If Macquarie wants to win over cost-wary cities, they may need a new plan

macquarie_logo_2638In all of the city council discussions over the Macquarie deal, the conversation has been dominated by the potential cost of the utility fee. Even with the extremely high probability of generating enough revenue to cover the utility fee and reduce the bond payment, it’s all about what how much money is going to be collected from the cities. This has sunk the deal in about half of UTOPIA cities and looms as a threat over the ones that opted to get more details under Milestone Two. If Macquarie wants this to pass, they need to quash this main opposition talking point.

My projections are that this Macquarie deal creates a whole lot of money, both for Macquarie and the cities. Macquarie is operating in a very risk averse fashion despite this. They need to put more skin in the game in order to get current UTOPIA cities to take the deal and expand it across the state and the nation like they want. With their size and the low break-even point (35%-ish take rate), that should be easy to do.

Macquarie could alter the deal to eliminate or sharply reduce the direct utility fee. In its place, they should stipulate that they take 100% of the wholesale revenues until what would have been the utility fee is covered, then go back to the revenue split for any money beyond that. This would remove the possibility of cities having to pay anything for the deal and creates a small (and very remote) risk of them taking in less money than what it costs them to operate the network. There would be no way to scaremonger that the cities would be creating a huge tax on residents.

This is still a really good deal for cities. They eliminate all operational and maintenance costs associated with the network. If it doesn’t work, the only money they have to pay is the original bonds that they would have had to pay anyway. If it does work, they lower the bond payments. Either way, the network gets done, they eliminate the operational costs, and they get a completed network back at the end of 30 years.

There’s still downsides to this approach. Macquarie had planned to bond for 80% of the money needed to complete the build. The utility fee ensured that they could secure the best possible rates to do so. Without that kind of security, they would have to find alternate financing options or direct money internally to the project (and away from other projects). It could be harder for Macquarie to pull together the money and it will definitely mean that the revenue split for cities would be much smaller. It also means that Macquarie could end up not meeting their required ROI.

Maybe what Macqaurie could do is offer the cities three options and let each city pick the one that works for them. Option 1 would be the current utility fee with a maximum amount of revenue sharing to the cities. Option 2 would be no utility fee, but the cities have much lower odds of getting any kind of wholesale revenue split. Option 3 would be a lowered utility fee with a lowered share of wholesale revenues going to the cities. This would allow a lot of flexibility in how cities can opt in. It also allows Macquarie to at least partially take advantage of lower interest rates for the cities who take Option 1.

So far, Macquarie hasn’t played the politics of the situation very well at all. Despite a few big successes in the beginning, they’ve gotten their clocks cleaned in most of the cities that voted later and they haven’t been willing to accept that this is a full-scale war, not some alley fight. I’m hoping that they’ve paid attention and are willing to look at ways to keep this a good deal all around while defusing the biggest arguments against taking the deal.

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13 Responses to If Macquarie wants to win over cost-wary cities, they may need a new plan

  1. John M. says:

    If I understood the opinions of the Orem city council, the vote tally would have probably been the opposite if there had been no utility fee. Six of them would have been in favor of Macquarie and one or two would have been against.

  2. Craig Schow says:

    You earned your A for the day. I’m going to discuss some of these potential options with my city reps.

  3. Anonymous says:

    Maybe this is implicit in what you’re saying, but I don’t think the cities are opposed to collecting a utility fee from those who use the service. It’s forcing people to pay the fee even if they aren’t interested that kills the deal.

    Let’s say that they decided to offer a model like you proposed, and a third of the city opted for the basic tier ($20 utility fee only), a third of the city opted for premium services ($20 utility fee + premium fees) and a third opted not to use it at all. If that were to happen, I expect that the transport fees from the premium users could cover the lost revenue from those who pay nothing because they use nothing.

    • Jesse says:

      The cities and Macquarie are doing a terrible job of explaining anything. Macquarie assess the fee based on all addresses. The cities have the flexibility you describe to figure out who pays it AND they get massive revenues from the deal to defray the costs. Somehow, a scenario where cities end up reducing bond liabilities with a private partner turned into lighting a giant pile of money on fire and making everyone pay for it.

