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March 03, 2010

Listen Up, Burlington Telecom: Lessons From Other Municipally Owned Networks

Ed. note: Seven Days contributor Kevin Kelley penned this week's cover story about Burlington Telecom. We didn't have room for his sidebar about other cities that have experimented with municipally owned telecom systems, so we're posting it here on our blog. Kevin wrote the rest of this post.

030310cover A few of the more than 50 publicly-owned telecom systems around the country may offer lessons – either cautionary or encouraging – for Burlington's financially troubled network.

Provo, Utah, for example, was forced two years ago to sell off to private interests what it had billed as the nation's largest municipally-owned fiber-to-the-premises network. That outcome is cited by political opponents of city-run telecom operations as proof that such enterprises can and do fail – and may soak taxpayers for millions of dollars in the process.

Provo, a Rocky Mountain city with a population of about 120,000, financed construction of its system, known as iProvo, by issuing $39.5 million in bonds. Buildout was completed on time and on budget, according to Provo city spokeswoman Helen Anderson. About 12,500 of Provo's 30,000 homes and businesses eventually became customers of iProvo, with many of the rest signing up with Comcast or another private provider.

Marketing iProvo proved difficult, Anderson says, because the Utah legislature prohibited city-owned telecom networks from offering their own Internet, telephone or cable TV service. That and other issues resulted in the city having to provide a total of $8.4 million in subsidies over four years to meet iProvo's operating costs. Political criticism intensified, which further damaged the iProvo brand, Anderson adds.

The network was sold to a fledgling private company in 2008 for $40.5 million – enough to cover payments on the the iProvo construction bond but not enough to pay back taxpayers for the operating subsidies. The private company, known as Broadweave, soon encountered major problems of its own and merged with Veracity Networks, another private telecom firm. The city then had to provide a $1.5 million loan to help Veracity stay in business.

But a different community-owned system in the same state – the Utah Telecommunication Open Infrastructure Agency (UTOPIA) – is so far proving successful.

UTOPIA is a consortium of 16 Utah communities with a combined population of 500,000 that built a fiber-to-the-premises network. It's one of several municipally owned telecom entities in the United States that are demonstrating the opposite of the iProvo experience -- that city-owned systems can function as financially viable alternatives to private networks, says Craig Settles, a California-based telecom consultant.

One of the public systems, Bristol Virginia Utilities, was recently profiled by the Economist magazine. Using $9 million in federal and state grants, BVU expanded beyond its own base in Bristol to bring fiber to eight counties in Virginia's coal belt. And that move helped bring hundreds of new jobs to the region, the Economist reports. The magazine says both Northrop Grumman, a huge military contractor, and CGI, an international information technology consultancy, announced plans in 2007 to hire a total of 700 workers in a community that is part of the BVU fiber network. “Neither would have come without BVU's investment, which Northrop calls absolutely critical,” the Economist wrote.

The magazine quoted BVU boss Wes Rosenbalm as declaring, “Broadband is jobs.” (Rosenbalm declined through a spokeswoman to speak with Seven Days because, she says, he does not want BVU associated with a story about a troubled municipal telecom network. That would be BT.)

Jesse Harris, a Utah blogger ( who writes as an unpaid advocate for UTOPIA, said in an email interview that “one of two things has to happen for muni networks to be successful: they need a high take rate among businesses to be financially self-sustaining OR the municipality needs to treat it as a utility and assume the balance as a necessary cost. If one or both aren't there, you're pretty much hosed in the long-term since any telecom project, public or private, needs 7-10 years to see black ink. Sounds like Burlington hasn't done either.”

Settles, the California telecom consultant specializing in municipal systems, offers the same assessment. “The ability to sustain a municipal network rests with getting large institutions and businesses to sign up for it. Individual residents are never enough to sustain it,” Settles says. “The churn [turnover rate] is simply too high.”

Burlington Mayor Bob Kiss argues that BT should be focusing more on finding business customers. And that could prove crucial, Settles suggests, adding, “If you deliver services that the incumbent [Comcast, in Burlington's case] can't touch, and you structure your business plan around the quality of your services, then you have an inherent advantage over even the biggest competitors,” Settles says. “You can make the model work.”

--Kevin J. Kelley

Click here to read Kevin's cover story this week, "City on Wire: How Did Burlington Telecom Become a High-Stakes Balancing Act?" It includes op-eds by Art Woolf and John Franco.

The point re business is right on target. You have to use business customers to cross-subsidize residential. This is fairly standard thinking in the telco industry and should've been common sense to BT management from day one. However, my own experience suggests that it has never been part of BT's thinking.

I own a business right downtown and would've gleefully given my business to BT, but they made it very difficult. They wanted us (4 person office) to pay the full costs of putting a T1 line in our building - about $500/month. They wouldn't split out the cost among other future tenants (we were the first business in the building after a renovation). We don't need a T1 and $500/month was a non--starter, so we got Comcast at $95/month, which meets our needs.

I hope that someone is able to sort out the BT mess, but am not optimistic. The debt load of BT is huge and the subscriber base is pretty small.

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