iProvo, the poster child for government-run broadband, is taking a hit from a libertarian think-tank that says the telecommunications system is facing a cash flow crisis because of lower-than-expected subscriber counts.

A study released Tuesday by Los Angeles-based nonprofit Reason Foundation says iProvo -- which was launched in July 2004 with high hopes -- had a rocky first 18 months of operation because it has repeatedly failed to meet its target subscriber counts, lost a retail provider early on, and has been forced to draw on city utility reserves twice to make payments on its $39.5 million revenue bond.

Provo Energy Director Kevin Garlick disputes the study, saying it's riddled with errors and biased.

The net losses are mounting, according to the study, which cites Provo's annual financial reports. It claims that iProvo lost $1.36 million in fiscal 2003, $1.42 million in 2004, and $1.67 million in 2005. And it is expected to lose another $2 million in fiscal 2006 -- money that could eventually come out of the pockets of Provo taxpayers.

Reason Foundation says it's not affiliated with private telecommunication companies such as Qwest and Comcast.

The group describes itself as a libertarian research group that is supported by voluntary contributions from individuals, foundations and corporations, including a $100,000 grant from AT&T last year. Reason Foundation maintains the study wasn't funded with money from AT&T, currently a provider on UTOPIA, a $340 million fiber-optic telecommunications project involving 14 Utah cities.

Garlick disagreed with the findings, criticizing the study as being full of "many, many inaccuracies and misinformation, and reflecting a very slanted position by the institution."

"Reason Foundation is not an unbiased think tank. They have consistently advocated privatizing airports and airport security, privatizing transit systems, prisons, education, power systems, water and wastewater systems and solid waste collection and disposal, among other services," Provo city said in a preliminary statement issued Tuesday.

"Those net losses are expenses for inner city telecommunications services, which have nothing to do with iProvo. The study is trying to misrepresent the project," Garlick said. "It's like conducting research on airplane safety without ever talking to a pilot or an aircraft manufacturer."

He said the city plans to develop a more comprehensive response to Reason's study in about a month.

But Steven Titch, a telecom policy analyst with Reason Foundation, maintains the losses of iProvo are the losses of taxpayer money.

"We're doing this study because iProvo is being presented in a lot of venues as a successful example, the soundest way to do municipal broadband. But data shows there are risks associated with municipally owned broadband projects," Titch said.

Subscriber target not met

Case in point, Titch said, is that Provo initially projected it would take 10,000 subscribers to break even and that this target would be achieved by December 2005. The city now says it needs between 12,000 and 15,000 subscribers to break even. There are currently 8,100 subscribers to iProvo.

"There are about 30,000 households in Provo, and if we need to have 15,000 subscribers to break even, that's 50 percent of the market. That's extremely difficult for any market to achieve," said Provo City Councilman Steve Turley. "We're being outgunned by the competition and our costs are extremely high. Qwest and Comcast offer a more competitive package. Qwest has a $200 million annual research and development budget and Provo city has none."

But Garlick disagreed, blaming iProvo's failure to meet subscriber and revenue targets on the problems of its first retail partner, HomeNet Communications, and its bankruptcy -- problems that he said set back iProvo's subscriptions and revenue targets by at least a year.

With HomeNet's replacement by two new retail providers, MStar Metro and Veracity, iProvo is adding subscribers and revenues again. "In 2006 to 2007, iProvo is projected to add 60 subscribers a week. But by the end of our first quarter in Sept. 30, we've added 80 subscribers a week," he said.

That shows iProvo is "on target, moving forward and adding subscribers," Garlick said. "We went through the public process and established new projections because of HomeNet. But we're still on schedule."

Provo Councilwoman Cynthia Dayton called the struggles just the "normal turn of a new startup company."

"We're moving forward, we're starting to get closer to our numbers," she said.

Titch disagreed. HomeNet squandered iProvo's competitive advantage of 2,400 retail customers and its poor performance contributed to an overall drop in revenues to $853,204 in 2005 from $903,556 in 2004, he said, citing Provo's 2005 annual financial report.

"The fact is this is a highly competitive and risky business and requires a lot of marketing expertise," said Adrian Moore, vice president of research with Reason. "Provo, like some other local governments, operates its own electric utility, which officials thought prepared them for expanding into telecom. But broadband and Wi-Fi is a different beast. Competition is fierce and technology changes rapidly."