      What I’m proposing is giving the cities that are too dumb and/or cowardly to adequately evaluate and explain this deal an option to give up a lot of money in exchange for political cover. For cities that take the original proposal and end up with a lot more money in city coffers, they’ll be laughing all the way to the bank and future cities will get an idea of the best way forward. I can live with that.

  4. Rob says:

    Jesse,

    First I’d just like to say thanks for your advocacy on UTOPIA. I’ve been following your site for years, long before I was in a position to be able to buy a home in one of the UTOPIA cities (Centerville). I know a lot of people appreciate your voice on this issue, especially where the loudest voice in opposition is often funded/supported by the incumbents (Comcast/CenturyLink). I can tell from this “op-ed” article that you have been listening to the discussion in the comments over the past week, and I think you summarized the situation well.

    Right now seems to be a critical point for UTOPIA and it concerns me that the opposition, primarily the UTA/uNOpia backed by CenturyLink, currently has the megaphone. As Richard commented on the Orem article, they have been effective at identifying and exploiting areas of confusion.

    I propose that we, as a community, begin to organize in support of UTOPIA/Macquarie to address the key issues at stake. Without limiting what we do, I think the two most important products we could produce would be:

    1) A concise, one page document that addresses the facts covering UTOPIA’s history and the Macquarie proposal.
    a) History of why UTOPIA got started. For instance, what was the incumbent offerings a decade ago? How have the incumbents responded in improving their offerings in UTOPIA member cities since then.
    b) Breakdown of the actual costs that cities have backed for UTOPIA up until now. Where has the revenue come from in each city to pay the bonds? Without Macquarie, what additional costs will the cities reasonably be expecting to take on to keep UTOPIA alive in the next decade?
    c) Facts on legislature that has been passed since UTOPIA was proposed which has limited its success. In cases where incumbents were behind legislation, make note of the involvement with verifiable references.
    d) Breakdown of the financial model proposed in the Macquarie deal as it is, with sample points at varying levels of take rates.
    e) Assuming no cities allow UTOPIA to go dark, a comparison of the situation if the Macquarie proposal was accepted or declined.
    f) The net neutrality issue that is heating up with the FCC this month could be a good case-in-point to remind people that the reasons UTOPIA started have not gone away, and the situation could easily get worse than it was if UTOPIA were allowed to go dark.
    g) Directly address FUD, by fact-checking the unfounded statements that we’ve heard thrown around recently.

    2) A more detailed and thorough analysis of specific issues, and brief opinion pieces from members of UTOPIA communities or from people seriously interested in moving to UTOPIA communities. Important points/issues that can not be verified by references should appear here, not on the one page fact sheet. This could include a forum where residents could share rumors or statements they’ve heard that sound suspiciously FUD, which the community could work together to fact-check.

    It’s important that item 1 is based on fact that can be verified by references. Except in extraordinary cases, the references should not be to articles on this site, which may appear biased or based on opinion or hearsay. This would provide residents with a document they could print out and bring with them to City Council meetings, which they could use to make well reasoned factual arguments.

    Jesse, perhaps you could support the community in developing something like this here on your website? Maybe a Wiki for the community to collaborate on, and a forum for us to discuss and research issues? As the only site I know of that advocates for UTOPIA, it would be much easier to gather the supporters through your site than to start and promote a new website.

    I’d be happy to contribute to something like this, both in the factual research and in an opinion piece as a UTOPIA subscriber. From the comments I’ve seen here over the past week, I think there would be a lot of support.

    • Richard says:

      Rob, I love it.

      Bear in mind that we’re trying to convince politicians, those who think any “tax” is bad, I would rather pay $80 to Comcast than $40 to the “Gubernment” cuz my freedom is more important than saving money people. (waves flag, holsters gun, puts down bible, crosses arms and stairs).

      The UTA/incumbents boiled this down to 2-3 catchy talking points that inflamed their constituents. The flyer prepared by Orem Fiber was perfect: short, concise and informative, yet it didn’t sway any of the city leadership nor the residents who couldn’t get past the choice, fee, freedom issues.

