After only two years, the municipal broadband system in Provo, Utah has begun to show the pattern of losses and declining net asset value experienced by other cities that have mounted expensive fiber optic networking projects, according to a report published by the Reason Foundation in December.
iProvo, the $39.5 million system launched in July 2004, has had to request $1 million in additional funds from the Provo electric utility to meet its costs.
The Reason Foundation report, Spinning its Wheels: An Analysis of Lessons Learned from iProvo’s First 18 Months of Municipal Broadband, written by this author, concludes losses will continue to mount as the municipal system faces greater-than-anticipated costs and growing competitive pressure from the private sector.
“iProvo will continue to lose money in 2006, and more critically, its net assets will continue to decline as its debt and interest load grow. Currently, liabilities outstrip assets by $2 million. This gap will widen and it will become increasingly difficult for iProvo to ever pay off the debt on its system or realize full value of its investment,” the report states.
Research Findings
The report made four principal findings, all of which tend to be endemic to municipal systems.
iProvo is behind on its business plan and being forced to borrow more money. In February 2006, Provo Mayor Lewis Billings and iProvo officials asked the Provo City Council to approve a transfer of $1 million from Provo’s electric utility reserve to cover fiscal 2006 costs. In June, iProvo requested and received a line of credit for an additional $2 million to cover costs in fiscal 2007 and 2008. iProvo officials also said in October that the operation will need 12,000 to 15,000 customers to break even, an increase over the original break-even target of 10,000 customers. iProvo currently reports it has 8,400 customers.
iProvo’s wholesale plan attracted only one retail partner, HomeNet Communications, in its first year of operation. That relationship proved a disaster that ended with HomeNet pulling out of the market in July 2005 and declaring bankruptcy. Of the 2,400 customers HomeNet and iProvo started with, as few as 1,600 were left by the time HomeNet closed up shop.
Cable and Internet prices charged by iProvo partners are not significantly lower than pricing from Comcast or Qwest. An original goal of iProvo had been to offer broadband services at “affordable” rates, implying the rates charged by private service providers are too high. Yet, when compared with similar service packages from the incumbent cable and telephone companies, the two iProvo retail partners that replaced HomeNet, Veracity Communications and MStar Metro, while less expensive, do not offer sizable discounts compared to the incumbents.
There is little evidence to suggest iProvo has generated any significant growth in broadband usage or penetration in Provo. All reports suggest the great majority of iProvo’s 5,000 customers had broadband service prior to iProvo, either as customers of bankrupt Provo Cable or as customers of Veracity and MStar.
On the Defensive
iProvo fired back with a response released in late December. “The project is on track, is growing, and is now fully covering all of its operating costs and contributing significantly to its capital costs. As telecommunications technologies continue to evolve to broadband applications, as the need for more bandwidth capacity and services continues to grow, and as more and more of our residents and businesses subscribe to services offered over the iProvo network, the financial gap will close.”
While iProvo pointed to revenues of $2.1 million in fiscal year 2006, numbers that were available after principal research had been completed on the Reason report, it did concede losses “were larger than expected.” The municipal utility lists several reasons for the shortfall, stating that processes took longer to set up than anticipated, construction began later, transport fees were lower than expected, the retail partner failed, and the customer mix did not meet forecasts.
Municipalities, however, tend to run into these factors, in part because they function as an arm of local government, not under the market demands of a commercial company. The iProvo report notes this, as does another Reason report, Dynamic Perspectives on Government Broadband by Jerry Ellig, issued concurrently.
Scholarship on dynamic competition suggests seven issues that are likely to be significant in municipal provision of Internet service, Ellig writes. These are price competition, performance competition, the pressure for continuous improvement, technological change, obsolescence, risk, and uncertainty.
Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute and managing editor of IT&T News.
For more information …
The two Reason Foundation reports are available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to http://www.policybot.org and search for document #20448 (Spinning its Wheels) and document #20449 (Dynamic Perspectives).
Steven Titch is a policy analyst focusing on telecommunications, Internet and information technology. He is also a policy advisor to The Heartland Institute.
