Making the Macquarie deal better: things every city council should consider

macquarie_logo_2638The Macquarie deal is really good. I have doubts that UTOPIA cities are going to get a better offer at all, and the odds that any other offer would even have a chance of paying any of the existing bond debt are very slim. That said, there are things that all city councils should work on to make sure this is the best deal possible. Here’s what I think they need to do.

Specify speed increases on the basic tier

Including a basic tier of service seems to be a must-have now that Google Fiber has done it. I think the included tier is a pretty good deal overall, but the contract must specify a rate at which those speeds will gradually increase. The FCC already defines broadband as 4Mbps/1Mbps service. It’s rumored that they’re going to bump that to 10Mbps/3Mbps Real Soon Now(TM). I don’t think the basic tier should necessarily match what the FCC calls broadband, but it certainly can’t sit at 3Mbps/3Mbps forever. Make sure the speed increases are built into the contract, potentially as a function of the FCC definition (i.e. 75% of FCC broadband downstream speeds for upstream and downstream).

Specify increases in the transfer cap on the basic tier

A lot of people got riled up over the 20GB cap on the basic tier, but for someone who’s doing really basic usage, that’s actually pretty good. That’s 100 hours of YouTube a month or 30 hours of SD Netflix. Most people on the basic tier probably won’t be using very much anyway. That said, the cap needs to rise with time just like the speeds. 20GB is good today. What if it’s not good enough tomorrow? Make sure the contract specified that it will increase.

Require providers to fully disclose the terms of transfer caps

While we’re speaking of transfer caps on the basic tier, I think we also need to get ISPs to be VERY clear and up-front about how they handle the cap. The spectre has been raised that a hard cap could mean that someone loses their VoIP E911 service when the cap runs out. It could mean big overages. All of these terms need to be up-front. Providers should disclose if they have no caps, a soft cap (with the terms of the penalties for repeated overages), or a hard cap (with transparent pricing on purchasing additional transfer). Anything less would not be acceptable.

Require all revenues to pay down the bond debt and utility fee

City councils should already be prioritizing revenues from the system to go towards first paying the bond debts and then reducing the utility fee. Should. Citizens need to make sure that they codify that this is how they’re going to actually do it. This removes the threat that revenues from the system will flow into the general fund and the full utility fee will be assessed to residents. That would be completely unacceptable.

Try to assess the utility fee on users only

Cities are free to figure out how to collect the utility fee from residents and businesses. Macquarie has suggested “everyone pays” as the model. That kind of stinks since the entire point of the UIA was to shift costs from taxpayers to subscribers, but it’s a hard reality of how city finances work. If cities can get the net utility fee low enough, they should seriously consider assessing it to network subscribers only. In the unlikely event that the income covers both the utility fee AND the bond payments, those who paid should be first in line for rate reductions to be made whole. Once the bonds are paid off, those who paid should also be first in line for reaping the benefits.

Conclusions

City councils are the ones ultimately in the drivers seat on these items. The first three need to be hammered out in the Milestone Two proposal. It’s entirely possible that some of them have already brought up one or more of these points. The final two, however, are entirely up to them. And it’s entirely up to you to let them know that’s what you want too.

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46 Responses to Making the Macquarie deal better: things every city council should consider

  1. Todd says:

    I agree that some effort ought to be made to structure the fee so that only subscribers pay. That seemed to be one of the major obstacles in Lindon’s discussion and vote. As a current Lindon subscriber, I would be happy to pay more so that those who don’t want the service don’t have to pay — especially if the alternative is going dark,

    • Greg says:

      I wonder how many subscribers it would take to make the fee (for subscribers) match the fee if everyone paid it.

      I wonder if a solution of, “if the line is ran to your home, you pay the fee…whether you use it or not. If you opt not to have the line ran to your house, no fee is required, but if you want the connection in the future, it will cost $2500.00, plus past-fees to have it installed. New home owners in an area can have the network connected for modest fee (if the previous home-owner opted out).”

      The reality is that it’s better to connect everyone up and have them pay the fee. Maybe they could adjust the cost where subscribers pay $20 and non-subscribers pay $10 (or whatever it would cost for the bond payment).

