Money-Losing iProvo Fiber Network Sold by City to Private Firm

Published July 1, 2008

The city of Provo, Utah has announced it will sell its money-losing municipal fiber network, iProvo, to Broadweave Networks, a South Jordan, Utah startup, for $40.6 million.

The deal represents the largest sale of a municipal fiber operation to a buyer planning to maintain and grow it, and marks the end of the largest and most touted municipal fiber-optic operation in the United States.

The system aimed to deliver 100 Mb/s fiber-to-the-premises (FTTP) to all homes and businesses in Provo. Although buildout was completed in 2005, the operation was racking up larger and larger deficits each year while failing to meet customer and revenue goals, leading to the May sell-off announcement.

For fiscal year 2007, ending last June 30, iProvo lost $2 million and required a special allocation of $1.2 million from the Provo city council to keep afloat. In December 2007, iProvo reported losses for the first four months of fiscal 2008 were already $214,000–with the $1.2 million additional funding already accounted for.

At that time iProvo reported 10,265 customers, the target its business plan had set to be reached two years earlier. The city admitted it had grossly underestimated the average revenue needed per user and was on pace to lose another $2 million during the current fiscal year.

Object Lesson

“iProvo is what happens when politicians develop the conceit that they know better than people who are putting their own money at risk,” said Randy Simmons, a political science professor at Utah State University and mayor of Providence, Utah.

“Since it was citizens’ money being risked and lost by the Provo city administration, citizens are lucky their city council applied enough pressure to force the sale,” Simmons said. “Now market demand will determine outcomes, and politicians can go back to providing the core services of government.”

The sale came as something of a surprise. Separate reports from two consulting firms in late April urged continued city funding while recommending substantial changes in iProvo organization and operations. Provo Mayor Lewis Billings had been expressing confidence in the system and signaling his administration planned to stay the course.

But as iProvo’s financial woes increased, so did calls from legislators and local taxpayer groups, including the Utah Taxpayers Association, for the city to privatize the system while value could still be recovered. Billings said criticism did not prompt the sale, claiming privatization always had been an option from the start.

Commercial Option

Unlike cities that have waited too long and failed to find interested buyers–such as Ashland, Oregon, which remains saddled with an uncompleted system projecting a $3.8 million deficit by 2011–Provo is unloading the system while it still has some value.

The $40.6 million sale to Broadweave Networks, which is backed by Sorenson Capital, one of Utah’s leading venture capital firms, suggests significant investment dollars are becoming available for commercial fiber-optic development.

Civic Courage

“Mayor Billings should be congratulated for his courage,” said Royce Van Tassell, vice president of the Utah Taxpayers Association. “It took a lot to admit that a project he had been supporting was not working. Not only did he do the right thing, but he set an example for other municipal systems around the country.”

It remains to be seen what effect the iProvo sale will have on other municipal fiber projects, including the Utah Telecommunications Open Infrastructure Agency (UTOPIA), a consortium of 11 small Utah cities building FTTP systems connected by a backbone running the length of the Wasatch Valley in northeastern Utah.

UTOPIA is expected to lose $17 million in 2008 on top of $21 million in losses for 2006 and 2007. It is asking its members, which have pledged sales tax revenues against any shortfalls, to approve a new 33-year bond.

The bond has been approved by 10 of UTOPIA’s 11 member cities and would allow UTOPIA to avoid default on its current 20-year, $180 million loan, but it would raise the overall cost of the financing–principal and interest–from $300 million to $505 million over the life of the bond. The 11th member, Payson, voted no on the new loan. As of press time, the ultimate ramifications of that decision are unclear.

Reckoning Likely

Observers such as Simmons believe UTOPIA, like iProvo, will ultimately face a reckoning.

“A difference between iProvo and UTOPIA is that of visible, current losses versus potential, but currently invisible, future losses,” Simmons said. “Provo’s elected officials were watching $2 million going down a drain, while elected officials in UTOPIA cities have not yet seen such losses. They have been asked to guarantee loans, which probably means that future politicians will have to deal with losses.”

The agency has made some major revisions in its business plan. Consumers seeking UTOPIA FTTP service will have to pay the cost of the fiber drop to their home, an additional $1,800 to $2,200 fee that likely will be apportioned over 12 to 24 months.

Also, UTOPIA will not begin building FTTP infrastructure in any neighborhood until 40 percent of customers commit to purchase the service, effectively backing off from its promise of ubiquitous buildout–which it originally used to justify its creation and public funding.

Steven Titch ([email protected]) is telecom policy analyst for the Reason Foundation.