I had the opportunity to attend the inaugural meeting of the iProvo Review Committee last Tuesday and walked away with more information than I knew what to do with. The Committee was kind enough to distrubute current figures for iProvo subscribers, information on municipal networks, and, best of all, a copy of the consultant's reports from CCG Consulting and Franklin Court Partners. There was a lot of information to soak in and it took me about three 2 hours of reading to slog through it all. After digesting where the network is and where it is going, I can come to only one conclusion: iProvo is the most valuable thing the city has ever done for its residents with a potential to save city departments and residents millions of dollars each year it operates.
Since the strategic summit last December, iProvo has netted a gain of just 180 new accounts over the October 2007 numbers reported at the time. This is very far from their goal of signing up 60 a week with growth spread largely between single-family homes and businesses. The growth in MDUs has stagnated, likely hitting the saturation point as they were the first adopters into the system with take rates nearing 53%. This stagnant MDU customer base, which accounts for over half of iProvo subscriptions, experienced a 8.2% drop in ARPU during this same period, from $12.74 to $11.70. Not only are MDU numbers halted, they're becoming less valuable as the high churn causes a large number of disconnects and reconnects.
The picture is rosier when looking at single-family homes. Subscriptions during the same period increased about 2.5% and the ARPU jumped about 2%; it's the opposite picture of the MDUs and customer loyalty seems to be stronger with long-term residents. The take rate is now up to 23.8%, a figure that leaves a lot of room for growth. In the last year, there has been no net loss of subscribers on a month-to-month basis.
Business accounts are gaining a significant amount of strength. Not only did subscriptions jump a whopping 11.5%, the ARPU shot up 10.3%. Each business is now worth more to the network than 8 MDUs, yet the commercial take rate is a scant 16% leaving a lot of room for improvement. A significant number of businesses have switched both their Internet and phone services to an iProvo provider. In the last twelve months, only one month saw a decrease in subscribers from the previous month though the following month made up the difference.
There's also interesting number on the installation costs. iProvo current eats $800 on installation, $500 to run cable from the curb to the premises and another $300 for the "portal" device used to interface with the network. This installation is over split over two days with iProvo handling the physical connection to the home and the service provider doing the installation inside the home. The consultants reports have noted that this bifurcated installation has lead to higher costs and a lower rate of initial customer satisfaction. I know I already dislike taking a day off to meet an installer for a "noon to 5" window, but doing it twice is just silly.
Some good news is that once a location is installed, it can receive service with few, if any, installation costs. According to Council Member George Stewart, chairman of the Committee, the portals are left on-premises when service is canceled and, per his knowledge, can be activated remotely without the need for a visit from a technician. This means that as the network grows, the installation costs to the network will decrease substantially.
So what can iProvo do in the meantime to improve cash flow? The consultants recommend using third-party technicians that assess the cost of installation to both iProvo and the retailer, but I think they need to look at UTOPIA's new plan for some ideas. Ideally, the retailer should bear all installation costs and offer customers the option of paying an up-front fee, rolling it into the cost of monthly service or some combination of the two. The retailer could also opt to eat part or all of the charge in a cell-phone like model or offer differing packages to give customers more options. With additional retailers, this could lead to interesting models where installation can be borne by the customer, the retailer or a combination of both.
Overall Financial Picture
Provo's problem appears to be a matter of cash flow caused by high churn that causes installations to not pay for themselves in the numerous MDUs that subscribe. At the current ARPU, an MDU takes a whopping 69 months to cover the costs of installation, longer than the time it will take the average student resident to earn a degree from BYU. A single-family home takes 22 months and business accounts cover the cost of installation in just 9 months. By moving the cost of installation into a combination of up-front fees and increased service costs, this will improve cash flow substantially for future customers, yet it still doesn't help with the existing customer base. With current growth trends, the subscriber base simply will not grow to cover the deficit that iProvo faces if changes aren't made.
Enter City Savings
The financial picture seems bleak until you start looking at the potential benefits of the network to various city departments. The Energy Department stands to eliminate costs of around $704,000 per year through automated meter-reading and remote connects and disconnects of service. Even more exciting is the potential savings to Provo City Power customers. The fiber-optic system will give the city immediate feedback on power outages and allow them to remotely turn on and off devices during peak usage, much in a manner similar to Rocky Mountain Power's CoolSaver program. This means power customers will save upwards of $5.5M on their electric bills or $161.76 per year per household. This savings more than covers the shortfall from telcom subscriber revenues and results in massive savings for the citizens of Provo.
The water utility also wants to get in on the remote meter-reading game. They stand to save around $250,000 per year and will, for the first time ever, be able to read meters in the winter. They can also get instant feedback on water quality, pinpoint potential leaks and see water pressure statistics in real-time. Combined with the power savings, Provo could end up saving upwards of $1.5M annually via the use of the network with an investment of $8.9M in new meters for both utilities. In the long run, the network makes a lot of sense of the city.