      • Jesse says:

        I don’t think going back to the install fee model is feasible at all. At that point, you’d be assessing a punitive fee against potential future revenue. That’s not financially sound.

        If the fee is assessed only to subscribers, they should receive priority for getting relief on their share of the bond payments (“first in, first out”). For example, if the money coming in is about $4/mo per household and there’s a 50% take rate, subscribers who pay the utility fee would see their share of bond payments dropped to about $0.50/mo while those who opted out would have to pay the full $8.50. If the money went up to $5/mo, then those who opted into the utility fee would have their bond payments eliminated and everyone else would drop to $8.00/mo. That would keep things equitable while providing a “put your money where your mount is” opt out provision.

  2. Ryan says:

    Great ideas. I’ve had similar ideas. Basic tier should scale exponentially similar to Moore’s Law. The content and therefore the need surely will scale. It doesn’t have to double every 18 months, but doubling every 5-10 years seems reasonable.

    I’d suggest something like this at a minimum:

    2015 to 2025 – 3MB/3MB 20GB Cap
    2025 to 2035 – 10MB/10MB 40GB Cap
    2035 to 2045 – 20MB/20MB 80GB Cap

    • Greg says:

      Definitely at a minimum. I like the suggestion of increasing at 75% of the down speed, compared to the FCC’s definition of broadband. But the solution you have makes sense too. It gives more of a hard date for speed increases on the free tier.

  3. Greg says:

    Great solutions, and all of which I agree with (and have thought about at one point or another). I’m sure there are other items on the list that should be brought up, but this list brings up the big items.

  4. Richard says:

    Is there anything to prevent ISPs from offering higher service/bandwidth as part of the utility fee to win customers, or is the current limit simply a suggestion from Macquarie.

    • Greg says:

      I’m willing to bet that they can offer whatever they want but they won’t get paid for it.

      I could see doing this from a strategy point of view to entice customers to pick your service over the others; at which point you could try and get them to upgrade to a premium service. Beyond that, it’s just a way to cost the provider money.

      • Jonathan K says:

        I seem to remember this question being asked in the Layton meeting. I think what has been said here is correct. If they were to offer something above the agreed upon minimal amount they would be charged transport fees by the wholesaler. As was mentioned someone doing this breaks the model of making money on premium services. If there is not revenue generated Macquarie will not make a return on their investment and the cities will not make extra money allowing them to pay off the bonds and possibly lower the fee.

        Its my understanding that the fee really only pays back their bonds and money put into build out the network, upgrade and run it. Any extra returns they derive from profits via transport fees. So its ultimately in their best interest to have a working network that passes many homes and is well run and marketed.

        • Jesse says:

          My math is that the utility fee has an annual return on their investment of 3.7% to 4.7%. Less operating expenses and network refreshes, it drops even more. As an investment, the utility fee is probably worse than a savings account. Almost all of the money to be made is tied up in the wholesale revenue splits. I think Macquarie is planning on taking 30-40% based on what I’ve worked out, but it won’t be nailed down for sure until the full Milestone Two report is done.

    • Ryan says:

      As I understand it, the ISP is not charged transport fees for the base service level. If the ISP offers higher speed (and/or higher transfer cap?) than the base service to a utility-fee-only customer, they would presumably have to pay more transport fees for that customer, so that is what would prevent them from doing it, if it is even allowed by the agreement (not sure it would be). Remember, the ISP doesn’t get the monthly utility fee. They only get a one-time $50 install fee when a customer requests the ISP to initiate the base service. The rest of the ISP revenue comes from premium services.

      • Jesse says:

        You are correct. 3Mbps/3Mbps with 20GB/mo is the minimum that providers will be obligated to provide to basic customers. They would probably have the option to offer some perks (higher speeds, soft caps, higher caps, etc) to try getting better access to market to them.

  5. Josh says:

    What I’ve heard is they looked at what Google was offering and increased it to 3/3. I like Orem’s plan for lowering the utility. Utility is really the only concern stopping many from agreeing with the MQ deal.

    • Anonymous says:

      Josh, what is Orem’s plan for lowering the utility fee? I was at the first of the two meetings and they didn’t mention anything about any plan to lower the utility fee.

