community broadband networks

Monticello faced a number of key decision moments throughout the history of its FiberNet. Given the recent changes in management and decision not to make up the different between debt service and revenues, some may be wondering if proceeding with FiberNet was the smart decision.

It was 2008 and the economy hadn't entered its death spiral. Monticello had overwhelmingly voted by a 3:1 margin for the local government to bond for and build the network.

When Monticello was beginning to sell its bonds, the incumbent telephone company (TDS) filed a lawsuit against the City, with the extremely dubious claim that Monticello did not have the authority to do what other cities in Minnesota had done. Courts later tossed it, finding that the TDS suit had no merit and making TDS reimburse Monticello for some of its costs due to the frivolous suit.

But the goal was never to win the lawsuit, it was to delay and harass. Monticello had to wait a year to begin building its network. Though TDS had previously maintained that its DSL was just fine for the needs of residents and busineses, it began pulling permits to significantly upgrade its DSL to a FTTH product. (TDS has steadfastly maintained, while investing more in Monticello than any other Minnesota community, that community networks result in less investment from incumbents.)

At any rate, Monticello had a decision. It faced an expensive court case and the City's action was apparently driving TDS to improve its poor network. Monticello could have backed down in the face of TDS' bullying.

And if it had? From what we have seen elsewhere, this is our best guess:

TDS could have delayed its upgrades or changed its mind entirely when the economy tanked. If it continued with upgrades, it would likely have made some token investments but not lowered its prices because the threat of actual competition was removed. It certainly wouldn't have unveiled broadband tiers that were superior on speed and price to those in Minneapolis / St Paul metro area.

If they had unveiled a high-speed option like the 50/20 Mbps package, they likely would have priced it sufficiently high that few took it and then would have used that as evidence that their old, slow, unreliable DSL had been just fine.

People would have no choice of phone providers because Charter still does not offer telephone in that area. Prices for telephone, television, and broadband would all be much higher in Monticello - the same as we see in the majority of other communities where people can only choose between one DSL company and one cable company. Savings for many households from Charter's discounts range in the several hundreds to perhaps $1000 each year -- real money that would be at Charter HQ right now rather than in Monticello.

Local businesses that depend on reliable telecommunications would have been much less competitive - paying more than competitors in other communities (regionally or nationally) while receiving far less. Some of those businesses may have decided to move or expand to areas with modern infrastructure, recognizing that companies like Charter and TDS would never view Monticello as a priority for investment absent a community network.

People who have been hired by Charter and TDS in their respective marketing blitz (particularly the door to door sales people) would not be working for those companies. All the multiplier effects from the saved money, the people hired to build or upgrade the networks, and such, would not have happened. Media outlets would have fewer advertisements and event organizers would have had fewer sponsors.

TDS suddenly decided to provide free broadband to the Monticello area schools around the time that the City decided to build its own network so the schools could be spending more money on telecom charges if the City had backed down.

Because Monticello had the courage to stand up to TDS and is now home to some of the best broadband access in the entire nation, it has been featured in several press stories and received a lot of positive attention. Whether this has paid off with people choosing Monticello or businesses considering it, we do not know -- but we do know that many cities would be thrilled to have that attention.

We do know that due to the lawsuit, predatory pricing from Charter, and the upgrades from TDS, FiberNet Monticello was not able to generate sufficient revenue to cover its costs and debt service in the time frame predicted. To cover the gap, the City loaned the network between $3 and $4 million from the liquor store reserves. Now, the City is trying to negotiate with the bondholders to find a solution that works for everyone.

We continue to believe that Monticello made the smart choice in proceeding with its network, even in the face of all the adversity they have had. If it were possible to total up the many varied benefits to the community from the additional investment, choices, discounts, and multiplier effects, we believe it would significantly outweigh the negatives.

Monticello has been all over the muni broadband news lately, in the wake of a letter it sent to bondholders [pdf] alerting them that the City would no longer make up the difference between the revenues produced by the system and the debt payments. This came shortly after the company managing the network decided to step down.

Over the next year, the reserve fund will make up the difference while the City and bondholders come to some sort of an agreement.

The Star Tribune today published a good synopsis of the situation:

City administrator Jeff O'Neill said that the city has no intention of abandoning FiberNet's 1,700 customers, including about 130 businesses.

"This system isn't going anywhere," he said. "We're not going out of business."

Despite the problems, he said the city has one of the fastest Internet systems in the country that has driven down prices and improved services by providing competition.

The article also notes that prior to the City-owned network, the telephone company (TDS) provided very poor DSL service that was harming area businesses with slow and very unreliabile phone and broadband services. Without FiberNet Monticello, we don't know how many businesses would have been forced to relocate to be competitive in the digital economy.

