What you need to know about Macquarie’s proposal to UTOPIA

Macquarie has let their proposal out and it looks like they’re planning to make good on many of the rumored details. There’s also a number of very attractive points that will make this an easy sell for new cities to join. Some highlights:

  • The network build will be done in existing pledging UTOPIA cities in 30 months.
  • The fee will be $18-20 per month per subscriber address with a 50% discount for MDUs and a 100% premium for businesses. This amount will be indexed.
  • Utility fees will have a grace period of 6 months from construction to allow ISPs to hook people up.
  • The free tier of service will be 3Mbps symmetrical with a 20GB monthly cap. All service providers must agree to offer it as a condition of being on the network.
  • Cities stand to earn between $1.0B and $1.5B depending on the take rate. That’s 2-3 times the existing debt service. On the low end, it would drop the Macquarie fees by almost half. On the high end, it could almost entirely cover the Macquarie fee.
  • Speaking of revenues, the cities stand to rake in another $100M annually when the network reverts to their control in 30 years.
  • Macquarie will be aggressively promoting the network and intends to extend it to any city that wants to accept its terms. Cities without existing debt service may end up making a good bit of money on the deal.

The worst case scenario is that it is a wash with what they have now except the network gets completed and everyone gets free service. In the best case scenario (which I still this is a little too conservative), they end up paying almost nothing for the network. I’ll just come out at say it: any city council that doesn’t move forward on this deal is committing an act of deliberate and malicious fiscal malfeasance against their city and its citizens.

Macquarie has already presented this information in Utah County and will be presenting again Wednesday April 30 at 7PM at Layton City Hall and Thursday May 1 at 8PM at West Valley City Hall. Show up and make sure the cities know you want this deal to happen.

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46 Responses to What you need to know about Macquarie’s proposal to UTOPIA

  1. Jason Porter says:

    Are the terms of the deal open and available for people? I’d REALLY like to get this before the West Jordan Council.

  2. u235sentinel says:

    Still in west Jordan here (even though we moved). I’m still in support of moving Utopia here to the city. We have century link 40+ down / 20 up but Utopia would be preferred. Hoping they will wake up and build the infrastructure we sorely need

    AND Utopia needs to advertise more. People who have it in their area don’t know about it somehow. Ugg!!

    • Jesse says:

      Macquarie plans to very aggressively market the service. They consider a 30% take rate a bare minimum with 50% as a high watermark. I personally think they can push 60%+ if they try hard enough.

  3. Brian says:

    I’m a little confused about the pricing. Right now I’m paying $30 to WVC for my connection (I’m not quite 3 years into my 10 year agreement), $35 to XMission for the 100/100 connection, and $12 in UTOPIA fees. Does the new $18-$20 take the place of the $12 or the $30 or both? I’m sticking with UTOPIA no matter what, I’m just wondering what my bill will look like if the deal goes through 🙂

    • Jesse says:

      My understanding is that you’ll pay around $20 in fees to the city and $35 to XMission. The fee to the city is likely to be reduced to under $10 depending on system revenues.

      • Jonathan K says:

        If your $30 is for UIA that will stay in place as well. They would like to buy that out and simplify thing but apparently buying out UIA bonds still needs to be fully researched.

        • Jesse says:

          Bummer, but I guess not surprising. The banks that issued bonds to UTOPIA put in all kinds of poison pills to try and make sure they keep the debt.

          • Jonathan K says:

            The thing they mentioned was that UIA is cash positive so ultimately its not a bad thing it just makes the view of the system to the end user messy. It still came down to further research but I don’t think they are holding their breath. Something with Brigham City net. I think in addition to the financing its the special improvement district aspect that may make it interesting. The reasons are detailed in the document.

  4. Sam Allen says:

    I haven’t read the Macquaries report… but my quick numbers running shows me the following. I don’t say they are perfect so feel free to change, edit etc.. I submit for purposes of discussion:
    Households in active participating Utopia Cities: 120,495 ( this is conservative as I got my house numbers from wikipedia and some – not all – used census data from 2000)
    120,495 households x $20 / month utility fee = $2,410,000 / monthly revenue from assessment
    $29,000,000 / Year in revenue from assessment fee
    $868,000,000 in revenue over the life of 30 years from assessment fee.

    If the cities pass this fee, why pay middleman Macquarie at all? Why not have the cities assess and collect the utility fee and use it to build out the system? Granted, macquarie will build out system in 2.5 years. But in that same time, if cities asses the fee, they will collect $60 million to build out system. Do we know what the cost to build out the remaining infrastructure in the remaining cities will be? Take a five year view, and the assessment fee will collect $120 million in five years. Can participating cities build out for $120 million? Once build out complete, we own it and don’t need to wait 30 years to get an investment that will return 100 million a year.

    I realize there are lots of moving parts to this argument but wanted to at least see if this should be part the discussion.

    • Jesse says:

      Macquarie’s figures show 163K households, for reference.

