Opponents of municipal broadband initiatives contend that public broadband projects are “failures” if they do generate “profits” in the amounts, and within the short time periods, that investors and the financial community expect of private corporations. To define success this way is to miss two fundamental points: (1) public entities have fundamentally different ways of creating economic benefits for the community than the private sector; and (2) municipalities often undertake a public communications initiative precisely because the project would not be profitable enough for a private company.
Nulty Discusses EC Fiber and Burlington Telecom
While the bad news about Burlington Telecom (BT) has traveled far and wide, it has been marked with errors, misinformation, and inaccurate comparisons to other projects. MuniNetworks.org will weigh in on this issue with a series of posts to explain what happened, what did not happen, and what lessons we can learn from it.
But today, we are publishing a commentary from Tim Nulty, the General Manager who started BT and is now working with the folks in East Central Vermont to build a rural FTTH network. In this commentary he discusses his experiences with Burlington Telecom and what lessons it has for the EC Fiber project. In short, they differ in important ways.
Business Plans of Burlington Telecom and ECFiber
Numerous loose allegations have recently appeared in the press regarding the business plans of Burlington Telecom and ECFiber. DPS Commissioner David O’Brien and John Briggs of the Burlington Free Press are examples but others have also chimed in. These statements are inaccurate, misinformed and unfounded. Since they affect organizations that are important to thousands of Vermonters they need to be corrected.
BT’s business plan was based on those of similar Fiber-to-the-Home (FTTH) networks already running and successful at the time…including Reedsburg, WI; Bristol, VA, Kutztown, PA; Dalton, GA and Winona, Minn. Experts from these projects were consulted in developing BT’s plan. Several came to Burlington to assist with and vet BT’s planning and BT staff visited them to in turn. All of these networks were built in towns, which like Burlington, had established broadband incumbents already in place so their experience was highly relevant. By their fifth year all these networks had achieved penetration rates over 55% and most over 65%. A study by survey firm RVA, in 2007 and updated in 2009 identified 57 municipal FTTH networks operating in the USA and calculated that the average penetration, including new start-ups, was 54%. BT’s business plan was constructed so that it would become profitable with 4800 - 5000 customers of the 19,500 potential—a more conservative take rate than comparable networks had actually achieved in practice. This provided BT with a substantial “safety cushion”.
All capital-intensive investments-- power stations, airports, steel mills--take some time to become profitable. This is also true of telecoms. Criticizing any FTTH network (public or private) for failing to make profits in the first couple of years is ridiculous and merely displays the critic’s ignorance of business economics. FTTH networks, both public and private, usually take 4-5 years to become profitable. They never earn profits in the first few years and it is unreasonable to expect them to. The real question is whether a project’s target is consistent with industry norms and whether it is on the normal growth path to reach that target. BT’s business plan projected becoming profitable in January, 2009—34 months after connecting its first customers and 51 months after it received its initial financing. This was consistent with industry norms and actual experience of similar networks.
BT connected its first customers in February, 2006. When I resigned 19 months later (October, 2007) BT had connected 2200 customers. This was a very good performance by industry standards. At that point BT: i) had crossed the threshold where revenues were covering all operating costs but not yet debt service, taxes or new capital expenditure (i.e. in financial parlance, it was “EBITDA positive”); ii) had a vigorous marketing campaign underway that was generating a backlog of waiting customers; and, iii) was connecting over 40 new customers per week. On that basis, anyone can calculate that, IF management maintained momentum, the 4800 customers needed for profitability would be achieved in approximately 15 – 16 months time….or early 2009. This was not “pie in the sky”…it was simple math. What it required was not luck but lots of hard work, vigorous marketing—and competent management.
That this target was achievable is demonstrated by the fact that BT did eventually connect about 4800 customers—but not until mid 2010. Unfortunately, the delay meant another 18 months of losses were piled onto previous costs so that when BT finally did reach 4800 customers that number was no longer enough for profitability. Speed in connecting customers is just as important as the absolute numbers.
Why the delay? After I left, BT’s marketing program was suspended on orders from City Hall and never fully restarted. The marketing director finally left because he was not permitted to do his job. The Blue Ribbon Commission last year identified inadequate marketing as the single biggest failing by BT management after I left. Why City Hall suspended BT’s marketing and why it was never restarted is a question to be answered by others.
In short: BT’s failure to reach profitability in early 2009 as originally projected had nothing to do with flaws in its business plan and everything to do with flaws in management after I left.
Regarding ECFiber: Because much of ECfiber’s territory has no effective broadband at all the situation is different than Burlington. A recent RVA study on rural fiber networks found that ,in territories similar to ECFiber’s, penetration over 75% is the norm. Examples where actual penetration rates exceed 75% include Toledo Telephone in rural SW Washington State, Jaguar Communications in SW Minnesota and Hiawatha Broadband in SE Minnesota. By contrast, the business plan prepared by ECFiber for the “Stimulus” application projected only 55% take rate in year 5. The town where ECFiber’s Phase I project is concentrated, Barnard, has already registered pre-subscriptions of almost 90%. However, the Phase I business plan projects only 75% take rate for this town.
The truth is that ECFiber’s business plans are based on the best data and industry norms available and are conservatively set in order to preserve a safety cushion.
As a evidence of my conviction that the business plans of both BT and ECFiber are sound, I am one of the group of investors who are negotiating to purchase BT, turn it around and restore to a successful state-of-the-art network to support the Burlington community. I am also one of the “friends and family” lending their own money to ECFiber to finance the Phase I project. With 35 years behind me as a successful investor, banker and venture capitalist in the telecom sector, I assure you that I do not put my own money into anything I am not absolutely confident is sound.
Mr. O’Brien and Mr. Briggs, by contrast, are simply ill-informed. They should either do their homework or keep silent.
Dr. Timothy Nulty
December 20, 2010