This just scratches the surface of the potential savings. The smart management of the power grid could help reduce demand for new capital-intensive power plants and help reduce air pollution in the city. The school district could save $78,000 per year with a switch to a new VoIP system. Electronic parking meters and traffic light photo enforcement can bring in anywhere from $180,000 to $275,000 annually. These just scratch the surface of how the city can save far more than it currently spends on the network.
New Revenue Streams, New Providers
The consultants also made a number of suggestions for new revenue streams including burglar alarm systems, co-location, off-site data backup and more. The biggest change they found to be critical to subscribing new customers, especially the lucrative business customers, was to add new providers. I hate to say it, but I came up with that last one back in December. This is going to be especially important as Franklin Court believes that neither of the current providers will stay solvent long enough to continue to provide services for an extended period. The prospect of another HomeNet fiasco is disturbing, especially given the vacuum that it created in its wake.
k in December, we were told that Provo was negotiating with several providers, three who had submitted an RFP and 5 who had merely expressed interest. Two months prior, the Daily Herald told us who those providers were that had submitted an RFP: Emery Telecom, FiberNet, and Utah's favorite home team, XMission. These long delays in adding new providers need to be overcome in order to retain customers and attract new ones, especially the business accounts. I've heard many stories from iProvo users that they would really like to get XMission in their homes, especially since they now offer a VoIP product.
Part of the problem may be Provo's own doing. They current stipulate that all providers be triple-play capable and dictate what Internet speeds providers can offer. This would likely scare off ISPs and phone providers with little experience and even less will to do video.
Strength in Numbers
Another consideration should be joining the network to UTOPIA. Given that both existing iProvo providers currently operate on that network as well and XMission has been in negotiations, it should be a problem to transition the customers over. They're also already leasing services from UTOPIA's fiber-optic backbone, so there's an established working relationship.
You might wonder why this makes sense. Based on a conversation I had last Thursday with an employee of a UTOPIA contractor, they've been in negotiations with a major triple-play provider (I'm talking millions of customers) to join UTOPIA. They said they'd join if UTOPIA hit 50,000 served addresses and bring with them a reputation for excellent customer service and extensive experience in video, voice and data services. Since Provo can't grow much past 34,000 served addresses, they could only gain access to this provider if they joined UTOPIA and became part of a larger network. Another major double-play provider is also interested in joining if the network grows to that size. Provo should keep its options open in order to gain access to these nationally-recognized providers and their expertise.
Further Consultant Recommendations
There were a number of other problems that the reports also touched on. It seems that the telecom department had a poor working relationship with the retailers and infighting amongst divisions of the department is common. All too often, employees are unitaskers and do not assist with other tasks as needed. Fixing this problem will require a significant culture change and likely someone to fill the shoes of managing that department. There's also a recommendation to start cross-training employees to allow more flexible staffing. This includes training electrical employees and fiber installers in each others job functions.
It was also noted that retailers regularly use iProvo staff to troubleshoot problems on their end. This results in a large cost to the city which can be alleviated by allowing retailers to directly provision services on the network, make small service changes on their own and start charging for support when the issue is deemed to be the fault of the retailer. They also recommended consolidating the Energy and Telecom NOCs into a single unit with appropriate chargebacks to each department and reducing the NOC hours from 24/7 to normal business hours.
Both consultants also recommend opening up the full 100Mbps of bandwidth to each premises and allow retailers to figure out what speeds they can offer. Going to a "dumb-pipe" wholesaler will allow retailers to be creative with the packages they offer and will make the network more enticing to new entrants. Certainly this kind of plan also needs to be paired with a plan to upgrade to 1Gbit connections at each serviced address to support additional services.
One recommendation by CCG is to have the city start paying to reserve some of the network capacity for future use. This seems like an unnecessary move given the high capacity of fiber and the ease with which the connections can be upgraded to 1Gbit or 10Gbit speeds. I feel it's more of a stop-gap "make the loan not a loan" measure that, regardless of acceptability in the marketplace, will not be politically feasible in Provo.
While a lot is made of iProvo's up-front losses of around $2M per year, it would appear that the potential savings and new revenue for both residents and the city of $8M+ per year far exceed these numbers. Even so, it behooves Provo to take some decisive action to stop the up-front losses with a concentration on adding new providers to the network to increase subscriber rates. This means decisive action, not more of what we've already seen. Provo's leaders need to take swift and prudent action to turn iProvo into a truly open network with vibrant competition between providers and few restrictions on services being offered. Anything less means that the success in overall savings will forever be overshadowed by the losses on subscribers.