      I think you ask a fair question. At this point, I don’t know if the cities can qualify to get the financing to do this on their own. If they could, your solution does sound a lot better. Realistically, deeper city control means a lot of political infighting. Inking a 30 year contract with an outside party is largely removed from the whims of new batches of elected officials. I can see the advantages there.

      It’s also worth noting that Macquarie is going to front the construction money and not collect anything for six months after a footprint is complete. It’s entirely possible that signups could be high enough to absorb all the costs. In the mid-range, you can probably get the Macquarie fee down to $5-6/mo and cover the existing debt service. It’s still a pretty good deal.

      • Charles Hart says:

        The cities could have done this on their own but history has shown that the typical city council is not qualified to drive a business or even manage a business.

  5. Drew Clark says:

    For a head to head comparison of the way that different financing models impacting gigabit connectivity nationwide, see http://broadbandbreakfast.com/2014/04/building-gigabit-networks-three-powerful-new-financing-models-in-utah-mississippi-and-texas/

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  8. Charles Hart says:

    Utopia always made sense with high take rates. The problem thus far is that Utopia/providers have not provided a low end tier to drive higher take rates. The result being the current take rate is ~10%.

    It it takes a mandatory utility coupled with a new low end tier to drive higher take rates then so be it.

    I’ll bet Comcast is not pleased at all. Look for them to try and kill the deal. It’s do or die for them.

    • Jesse says:

      Provo managed to get a 35% take rate with abysmal providers thanks to the power of intense marketing from MSTAR and a ubiquitous network. Macquarie will have the benefit of good providers, a universal build, and intense marketing. I think the high estimate of 50% is probably conservative. Lindon is sitting around 45% on a 95% build after doing jack to promote it.

  9. Jarrod Ribble says:

    The utility fee is per address, not per subscriber. You pay the fee if you can get Utopia, not if you sign up. Read page 76:

    “The utility fee will be charged to all new or non-active premises on the network and
    the UTOPIA users with active connections. This totals approximately 159,700

    • Charles Hart says:

      Why wouldn’t take rates be 80%+? The utility fee is going to be a sunk cost. The incremental cost of internet on Utopia is going to be why under alternatives.

      I expect Comcast (and others) are not going to die without a fight.

      • Jesse says:

        We have to assume there’s going to be people who 1) refuse to use the service because they hate UTOPIA enough to cut off their nose to spite their face, 2) won’t upgrade past the basic service because that meets their needs, or 3) will choose to go with Comcast or CenturyLink to take advantage of either TV packages or really low bundle pricing. I don’t think it unrealistic that this could easily be 35-40% of total households when all is said and done.

  10. Justin Sharp says:

    Was at the Layton meeting tonight. One point made which I thought was a good one, even for citizens who choose to stay with the incumbent providers, their prices will likely drop as has happened in Provo making the utility fee a value to them as well regardless if they choose to use the system. This due to the diversity in ISP options and market pressure to drop prices.

    There were a lot more city council from other cities asking questions than those from Layton. Ironically it seemed to be those cities whose build out is in the 90% completion range. A lot of questions around the marketing of Utopia came from those cities who currently see a relatively low take currently. It was a little irritating honestly that the cities who are built out don’t seem to be as on board with the deal as those who are still waiting (Layton, 12% built). In classic fashion it seems that the cities least likely to appreciate fiber were built out first leaving those who are most likely to have a higher take holding the bag. Orem and Murray excepted. Brigham and Tremonton are both 90%+ built out and neither seemed all that keen on the deal since their networks are built. They were more interested in how Macquarie would market the rebranded network. Macqueries response is that its largely on the ISP’s to market and acquire customers – which in a city where access is more widely available, they haven’t been doing very well at thus far it seems. Maybe the utility fee would help coerce people into making the leap since they are paying for it anyway – if those cities will bite.

    Macquarie also made it somewhat clear that they aren’t interested in an ala carte deal. Either all of the member cities participate or the bag holders (Layton, WVC) would have to pay significantly higher utility fees to make the deal work. This will be very frustrating if the cities who are already built opt out and the deal slips because of it.

    • Jesse says:

      It’s Payson all over again. They don’t seem to understand that this isn’t just about building out the network; this gives them a good chance to reduce their debt liabilities. Brigham City got a 28% take rate with an install fee, so I can’t imagine they won’t get much higher without one (and the associated fear-mongering about liens). The “wash” point is 40%. Anything beyond that makes their net payments lower. If Provo can hit 35% with a crappy headline provider like MSTAR, that’s highly probable.

  11. utah_1 says:

    The meeting at West Valley City tonight has been announced at 8pm on the city’s website. Why list it at 7pm when it is at 8pm?

  12. Bill says:

    Jesse, any thoughts how the deal will affect places like Centerville and Murray where much of the rollout is taken care of? Will their utility costs be lower than cities that hardly have any rollout? What kind of benefits will they use to get them on board with the cities still waiting for Utopia? Thanks.