  6. Charles Hart says:

    Tie the basic rate/cap to the wholesale cost of bandwidth the ISP pays.

  7. Charles Hart says:

    If everyone doesn’t pay the fee the fee for those who do will go way up. The only way to make this work is to get everyone to use it. History proves that people won’t use it unless they have too.

    • Jesse says:

      That’s why I say “if possible”. With a high take rate, the cost per household could get low enough that just putting it on subscribers would be feasible. Example: you get a 50% take rate and the utility fee is effectively $0.96/mo per household. (Very unlikely, but let’s say it happened.) If you just put it on subscribers, you’re looking at $1.92/mo per household on just the subscribers. That’s not too painful at all.

      • Greg says:

        while I like this, I do like the solution you provided on my comment. Basically, the people that don’t want it and think it’s a waste, should be on the hook for the bond payment at the least. So if subscribers are paying the 1.92/mo for a 50% take-rate, the non-subscribers should still be paying the bond payment of 8.50. Although, I’m not 100% sure how all the fees work, so there is a chance that the 1.92 is in addition to the 8.50/mo bond fee. both of which I’m perfectly ok with, given a gig connection with those fees is nearly the same as my lackluster 25Mbps down (3 up) costs.

    • Charles Hart says:

      One of the reasons people don’t use it is because it’s too expensive. The lowest price is 25Mbps for $50/n ($20 utopia + $30 ISP). Why is there nothing cheaper?

      I talked to a manager at one of the ISPs last Sunday. He said Utopia will not allow ISPs to offer a lower priced tier (e.g. 10Mb/s for $10). Is this true?

      The key to Utopia success is for more people in already passed areas to use it. You have to attract them with a lower price point than $50/m or force them with a universal utility fee. It is not rocket science.

      • Jesse says:

        With super-cheap tiers you run the risk of cannibalizing your higher tiers. If you had a $10 option, you’d need to make sure that you had at least two people take it for each person that dropped the $30 25Mbps plan to save a few bucks just to break even.

        My understanding is that right now UTOPIA charges wholesale rates for 100Mbps and 1Gbps circuits. (They’re not going to install 10Mbps circuits.) Providers can only go so cheap before the margins don’t make sense anymore. If you’re paying for 100Mbps, it wouldn’t make sense to sell a 10Mbps service on top of it.

        I do agree that pricing elasticity is important (and it’s why dropping the gigabit tier from $300 to $70 was a good move), but you can’t drop the price below your costs or sacrifice your higher-end business to do it. Unlike digital media (curse you, Steam sales), there’s no sunk cost of creating the product and the cost to deliver it isn’t very close to zero.

        • Charles Hart says:

          “My understanding is that right now UTOPIA charges wholesale rates for 100Mbps and 1Gbps circuits. (They’re not going to install 10Mbps circuits.) Providers can only go so cheap before the margins don’t make sense anymore. If you’re paying for 100Mbps, it wouldn’t make sense to sell a 10Mbps service on top of it.”

          If this is how Utopia management thinks I can understand why they are not successful. Utopia needs to find a way for ISPs to offer lower cost tier service. Why? The bulk of the market is below $50/m for internet service. If you don’t find a way to get there you will continue with very low take rates.

          100/1000Mbps circuits (GBICs) are not expensive ($50). Depreciated over 10yrs, that’s $5/yr. (30ys <$2/yr. The 10M customer today is not going to exceed 1G in 30yrs.) Besides the current install fee easily covers the cost of the GBIC.

          If you view is correct how are ISPs magically going to be able to offer the $20/m base rate (3M/20G) in the future, for free no less?

          Utopia management appear to be idiots.

          • Jesse says:

            I don’t think I follow. $35/mo for 100Mbps/100Mbps service is pretty darn cheap. The only way to go cheaper is getting a vanilla DSL product that’s worse than the basic 3Mbps tier. I’m not sure how you figure that there’s a market for a dirt cheap tier that also helps keep the lights on. The income matters more than the number of subscribers.

            The utility fee goes almost entirely towards network construction, maintenance, and operation. There is no money earmarked for service delivery The basic service has such a low cost of delivery (between $1.50 and $2.00 per month max) that service providers are happy to eat that in order to upsell those customers.