Moreover, when Provo sold the assets of Provo Cable -- which consisted of 2,400 customer accounts -- to HomeNet in February 2004, at what Titch said was 40 percent of its true market price, the city indirectly subsidized HomeNet's entry into the telecommunications business. That customer count represents about one-quarter of the total number of subscribers iProvo would need to be a success, he said.

"In selling a key asset for less than what it was worth, Provo cheated both local commercial service providers and Provo taxpayers," the study said, citing a HomeNet financial statement on Dec. 21, 2004. "The agreement valued Provo Cable's customers at $275 each. The agreement, however, stipulated that HomeNet pay only 40 percent of this cost, $110 per single family residence, for the great majority of the accounts."

Of some 2,400 customers HomeNet started with, only 1,600 were left at the time it pulled out of the Provo market in mid-2005.

Shoring up shortfalls

To cover iProvo's problem with subscriber shortfalls, the city shored up revenues in fiscal 2005 with nearly $335,000 in unexpected interest income from iProvo bonds and $48,000 in revenues from UTOPIA, which is leasing its cable feed from iProvo, the study said.

In March, Turley cast the sole vote against a Municipal Council resolution to allocate $980,000 from the electricity reserve fund -- which is paid for by Provo's electricity customers -- to make iProvo's first bond payment. Then in June, the Municipal Council voted to borrow $2.1 million from the electricity reserve fund to continue making payments on the iProvo bond in fiscal 2007 and 2008.

"The $39.5 million revenue bond is supposed to be funded with revenues generated by iProvo, but taxpayers are paying for it. It definitely hasn't met its financial goals," Turley said. "iProvo is supposed to be operating at $2 million surplus by 2005 but its operating surplus is marginal."

In 2005, just 35 percent of iProvo's revenues came from consumer broadband services, the rest came from government reserves, the study said.

According to Reason's study, iProvo will "continue to lose money this year and its net assets will continue to decline as its debt and interest load grow."

While iProvo still has positive net assets, the study shows it owes more than the system is worth. Overall, assets grew by $2.2 million in 2005, but liabilities grew by $3.9 million. "This gap will widen and it will become increasingly difficult for iProvo to ever pay off the debt on its system or realize the full value of its investment," the study said.

Turley agreed, saying the study "brings to light the precarious situation we're in. We're continuing to subsidize iProvo instead of coming out with Plan B."

Garlick disagreed with the study's view that iProvo illustrated the failure of municipal broadband systems to compete with the private sector. "What happens down the road depends on how this project continues to grow and prosper. I see those loans paid back by subscriber revenues," he said.

Comparison with UTOPIA

Meanwhile, Titch said he hasn't done any studies of UTOPIA -- Utah Telecommunication Open Infrastructure Agency. But he says UTOPIA doesn't seem to be having the problems iProvo has.

"UTOPIA has a statewide fiber backbone and its business plan doesn't really hinge on the success of its partners in the retail telecommunications services. UTOPIA's provider AT&T leases bandwidth and is more about the business of moving data," Titch said.

"iProvo however, is set up to support the delivery of triple-play services to Provo and needs aggressive retailers to compete with Qwest, Comcast and other ISPs in order to sell services on its network," he said.

Ultimately, as a government-funded entity, iProvo has certain goals, including offering telecommunications services at lower rates than the incumbents, which it has not yet achieved, Titch said. "Either it can think about selling its fiber assets to a private company and leaving the business, or coming clean and saying this will be a social, government-funded project that will cost money to taxpayers," he said.

Dayton said iProvo has benefited residents, even those without the service. It has driven phone, cable and Internet package rates lower because it offers competition to companies like Qwest and Comcast.

Comparison of triple play phone, Internet and cable rates and service packages

Qwest- cheapest package including 225 channels from DirecTV and 5 Mb/s Internet download speed starts at $89.97 a month.

MStar - package including unlimited long distance, which would cost Qwest customer $20 more a month, costs $124.95. Package also includes 122 cable channels and 10 Mb/s Internet download speed.

Veracity - package includes 125 cable channels for $115.94.

Comcast - Doesn't have triple play package. But 200 cable channel package alone costs $58.55. Cable modem with download speeds of 4 Mb/s cost $42.95. Although Voice over Internet Protocol, which allows users to make voice calls using a broadband Internet connection instead of a regular phone line, isn't available from Comcast in Provo, it is available from other service providers like Vonage for $24.95. That brings a customer-rigged triple play package using Comcast to $126.45.

Source: The Reason Foundation

This story appeared in The Daily Herald on page A1.