Is Macquarie a good deal for UTOPIA cities? The math says yes

It’s not very surprising to see Royce Van Tassell attack UTOPIA and its proposed deal with Macquarie. He is, after all, vice president of the Utah Taxpayers Association, a group that receives contributions from Comcast and CenturyLink. It is surprising, though, to see him make up his own facts and numbers. A fair look shows that the deal is much better than Macquarie is willing to say out loud.

A lot of hay has been made over the requirement in the deal to have the utility fee rise with CPI. The criticisms, however, assume that the cost to provide service and the revenues from subscribers are both static. Why is it a reasonable assumption that neither of these things will also rise with inflation? It isn’t, so inflation is entirely a non-argument.

Royce also gets some very basic facts wrong about the deal. This covers 163K addresses, not 157K. Macquarie has stated clearly that the utility fee will include network refreshes every seven years at a cost of about $60M each time, but he’s claiming that it’s not included and that equipment refreshes will happen as often as every three years. Royce claims that upgrades will be incredibly expensive, yet 100Mbps electronics from 10 years ago were more expensive than 1Gbps electronics are today. There are so many errors of fact in his op-ed that it’s hard to take any of his conclusions seriously.

And so let me break down the very simple math of how the deal works and what it will actually cost subscribers.

Let’s take a worst case-scenario first. Assuming a take rate of only 30% and a utility fee of $20, the total cost of the Macquarie deal will be $1173.6M while revenues are estimated to be $1000M. Less $500M to pay for the existing bond obligations, you’re looking at a total cost over 30 years of $673.6M or an effective utility fee of $11.48 per month per address. That’s a lot less than the stated fee.

But what about the best case scenario? That’s assuming a take rate of 50% and a utility fee of $18. This brings the total cost to $1056.2M and total revenues to $1500M. Less the $500M for existing bond obligations, you’re looking at $56.2M over 30 years or a scant $0.96 per month per address. It’s pretty hard to get upset over a fee that small.

So really, it all depends on the take rate. The question is what take rate we can reasonably expect. Brigham City got a 28% take rate with a $3000 installation charge, but Macquarie will eliminate it. Provo managed to keep 35% despite having disastrously bad providers like MSTAR and Broadweave, but Macquarie has well-respected ISPs like XMission, Veracity, and many other local companies. If Macquarie achieves this take rate, the cities hit the “wash” point where their costs are the same whether or not they opt to go with the deal. That point is about at a 38% take rate. I’d like to think just about anyone can do 3% better than Provo.

Even at the point where the deal is a wash financially, cities still get a completed network with an included basic level of service for every resident. Comcast and CenturyLink will slash their prices substantially in response to the competition (at least 50% in Provo) so that every citizen benefits regardless of if they use the network. Even for someone with a very basic Internet connection that wouldn’t use the network, they would be paying no more than $11.48 to potentially save at least $15, a net gain. The cities also get a $100M annual revenue stream at the end of the 30-year contract, effectively making the worst case scenario break even after less than seven years of ownership.

Given the very easily attainable goals and the high likelihood of reaching them, it would be ridiculous for cities to not move forward with negotiations under Milestone Two. Or to listen to a naysayer like Mr. Van Tassell that’s paid to say the things he says.

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37 Responses to Is Macquarie a good deal for UTOPIA cities? The math says yes

  1. Richard says:

    Where do I pick up my ” I Support Macquire for UTOPIA and our City” poster so I can put it on my lawn?

    • Justin Sharp says:

      This is actually not a bad idea.

      Waiting on pins and needles hoping this deal goes through. I am standing here with my cash held out just waiting to shovel it at Utopia/ISP to get 1Gbps to my house.

  2. Ronald D. Hunt says:

    Comcast changes me $65 per month and other $10 pleasure of not having basic cable fee, My bill after taxes is over $85 bucks per month.

    The option to pay $20 for a utility fee, and $35 to xmission for vastly superior service(i really miss xmissions awesome peering that keeps latency low to most places).

    Currently my options are the grossly overpriced cable service, and non functional dsl service. The quality of CenturyLinks network is so poor in my area that they might as well not even be here. And both options lock me out of isp options.