            • Jonathan K says:

              I would have to agree with Jesse. $35 is already as low or lower than any of the competition. As an example a Centurylink 3/1 DSL is $29.00 (pre taxes). Anything higher at least doubles the price.

              There is a lot more than a $50 GBIC that goes into the cost of turning up a port. Don’t forget the network switch, fiber jumpers, CPE device, fiber plant (plus repair costs), power to run switch, people to setup and run the switch, replacement of the switch and GBIC in ~7 years. Often times the largest cost of running a business is paying for the people. All of the electronics for the network will last ~7 years before needing a tech refresh. The fiber 30 years is a good number. At some point even if the fiber is still viable you are going to have to move a line or repair a break. The people on the other hand cost every year. One of them often times cost more than the switches in your nearest fiber hut.

            • Charles Hart says:

              You previously stated that ISPs could not offer $10/m for 10M because their costs were too high. Now you say the basic service has a cost of delivery <$2.

              Which is it?

              I'm explaining the low take rates based on a premise that the $50/m cost is too high for most people ($20 utopia + $30 ISP). How do you explain the low take rates?

              • Jesse says:

                ISPs have no wholesale costs on the basic tier. They would have a wholesale cost on other tiers. I’m also not including any cost to support the accounts (which on a free tier may actually be HIGHER than a paid tier; people who get free stuff often expect more). My cost to deliver is based on a cost of $0.01/GB for transfer. There’s no conflict in the information presented at all.

                The main barriers to higher take rates are availability (only 27% of addresses are marketable) and up-front cost (a $3K install fee). The Macquarie plan solves both. In areas of high availability (Brigham City and Centerville are over 90%), take rates get around 25%. Eliminating the install fees would drive adoption higher.

                • Charles Hart says:

                  “ISPs have no wholesale costs on the basic tier. They would have a wholesale cost on other tiers.”

                  I assume the ISP is paying the wholesale cost to Utopia?

                  Assume the wholesale cost is $X/100Mbps. Then the cost to offer 10Mbps would be X/10?

                  • Jesse says:

                    Yes, that wholesale cost is paid to UTOPIA. It covers the cost of the circuit (electronics, labor, electricity, etc).

                    Circuit costs aren’t a linear function. Some costs (like labor and electricity) are the same no matter the speed. Others depend on the cost of the equipment. It’s just not that simple.

                    • Charles Hart says:

                      Well some of the costs will not be linear and some will. If the ISP can offer 3Mbps for free then the incremental cost to offer 10Mbps should be $X/10 – $X/33.

                      I would be willing to bet that $X/10 – $X/33 is a small fraction of $10/m.

                    • Greg says:

                      Charles, From a business point of view I see a couple of reasons not to offer the 10M tier (I also see a reason to offer it):

                      1. Your included offering is a better value than the lowest tiers from any of the competition: Comcast (6 Mbps at $50/mo) or Century Link (1.5 Mbit at $30/mo+phone line (really $40/mo)). A $10 tier just creates competition in a space where nothing existed…A $10 service would exist if it were in demand.

                      2. Your first premium tier with UTOPIA is $35+$20 (Utility fee, which probably won’t be $20) and it gives you 100 Mbit up/down. None of the other providers have a service that is even close to the speed and/or price. (Comcast’s cheapest tier (6 Mbit) is $50, and CL’s cheapest tier (1.5 Mbit) is $30 (assuming you have/want a phone line). They don’t have a sericve lower than those, and the next service up is $10 more for Comcast, and $10 less for CL (but still not better than the Utility fee offering).

                      Now my main argument for the $10/mo 10M tier:

                      1. If they offered the $10 tier that removed the 20 GB cap (maybe a family doesn’t need 100 Mbit, but they need more than 20 GB of transfer beyond a “soft cap” per month), this would also net a slight increase in internet speed (10 Mbit versus 3 Mbit).

        • Charles Hart says:

          “With super-cheap tiers you run the risk of cannibalizing your higher tiers. If you had a $10 option, you’d need to make sure that you had at least two people take it for each person that dropped the $30 25Mbps plan to save a few bucks just to break even.”

          So Toyota should stop selling cars because it’s cannibalizing their Lexus division sales?