We decided to dig a little deeper to get a sense of what Monticello has received for its investment and difficulty. We previously examined the prices charged by Charter cable in town and found that households taking that deal were saving $1000/year.

We also noted that Charter was almost certainly engaging in predatory pricing. After talking with other networks, we would guess that Charter is losing between $30 and $50 (conservatively) per subscriber per month. Charter is literally losing hundreds of dollars each year for every subscriber that takes the offer in its bid to run the City network out of business. It can do this for years by subsidizing from other markets where they do not face real competition.

Prior to FiberNet Monticello, Charter was the lone local cable provider and served most of the market. In response to competition, cable providers rarely change listed prices but instead individually negotiate lower prices with households or run much longer promotional offers. If we assume that only 20% of Monticello households have benefited by lower prices (either by switching to FiberNet Monticello or by getting a lower rate from Charter), that is 1000 households. Some of those households took the predatory pricing deal, resulting in extraordinary high savings but most probably saved less. Let's assume the average household savings was only $20/month, or $240/year. Spread over the 1000 households, the savings to the community is conservatively $240,000/year. Of course, that doesn't put a value on the iPads or HD TVs that Charter has been giving away as promotional items for new customers.

TDS had a de facto monopoly on telephone until the city began offering services (Charter still does not offer telephone). When presented with another choice, TDS cut its telephone rates almost in half - from around $40 for local service to $25. The City offers telephone service for less though it has more features. If TDS had not cut its price in response to the community network, the community would have paid more than $1 million in extra telephone charges by now (assuming Monticello still subscribes to landline telephone at the same level as the rest of the nation). And again, that puts no value on the additional services or the much larger "local" calling area used by FiberNet Monticello.

Now we come to broadband. TDS offers faster broadband services in Monticello than any other Minnesota community, nearly all of whom are stuck with slow and unreliable DSL. In Monticello, TDS invested in a much better network capable of FTTH in direct response to FiberNet Monticello. Not only did this create new jobs for technicians and salespeople in Monticello, the multiplier effect benefited area businesses as well.

Let's look at what broadband packages TDS offers other communities (packages displayed are those without a phone line to keep it simple). These are packages in Spicer, Minnesota.

Here are the packages in Buffalo, Minnesota.

And here is what Monticello residents get from TDS:

Notice a little difference? Monticello residents pay less and get faster connections. Compared to Spicer, Monticello residents are paying $35/month less for 25Mbps. The packages from TDS in Monticello are even superior to what I can get in Minnesota's capital city, St. Paul. A Comcast connection with 50Mbps download speeds is $99 and comes with far slower upstream speeds (and the download speeds from Comcast are rarely achieved in practice due to the shared neture of a cable network). If we assume that only 20% of Monticello households have benefited from this competition, at an average of $15/month, the cumulative cash savings are at least $180,000 each year. The many benefits from having much faster connections undoubtedly add to that value.

But if I lived in Monticello, I would be definitely taking one of the packages from FiberNet. These are globally competitive speeds and prices:

In the business world, where price comparisons are even harder to make due to the many options and individually negotiated deals for many circuits, FiberNet Monticello may be making the biggest difference.

We could not find evidence that TDS or Charter have come anywhere close to the incredible business pricing from FiberNet Monticello. As soon as FiberNet Monticello bonded, TDS began offering long term, lower cost deals to businesses.

There are more benefits that could be noted, but this post is already pushing length limits. FiberNet Monticello is at a crossroads. Bondholders should work with the City to refinance the network and allow it to make up for the time lost from the frivolous lawsuit filed by TDS -- an action TDS undertook specifically to cause the outcome currently concerning Monticello's elected officials and residents.

It is still early in the lifetime of an investment that will last multiple decades. One promising option is to expand the network. The head end can serve tens of thousands of more customers, spreading the fixed cost across a wider area. We hope FiberNet Monticello finds a new partner to manage the network and expand it, providing greater choices and new competition to communities surrounding Monticello.

In a surprise move, HBC has announced it will end management of FiberNet Monticello, though the actual time frame has not been announced. FiberNet Monticello is a FTTH network approximately 45 miles northwest of Minneapolis. HBC has been operating the publicly owned network, offering triple play services, since inception.

FiberNet Monticello has had a particularly rough road since citizens overwhelmingly voted to build it to create a locally owned alternative to cableco Charter and incumbent telco TDS. TDS landed the first blow against the network with a frivolous lawsuit. Though the courts tossed it out, the proceedings took a year and slightly added to the interest rate Monticello had to pay on its debt.

Since then, TDS invested in its own FTTH connections and Charter engaged in a vicious bout of predatory pricing in their attempt to drive competition out of Monticello.

Throughout it all, the City and HBC worked together to deliver the best broadband and customer service in the area. However, the network has not met its revenue targets (largely due to time lost from the lawsuit) and that has led to discussions about how to ensure the network would become financially self-sufficient as rapidly as possible.

