Proposed Lafayette Broadband Will Cost More, Run in the Red Longer than Proponents Claim

June 20, 2005
Ralph Conner

According to a new analysis by a nonprofit research organization, a proposed $125 million municipal broadband network in Lafayette, Louisiana is likely to cost more to operate and run bigger deficits for a longer time than its proponents claim.

The data that form the basis of the new study come from a surprising source: a municipal broadband network built three years ago in Bristol, Virginia. The same consultant retained by proponents of the Lafayette municipal broadband system, CCG Consulting Inc., developed the proposal for Bristol Virginia Utilities' OptiNet unit.

"Lafayette Utilities System presents OptiNet as an example of a successful implementation of an FTTP platform and aims to use it as a model for the Lafayette system," notes Steven Titch, author of the new study and managing editor of InfoTech & Telecom News. "So it makes sense to examine the LUS feasibility plan for Lafayette alongside OptiNet's results."

As of its fiscal year ended June 30, 2004, BVU OptiNet had a net operating loss of $3.3 million. Although revenues increased from $754,000 in 2003 to $4.7 million in 2004, OptiNet's operating expenses also grew dramatically, from $3.9 million in 2003 to $6.5 million in 2004.

"Marketing costs and interest expenses are much, much higher for OptiNet than BVU's other utility operations relative to the revenue they produce," says Titch. "Escalating programming costs--the sums cable companies pay to carry CNN, ESPN, TNT, and other cable channels--have already forced OptiNet to increase rates."

Titch notes the feasibility plan for the Lafayette system is based on the OptiNet model rather than its reality after two full years of operation. In particular, Titch says, the LUS plan dangerously underestimates the cost of marketing, program acquisition, and debt.

"The success of the LUS plan is tied to extremely fast growth of revenues--faster and more aggressive than OptiNet has seen in its market," notes Titch. Between its third and fifth year of operation, LUS expects to triple revenues and reach 50 percent cable TV penetration against BellSouth, Cox, DirecTV and Dish Network--while at the same time cutting its marketing costs by 30 percent. "LUS has not explained how it expects to manage these two goals at the same time," says Titch.

He also notes the LUS revenue plan is heavily dependent on the system's success in cable TV--even though LUS tends to emphasize the importance of a high-speed broadband Internet connection for its citizens and the local economy. Similarly, OptiNet justified its taxpayer-backed entry into broadband and cable based on the idea that only a municipal entity could deliver universal broadband access at prices below market. OptiNet now requires a customer to purchase at least $44.95 a month in services before it will extend fiber to a home. "As LUS grows, low-paying Internet-only customers--the very demographic group LUS is ostensibly being taxpayer-funded to serve--will also likely get short-shrift," warns Titch.

"Even municipal broadband operations regarded as successful, such as BVU OptiNet, are still millions of dollars short of breaking even," concludes Titch. "Based on numbers from other municipal operations, as well as overall industry trends, Lafayette citizens and leaders should question whether the CCG plan, as it stands now, is achievable."

The study was released on June 20. Titch's newsletter, Info Tech & Telecom News, is published by the Chicago-based Heartland Institute and sent monthly to approximately 12,000 local, state, and national elected officials nationwide. The study is available for free online at Heartland's Web site, http://www.heartland.org, or can be ordered for $10 a copy by calling 312/377-4000.


Editor: If you have any questions about this study, please do not hesitate to contact the author, Steven Titch, at 281/571-4322 or by email at titch@heartland.org. The complete text of the study can be found at http://www.heartland.org. For additional information about The Heartland Institute, call Ralph Conner, public affairs director, at 312/377-4000.

The following individuals have received advance copies of this study and may be willing to comment on it and municipal broadband generally:

Sonia Arrison
Director, Technology Studies
Pacific Research Institute
Landline 415/955-6107
Cell 415/812-2814
email sarrison@pacificresearch.org

Braden Cox
Technology Counsel
Competitive Enterprise Institute
Phone 202/331-2254
email bcox@cei.org

Dr. Ronald J. Rizzuto
Professor of Finance
University of Denver
Office 303/871-2010
Cell 303/619-5701
email rrizzuto@du.edu


The Heartland Institute is a tax-exempt charitable organization organized under Section 501(c)3 of the Internal Revenue Code. This news release and the study it describes should not be construed as necessarily representing the views of The Heartland Institute nor as intended to aid or oppose passage of legislation.


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