t know, but this analyst had a fiber engineering design company design a sample network and came up with that cost.

        I think google is including the cost of the equipment in the home and the optical switching gear that drives the gigabit network too in that $18m number.

        So when you look at fiber cost alone (I assume they will scrap all the current equipment in and out of the home and just use he fiber itself), its not that much value they are ascribing to the fiber itself, probably closer to the wall st estimate than the utopia number.

        As for utopia, I think the is going to be a lot of pressure from folks in the legislature and probably from the ciies as well to get Google Fiber in Utopia land too as a way to avoid pouring in a lot more money with no end in sight. I am not so sure the cities care about open access.

        You got to hand it to a Google though, their TV service looks sweet.

        • Jesse says:

          I have a hard time believing the numbers. UTOPIA manages to quote $2750 per home passed assuming a 35% participation rate. If you get to 100%, you can drop their cost, but I doubt it would get south of even $1400 per residence. Google spending $515 per home just to connect 2/3 of residences without a connection and swap out the electronics seems to indicate to me that the trenching, backbones, and rings are worth a good deal more than is being discussed.

          I don’t think UTOPIA is going to feel much pressure from the cities. Provo is essentially offering a free lease in perpetuity with a $1 security deposit. I don’t think the UTOPIA cities would be inclined to take that deal, especially if they have to throw open access out the window on top of it. If Google were willing to, say, buy a stake in UTOPIA, become a provider, and pay the install costs for the homes they hook up, I would think that UTOPIA is getting a good enough deal.

          And yes, they’re doing a heck of a TV package. I think they’re treating it as the loss leader that it is, selling it very close to cost just to increase subscriber stickiness.

  9. Hey Jesse, I am loving the discussion on here, very thought provoking. I won’t bore you with rehashing any of my thoughts that I posted on your guest blog post, but I do have a couple more thoughts for you.

    Value of Network, as-is: When Provo took the network back from Veracity, it showed up on their financial records as a ~$25 million capital asset as of January 1, 2012. So by Provo’s estimations, it is giving away a $25 million (minus 15 additional months of depreciation) asset, not a $50 million asset as you estimate in this post.

    Per Household Debt Service: As far as I know, I am only paying $5.35 per month for telecom debt service on my utility bill. Is the city sticking it to me somewhere else that I don’t know about?

    Thanks for your insightful posts!

    • Jesse says:

      Do you have a source for that valuation? It seems a lot lower than I would expect. The cost to recreate the network would be almost four times that.

      Yes, Provo assessed the debt service in such a way as to put a larger portion of it on businesses, but it would be incorrect to assume that because you don’t directly pay it, it doesn’t come out of your pocket. Those costs almost always get spread out in one form or another, and that’s why I think the average per household is a better way to think of it. I’m thinking my numbers are off anyway, and I’ll be writing more about it later tonight.

      • So I attended the meeting tonight (it was fantastic btw), and it answered a couple questions I had. The mayor did a fantastic job explaining the financial side of the deal. He said they had several other organizations express interest but wanted to buy the network for at most $10 million, and make none of the service promises Google has made. He explained because the bond does not allow pre-payment, that each million dollars collected from the sale will only reduce tax payers monthly utility fee by $0.14. So best case scenario, they might have been able to sell it for $10 million and turn that $5.35 into $3.95, with none of the service agreements Google has made.

        I got that $25 million valuation from the 2012 fiscal year financial report that the city published. You can find it here: http://www2.provo.org/finance.rpt.html

        But that valuation seems irrelevant after the Mayor explained the highest semi-serious offer to come out of the RFP was $10 million. An asset’s market value is only what someone is willing to pay for it, so I think ~$10 million is a reasonable as-is valuation at this point.

        I am going to write up a full report on the meeting on my blog, owenjohnston.com

  10. Mike Stevens says:

    Jesse, a friend of mine was at the Broadband Communities Summit in Dallas this week, and he said a guy from Utopia gave a talk there and blamed Utopia’s problems on the retail ISP’s tha kept failing, and the inability for Utopia management to take over.

    And apparently he said that he wanted to blow up the wholesale only model. Is this related to the Google announcement some how?

    His name is Dave Shaw – does he actually work for Utopia?

    • Jesse says:

      Dave Shaw has been UTOPIA’s legal council (and a specialist in municipal broadband legal matters) since as far back as I can remember. I don’t think he’s in any capacity to speak for UTOPIA on such matters officially, but I respect his opinion as someone well-informed enough to know what will and won’t work.

      I do agree that some of the retailers have caused UTOPIA problems just as they caused iProvo problems. Mstar was a disaster of a company that grew too fast, too quickly and left behind a lot of dissatisfied customers. ConnectedLyfe just didn’t do well enough to impress the Mstar customers that they took over. Nuvont faded into the sunset once they lost their iProvo customers to Broadweave. On the flip side, XMission is, without a doubt, one of the finest ISPs in the nation. The first time they had to disconnect a customer, it was years after they had started on UTOPIA and it was for non-payment, not cancellation. (They actually had to call UTOPIA to figure out how to do it because nobody knew.) Veracity offers top-notch business services and a voice product that’s the envy of the state. That’s kind of the mixed bag you get with competitive choice, but at least the network connection you paid for means you can switch at any time.

      For new projects, I can see employing an exclusive provider model over a limited time in order to retire the network debt more quickly. Powell, WY has done something like that, and I believe they will (or maybe already have?) open the network to more providers.

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