GRACE LEONG - Daily Herald | Posted: Thursday, December 28, 2006 11:00 pm
Poorly researched. Not objective. Premature.
That was Provo City's firing salvo in a 32-page white paper released Thursday in an ongoing spat with a libertarian think-tank that called iProvo, a $39.5 million government-run broadband network, a failure.
While Provo officials concur iProvo has repeatedly failed to meet its subscriber and revenue targets, they say it's premature to write off the fledgling fiber-optic network as a failed government venture and liability to taxpayers.
The city's report on Thursday criticized Los Angeles-based nonprofit Reason Foundation's financial analysis of iProvo as unfair because it used data from the city's fiscal 2005 report when the project was only partially built.
According to the city's fiscal 2005 financial report, iProvo lost $1.67 million. And it is expected to lose another $2 million in fiscal 2006 -- money that could eventually come out of the pockets of Provo taxpayers, the Reason report said.
"How can Reason suggest on the basis of one fiscal year's numbers that iProvo won't workfi" asked Wayne Parker, Provo City's chief administrative officer. "We've just completed the build-out of iProvo five months ago. So there may have been many subscribers who wanted service but weren't able to subscribe because the system wasn't built out."
Provo initially projected it would take 10,000 subscribers to break even and that this target would be achieved by July 2006.
Due to the problems and eventual bankruptcy of its first retail partner, HomeNet Communications, the city now says it needs between 12,000 and 15,000 subscribers to break even by summer 2008. There are currently 8,400 subscribers to iProvo, of which at least 300 are business customers.
"We're averaging about 60 new subscribers a week. We get as many as 150 subscribers a week and as low as 20 a week or even zero over the holidays," Parker said.
Excuses, excuses
Steven Titch, a telecom policy analyst with Reason Foundation and author of the iProvo report, is unfazed by the city's criticism of his findings.
"This doesn't change the fact that Provo was unrealistic in its expectations in reaching break-even. If AT&T didn't meet revenue projections, they get crap from their shareholders. If the government doesn't meet its projections, the taxpayers pay the price," he said.
Titch also downplayed the city's criticism that his report was unfairly biased in favor of private telecommunications companies like Qwest.
"I was an editorial consultant for Qwest in 2003. But my iProvo report wasn't funded by Qwest or any other private company," he said.
"iProvo is losing money and will continue to lose money and have trouble recovering its costs. I see a lot of rationalizations in the city's report, like here's what we're doing with funds. But I don't see anything that directly contradicts my analysis or reading of the situation," Titch said.
Startup challenges
Parker disagreed. "For Reason to say this is the city's fault is disingenuous. For iProvo to be successful, the private sector has to be successful. HomeNet didn't live up to its agreement to get subscribers, so that delayed our break-even target."
Of some 2,400 customers HomeNet started with after buying those accounts from Provo Cable at a discount, only 1,600 were left at the time HomeNet pulled out of the Provo market in mid-2005.
He attributed larger-than-expected losses in 2004 and 2005 to delays in the start of iProvo's construction and in finding suitable retail providers. Parker also blamed its failure to meet revenue targets on unexpectedly higher subscriptions from apartment subscribers and lower subscriptions from single-family home subscribers.
But this just proves telecommunications isn't a market for governments to be involved in, Titch argued.
"Because municipalities aren't businesses, they don't know how to do focus groups and market research. Private companies, however, have the financial resources and the wherewithal to get subscribers," he said.
Citing a report from Fiber-to-the-Home Council, a telecommunications trade group, Titch said Verizon has about 500,000 voice, video and Internet customers nationwide within a year of introducing its fiber-to-the-home network.
But that's not a fair comparison, Parker said. "We don't know what Verizon's penetration rate is. iProvo will be available to only 33,000 homes and 4,100 businesses. So far we have about 25 percent penetration rate."
Defending the cross subsidy
Provo officials also challenged critics questioning whether the city is competing fairly with the private sector. The city defended its move to cross-subsidize iProvo's broadband operations from other utility funds, namely its electricity reserve fund.
In March, the Provo Municipal Council voted to allocate almost $1 million 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 iProvo's bonds in fiscal 2007 and 2008.
Parker stressed these are loans, not grants. "They're done as market rate loans, and have to be repaid with interest over time."
But Titch said such tactics are questionable.
"The city is taking funds set up by a municipal utility as a hedge against increases in electricity costs and putting it in something that's a riskier venture. With private companies, a new product and service can be funded as a loss leader by something else. But if it doesn't become profitable over time, then the product is discontinued," he said.
"But in the case of iProvo, the opposite happens. The fund transfers keep happening because Provo can tap on money from electricity payers for broadband. Very few companies can sustain using captive customers for its loss leaders for a long time. What if there's a spike in electricity rates and the money isn't in the reserve, the city will probably end up raising rates to its electricity customers."
Parker downplayed Titch's concerns, saying the city's electricity reserve fund is in good health with more than $15 million in funds. "We have the authorization to borrow up to $2.1 million, but we haven't taken that step yet."
How to justify iProvo's investmentfi
Provo officials also defended their decision to support the iProvo project, saying it took over when the private sector refused to build the broadband network.
Titch said the private companies like Qwest haven't been as proactive in investing in fiber-optic deployment, but he questioned if that role should be taken over by the government.
"You would think a community the size of Provo plus its university population would be wired for fiber by the private industry. Provo and other medium-sized cities like Portland, Ore. jumped in because they didn't want to be left behind in the broadband rush. But how to justify the value of the investmentfi Ultimately, demand has to be there to justify it," he said.
The problem is Provo entered the telecommunications market too early, although demand for broadband is now growing, he said.
"There was no YouTube then. But now we're seeing high-definition TV, which works well over fiber and will be reason for more fiber deployment. With Vongo and Movielink, you can now watch TV on the Internet. These are reasons for people to buy broadband. Plus there's more interest in applications over the Internet for multi-level video gaming, which Xbox provides now."
These developments, Titch said, will justify more investment in broadband deployment by private companies over time.
But for now, iProvo appears to be ahead of the curve. "There's consensus around the point that broadband isn't an essential service. But we believe time will prove us right. The space program in its earliest years faced challenges from those who questioned why taxpayers should fund such a program. But no one can argue now that it isn't a smart thing to do," Parker said.
This story appeared in The Daily Herald on page A1.