          • Jesse says:

            There’s limits to pricing elasticity. To extend your argument, why doesn’t Toyota sell a $500 car? Because there’s only so far you can reduce the retail price before you don’t make any money or ruin the product quality. Same deal here. You can only get so cheap and still make money. If you cut support to save costs, the product quality goes into the crapper and it’s MStar all over again.

            Seriously, I don’t think you understand the economic realities of the ISP market. (And any ISP readers would be invited to chime in here.)

            • Charles Hart says:

              Let me try a different approach. Let’s try and understand the market.

              You say a 25% Utopia take rate is typical/possible in covered areas. What are the other 75% paying for internet service?

              $0/m (no internet service)
              $10/m
              $20/m
              $30/m
              $40/m
              $50/m or greater

              If Utopia management doesn’t know the above then they are incompetent.

              • Jesse says:

                Not just typical/possible. 25% is happening right now. Look at the Milestone One report. It shows a 25% take rate in marketable areas. Brigham City and Centerville are the best examples since they have almost full builds and don’t have, er, “unique demographics” (read: a lot of rich people) like Lindon (who sits at 45%).

                Per data from a recently released report from the Utah Broadband Project, the average selling price of an Internet connection in Utah is $42-43/mo. That $35 for 100Mbps/100Mbps service is quite competitive.

                • Charles Hart says:

                  “Per data from a recently released report from the Utah Broadband Project, the average selling price of an Internet connection in Utah is $42-43/mo. That $35 for 100Mbps/100Mbps service is quite competitive.”

                  OK, now we are making progress. The $35 is the ISP fee. Add the $20 Utopia fee and you get $55. If the average is $42 then 50% of the market is paying less than $42. If Utopia wants to expand its market share (take rate) they need to offer products less than $42 (e.g. $30 = $20 utopia + $10 ISP for 10Mbps).

                  • Jesse says:

                    The $20 you keep citing is the cost to install the infrastructure. It’s not the cost of service and it goes away completely and entirely under the Macquarie plan. In fact, the Macquarie plan bears a striking resemblance to what UTOPIA would have looked like had it been able to bond for the full cost of construction (instead of being prohibited from doing so by the legislature).

                    I’ll say it again: it will not be financially possible to deliver a $10/mo product. No way, no how. You keep insisting that the only reason it doesn’t exist is because UTOPIA charges too much for wholesale, but the costs of the network are the costs of the network. You’ve made the assertion; now it’s time for you to present the evidence that it’s possible instead of putting the onus on me to disprove it.

                    • Charles Hart says:

                      “The $20 you keep citing is the cost to install the infrastructure. It’s not the cost of service and it goes away completely and entirely under the Macquarie plan.”

                      No, the $20 just transitions to a $20 inflation adjusted utility fee. It’s still there. Under the current deal, one has the option to pay it all upfront, which is a must better deal.

                      The consumer now pays $20 (utopia) + $30 (isp) for the cheapest internet service available now. According to your data this is higher than the $42 average, which explains the low take rate.

                      If Utopia wants to increase it’s take rate they will have to offer a lower tier product. Many people do not need a Lexus and are happy with a Ford.

                      If Utopia continues with it’s Lexus strategy their take rates will remain low. If take rates for passed areas remain low it will not help to spend more money to expand the passed areas.

                      Some how Utopia/Macquarie/ISP with a $20 utility fee can offer a $0/m for 3Mbps and $30/m for 25Mbps but can’t offer anything in-between? Incompetent if true.

                      Bottom line: Utopia/ISP needs to be required to improve it’s take rate before spending more money expanding. Offer $20/m for 3Mbps NOW. Fill in the price tiers. $20/m, $30/m, $40/m. Add Fords to the product line. Get in there and compete!

                    • Jesse says:

                      The utility fee covers operational expenses, building the network, and maintaining it and would decrease with system revenues. The install fee covers just getting the connection to the house and will not vary depending on system revenues. There’s a giant gulf of difference there.

