Free UTOPIA!

Long-time readers of this blog (or those paying attention to iProvo) will recognize the name of Steve Turley. As a member of Provo’s municipal council, he’s been a consistent voice of opposition on all things iProvo since as far back as anyone can remember. You may even recall the recent series of articles in the Daily Herald bringing light to some shady-looking real estate deals and resulting lawsuits that he’s involved in. Today, he had an op-ed in the Deseret News calling on UTOPIA cities to follow Provo’s lead and dump their fiber network. Unfortunately, it would appear that Councilman Turley is about as knowledgeable as he appears ethical.

The biggest surprise is that Turley claimed the sale of iProvo is a success, this in spite of voting against both the sale to Broadweave and Veracity’s subsequent takeover of Broadweave. I have a hard time swallowing Turley’s characterization given that Broadweave spent sixteen months doing a terrible job at running the network (just like I said they would) before Veracity stepped in to save their hide. Even so, Provo had to loan out more money to Veracity to make the deal work. Veracity has done a superb job at turning around operations, but they have also had to cross-subsidize the network from their other operations and may continue to do so for several years. The reality is that this is the best the council could come up with since they did not have the stomach to do what was necessary to run the network successfully as a city department. It is absolutely absurd that Turley thinks he could vote against these outcomes and still be able to claim responsibility for them.

There’s also the wildly inaccurate claim that Provo solicited bids to buy the network. That’s absolutely and patently false. (I’d go so far as to call it utter bulls–t, much like the rest of his arguments.) The sale of the network came as a total surprise to the general public, service providers, industry watchers, and even the entire municipal council. The Mayor himself, the architect of the Broadweave deal, was adamant that a sale wasn’t on the table up until a couple of months before unveiling it. This was during the time that Billings and Broadweave were busy negotiating the terms of the deal. There was no clear RFP for bids, no public bidding process, and a very short period in which to review the terms of the deal. Does that sound like hanging a “For Sale” sign to you.

Turley has also wildly distorted the cost of building iProvo. Most of the main fiber optic rings were built many years before iProvo was even proposed. (I’d say planned, but I’m sure Mayor Billings knew what he was doing the whole time.) Those rings were paid for with federal grants so that the city could monitor traffic and improve air quality. That backbone certainly didn’t come cheap and should be included in the cost of expanding the network to include service to city residents. The $39M figure also does not include the shared cost of the video headend built jointly with UTOPIA. These items could easily add $10M or more to the total cost of the network, something that Turley has intentionally chosen to ignore.

Of course, these are just the factual problems with what he has written; I haven’t even made it to his faulty conclusions yet. Based on the “evidence” Steve Turley has presented, he thinks that UTOPIA cities should follow Provo’s lead and find a private company to buy the network. Unfortunately, that’s ignoring the marketable reality of the network. iProvo is a fully-built network covering an entire municipality. By the last publicly available figures, the network should have had little trouble being self-sufficient with some modest increases in take rates and small rate increases (not to mention better accounting practices). That makes it a very attractive target for acquisition, especially since the network was ready to roll.

UTOPIA, on the other hand, has patchy coverage and needs a lot of significant investment to cover its intended service areas. It’s main asset is the fiber running from Portland to Las Vegas, but even that isn’t valued at enough to pay off the current debts. UTOPIA cities, if they sold today, would still be making most of the payments and getting nothing in return for it. Provo, on the other hand, got someone else to assume the full debt load while walking away from it. Do these sound like similar situations to you? Me neither.

He also characterizes the new $60M bond proposal as additional system debt, just like the Utah “Taxpayers” Association has been doing. This, again, flies in the face of reality. The entirety of the $60M bond would be paid for by system subscribers, not the cities or UTOPIA. Claiming that signing on to this plan creates an additional burden systemwide is uninformed drivel.

In summation, Steve Turley knows about as much about municipal broadband now as he did two years ago. Unfortunately, that knowledge wouldn’t fill a thimble. Councilman, do us all a favor and go back to your home planet. Maybe they’ll be more accepting of your Reality Distortion Field.