    I want my xmission service **** it, they where awesome before Qwest “upgraded” my area to CFTN(copper from the node), ADSL2 causes line noise that older ADSL1 service can’t handle. They effectively kicked me off xmission and forced me into their garbage internet service(MSN internet at the time).

    Macquaries deal gets my stamp of approval, Get me my fiber and I will tell Comcast and Qwest they can take their copper and shove it where the sun don’t shine.

  3. Janai Ott says:

    Where do current subscribers paid $2750 up front for my Utopia hookup stand in this deal? Certainly I will get some kind of break? My father went to a meeting and told me they said speeds would be 3mbps. Can’t imagine that, as for the past years my Utopia has been 100mbps up and down. So much (mis)information…

    • Jesse says:

      Janai: They’re working really hard to try and figure out how they can handle it. They’d like to refund everyone who has already paid the install fee (or has made payments), but the way the bonds are structured makes it difficult. I don’t know the specific reason (that hasn’t been discussed yet), but I’ve gathered that it has something to do with a prohibition on pre-payment on the bonds. I’ll see if I can find out more about what’s proving to be tricky.

    • Jonathan says:

      To answer your 3Mbps question that is just for the “free” tier. Premium services are between ISP and customer.

  4. Peter says:

    So I guess I need you to spell it out to me because I don’t understand the utility fee. At the first part you’re saying it will be 18/mo. Then you’re saying it will be 0.96/mo. I think we’d all agree 0.96 is better than 18 right?

    • Jesse says:

      There’s two different “utility fees” so to speak. The first one is what Macquarie charges the cities. That’s going to be between $18 and $20 per month. The second is what the cities turn around and charge residents. That’s going to be between $0.96 and $11.48 depending on take rates. The reason it will be lower is because the city keeps the lion’s share of the subscriber revenues to pay off the existing bond debt and then puts the remainder towards the fee from Macquarie, effectively reducing what they would need to charge residents.

      • Peter says:

        Thank you. That makes much more sense. This is an awesome deal but just like I had my information confused so many people are going to be the same way I think.

      • Charles Hart says:

        I didn’t know this. This needs to be highlighted much more aggressively.

      • Charles Hart says:

        Source? Can you post a link?

        • Jesse says:

          It’s in the Milestone One report. I don’t remember which pages are the relevant ones. Macquarie laid out the raw data but didn’t bother to come back and put the numbers together into something a little more meaningful. They really should step up their game on this point and I’m not convinced they understand just how aggressive they need to be with their sales game. They’re already pulling their punches with the UTA when they need to just go all Indiana Jones and shoot the sword-wielding maniac.

      • Charles Hart says:

        “the city keeps the lion’s share of the subscriber revenues”

        I assume the “subscriber revenues” are those charged by the ISP beyond the $20 utility fee?

        The city gets more than 50% of these? Are the ISPs ok with this? Have any ISPs projected what rates they would charge for bit rates above the 3Mbps rate base?

        Are the ISPs going to be forced to charge more than they do today to cover the free base rate the and city portion of their revenue flow?

        Today : $25 utopia fee + $30 for 25Mbps ISP fee (info west)
        This deal:
        $20 utility fee +$0 for 3Mbps from ISP
        $20 utility fee + $?? for 25MBPS ISP fee

        • Ronald D. Hunt says:

          The ISP isn’t charged a transport fee for “free” connections. upto the 20gig cap. The transport fee is their largest cost by far, when it comes to providing service, actual bandwidth to the internet backbone isn’t terribly expensive when considered on the scale they buy it at.

          I suspect that none of the ISP’s will have any issue with this, the massive increase in premium service customers will be well worth the minor cost of the free service tier.

        • Jonathan says:

          It was indicated in the Layton meeting (which Pete Ashdown and other ISP representatives were at) that the ISPs were ok with the terms. Macquaire believes the transport fees charged to the ISPs would actually go down from what they are currently charged.

          As Ronald mentioned the way the PPP and the wholesaler make money is via the transport fees.

