Monday, January 18, 2010

Broadband Stimulus: Some Questions

In 2004 I had a company, The Merton Group, which was awarded funding to build broadband in New Hampshire, Vermont, and Massachusetts. The above is the dummy check for Hanover, New Hampshire. We eventually never started and never took a penny of Government money. As we have noted before it was due to the franchise requirements. Moreover there were parts of the towns that under no circumstance could be ever make the business work. Those parts are similar to what a Vermont company called EC Fiber is allegedly doing in Vermont.

I was interviewed a week ago by the Burlington Free Press regarding EC Fiber. As I told the reported I really knew nothing about the company other than what I had read on the Internet but I had the experience having tried this once before. I could speak only regarding my extensive industry experience.

The paper states:

Managers of the proposed network — a patchwork of 46,500 people living in 22 towns in four counties — say it will pay off its debt with its subscription revenue. ECF Board Chairman Loredo Sola of Pomfret said the nonprofit network hopes to hear within a few weeks whether it has been chosen from hundreds of applicants nationally for a $69 million federal stimulus loan from the Department of Agriculture’s Rural Utility Service. If that federal money becomes available, work on the “shovel-ready” project can begin quickly, Sola said.

If we take the above we see that there are about 20,000 households, and they desire a 50% penetration by year six so they will have 10,000 subscribers and the RUS funding of $69 million is only 80% of the total requires so that a total of $83 million is needed. That is $8300 per sub!

Just to pay back RUS will be $69 per sub per month at 50% take rate! That seems to me to be un-doable. I am quoted initially as follows:

Some industry observers are expressing concerns that the project is too costly and the market too competitive. Terry McGarty, a researcher at Massachusetts Institute of Technology with experience trying to develop fiber-to-the-home systems, said ECF’s chances of financial success are “highly problematic.”

Problematic is an understatement. If the revenue is $100 per sub per month and just paying RUS with a 50% penetration is $69, that is 1% per month of the total capital per sub, then they are under water already for the video content may exceed $30. And no other costs are included. The article continues:

Twenty-seven towns passed an advisory question on Town Meeting Day 2008 to build the ECF network. Ultimately, 22 signed an interlocal contract to proceed. “Basically, it was an instrument to allow the towns to get together and do things,” said Jim Dague, Granville road commissioner and the town’s liaison to the ECF project. “Everyone was in favor of doing that.” Granville, with a population of about 300, is one of the smallest communities in the network. “We have about four houses per mile and 17 miles of roads,” Dague said. “That’s why FairPoint is not doing it.”

Let me do another simple analysis.

1. We know that the target capital per sub should be $3500 at the maximum for that converts to $35 per month per sub for capex repayment. Why is $35 per capex important well because the video costs $30 per month, the Internet access is $20 paid to the Internet backbone carriers, and the operating costs are $15. That is the all in revenue of $100 and thus at that point the business is break even.

2. Now we also know that of the capex we have $500 for the drop from the street to the home, $500 for the equipment in the home, and $500 for miscellaneous other centralized equipment. These are incremental costs. This leaves $2000 per home for the fiber in the streets and common equipment.

3. We know that fiber costs about $50,000 per mile to string up including pole changes and the like. Since we have $2000 per sub we know we need about 25 subs per mile. At 50% penetration that means we need 50 houses per mile.

4. Ooops, these towns do not seem to be even close!

The analysis is all back of the envelope. Any experienced and competent person can do the analysis. What has happened here. Well the Burlington Free Press states I am an MIT researcher, yes that is what I do part time now, but I have built these networks world wide, and have been amongst many things a Group President at Warner Cable, deploying the first single mode fiber in 1981, the COO of NYNEX Mobile deploying a full New England Network, and Founder and CEO of Zephyr, the dominant fiber network in Central and Eastern Europe. Thus I have the distinct disadvantage of experience which apparently the EC Fiber teams seems to be weak on, especially if one looks at Burlington Telecom.

Now as to BT, I was asked in 2004 to meet with town officials there to give them advice regarding BT. I went through this simple analysis above. I think the got it and I told them of the high risks. It seems that they were not listening then as they are not now.

The article continues:

ECF said RUS responded to that question: “Provided the prices and technical specs were within industry norms, the ‘no-bid’ aspect of the contracts would be outweighed by the ‘shovel ready’ advantage of having signed, complete contracts ready to go into operation as soon as financing is completed.”

When I did Merton back a few years ago I was made by RUS as well as by common sense to go and get competitive bids. We had dozens and I made many trips to vendors and had vendors come to me. We finally chose a collection to do the work. This seems to be a sole source deal. It further seems to be one where RUS just wants the money out the door if the above quote is correct.

It is a shame because systems like this can be be built in targeted areas but if they fail the costs will be on the backs of those who are least able to pay, namely the taxpayers. And yes there will be many who profit while there will be many more who may not.