I usually spend a lot of time checking my non-broadband opinions at the door. If anyone cares about my political leanings outside of telecommunications, they can find my other blog with great ease. In this case though, I’ve got more than a few choice words for the broadband stimulus and how it has failed to improve anything at all. In fact, I believe it has only made things worse.

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Sprint has been down on its luck for quite some time. The company suffered through a long period of wandering in the wilderness with poor customer service and defecting subscribers to the tune of over a million per quarter for years. This wasn’t helped by its merger with Nextel, a partnership that made little sense considering that both companies use different signal standards. It looked for some time that Sprint would simply collapse on itself. Lately, though, I’m beginning to think that this brush with death has made the company smarter than any other wireless company in the country.

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Retransmission fights between cable companies and station owners is not a rare thing, but networks actually disappearing from the line-up isn’t common at all. It’s been almost a week since Scripps pulled their channels, including Food Network and HGTV, from Cablevision, leaving many New York City customers without access to these stations. Even more remarkable, they’ve chosen to get popular programs, such as Iron Chef, to customers by partnering with local over-the-air stations. Have the catfights between cable and programmers finally reached a level where cable just can’t cut it anymore?

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If regulators sign off on it, the nation’s largest cable company will end up with a significant foothold in both the broadcast media and movie industries. Overnight, a content distributor becomes a content producer. Pre-merger, Comcast had little incentive to play along with the copyright cop ambitions of the RIAA and MPAA. This merger could change everything, driving Comcast into policing not just the distribution of its own wares but those of fellow studios.

Given how Time Warner Cable would regularly roll over for MPAA requests to disconnect service, both before and after being spun off from parent company Time Warner, this is a legitimate and pressing concern. The MPAA spends a lot of time trying to track down pirates and they often get the wrong person.  The MPAA has also pushed hard for restricting what DVRs can record, locking down digital media to the point of near-uselessness, and wiping out net neutrality so that peer-to-peer programs can be blocked on a whim. None of these proposals are good for Comcast data or video customers and I do not think Comcast wants to unnecessarily restrict what customers can and cannot do with their connection.

That said, what will they do when Universal Pictures, a division of the merged company, has a competing interest? Which part of the company has their interests heard first? Will Comcast give Universal special access to routers and logs to track down pirates? Will they start using deep packet inspection? What can the falsely accused do about it?

This is why we should be very, very scared of the continued integration of media and telecommunications companies. The verticial monopoly of wholesale and retail telecom is bad enough, but when they control the content going over the pipe as well, it can get really ugly really fast.

Now that the SAA has been approved in Brigham City and construction can start, we can expect that the same model will be executed in other member cities to help build out the infrastructure. Even neighborhoods not in member cities could get in on the action if they were so inclined. Even with how successful it was overall, I still have some reservations.

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While I was on KVNU’s For the People tonight,  a caller expressed concerns about how UTOPIA is financed. It became clear to me that this caller had confused the various funding models and bonds UTOPIA has been and is currently using. I thought I should clarify how exactly UTOPIA got its money and who is on the hook for what. There’s a lot of confusion about how UTOPIA is backed and financed and this is because there have been two rounds of bonding under one financial model and new potential rounds of bonds under a new financial model.

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I’ve spent the last week rolling over the proposed merger of Veracity and Broadweave as well as their proposal to Provo City upon which it is contingent. I’ve gotten  more information from Veracity and Broadweave on their position and talked to other people who’ve been keeping an eye on things. I’m still not sure if the deal is in the city’s best interests, but I don’t know that it’s necessarily rotten or the only option either.

Veracity’s proposal to the city is, for all intents and purposes, a loan of $1.5M over the next 18 months to reduce the bond payments to be paid back over the seven years following that at 5.1% interest. (Ironically, this is the amount Provo City would have paid on the bond had they kept the network.) Veracity has said it has pursued private financing for the deal and has been unable to secure it, though I imagine the terms were also not as favorable as what’s being proposed to the city. Under the proposal, Provo would use the energy reserve fund to make the payments, money that would have been earning 1% interest. Taxes wouldn’t increase to finance it nor would other budgets be cut into.

