How likely is it that Google Fiber takes over UTOPIA?

Even before Provo announced that Google Fiber would be taking over iProvo, there’s been a lot of speculation that Google Fiber could potentially take over UTOPIA. UTOPIA made their pitch with 1100 other cities, and I produced my own video explaining why a partnership would be a good deal for both parties. Since then, Google has drastically altered the original terms of the arrangement, throwing both open access and municipal involvement under the bus (unless you consider providing tons on concessions “involvement”). Despite Google and UTOPIA being in talks shortly after the RFI closed, I don’t think we’re likely to see any kind of takeover or partnership between the two unless there’s concessions from one or both sides.

I think the largest sticking point is going to be open access. UTOPIA has repeatedly stated that their goal is to offer a world-class infrastructure that any private company can use to provide services. It’s not just enough to provide a third pipe; the network must allow you to pick between companies that differentiate themselves on what they can do with it. This kind of competitive environment has been proven to drive innovation and lower consumer prices across the board. While I have no doubt that Google’s network will do both, it runs the risk of being so superior to existing options as to become a new monopoly.

Google’s focus has been on residential customers. While this is a critical segment for service, there’s almost no mention of business needs. Yes, small businesses and startups can probably do just fine using the same tier as residences, but many need more than that. UTOPIA’s biggest customer uses 20Gbps of bandwidth. If all of their users on the network were on gigabit, they’d need even more to keep up with all of them. The lack of focus on the business end of the pipe degrades the value of the gigabit connections for residential customers. UTOPIA has a complete end-to-end vision; Google does not.

Another problem is the financial terms of any arrangement between the two. Google got a very sweet deal on iProvo, effectively a perpetual free lease with a $1 security deposit. The city is still going to have to pay off the debt on the asset themselves. In exchange, they’re hoping that improvements done to the network will improve it enough that it will be an economic net positive. I think the city could have negotiated a better deal and Google would still be doing well on it financially. I have no doubt that the UTOPIA cities, who are much more eager to pay off the bond, would hold fast for better terms.

If the numbers from iProvo translate to UTOPIA, Google would have to spend somewhere in the range of $40-50M to connect houses currently passed by the fiber and upgrade them to gigabit. This doesn’t include building fiber rings to areas not yet covered. That could easily add another $150-200M to the tab. Should they manage decent take rates (35% of customers paying for service split evenly between Internet-only and double play, and another 35% taking the freebie service), they’d earn $78.1M per year on expenses (including the bond) of about $36M per year. At the high end of finishing the network, it would take them almost six years to break even.

Given that Google seems to be aiming for seven-year commitments, that might be a price they’re unwilling to pay. The cities would have to make some kind of concession to sweeten the pot, and it would likely include tossing existing providers off the network and covering at least some portion of the bond debt. These actions would cause a decent amount of backlash both from residents as a whole and the power user subscribers who have been evangelizing the network for years. If Google’s goal truly is to increase broadband penetration, I’d like to think they would accept any offer that doesn’t make them lose a small fortune.

Google Fiber: The best deal Provo deserves, but not the best deal it can get

Yep, that’s my final take on Google Fiber taking over iProvo: even though you can, you’re not willing to do any better, so go ahead and take the deal.

Google is effectively getting a free lease on the network for a $1 security deposit. Yes, legally, it’s getting “sold” for $1, but Provo has the right to buy it back for the purchase price if Google either doesn’t meet its service and upgrade obligations or decides to stop providing service. That may sound like a decent deal with Google pumping $18M in upgrades into it, but Provo doesn’t have the best track record with getting ownership back, do they?

Meanwhile, Provo is left holding the debt and paying $39.6M over the next twelve years. The city seems to value the network asset at just $25M, and other offers to buy the network were low-balled at $10M. Why has so much value disappeared? It’s because of a string of poor choices with service providers. First there was HomeNet. Then Mstar. Then Broadweave. By the time Veracity came to the table, they didn’t have quite enough oomph to overcome the immeasurable brand damage done by their predecessors. A network that used a $40M bond and who knows how much in federal grants  (which is what built the initial fiber rings) has managed to lose value simply based on perception.

I think Provo can do better. My back-of-the-napkin math is that Google picks up 70% of the total subscribers in town. Half of those are likely to use the free service and pay in one-time revenues of $367K, barely anything in the big picture. Of the remaining half, I’d bet they’ll be evenly split between Internet-only and double play for an average monthly ARPU of $95 each. That works out to about $14M per year in revenues.

On the expenses side, the upgrades are costing Google about $2.57M per year over the seven-year commitment. If Google were to assume the bond payments (and let’s assume they end as soon as they leave), they would still have $8.13M annually to cover expenses related to network operations. This doesn’t even include the revenues that Google is likely to get from TV ad revenue. In short, Google could both assume the bond and do well financially.

That said, I don’t think the council is going to try pushing for those terms, even if they are a win-win. Just as with most things in Provo politics, the die has been cast by the executive and council approval is merely a formality. The short public review period of under a week makes it perfectly clear that questioning the deal is not welcome. I think this deal is a neutral as it currently stands, but I wouldn’t be surprised if there’s a bit of buyer’s remorse down the road.

I was wrong about Google Fiber, but this isn’t a golden deal for the city either

After more than a few false rumors concerning Google Fiber in Utah, I dismissed the latest one as being as equally untrue. Boy was I wrong. Like so wrong that I probably can’t express it myself. (That’s okay; plenty of you are doing it for me, some more kindly than others.) I seriously overestimated Provo’s aversion to risk, and it appears they are putting a lot on the line to make this deal work with Google. I’m not convinced that the city is getting a very good deal. I’m also worried that these important details are getting ignored in your excitement to have a big name like Google running what has been a heavily abused asset. (Seriously, you folks who put up with Mstar? My condolences.)

The basic terms of the deal is that Google gets to take over iProvo for $1, effectively giving the $50M network away. The city maintains bond payments of $3.3M per year for the next twelve years as Google will not be assuming the debt. The city is effectively giving them $90M to take over the network in a no-bid process. Google can also walk away when the seven year deal is finished, leaving the city with none of the assets and five more years of bond payments. Google has to spend a scant $18M to provide gigabit services to 35K households. If they get a take rate of just 20% for Internet-only (a ridiculously low-ball estimate), they’ve made their money back in only three years. You can bet that more than a few other companies and providers would have liked to get that deal. For all of the accusations I made of giving the network away in prior arrangements, this one makes them look fair by comparison.

In order for this to break even on the rather immense subsidy being granted, the city will need to earn an average of $12.9M per year in new tax revenue for each of the seven years. Based on the city’s 2012 filing with the State Auditor’s Office, this would equate to an almost 35% increase in total tax revenues. Given that the amount of land left to be developed in the city is relatively small, I can’t see a way in which the city actually accomplishes this. Google is making easy money at the city’s expense.

So what are you getting for your money? For a one-time fee of $30 (assuming you already have the connection in your home), you can get 5Mbps service for seven years, the length of Google’s commitment. (The standard packages of $70/mo for gigabit Internet or $120/mo with TV will be available.) City facilities get gigabit for free for the seven-year period. Each household will effectively be paying $368.57 per year in bond payments and the loss of the asset, so jack those prices up about $30.71 per month.

Is it a good deal? That remains to be seen. A lot of you are rightly excited to be getting the kinds of speeds that UTOPIA customers have been enjoying for almost a year now. But this isn’t a bailout. This isn’t a free lunch. You’re paying a pretty goodly amount for this arrangement, and you should be asking if it’s worth it. I know I am.