Broadband Lessons ... from a Town that's Been There

Broadband Lessons ... from a Town that's Been There
June 17, 2005

Steven Titch

Steven Titch is a policy analyst focusing on telecommunications, Internet and information... (read full bio)

Bristol, Virginia--700 miles away with only one-sixth the population--would seem an unlikely role model for Lafayette. What could the two communities possibly have in common?

For one thing, municipally owned broadband: hotly debated in Lafayette, and still losing money after three years in Bristol.

Bristol is the home of OptiNet, a municipal fiber-to-the-premises (FTTP) broadband system funded by $27 million in revenue bonds, offering phone, Internet, and cable TV.

Bristol's experience with municipal broadband is especially important because Lafayette Utilities System (LUS), in its campaign to win voter approval for a $125 million bond issue for municipal FTTP, cites OptiNet as a solution to the "digital divide" and holds up Bristol as a successful model. CCG Consulting--the same firm touting the LUS broadband proposal--designed OptiNet.

Is OptiNet a model worth emulating? Not if the goal is universal high-speed Internet access. OptiNet recently stopped selling Internet access as a free-standing service and now requires customers to commit to paying $44.95 a month for assorted services before it will run fiber to a home.

OptiNet had no choice. Broadband is a highly competitive business, it costs a lot to be a player in that arena. OptiNet had to spend $220,000 on sales promotion and marketing in fiscal 2004, more than double the $96,000 it spent in 2003, to keep current customers and attract new ones.

Here lies a second lesson for Lafayette's broadband boosters. The LUS feasibility plan calls for the marketing budget to fall over time--by fully 30 percent between the third and fifth year of the plan. Over that same period, LUS plans to triple revenues.

That is downright laughable given the level of competitiveness that can be expected in Lafayette, the need for LUS to maintain consumer mindshare, and the frequently changing technology and services it may be offering.

The LUS plan calculates a rosy cash flow on the assumption that its costs to acquire cable programming will increase only 4 percent a year. Open the 2005 annual report from any of the cable companies and you'll find programming costs are increasing at 6 to 12 percent. OptiNet was forced to raise rates last year in response to the rising cost of content.

Finally, interest payments as well as operating losses are pushing OptiNet's net worth further into the red. OptiNet started with $27 million in taxpayer-backed debt. LUS' FTTP operations would start in the bottom of a much deeper hole: $125 million in public debt. Don't be surprised if, two years down the line, LUS starts scaling back its plans and focusing on the most profitable services in the highest-income neighborhoods.

"Mission failure"--the decision to abandon the universal service goal in order to stay financially stable--tends to be the common outcome of municipal excursions into broadband. At the end of the day, the municipality finds it must adopt the same business approach as the commercial service providers it sought to replace.

The proponents of municipal broadband demonize commercial service providers for ignoring low-income users. Yet universal service, the major justification for municipal broadband, is the first to go by the wayside when the financial going gets tough.

Citizens of Lafayette, beware. You have no reason to expect a better deal for your $125 million than Bristol got for its $27 million. Your future is clearly visible ... about 700 miles to the northeast.


Steven Titch (titch@heartland.org) is senior fellow for IT and telecom policy at The Heartland Institute. He is the author of Heartland Policy Study No. 108, "Municipal Broadband: Optimistic Plan, Disappointing Reality," released on June 20, 2005 and available online at http://www.heartland.org.

Steven Titch

Steven Titch is a policy analyst focusing on telecommunications, Internet and information... (read full bio)