HBC's performance in Monticello has actually been impressive given the anti-competitive tactics of Charter and TDS. If you want to know why we have no cable or broadband competition in America, look no further than the refusal of state and federal agencies to investigate predatory pricing tactics used to deny subscribers to FiberNet Monticello.

Regardless, elected officials in Monticello were not happy with the status quo (covering FiberNet shortfalls from the liquor store fund) and new management will offer an opportunity to chart a new course. Though HBC has decided to withdraw, FiberNet Monticello retains most of its staff and may even be better motivated to meet this challenge. From the City's press release (also below in full):

The City of Monticello would like to express appreciation to HBC for the key role they played in successfully developing and delivering high quality and reliable video, voice and internet service to the community. The HBC legacy in Monticello includes the development of a well-trained FiberNet Monticello staff and the establishment of a strong and loyal customer base, which provides a great starting point for moving forward with new management.

We have long supported the publicly owned, privately operated approach to broadband networks, but in our experience, the networks that have most succeeded have been operated by the owner.

The official announcement from HBC is as follows:

Hiawatha Broadband Communications (HBC) has provided the City of Monticello, Minnesota, notification of its intent to end its management of the FiberNet Monticello (FNM) telecommunications system. The decision was conveyed Friday, May 25, in a letter to Mayor Clint Herbst from Gary Evans, HBC President and CEO.

Many matters regarding FNM are in flux and in the midst of those changes HBC had concerns about being able to continue to manage the project in accordance with HBC principles. According to Evans, this seemed a prudent time to end the agreement with FNM and free the city to negotiate with other prospective managers.

Evans said HBC is very proud to have participated in the launch of the system and to move it to a position where its subscriber number forecasts have been met. Achieving that position, Evans indicates, is a significant accomplishment, considering the number of negative factors that affected the system in its early operations. Included were a crippling law suit and subsequent appeals brought by telephone provider TDS, the economic downturn that struck in 2008 slowing growth in the community, accumulation of interest debt due to law suit delays, inadequate recovery of legal damages, and a series of predatory pricing practices by cable and telephone incumbents.

HBC understands discussions about refinancing the system and discussions with other potential prospective managers are underway to help assure the continued growth of the network.
All the employees of FNM are City of Monticello employees except for the General Manager, Ben Ranft, who is employed by HBC. Ranft will be re-locating to the home office in Winona, Minnesota, when the details of the transition to new management are complete.

Evans, in leaving the door open to future cooperation, emphasized that HBC believes that the City of Monticello is dedicated to making the network a success.

And the Press Release from the City of Monticello:

With the current management contract for FiberNet Monticello scheduled to expire at the end of the year, the City has held discussions with FiberNet Monticello manager HBC regarding operation of the system and renewal of the management contract. The City has also been exploring other operation and management options.

The City was recently informed by HBC that they do not wish to renew the management contract and prefer to end the agreement before the expiration date, as allowed under the current agreement.

The City of Monticello would like to express appreciation to HBC for the key role they played in successfully developing and delivering high quality and reliable video, voice and internet service to the community. The HBC legacy in Monticello includes the development of a well-trained FiberNet Monticello staff and the establishment of a strong and loyal customer base, which provides a great starting point for moving forward with new management.

It is anticipated that a draft agreement for interim management services by another qualified and capable telecommunications company will be presented to the City Council for consideration at the next Council meeting.

We want to let you know about an upcoming one-day workshop that looks to be a good opportunity to learn more about FTTH networks. "Lighting Up New England" will be June 13 in Westford, Massachusetts, at the Westford Regency. The workshop will be hosted by the Fiber-to-the-Home Council and is part of the 2012 NEFC FiberFest.

Here are specifics from the announcement:

Fiber, Fiber Everywhere - a discussion panel covering the latest technologies that require more fiber to operate effectively - including fiber for wind farms, solar energy and for greater wireless reach using fiber to the antennae and to the cell tower.

Monica Webb, Executive Committee Chair, from WiredWest will be speaking about working with state and local organizations in Massachusetts as they build their own fiber optic networks. We have been seeing impressivee results from the work of WiredWest and their group of 40 communities. Also speaking will be leaders from the FTTH Council, the American Cable Association, and analysts with expertise in FTTH and the fiber optic broadband industry. From the 2012 NEFC FiberFest website:

There will be a special focus on the trends in FTTH technology and equipment, as well as a focus on what network operators are doing to leverage fiber to the home into their strategies for success in the telecommunications market. This workshop is an outstanding learning opportunity for anyone who is interested in next-generation broadband -telecom service providers, consulting network engineers, manufacturers of optical access equipment, or anyone else who wants to get the inside scoop from the front lines of the all-fiber revolution.

You can register for the workshop here and visiting the exhibit area free.