    • Jesse says:

      There’s a few benefits to cities that have a lot of infrastructure.

      1) No more install fees.
      2) Everyone gets the basic service.
      3) Take rates and thus revenues increase.

      I think the take rate will increase enough to put the cities ahead on the deal.

  13. Richard says:

    Was the Utah County meeting announced publicly? I don’t recall seeing anything, otherwise I would have tried to attend.

    For sure we need to stay on top of our city councils when they hold follow-up discussions.

  14. Richard says:

    If the deal goes through, will the debt obligations come out of the revenues, effectively trading one method of payment for another?

    • Jonathan says:

      There is revenue sharing with the cities. What the cities do with their portion of the revenue is up to them. I can’t see why they wouldn’t use it to pay the debt. Know that Macquarie is not assuming any of UTOPIA’s existing bond debt.

      Basically the utility fee pays for the new debt being proposed. Anyone subscribing to premium services ultimately just adds more cash to the pie and that money gets split between UTOPIA (the cities) and what they are terming the PPP & the wholesaler. The split is yet to be determined that will be negotiated in milestone two or three.

      Figure 18 on page 78 shows the money flow.

  15. Charles Hart says:

    The utility fee yearly increase is a big item. Current subscribers could put up $3000 and connect and never face a connect fee again, let alone an escalating one.

    $3000 paid back over 30yrs at a FIXED $20/m is better than a 7% return.

    The escalating utility fee is very favorable toward Mar/cities and is a big part of what makes this deal attractive. If the fee increases 2% year then the total return is 9%. Darn good in today’s environment.

    • Jesse says:

      Bear in mind that the utility fee is a combination of operating expenses, network refreshes, AND installation costs. When you consider that simply running the network is probably going to be another $25M-ish annually, the rate of return drops quite a bit. Then you add in network refreshes of $60M every 7-ish years. Yes, the fee rises with inflation, but so does the cost of operating the network and, presumably, the fees charged for services. It’s a wash, so the inflation shouldn’t even really figure into it. We’re over-fixating on it.

      • Charles Hart says:

        Well if your going to raise the fee with inflation then you should raise the 3Mbps basic rate with the rate of technology progress (e.g. double the bit rate every 2yrs).

        • Jonathan says:

          Macquarie agrees with you and is open to negotiating something like that into the deal. What they don’t have is a nice index like CPI to tack it too so they didn’t suggest it in milestone one.

          • Jesse says:

            It’s absolutely on their radar. They just have to figure out how to put it into contractual terms that don’t do anything funky.

          • Charles Hart says:

            Another thing I would like to see is some way for participating city taxpayers to participate in the purchase the new Macquarie debt on most favored customer terms.

            Thus if you a) index the Mbps base rate along with a CPI indexed $/mo rate and b) allow participating city taxpayers to invest in the new debt this deal becomes quite attractive to city taxpayers.

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  17. Subject: Integrity

    Utopia Just fired me because i pointed out to UTOPIA That they are in violation of Title VII of the Civil Rights Act of 1964 http://www.eeoc.gov/laws/statutes/titlevii.cfm which is illegal

    All of the laws we enforce make it illegal to fire, demote, harass, or otherwise “retaliate” against people (applicants or employees) because they filed a charge of discrimination, because they complained to their employer or other covered entity about discrimination on the job, or because they participated in an employment discrimination proceeding (such as an investigation or lawsuit).

    For example, it is illegal for an employer to refuse to promote an employee because she filed a charge of discrimination with the EEOC, even if EEOC later determined no discrimination occurred.

    Retaliation & Work Situations
    The law forbids retaliation when it comes to any aspect of employment, including hiring, firing, pay, job assignments, promotions, layoff, training, fringe benefits, and any other term or condition of employment.

    I need help in finding the right person to contact locally about this that can help.

    Please type a full description of your problem/issue here

    • Jesse says:

      May I make a suggestion that seeking legal advice and making criminal accusations in blog comments may not be the most sound of strategies? Find a lawyer and please keep the dirty laundry away from here.

  18. Jake says:

    I have a question about this. My mom and I just moved to Murray, heavily based on the misunderstanding that we could have Utopia for 1Gbit internet. After moving in, they tell us that their network is damaged in our area and thus we can’t use it.

    They are telling me it will cost $38000 to repair the damage, and that this proposal “might” repair the damage soon if it is accepted.

    The other option they gave me was to get 5+ neighbors to agree to sign up for the service, in which case they would fix it themselves now.

    Does that all sound accurate, or am I missing something?

    • Jesse says:

      That’s the first I’ve heard of something like that, Jake. As far as I know, the Macquarie proposal is to make every single address service-ready, so I assume it would include fixing any network damage. Given that it’s already in the ground and needs a repair, I imagine you’d be at the front of the list to get hooked up, but don’t quote me on that.

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