      I agree with Jesse, that if Macquarie can come to the table with an a more palatable option, we might have a chance. For example:

      - Eliminate the monthly fee.
      - Give residence a choice for installation, but not free. Perhaps $300 during initial period, $600 or more if later except new homes. Allow for fix-income or indigent to install without undue burden.
      - Macquarie keeps all revenues from premium services for the first 10 years, and then it only shares a small percentage each year growing by xx% each year to a cap of say $20%. Structure it so revenues could must first be used to pay down existing debt.

      • Jesse says:

        I don’t think an install fee can work long-term. It lowers the take rate compared to an included install and doesn’t achieve ubiquity. The UIA used an install fee, but we don’t know how well it would work since it apparently was allowed to more-or-less rot on the vine once Brigham City was complete.

        • Mike says:

          The install fee is a huge barrier for entry.

          At the Payson meeting, it was cited as part of the confusion: at least one person said that they didn’t want to have to pay $20/month, and then have to pay $3000 “on top of” that in order to actually use it. Unfortunately, a city council meeting really doesn’t present the opportunity for a discussion, to be able to address such points, unless a subsequent speaker brings it up.

          The install-fee model (unless it’s somehow a ‘you didn’t sign up when you had the chance, so we’re going to charge you’) isn’t going to work.

          Why do you think DirecTV and DISH offer free installation? They HAVE to, to compete.

          Maybe “we’ll waive the installation in exchange for a 2 year term commitment” could work (that’s effectively what the satellite companies do).

          Another comment that was made in Payson, that demonstrates just how bad the situation is: the comment was made that in addition to the $20/month, there would be modem rentals and other fees tacked on. Again, no one answered that, but it just proves the point that the incumbents are so bad that we simply assume that there are hidden fees and extras that aren’t mentioned in the advertised price. We simply accept it as a cost of doing business and move on, when it doesn’t HAVE to be that way.

    • Jesse says:

      There definitely needs to be some kind of professional-ish counter to the UTA’s crazypants arglebargle, but with as much as I know, it likely exceeds my ability to do it. I did try a wiki back in 2008, but nobody really used it much and it was lost during some server move when I deemed it non-essential. (Don’t worry; there wasn’t much in there to lose.)

      What might be a good idea would be to expand and enhance the Wikipedia article on UTOPIA instead. This would provide a much more visible place to put those counter-arguments and would be independent of what I do here.

    • Mike says:

      I like your idea Rob, but I don’t think you will be able to fit all of the suggested points under #1 onto a single page. :D

      I like Jesse’s idea about the wikipedia page, but of course, nothing stops someone on the other side from destroying edits we might make, and enough of that happening will lead to them locking the page. I have hosting space and I could set up a wiki, if we wanted to do that as an alternative (or may if/when wikipedia locks the page)

      • Rob says:

        Updating the Wikipedia page is a great idea, and I will look at adding some information there this week. Just as is the case of my suggestion #1, Wikipedia is no place for opinions and hearsay. However it is a perfect place for facts backed by verifiable references. The Streisand Effect would take care of any opponents attempting to suppress this type of information from Wikipedia.

        Jesse, I understand and respect that you would like to keep this site as it, particularly since you’d tried a wiki in 2008 without much fanfare.

        Mike, you’d be surprised how much information I can pack onto a single sheet of paper! Somewhere in my storage room is a single piece of paper packed with just about every law of physics you’d need to design a fiber optic system. Surely the politics of a fiber optic system could fit on a single page, right? Well, maybe not.. haha! ;) (Before someone accuses me of having ulterior motives, I’m not employed in the networking/comms field)

        • Greg says:

          Haha, just because you can pack it all on one page, doesn’t mean everyone will want to read it. :D

          I do like the idea of a “get your facts right” sheet that is a single page. The hard part is trying to figure out what pieces of information are the most important.

          As for a wiki, it would be nice to have one that has all the facts. It would also be nice to have a “cliffs notes” version of them as well, just so we can quick glance the info and get a general idea. Also, getting it out of “contract speak” would be nice too.

          • Jesse says:

            The Wikipedian approach has usually been to summarize a given topic and provide a link to a new article with more in-depth explanations. It prevents the Wall of Text problem while still keeping an information-dense version available for those who want to dive deep. (Bonus: it increases the visibility of the issue with a higher page count.) Seems like that could work for this too.

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