      • Scott McIntyre says:

        Are you saying that the repayment of the existing bond would be wrapped into the utility fee? If so, I must be reading the Milestone 1 report wrong. In section 4.3.1 it says the proposed range for the utility fee excludes the repayment of the existing bonds. It goes on in section 4.4 to state that refinancing and wrapping that debt into this deall would add $10-15 per month to the utility fee.

        Macquire’s predictions of take rates seems really high considering that all the networks they studied to reach those figures didn’t offer a free basic service. Why buy a cow if you can get the milk for free?

        I am afraid that while some people (myself included) will pay for top tier service, the vast majority will stick with basic free service. If the predicted take rate isn’t achieved, it could trigger the as yet unspecified rate covenants that would jack up the utility fee to whatever amount is needed to acheive Macquire’s anticipated proffitability.

        • Jesse says:

          No, I’m not, because it isn’t. I am saying that the revenue generated by the proposed deal is likely to exceed the money charged by Macquarie and thus cover at least some of the bond payment (or vice-versa; doesn’t matter since it’s all basically the same pot).

          Google Fiber is hitting as low as 27% in poorer neighborhoods and as high as 83% in richer ones. (Citation: Granted, they’re also redlining and cherry-picking like crazy, but it still averages about 50% across all neighborhoods where they build. Bear in mind that the people who already take service (that 25-30% in Brigham City and Centerville, for example) have already decided that it’s worth it to pay for installation to get access to 100Mbps or 1Gbps service. Tossing out the install fee and creating a relatively slow “free” tier is going to bring in a mix of freebie and paid users on top of that. That’s why I say that 30% is a REALLY low bar to hit. I don’t believe a lot of people are going to stick with the free service when they already pay UTOPIA, Comcast, or CenturyLink for something higher than that.

  5. Scott says:

    What exactly is the take rate and what determines it?

    • Jesse says:

      The take rate is percentage of people who opt to buy service beyond the basic service (100Mbps or 1Gbps). That’s where the subscriber revenues to the cities will come from. Based on data from Google in Kansas City and iProvo, a take rate of 40-45% seems both likely and reasonable (if a bit conservative).

      • Scott says:

        What is the average take rate for the top 3 Utopia cities currently?

        • Jesse says:

          I don’t about about top three, but I do know a few examples we can refer to for cities that are substantially (95%+) completed. Lindon is around 45%, but it also has average income more in-line with Park City than an average town. Brigham City is sitting around 30% and Centerville is around 22% (last I heard). The install fee holds back take rates right now, but they’re going to be eliminated as part of the utility fee. UTOPIA has also not done a lot of marketing to drive up take rates, so much of this is either direct marketing by the providers or word-of-mouth. An aggressive marketing campaign (like what Google has done) can make a lot of difference and is someone Macquarie plans to do.

      • Scott McIntyre says:

        Where did you find your data on Google Fiber take rates? I’ve seen numbers all over from 27% to 83% based on door-to-door surveys.

        The surveys appear to be counting households that pay the $300 “connection fee” and then remain on the free service plan in their take rate calculations.

        I saw today that one section of Kansas City failed to meet the minimum take rate and will be dropped from the the buildout plan.

        Section 5.2 of the Macquire Milestone 1 report admits that high take rates haven’t been realized in other areas when users were offered a free service.

  6. Richard says:

    The Orem City Council meeting notes with the Macquirie presentation and question from council members is up at–2014.05.13.pdf

    One nugget I pulled out was the fact that residents could switch to a VOIP provider and eliminate a land line if they still had one. This would still be cheaper than phone service alone, effectively paying for itself immediately.

    • Charles Hart says:

      I and many others already do this. Magic Jack is probably the cheapest. $3/m. Works on any internet service.

    • Scott McIntyre says:

      The main problem I see with advertising the basic “free” service as a replacement for an existing landline is that the basic service has a hard cap. That means that once you have used up the 20Gb of data for the month, your internet quits working. Without internet, VOIP can’t function.
      In a household where the occupants might collectively own a couple smart phones, tablets, computers, and televisions, that 20Gb cap could be reached long before the month ends.
      Just as an example, a typical Netflix streamed movie can eat up 1-2Gb alone. If your family streams a handful of TV episodes and movies a week, don’t expect to have VOIP phone service for more than acouple of weeks a month.
      With that in mind, make sure any emeregencies happen at the begining of the month. Not even 911 works over VOIP if you have reached the hard cap on data usage for the month.

