Some Realism on iProvo

Last night, Provo Mayor John Curtis gave an update on iProvo and the city’s continuing involvement with the network and it looks like the city finally has an executive who wants to face facts. The reality of iProvo (or more accurately, the network sold to Veracity) is that revenues still don’t cover bond payments and aren’t likely to do so for quite some time. Veracity has already told me as much and that the single-family home business, which is both difficult and slow to grow, is the only thing left. It’ll probably be a while before revenues can cover the bond, and the payments will have to be cross-subsidized. The question, though, is who will do it.

Veracity has already received a break on payments, a break that runs out in just a few months. I’m confident that they can and will (but more importantly, should) continue to cross-subsidize Provo operations from other divisions of the company. Mayor Curtis’ remarks, though, seem to indicate an expectation that the city generally will have to continue to pick up part of the bond payments. I wouldn’t have much of a problem with this if Provo were continuing to operate the network with a wholesale open-access model, but effectively subsidizing a private company gives me serious pause.

I believe that Veracity is a good company and that they’re not out to pull a fast one on anybody. That said, I wouldn’t blame them for negotiating whatever they can get from the city. It’s the same as Google: “don’t be evil” doesn’t mean you should give up your strong negotiating position out of the goodness of your heart. And right now, Veracity is holding all the cards.

Read the articles from the Daily Herald and Salt Lake Tribune for more.

Provo Approves Veracity Proposal

As I predicted yesterday, Provo’s Municipal Council signed off on the proposal from Veracity to merge with Broadweave and float some of the bond payment for 10 years. (I also totally called Steve Turley voting against the proposal.) I’m not surprised at all given the political climate surrounding the network. Iin a worst-case scenario where Veracity gives the network back, Provo will have had more time to come up with a Plan B and the willingness to execute it.

Want to read more? The Daily Herald and Deseret News both have their articles up.

Provo's Decision Tonight

Tonight, Provo’s Municipal Council will likely make a decision on the proposal from Veracity to float part of the bond payment for upwards of 10 years. I’m not going to delude myself or any of you: the meeting and vote is mere formality. The Council will, amidst some grumbling, approve the proposal. Steve Turley will vote against it knowing it will pass so if something goes wrong later, he can wash his hands of any responsibility. (Prudent politics, Steve, but how about owning something for a change?) Given the options that have been presented by the mayor, I don’t know that the municipal council is being given much of a choice.

Yes, there are options. Provo could take the network back with many different avenues for running it differently. That said, there exists no political willpower or stomach for doing so. If Provo doesn’t have its heart into running the network, it will be at least as badly mismanaged as it was before if not worse. They’re still in “run and hide” mode, willing to accept any moderately reasonable deal to keep the thing away from the city.

Several companies have expressed to me an interest in participating in an RFP process for the network. Provided that such an RFP process leaves enough time for companies to submit applications and the city to review them before having to make a “do or die” decision regarding Broadweave, it should be encouraged and acted upon to make sure that the Council is truly evaluating all of the possibilities before them. There’s nothing to lose by asking for more options.

Even with options other than approving the sale, I don’t think the council is going to consider them. Veracity has thrown Provo a decent pitch with a decent chance of success and this Council has already shown a tendency to vote with the mayor. (Despite their recent pushback, I doubt there will be any serious resistance.) Unless another party comes along with a better concrete proposal, it would appear that the best choice is what the council was going to do anyway. How’s that for the world’s most tepid and lame endorsement?

Veracity Customers as Collateral: Where's the Skin in the Game?

The Salt Lake Tribune wrote up an article on Tuesday’s decision to delay the vote on accepting Veracity’s offer and it brings up interesting points on how the loan from the Energy Department’s reserves will be secured. The plan is to have existing customer accounts and any new accounts on the network act as collateral as well as Veracity’s customers on iProvo. Veracity, however, is not required to include any customers not on iProvo included in that total.

I think this raises important questions about how much skin Veracity has in this game. If Provo ended up having to seize the collateral after a default, what can they do with it? They’re legally barred from selling the services to those customers and the customers themselves will have little value of their own without the network. In that scenario, the network would be quite distressed and wouldn’t be able to fetch the same sale price as it had before. It would also be hard to convince another provider to buy the customer list.

I also have a problem with the appearance that Veracity has structured a deal that insulates them from almost all risk. If there’s nothing contractually stopping them from doing so, they could switch their customers back from iProvo to Qwest transport just before defaulting and lose nothing in the deal. If that is the case, Veracity has nothing to lose and everything to gain.

