Joe Pyrah - DAILY HERALD | Posted: Thursday, May 8, 2008 11:00 pm
Money will be paid back over time from sale proceeds Provo City will have to front almost $2.6 million to close out the deal for its fiber-optic network, and the fate of the network's service providers got a little clearer on Thursday.
Earlier this week it was announced that Broadweave would be buying iProvo for $40.6 million, and on Thursday more financial details were laid out to the city's telecom board. The network has provided high-speed Internet, TV and phone services since its launch several years ago but has run consistently in the red to the tune of millions a year.
The $2.6 million up-front money will likely be paid by the city giving itself a loan, but the good news is that it will be paid back over time via the money made from the sale, said Provo Financial Director John Borget.
The $2.6 million comes from debt currently held by the city related to the system, including equipment costs and $800,000 owed to the city by its current service providers. Those providers, Mstar and Veracity/Nuvont are under investigation by the state Auditor's Office, which reported Thursday that research is complete and a report is expected in "several weeks."
The city also plans to see serious savings in its future use of the system. While it was announced that Provo will be paying Broadweave $300,000 a year for network access. Borget said Thursday that consultant reports indicate the deal could result in a savings of $1.2 million to $2.2 million per year. The cost savings would be found largely in power management and automatic meter reading.
The fate of iProvo's current service providers was inadvertently made a little clearer in a consultant's letter read during the meeting. Doug Dawson of CCG Consulting wrote while evaluating the sale that "the buyer wants to be the sole provider on the network." Broadweave and Provo City have so far declined to be specific about plans for Mstar and Veracity/Nuvont.
"I'm going to start from the top and say you can ask any question except for that one," Broadweave CEO Steve Christensen told the telecom board. He later added that the company will release more information about it next week and that there are closed-door talks underway with the two current providers.
Christensen took a moment to say that the providers are stuck in a marketing trap in that the only benefit they can offer consumers is lower price, which in turn harms the company.
"There's always someone who's willing to race to the bottom. There's always someone who's willing to go out of business," he said. "We're not going to get into the race to the bottom mentality."
Whether that means Broadweave would raise prices after taking over is unclear, with Christensen saying only that the company would be offering a "very compelling price plan."
Dawson also feels the sale is a good deal. "As it turns out, the buyer adopts the most risk since they need to execute on their plans to be a financial success in the city," he wrote. "The city's risk is really limited to the possibility that the buyer will fail and the network will revert back to the city at some future date."
Whether Provo found its buyer legally is still being questioned. At Tuesday's sale announcement, the process was questioned by XMission CEO Pete Ashdown, who said proposals were never openly sought and instead Mayor Lewis Billings negotiated with just one company, Broadweave. Billings contends that an April 2007 request for proposals included the possibility of purchasing the system.
City spokeswoman Helen Anderson said Wednesday that any requests for proposal information would have to go through the formal open records request process, though there would be no guarantees the information would be released. The Daily Herald made that request Thursday.
Anderson did say the city received about 10 responses to the RFP offering a variety of alternatives, including some to take over the network.
Councilwoman Midge Johnson said she expects the council will find out exactly who bid.
"I seriously doubt there were better offers," she said. "[But] I think that's a very good question we will get answered in a couple of weeks."
On Thursday, the telecom board asked Christensen what his company would be doing to improve the marketing situation for the network, a sore spot between the city and its current providers.
"We'll put on the boxing gloves. We'll do some of the cage fighting," Christensen said of taking on the likes of Qwest and Comcast.
The company already plans to improve the TV quality by offering its channels in MPEG-4 format instead of the current MPEG-2, and it has its own phone switch that should provide higher quality and more reliable service.
It was also clarified Thursday that while Broadweave is buying the network, the company will do so by paying Provo the amount of each bond payment as they come up, because municipal bonds cannot be transferred. The city will then use that money to actually make the payment.
The sales agreement has a safety net in case Broadweave goes belly up, which includes millions of dollars being made available to Provo City via venture capital firm Sorenson Capital.
Broadweave isn't planning to go belly-up anytime soon. In fact, it will be announcing the acquisition of a Houston, Texas, fiber network soon.
"We've got a pretty active acquisition strategy," Christensen said.