      • Jonathan K says:

        If a customer regularly going over the free limit they should upgrade to a premium service without such a cap. The free tier isn’t meant to work for all people and scenarios. Its meant to give some basic service to all users who pay the utility fee. Also the limits imposed are meant to keep the service from cannibalizing sales of premium services. Remember the take rates mention in Milestone One are for users of premium services not free services.

        In regards to it being a hard cap vs say a soft cap that causes further rate limiting I don’t think Macquarie specified and will be either discussed further with the ISPs in Milestone Two or left up to the individual ISPs to implement. I know that question was specifically asked in the Layton meeting but I don’t remember the exact answer at the moment.

        Lets also remember that 3Mbps isn’t high enough for Netflix to send you a 1Gig per hour stream. That data rate can only download a 1.2 Gig file in an hour on a good day with no room for overhead.

        • Jesse says:

          Jonathan nailed it. The 3Mbps tier is meant to be for light users, not the scenario you described, Scott. People who take the free service are either very casual users (who probably don’t have Netflix) or are trying to be super cheap (and should be cut off because they’re trying to get something for nothing). The 20GB cap is what Macquarie will require the providers to offer. Some of them will probably opt to do hard caps, many of them will likely do soft caps with throttling. Quit with the baseless FUD.

  7. Doug Payne says:

    Well I hope this money also brings a bit of sense about marketing and getting the word out…

    In Layton, I have a new switch box, about 1/2 mile away…yet nothing here…..When I call and ask about it….

    “talk to your friends and neighbors and have them call us”????

    Really how about putting out some flyers, to let people know whats out there….grrrrr

    SO on the flip side, if this goes through…no hook up fees?? it becomes a utility payment of sorts/???

    Hook me up with a sign for the lawn as well….SCREW COMCAST…

    • Jesse says:

      UTOPIA’s position on their lack of marketing has been that 1) any widespread campaign would reach a LOT of people who can’t get hooked up and would thus get angry and 2) targeted campaigns require a lot of up-front capital that they don’t have. Both are really, really frustrating.

      Yes, the up-front connection fee disappears. That’s part of the utility fee plan. That was going to be UTOPIA’s original plan, but they didn’t have the capital needed to make it happen.

      • Scott McIntyre says:

        UTOPIA had it all backwards. They didn’t advertise because they didn’t want people to get upset if fiber hadn’t been built in their neighborhood but then, they tell people who want the buildout in their neighborhood to have everyone call them so they could guage interest.

        • Richard says:

          I spoke at length with someone at UTOPIA about their lack of advertising. Every time they would announce something, the incumbents would rush in and build out. I experienced this myself in the early years of UTOPIA.

          At the time, we couldn’t get Centurylink to do anything about lousy ISDN lines. I was paying $125 a month for 256K connection. Our house was nearly at the max distance from the central office, but they wouldn’t budge. Then UTOPIA was formed. Within a few months, there was a rush of construction and we had both Cable Internet and new options from Centurylink.

          I’m looking forward to UTOPIA when providers will compete on service and value, not who had the cash to quickly gain an operating monopoly.

  8. Doug Payne says:

    Well their position sucks hahahha…and makes no sense…

    Like I said 1/2 to a mile, depending on how you measure it, from the NEW switch station…. They cant take flyers to where they are going to take it…or rather would like to….sayyyy a 1 mile radius or so???

    Targeted and wide spread right there…..

    Laziness is what it is… have to actually put forth effort to get some business, not sit back and say woa is me, no one wants to sign up…

    Makes me angry can you tell??? More so that its soooooo close, and i cant get it

  9. Pingback: How does the Macquarie deal stack up against the other options? Very favorably - Free UTOPIA!

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  11. Funface says:

    No one has explained what will happen if the Macquarie deal is not accepted?

    • Jesse says:

      I’ve heard that those cities will receive a bill for their share of operational expenses and maintenance. If they don’t pay, they go dark. That’s supposed to happen this fall. If you live in a city that voted against the proposal, you may want to urge them to reconsider.

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