Lessons from Bristol: Becoming What it Beheld

Published July 1, 2005

At some point, Bristol Virginia Utilities OptiNet realized the truth about the broadband business–that it’s all about average revenue per user, or ARPU, as it’s called in the trade.

On that day, OptiNet, founded on the principle of universal, low-cost access to high-speed Internet and cited as a model system by proponents of municipal fiber optic systems, told a substantial portion of its community it need not apply for service.

OptiNet, a municipally owned and operated cable TV, phone, and Internet company using a fiber-to-the-premises (FTTP) platform, had become very similar to the type of company it was created to counter: “greedy” cable and phone companies who charged higher prices and were extending infrastructure for high-speed broadband only to high-income areas.

OptiNet, funded by $27 million in revenue bonds, promised low prices and general availability for everyone in the area. OptiNet has since undermined that mission by requiring customers to commit to $44.95 a month in assorted services before it will agree to run fiber to their premises. The fine print can be found on the OptiNet FAQ page, http://www.bvu-optinet.com/index.htm.

A requirement like this changes the fundamental nature of a municipal broadband utility.

The municipal rationale is based on the premise that the marketplace is failing to deliver broadband fast enough or cheap enough and entire groups of the population are being left out. When a municipal utility demands a minimum of $45 a month in order to provide service, public broadband ceases to be about subsidizing Internet access to low-income households.

Taxpayers in Bristol aren’t funding a public utility so it can offer broadband to people who otherwise can’t afford it. They are funding a public utility so it can discount HBO to customers in tony neighborhoods.

To be fair, OptiNet had no choice. Proponents of municipal FTTP don’t like hearing it, but broadband cannot be modeled on the municipal utilities of the twentieth century. It’s a compelling idea, but flawed, as discussed in “Municipal Broadband Is Not a Utility” (IT&T News, May 2005). Any community considering municipal FTTP should pay close attention to OptiNet’s experience.

OptiNet, to its credit, is one of the few municipal broadband operations to make its financial data available (http://www.bvub.com/index.htm). With OptiNet’s information in hand, we can go beyond the simple “success or failure” rhetoric that clouds the municipal debate and look at the economics of running a broadband utility (see table).

BVU Annual Itemized Costs
OptiNet and Other BVU operations — 2004
Budget Item OptiNet Electric Water Wastewater
Communications $2,861,101 0 0 0
Billing and Collection $$467,377 818,863 355,753 344,620
Sales Promotion $221,775 44,569 0 0
Administrative and General $1,178,419 1,925,032 856,015 745,277
Interest Expense $1,603,011 827,154 69,358 79,580

The High Cost of Marketing

In 2004, BVU OptiNet spent more than $220,000 on sales promotion. Those costs were more than double the $96,000 OptiNet spent in 2003. For every revenue dollar in 2004, OptiNet spent about 5 cents on promotion.

By contrast, BVU’s electric utility spent $44,500 on sales promotion in 2004. That is about two-tenths of a cent on each revenue dollar.

Marketing is a necessary expense in broadband. OptiNet must sell against at least four other companies that offer Internet and cable TV in Bristol–Sprint, Charter Communications, DirecTV, and Dish Network. OptiNet’s success depends on brand awareness and customer mindshare to a much greater extent than its other utilities.

BVU’s balance sheets include the line item “Communications.” That expense increased 88 percent to $2.86 million in 2004 from $1.52 million the previous year. BVU does not describe what these costs are, and the company did not respond to inquiries seeking clarification. It can be assumed however, that these expenses, which do not have counterparts in the other utility operations, include the cost of programming acquisition for OptiNet’s cable TV service.

Programming acquisition is the most volatile cost in the cable industry today. In their respective 2004 annual reports, the four major cable companies reported increases in programming acquisition ranging from 6 to 12 percent.

Municipalities have responded to this cost pressure in different ways. OptiNet raised prices last year. Ashland Fiber Network groups popular cable channels, such as ESPN and TNT, in higher-priced tiers.

Finally, there are interest payments. Broadband FTTP utilities must take on enormous debt. Here, OptiNet’s expenses have grown from $251,253 in 2002 to $1.4 million in 2003 to $1.6 million in 2004. OptiNet’s interest expense is almost twice that of the BVU electric operation although the unit brought in only one-sixth as much revenue in fiscal 2004 ($4.6 million vs. $28 million).

OptiNet’s liabilities exert their weight on the balance sheet. OptiNet’s net deficit in 2004 was $8.6 million, about $1,075 per Bristol household, a 36 percent increase over 2003.

ARPU Trumps Universal Service

We can argue whether these results mean OptiNet is a success or failure as an FTTP operation. But one thing is undeniable: To rein in costs OptiNet abandoned low-income households to concentrate its sales focus on high-revenue cable TV subscribers.

OptiNet’s experience fits a pattern. As costs rise faster than predicted, tough decisions must be made. Generally, an operation stops building its network, as has happened in the Grant, Washington Public Utility District and in Ashland, Oregon, or it raises prices or reconfigures services. In Bristol’s case, OptiNet just stopped selling to low-ARPU customers.

Municipal broadband proponents demonize incumbents 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. At that point, the utility becomes little more than a taxpayer-subsidized cable TV company. And this gives weight to opponents who say municipal broadband is unfair competition and inappropriately places on the shoulders of taxpayers risk that rightfully should be borne by shareholders.

Bristol, we are told, is among the best-run systems out there. Maybe so, but what residents were promised, and were cajoled into funding, was, at the end of the day, not what residents got.

Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute. This essay is derived from his June 2005 Heartland Policy Study No. 108, “Municipal Broadband: Optimistic Plan, Disappointing Reality.”