I think Veracity is a great company providing great services, but my inner skeptic says that this needs additional scrutiny. I’d feel a lot more comfortable with this proposal if I felt that they had more risk involved.

Delayed: Provo Punts For Now

Just a head’s up that Provo’s Municipal Council had to delay the vote and discussion on the proposal from Veracity and Broadweave until another day. Some of the language in the final resolution needed a bit of tweaking and I’m sure it didn’t help that a council member was absent. I’ll be sure to let you know when it gets rescheduled.

Provo Municipal Council to Consider Broadweave/Veracity Deal Tomorrow

Provo’s municipal council will meet tomorrow to discuss and vote on the proposal from Veracity and Broadweave to ease up on payments for a few years. The meeting will be at 7PM in the council chambers at 351 W. Center St. I’d encourage everyone to show up and share your thoughts with the Council.

As an aside, the Herald’s editorial board sees what I do: the choice between two options, neither of which is terribly palatable. I still don’t know that I favor one option over the other. Despite being a loud proponent of open networks, the management that Provo picks hasn’t exactly shown competency in the area. It’s hard to tell if Provo has more of a stomach for either extending their risk or doing the work that is necessary to make the network work under city control. In either event, I want to make sure that the council has considered their options and is making their decision based on facts and rational thinking, not fear.

An Evaluation of the Broadweave/Veracity Merger

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.

Take 2: Veracity/Broadweave Merger Back On

After a failed attempt at merger around a year ago, Veracity and Broadweave have decided to give a merger a second shot. The new company will be named Veracity Networks with Veracity’s Drew Peterson as CEO. Broadweave CEO Dave Moon will remain on the board.

So what’s the new company’s first step? To go to Provo’s city council to ask for a “restructuring” of the bond debt to lower payments by $82K per month for 18 months. I’m not sure how exactly that will work out without the city basically floating the difference during that time frame (an action surely to come under fire from both incumbent providers), but I’m hoping Broadweave will take a new tack with being a bit more open as to what the heck they’re doing. After all, a significant amount of public money is still on the line and if they ask Provo to dip into the till to keep things going, citizens deserve to know what they’re getting for what may be an interest-free loan.

Broadweave was gracious enough to invite me down to their offices to inform me personally. After the sharp criticisms I’ve had for the company, I was surprised they extended the olive branch. I suppose that’s one of the many positive side effects of an almost total refresh of company management. All the same, the visit was very cordial and felt very much like a press release event rather than a heart-to-heart. (I’m still sure that my picture is on more than a few dartboards around the office.)

I see the merger as a bit of a mixed bag. Veracity brings a lot to the table including large corporate customers, experience competing against and working with incumbents (they offer services on Qwest’s network), a stable cash flow, and significant technical experience. They also bring potential access to UTOPIA for Broadweave via their existing contracts.

On the other hand, asking for another hand-out from the city instead of making it on their own will likely rankle a city council that thought they’d managed to wash their hands of the deal. If the council doesn’t go along, it begs the question as to where additional funding will be found from. Not knowing what Veracity’s available cash flow is, it’s hard to tell if that side of the equation would be able to staunch the flow of money from the surety enough to allow Broadweave/Veracity to sign up more customers. At the very least, this makes iProvo even more of an election issue than it was before for all sitting council members as well as the mayor.

For the time being, I’m content to watch from a distance and see what happens. My opinion of Broadweave hasn’t yet been changed, but I’ll willing to give them a second chance and benefit of a doubt.

UTOPIA Prices on the Rise?

While many cablecos and telcos are holding the line on broadband pricing, UTOPIA may be stepping it up a notch. FuzeCore lists pricing for Internet connections that is more money for less bandwidth than we’re used to getting. XMission lists similar pricing for UTOPIA services in Tremonton, though the prices for other UTOPIA cities is largely unchanged. Neither Nuvont nor Veracity disclose their pricing up-front (at least as far as I can tell).

Commenters who contacted service providers for pricing in Tremonton have gotten quotes of install costs in the $30-60 range. It’s entirely possible that UTOPIA is trying out some new pricing models that build the cost of the install into the monthly fee similar to what cable and phone companies already do. The real question is if pricing will drop once the install is paid for or if customers could choose to pay off the install cost in exchange for a lower monthly fee. I’m also wondering if the pricing in Tremonton will be rolled out to other UTOPIA markets should it prove successful.