                      And you’re still missing the real point. UTOPIA has no money to hook up customers in marketable areas. Not one red cent. Even if they did, would it be better spent chasing down a customer like me who would pay all the dollars for a gigabit line or the guy who wants an el-cheapo plan that’s the same cost as his current dial-up connection? It’s pretty much a no-brainer. Argue all you want about take rates, but take rates don’t matter; the dollars do. That’s why cities directed UTOPIA to focus on high-margin business accounts instead of residential customers two years ago. Once UTOPIA is at least covering opex and the bonds, we can talk about making cut-rate plans. Until then, they need the money.

                    • Jonathan K says:

                      Charles, The $20 figure under Macquarie assumes (basically) all residence pay the fee. The $20 figure currently paid by only subscribers and only a subset of subscribers at that is a much smaller base. The fee you see now in the form of $35 is very close to the wholesale rate that UTIOPA currently charges ISPs for a residential line. It can be assumed that they can’t go much below that cost on a subscriber only model so the thought that they can offer a $10 10Meg line and still run the network I don’t think is a reality.

                      As with traditional DSL and cable we know that the large part of the cost is running the network not acquiring upstream (Internet) bandwidth. So if a ISP on the Macquarie freebie plan is not charged for use of the network (which I submit is a little less than $35 currently) ISP costs drop significantly.

                      There also seems to be an assumption that the 3/1, 7/1 DSL or 25/3, 50/10 cable speeds are directly related to costs. Past the cost of the lowest tier most of the markup is pure profit. The speeds offered are driven by the technology used. In only a few cases I can see their being a direct extra cost to increase the speed to a home owner (business lines are a hole other game). That would be with VDSL where the 40/20 product takes double the copper and double the ports on the DSLAM.

                  • Greg says:

                    Your’e also forgetting that UTOPIA is offering a tier for the people who don’t want to pay $55/mo. It’s the “utility fee/free” tier and it gives you 3M up/down. Those people who pay less than $42/mo, aren’t getting speeds in the 100Mbit range, they aren’t even seeing 25 Mbit…they are the 1.5-7Mbit customers. Speeds above that are in the $55+ range. UTOPIA doesn’t need to create a tier, because they are already offering a better solution for less money.

            • Charles Hart says:

              Toyota doesn’t need to see a $500 car because no one else does.

              I assume you agree that it makes no sense for Toyota to stop selling cars even though it cannibalizes their Lexus division sales.

              Toyota must offer products competitive with other makers. Similarly Utopia must offer products that compete with alternatives if they want their market share (take rates) to be higher.

              What you have now is Utopia trying to sell Lexus to customers who prefer the price points offered by Ford, Hyundai, … (everyone) and they wonders why their take rates are only 25%.

      • Greg says:

        None of the “big 2″ offer a rate that cheap for those kinds of speeds. My Comcast bill is well over $65/mo for 25Mbps. I will be begging Macquarie to start on my street when this goes through, and I will drop comcast faster than a fat kid downs a big gulp.

  8. Scott McIntyre says:

    I don’t have a problem with the slow basic tier or the monthly cap (as long as it is a soft cap to allow throttled internet access and VoIP functionality after limit is reached).
    If the basic speed is increased, it eliminates the incentive for users to upgrade to a premium service.

    On another topic, I am interested in seeing the details of the agreement between Macquarie and the service providers. It may be flirting with anti-trust issues espessically where they talk about setting a standard price across the board for certain services. I would hope that they don’t defeat the benifits of an open network by binding providers to pre-structured pricing plans.

    • Jesse says:

      Increasing the free tier is a very fine line. I don’t think it can stay stuck at 3Mbps/20GB forever, but you’re right that potentially cannibalizing paid users isn’t a good option either.

      As I understand it, the service providers are obligated to deliver the free tier and get uniform pricing based on circuit size (100Mbps, 1Gbps, 10Gbps) and type (residential or commercial). It’s up to the SP to determine what they sell on the wire and how much they charge for it.

  9. comcast user says:

    I personally would pay the $99 for the gigabit link plus the base service fee, comcast is ripping off their customers 23 gig or 50 gig if you pay extra.

    just bring it to my area, hell i would even pay the installation fee but at this point I have no choice because comcast is the only real boradband service provider in utah, qwest, was usworst, changed the name but didn’t improve any service. 1.5 meg DLS is not broadband, and good luck getting anything better on their 50 year old copper.

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