So why does Veracity want a loan to reduce the payments? They’re looking to buy time to move their Provo customers onto iProvo to slash costs and improve operating efficiencies. Not only does that cut Qwest transport out of the picture, but they can also sell services that would not have been easy to provide given the wholesale rates that Qwest charges. Moving those customers will cost a fair amount of money, so Veracity needs time to get it done.

Given Veracity’s financial state, I have my doubts as to whether or not they could secure private financing for this deal. They reportedly operate debt-free with a very healthy cash flow and I would hope that they presented the council with scenarios under which they use private financing combined with current revenues to accomplish the same ends. They have been opening the books to the city council and some staff for their review, but there also needs to be a Plan B. Right now, the proposal feels very “take it or leave it”.

This isn’t to say that I doubt Veracity’s capability. They’re an exceptional company offering exceptional service that I use in my job every day. Their management team is full of smart people and Broadweave has done a much-needed sweep of almost all of its management team. My reservations hinge on asking the city to extend their role in the financing of the sale.

So what’s the alternative? Broadweave is fast-approaching the date where the network will have to be returned to the city since investors aren’t willing to put any more money into it. If that happens, Provo will have several months of the reserve to use for paying off the bond while they regroup. It sounds like a worst-case doomsday scenario, but I don’t think it’s quite as dire as even I would have once predicted. Provo will still have a couple of options at their disposal.

The first option would be to resume control of the wholesale side and allow Broadweave to continue as the main retail provider. This option would only work if, after being relieved of the wholesale obligations, Broadweave would have sufficient funds to find new customers and finance install costs. There’s also the problems of re-staffing the NOC as a city department and relocating Broadweave to another office. It may also be very difficult for a single retailer to secure enough customers to cover the wholesale side of the operation

The second option would be to bring in new retail providers to compete with (or replace) Broadweave. If Provo entered into some kind of reciprocity agreement with UTOPIA that allowed a provider from one network to participate on the other, it would secure the residential contract on UTOPIA that Broadweave wouldn’t mind having and bring in a half-dozen new providers to Provo to scoop up new customers. This would also mean that at least two different head-ends on both networks would be competing for customers, a win-win for served residents. New providers, however, may be leery of making a deal with Provo after the way that they threw Mstar under the bus. Granted, Mstar wasn’t paying its bills and didn’t have much goodwill to cash in, but they were also bullied into the deal they got. In either scenario, Provo would have several months of lead time to figure out what to do and find a way to make the payments once again.

Provo isn’t necessarily locked into the merger option. If the council still wants to get out of the business, they believe that Veracity is good for the money, and they don’t have qualms about extending some more financing, they can go with the merger. If they want city money to result in a city asset, don’t have heartburn about doing the work to fix iProvo (now that we’ve seen that a private company wasn’t able to), and don’t think this is the last time they’ll be asked to extend their risk, there’s options for taking the network back.

No matter what happens, this should be an example of how difficult it is to try and undo the decision to get into the business of telecommunications. We’ve seen that a private company operating a closed network is not necessarily any more successful than a public entity operating an open network when in an overbuild scenario. We’ve also seen that self-financing means you aren’t really out of the business until the last red cent of the bond has been paid off. Any city thinking about jumping ship would do well to consider that it’s not an easy way out like the Reason Foundation and Utah Taxpayers Association claim it is.

Capt. Video and I had a discussion a few weeks ago about how service providers handle over-the-top providers such as Vonage. Service providers are in a sticky situation as many of these services may compete with their existing products. Vonage and Skype take away phone customers. Hulu and iTunes take away video customers. So what should a service provider do about it? I see only three options open to them.

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I’m telecommuting this week and next and forced to use my own phone line for all of my business-related calls. My cell phone plan includes only 550 minutes of airtime per month. My Vonage line, which I took with me, includes just 500. So why aren’t I sweating about using up all of my minutes?

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