Lessons from Bristol: Becoming What it Beheld

Published June 17, 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.

OptiNet is a fiber-to-the-premises (FTTP) system funded by $27 million in revenue bonds, offering phone, Internet, and cable TV. In its campaign to win local backing for the plan, BVU promised low prices and universal availability. OptiNet has since undermined that mission by requiring customers to pay $44.95 a month for assorted services before it will run fiber to a home. The fine print can be found at the OptiNet FAQ page, http://www.bvu-optinet.com/index.htm.

Bristol presents some important lessons for the people of Lafayette, Louisiana about the costs municipal systems face and the compromises they must make. OptiNet’s example is all the more 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.

To be sure, if we define success as being able to launch service and garner several thousand satisfied customers, OptiNet qualifies. Even its operating loss of $3.3 million would not be bad were it a commercial start-up in this sector, as its admirers say.

But OptiNet wasn’t intended to be a commercial service provider; it was created and funded to meet what the Bristol government identified as a crucial community need–universal high-speed Internet access. When OptiNet began demanding at least $45 a month, municipal broadband in Bristol ceased to be about subsidizing Internet access to those who couldn’t afford it or to whom incumbents had chosen not to serve.

To be fair, OptiNet had no choice. The cost of competing in broadband demanded it do all it could to maximize revenues in the near term. Phone and cable companies do not get a sympathetic response when they claim the broadband revenue models at this time do not support universal rollout of FTTP. Once OptiNet set a price floor for service, not only did it validate the incumbents’ case, it embraced it.

Unforeseen Costs

OptiNet’s balance sheets show how much it actually costs to be a broadband player. And when placed side by side with the LUS FTTP plan for Lafayette, financial questions immediately pop out.

For example, OptiNet spent $220,000 on sales promotion and marketing in fiscal 2004, more than double the $96,000 spent in 2003. The LUS feasibility plan, on the other hand, calls for the marketing budget to decrease over time–30 percent between the third and fifth year of the plan. Over this same period, LUS plans to triple revenues. This is downright risible given the level of competitiveness that can be expected in Lafayette, the need for LUS to maintain consumer mindshare, and the need to keep consumers aware of new technology and services.

The LUS plan also assumes 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 these costs are increasing at 6 to 12 percent. OptiNet was no exception. Although it does not break out programming costs, it was forced to raise rates last year in response to the rising cost of content.

Finally, interest payments are pushing OptiNet’s net worth further into the red. OptiNet was funded at $27 million. LUS’ FTTP operations will launch $125 million in the hole. Don’t be surprised if, two years down the line, it starts scaling back its plans.

While the handful of municipal broadband bankruptcies get the most attention, “mission failure”–the decision to abandon the universal service goal in order to stay financially stable–tends to be the more common outcome. Of the two, perhaps it’s the most insidious, because at the end of the day, the municipality adopts the same business approach as commercial service providers yet relies on subsidies from taxpayers it won’t serve.

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. This gives weight to opponents who say municipal broadband is unfair competition and inappropriately places risk on the shoulders of taxpayers that rightfully should be borne by shareowners.

Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute.