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Monticello Fiber Price War Offers Key Lessons for Broadband Competition

Monticello Minnesota may be located 40 miles outside Minneapolis, but it is the center of the planet when it comes to FTTH competition. We have tried and cannot identify another community localed on planet earth with two separate FTTH networks going head to head across the entire community.

We have long written about Monticello, most recently to look at hypocritical criticism of the project (which gives me an opportunity to note a similar dynamic in Lafayette, Louisiana). And we have covered the disappointing news that the network has not produced enough revenue to make full bond payments.

Short explanation for how Monticello came to be unique in having two FTTH networks: Monticello had poor Internet access from Charter and telephone company TDS. Each refused to invest after local businesses and elected officials implored for better networks. Monticello started building its own FTTH network (Monticello FiberNet) and TDS sued to stop the project while suddenly decided to upgrade its slow DSL to fiber. Lawsuit was tossed out and Monticello finished its network.

In most community fiber networks, the DSL provider seems to fade away because it cannot offer the fast speeds of fiber or cable, so the market basically remains a duopoly with the community network replacing the telephone company (which continues to offer cheap, slow DSL to a small number of customers). But in Monticello, Charter and TDS engaged in a price war, which has really hurt the City's ability to generate enough revenue to pay its debt.

Price wars are very hard on new market entrants because they have to amoritze the cost of their investment whereas the incumbents often have already done so. This means incumbents can almost always offer lower prices if they are determined to do so.

In many communities, we have lacked clear evidence of predatory pricing - that is pricing below the actual cost of service to run competitors out of business. This would violate federal law (if any agency bothered to enforce it). Charter gave us that evidence in Monticello.

Since then, the deals have remained amazing in Monticello, far surpassing what cable-funded crazy people in DC pretend is competition between DSL and cable in the majority of the country.

TDS is now offering a deal that far surpasses anything available in the Minneapolis/Saint Paul metro - over 190 channels (including DVR and HD), 50 Mbps Internet (50 down, 20 up I believe), and telephone for $70/month for one year with no contract. The price goes up after year one, but doesn't go back to full price until after year 2 ... at which point you will likely get another deal if there are still more than 2 high speed choices in the market.

TDS Advertisement

TDS is also regularly running full page advertisements regularly in the local newspaper. How many local newspapers would love to see regular big-ad buys like this one? If enough communities build networks, perhaps the resulting advertising bumps will help local newspapers stay in print!

Charter has gone beyond newsprint and static billboards with a big truck advertising Monticello residents a free DVR that will save them $650/year (which is phrased in a way that makes you think they are charging WAYYYY too much for DVRs!).

Charter Advertising Truck

These advertising strategies are in addition to many door-to-door sales people from both TDS and Charter. Both are boosting local employment opportunities for these sales people far beyond what they would do absent Monticello FiberNet.

Existing Charter customers outside of Monticello might be interested in how cable promos in Monticello compare to in their communities where there is no real competition for the cable giant. Here is an 8 page glossy advertisement they have been using [pdf].

Charter is also going after small businesses with a 30 Mbps asymmetrical package for $55/month when bundled with business phone. I can only imagine how many businesses in areas without a real choice would like that deal.

Monticello FiberNet Biz Services

Charter Small Biz Advertisement

However, the Monticello FiberNet business service is far superior, particularly as it is symmetrical and fast upstream makes a huge difference for local businesses. Business services from the city owned FiberNet starts 10 Mbps symmetrical at $41.95 and the list sheet tops out at 100 Mbps for $350/month.

Update: Fibernet Business Services prices have decreased on the faster Internet connections. 30 Mbps symmetrical is $99/month and 100 Mbps symmetrical is $199/month.

We don't have enough information to compare what it would cost a business to connect multiple sites with point to point gigabit links, but we would guess there could be more than $1,000 savings each month from such a service based on FiberNet pricing vs Charter or TDS.

Going through all these deals, a few things have become apparent.

First, DSL and cable are not engaged in real competition. Adding a third player really changes the market in ways that satellite and 4G wireless Internet do not.

Second, most of the competition from the big corporations is aimed at taking subscribers from rivals by temporarily lowering prices rather than attempting to keep their own subscribers happy with their services. Most of the deals are only available to new customers, incentivizing households to regularly switch providers, which is costly to all competitors (churn). Community owned networks by contrast tend not to offer these short term promo deals and invest in keeping existing subscribers happy.

Third, the strategy of TDS and Charter would not be possible if they were not cross-subsidizing from distant, non-competitive markets. They may not be losing money on all the customers that take these deals, but the increased marketing costs and extremely low priced deals are aimed at driving a competitor from the market, not at merely preserving market share. Their ability to cross-subsidize (and the initial frivolous lawsuit) have damaged Monticello's business plan to the point where it has had to transfer public funds from the liquor store and negotiate with bond holders over a significant haircut.

And finally, whatever this network may end up costing city taxpayers, it will likely be less than the savings from all of these lower prices and indirect benefits such as not losing employers that could not be competitive when only having last-generation Internet access from unreliable DSL. That doesn't help the City to make its debt payments, but it sure makes Monticello a better place to live.

Monticello Moves Closer to Settlement with Bondholders

It has been about a year since we checked in on FiberNet Monticello, a city-owned FTTH network about 40 miles northwest of Minneapolis. At that time, the network was generating insufficient revenue to meet debt payments, the private company operating the network (HBC) was stepping down, and Gigabit Squared was kicking the tires.

Since then, Gigabit Squared and Monticello decided against a partnership and the City ceased making payments to bondholders. Previously, the City had covered the difference between revenues and debt payments by borrowing from the City's liquor store fund, a municipal enterprise fund.

Monticello had financed the network with unbacked revenue bonds, meaning investors understood from the start that the full faith and credit of taxpayers would not "make them whole" in the event that the network did not create the revenues necessary to pay back the bond. Because Monticello chose that financing method, it had to pay a higher interest rate - those who buy bonds understand the differences in risk with different types of bonds and rates.

However, the City has been negotiating with bondholders for a settlement to avoid potential lawsuits over the telecom utility and because this is a typically what how these situations are worked out. Bondholders will "take a haircut" in the parlance of finance rather than risk a total loss.

Last week, Monticello City Council approved a $5.75 million proposed settlement in addition to the remaining funds left in the reserve fund, totaling approximately $8 million from an outstanding bond of $26 million. Final resolution may take many more months, but the major arguments seem to be worked out.

This means that Monticello will own and continue to operate FiberNet Monticello. It also means that rather than having a network financed by revenue bonds, the network will have benefited from City funds from the liquor store and will almost certainly be re-financed with other City funds. Monticello could issue a bond for the new $5.75 million but to my knowledge, no one has suggested that.

Thus far, the impact on Monticello's bond rating has been fairly minimal considering the prolonged ambiguity about the bond. Last year, the City had moved from Moody's AA3 to A2, which suggested they are only a slightly higher risk, falling to upper medium grade out of high grade for credit worthiness.

We have seen some criticism of the City for not being more open in how they run the network and engage in negotiations, some of which was noted in the Monticello Times article linked to above. I'm sympathetic to the need for secrecy in discussing matters being litigated but we have also seen secrecy taken to extreme levels in some networks. We encourage Monticello to be as transparent as it can with residents while respecting its need to shield some information from competitors that are far more secretive.

We continue to see FiberNet Monticello as benefiting the community on the whole, as I wrote last year. We draw a number of lessons from this experience, which I will expand on in a future post. As a teaser, they include the impacts of predatory pricing, frivolous lawsuits to delay a project, the challenge of public-private partnerships, and the oddity of being the only city on Earth with two FTTH networks going head-to-head.

What if FiberNet Monticello Had Been Canned in 2008?

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 Telecom Logo

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.

Charter ad

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.

A Closer Look at FiberNet Monticello

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.

monticello-goodbadugly_0.jpg

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.

spicer-naked-Internet.PNG

Here are the packages in Buffalo, Minnesota.

buffalo-naked-Internet.PNG

And here is what Monticello residents get from TDS:

Monticello-naked-Internet.PNG

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:

fibernet-monticello-res-bb.PNG

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.

HBC Steps Down from Managing FiberNet 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:

HBC Logo

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:

Monticello Logo

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.

Charter Fights Dirty to Kill Competition in Monticello

When Monticello, Minnesota, decided to build its community fiber network -- Fibernet Monticello -- it expected the incumbents to lower their prices and fight to keep subscribers. But Monticello had no idea the lengths to which they would go.

The telephone incumbent, TDS, delayed the project for a year with a frivolous lawsuit and then built its own fiber-optic network while dramatically lowering its prices. We have yet to find another community in North America with two citywide FTTH networks going head to head.

Because of the city's network, Monticello's residents and businesses have access to better connections than the biggest cities in Minnesota can get.

Now, Charter has weighed in by cutting its rates to what must be below cost to gain subscribers. It reminded us of a shoot-out, so we created this infographic to explore what is at stake.

The Good, the Bad, and the Ugly in Minnesota

Download a higher resolution PDF here.

Charter has taken a package for which it charges $145/month in Rochester, Duluth, Lakeville, and nearby Buffalo (MN) and is offering it for $60/month - price guaranteed for 2 years. A Monticello resident supplied us with this flyer, which this person had received multiple times at their home over the course of a month. (See below for the full flyer).

Charter's rate sheet

This is either predatory pricing or the cable industry is out of control with its rate increases. If that package costs Charter more than $60/month to supply, then it is engaging in predatory pricing to drive competitors out of the market. Consider that Charter may be taking a loss of $20/month ($240/year) from each household that takes this offer. They can do that by cross-subsidizing from nearby markets where they face very little competition.

If that package costs $60 or less per month to Charter, then it has an incredibly high profit margin and the fundamentals of the market have to be questioned.

Traditional economic theory tells us that very large profits anywhere will attract new market entrants. Yet the private sector refuses to provide competition aside from the common duopoly of DSL/cable. And these companies use their incredible lobbying power to push bills such as Minnesota HF 2695 that would ban communities from building their own networks.

Unfortunately, building their own networks is often the only way for communities to create real competition and investment in next-generation networks. But communities then have to face dirty tactics from these massive companies bent on maintaining their marketshare using any means necessary.

The aggregate benefit to Monticello is very large right now. Prices for telephone, cable, and broadband have all dropped, keeping millions of dollars in the local economy. But Fibernet Monticello has missed its revenue targets because TDS and Charter care more about driving competition out of town than a fair fight.

The question is whether dirty tactics will successfully run Fibernet Monticello out of business, allowing TDS and Charter to resume gouging subscribers with their ordinarily high rates. If they do, it will be ironic that FiberNet Monticello, which brought the fastest residential speeds in the nation to a small Minnesota town while lowering the prices everyone pays for telephone, broadband, and cable, will be regarded as a failure.

Monticello FiberNet Attempts to Adapt Business Plan

Monticello, a small community of 13,000 about 40 miles northwest of Minneapolis, built one of the most advanced broadband networks in the midwest and delivers some of the fastest connections available in the state at incredibly competitive rates. The Twin Cities metro area, stuck mostly with Comcast and Qwest, cannot compare in capacity or value.

Monticello is fairly rare in the publicly owned FTTH region because it does not have a public power utility and services on the network are provided by a third party, Hiawatha Broadband Communications -- a Minnesota company with an excellent reputation and track record.

Unfortunately, Monticello's network suffered costly delays due to a frivolous lawsuit filed by the incumbent phone company in a bid to bleed the publicly owned network while it suddenly invested in its own second generation network (that it previously maintained was totally unnecessary for a small town like Monticello).

Monticello lost a full year on the project, which has hurt its finances significantly. More unexpectedly, it has become the only community in North America where all residents have a choice between FTTH networks. They also have Charter in the mix. Add to this the economic downturn that hit just after they financed the network in 2007 -- the population growth has been much lower than forecast. The predictable result? Much lower prices, lots of community savings, and a publicly owned network that is behind its projections.

The local paper recently ran a story about the project, "FiberNet struggles in a sea of red. Should you read the full piece, please be aware that the inaptly named "Freedom Foundation" has no credibility, existing solely to defend massive corporations like cable and telephone companies.

For those who wonder why incumbents filed absurd lawsuits that have a vanishingly small chance of winning, note this discussion from the story:

“It stopped us from really building the system by about a year,” said Finance Director Tom Kelly, “which put our revenue collections about a year behind. Obviously if you don’t have a system, you can’t bill people for it.”

“The delay has created a substantial impact in our ability to cash flow because money had to be spent paying for costs related to the lawsuit,” added O’Neill.

At the same time, Kelly said, they still had to make interest payments on their bonds, leaving them with expenses but no revenue source. He said if the city had pushed its business plan back about a year, they actually would be ahead of the game from a revenue standpoint. From an expenditure standpoint he said they would still be behind. This is happening, he said, because of the added cost the city incurred when it tried to build the system in 18 months versus the two to three years it had planned on before the lawsuit.

The City operates a municipally owned liquor store and is using proceeds from that fund to cover shortfalls in FiberNet currently. In time, they plan for FiberNet to get back on its feet and repay the liquor loans. Should the problems continue, Monticello will have to make a choice. It issued non-recourse revenue bonds, meaning the City has no obligation to cover shortfalls. However, there are credit implications of that decision.

FiberNet Monticello

In 2007, voters overwhelmingly supported the network with a 74% yes referendum vote. Unfortunately, people often have short memories when they suddenly see all the prices in the market drop and billboards advertising a free TV for those who switch away from the publicly owned network.

In response to the story, and more generally, the less enthusiastic response to the network than was demonstrated in the referendum, Mayor Clint Herbst published an op-ed in which he notes that they followed the will of the people and TDS sued the town, disrupting their plan.

He finishes strongly, with a personal example as the owner of a video rental store:

Those operating dollars were counted on to get this system past its first couple of years. Anyone that has started a business knows that the first couple of years are critical. In FiberNet’s case, many dollars have to be expended to get the system in place before revenues can be realized. Our business plan showed that it would be close to dipping into the red as our expenditure exceeded our revenue and that is why we needed the full $26 million - not the $20 plus million left after our battles in court.

The whole idea behind this system has been to bring in some competition and it has been a successful mission. Monticello has gone from paying some of the highest rates in the nation with miserably slow speeds, to some of the lowest rates in the nation with the highest speeds available. FiberNet will not be sending your dollars out of the city or even the state. We will keep those dollars local and when the bond is paid off, those dollars will go back into our parks, programs, aid in lowering the levy and so on. FiberNet cannot compete with the predatory pricing that others use. We are charging a fair price for great service and a top-of-the-line system. Others have come in to offer great deals at prices that are designed to put your company out of business. It is no different than what Netflix and Red Box did to the video stores. Now that the video stores are out of business, the prices have started and will continue to increase. You are fooling yourself if you think it will be any different in the telecommunication industry.

People have to make adult choices. They city chose to build a publicly owned network that significantly lowered prices by all competitors in the market (if not list prices, the competition has increased the use of promotional discounts). If people choose to then turn their backs on the network, that is their decision. But they should not fault elected officials if the network fails to break even. The community will likely have gained on net -- the lower prices everyone pays keep real money in the community that almost certainly adds up to more than the unpaid debt of the network. But complaining about government is a far easier exercise than a full evaluation of the fiber-optic network.

WindomNet Saves Jobs, Provides Stellar Customer Service

Minnesota Public Radio, as part of its Ground Level Broadband Coverage has profiled WindomNet with a piece called "Who should build the next generation of high-speed networks?"

Dan Olsen, who runs the municipal broadband service in Windom, was just about to leave work for the night when he got a call. The muckety-mucks at Fortune Transportation, a trucking company on the outskirts of town, were considering shuttering their office and leaving the area.

"They said, Dan, you need to get your butt out here now," Olsen recalls. "I got there and they said, 'You need to build fiber out here. What would it take for you to do it?'"

Fortune, which employs 47 people in the town of 4,600, two and a half hours southwest of the Twin Cities, relies on plenty of high-tech gadgetry. Broadband Internet access figures into how the company bids for jobs, communicates with road-bound truckers, controls the temperatures in its refrigerated trucks and remotely views its office in Roswell, New Mexico. Fortune even uses the Internet to monitor where and to what extent drivers fill their gas tanks in order to save money.

Yet, when it was time to upgrade company systems three years ago, Fortune's private provider couldn't offer sufficient speeds.

That's where Windomnet came in. Though Fortune was a mile outside the municipal provider's service area, "We jumped through the hoops and made it happen," recalls Olsen. "The council said, "Do it and we'll figure out how to pay for it.' We got a plow and a local crew. We had it built in 30 days."

I have thought about this story frequently when I hear claims that publicly owned networks are failures. For years, lobbyists for cable and phone companies have told everyone in the state what a failure WindomNet has been - they crow about debt service exceeding revenue while ignoring the fact that all networks -- public and private -- take many years of losses before they break even because nearly all the costs of the network are paid upfront.

Toward the end of the article (which should be read in its entirely rather than in the snippets I repost here), Dan puts the matter in context:

Dan Olsen retorts that Windomnet was never designed to make money; one of the benefits of a municipal system is that nobody takes profits out of it. He says the plan was to break even by year five, which arrived in 2010, and it looks like they'll come within $50,000 of doing so.

"We don't charge enough to make money," says Olsen, noting that Windomnet serves the vast majority of the town's 2,000 homes with internet, phone, cable or all three. They also provide free service to city buildings and the library. "The point is not to make money, but to break even," Olsen says. "The number one goal of the system is to provide broadband to the residents of Windom."

And the vast majority of residents take service from WindomNet. With a population of 4600, meaning probably 2000 households, the network has 1846 fiber drops that are active with at least one service. They have people working for companies in South Dakota but able to work from home regularly due to the Internet connection. Compare that to Sibley County, where Qwest has not even bothered to offer DSL in the county seat of Gaylord!

And the customer service comes highly recommended. Again, from the MPR article:

For his part, Dale Rothstein, who runs the IT systems at Fortune in Windom, says, "I get three calls per month from people trying to get me to convert. I say 'no.' Dan and Windomnet took care of us. I'm not going anywhere. It's a great relationship. When there is a problem, I call and it's taken care of. It's great to have a local company to deal with."

Major providers, like Frontier (famous for some of the worst DSL in the nation) pretend to be reasonable on the issue by claiming that publicly owned networks will make it harder to reach the highest cost households. This must be why Frontier is trying to derail the Sibley County project from building fiber-to-the-farm when Frontier can't even provide reliable slow DSL across all of its phone lines in the area. Not only does Frontier have no plan to connect these farmers, they have no reason to as such an investment would not generate sufficient return for them to be interested.

FiberNet Monticello

TDS has been the king of BS in this arena, putting out patently absurd press statements that reporters feel compelled to repeat no matter how implausible. Regarding Monticello, MN, which built a FTTH network compelling TDS to upgrade their poor DSL service (while also delaying the Monticello network with a year-long frivolous lawsuit that was eventually tossed out of court):

Fast forward to today, a city with two fiber networks. Andrew Petersen, director of external affairs for TDS, acknowledges "the importance of broadband to stimulate economic development in urban and rural communities" and says his company would have built a fiber network eventually, without prodding from the city. He believes the network may be somewhat ahead of its time, though.

Ha! Monticello begged TDS to invest in a modern network and TDS refused, saying that their DSL was perfectly suitable for what Monticello needed. They suddenly changed their mind when the City decided to build their own network to ensure not only faster, more reliable connections, but a LOCAL option.

Keep an eye on this MPR coverage of broadband - they have several of the few reporters in the state that have developed a good background in telecom and can get beyond the soundbites too common in broadband coverage. Well done.

This article led to a great response on Connected Planet Online by Joan Engebretson:

Take this quote from a Frontier executive cited in the MPR story. “Simply pouring money into projects that overbuild and compete with networks built by private investment discourages private investment and does not help reach those highest cost households,” the exec said. “Duplication of the network is no guarantee of success, and is often simply a waste of both public and private resources.”

This argument, of course, ignores the fact that if the new facilities truly were simply a “duplication” of what was already there, there would be no need for them and local municipalities would not be taking on the task of building the new higher-speed networks.

Exactly.

In Wisconsin, Residents beg for broadband

The private sector is not going to expand broadband to everyone. Some places simply do not offer enough promise of profit.

This story out of Wisconsin, "Residents Beg for Broadband" not only reinforces this truth, it looks at what happens when people depend on the private sector to control essential infrastructure.

Some Berry residents may have to move if they can't get high-speed Internet access, according to town officials, because their employers require them to have the service for working from home.

"Parents have told us their children are at a disadvantage by not having high-speed connections," Town Chairman Anthony Varda wrote in a recent letter to TDS Telecommunications, the town's Madison-based telephone provider.

"It is critical to the success of rural students, people working from home, and residents serving on nonprofit boards, committees and local government," wrote Varda, an attorney with DeWitt, Ross & Stevens.

Their property values are going down because few people want to live someplace without fast and reliable access to the Internet.

To cap it off, Wisconsin is one of 18 states with laws to discourage communities from building their own networks. TDS puts on an act about how difficult it is to tell these people that they aren't getting broadband ... but if they were to build it themselves, I wonder if TDS would sue them like it did Monticello.

In asking the state PUC to require TDS to expand, the residents are taking a unique approach. I can't really see it working under the modern rules.

It long past time we realize the limits of the private sector: The private sector is simply not suited to solve all problems. Matters of infrastructure are best served by entities that put community needs before profits.

(Image: Liberty rotunda mosaic at Wisconsin State Capitol, Madison, Wisconsin, a Creative Commons Attribution Non-Commercial No-Derivative-Works (2.0) image from photophiend's photostream)

TDS Ups Ante in Monticello with Predatory Pricing

Monticello Minnesota, the small community located 40 miles northwest of the Twin Cities, recently returned to the news when its telephone incumbent, TDS, began offering a fast 50/20 Mbps residential broadband connection for $50/month.

Nate Anderson, of Ars Technica, covered both the story and backstory (something he has extensively reported).

But the entire congratulatory press release glosses over a key fact: the reason that Monticello received a fiber network was the town's decision to install a municipal-owned fiber network to every home in town… spawning a set of TDS lawsuits that went all the way to the Minnesota Supreme Court, which ruled in favor of the town.

I might also note that the press release and much of the coverage also glosses over a one-year contract and early termination fee (though it isn't clear if this is applied in all circumstances). However, Nate nails the story by framing it with the title "Want 50Mbps Internet in your town? Threaten to roll out your own."

We spoke to TDS about the situation last year, and its director of legislative and public relations told us that TDS didn't act earlier because it didn't actually know that people really, really wanted fiber; once the referendum was a success, the company moved quickly to give people what it now knew they wanted.

Of course, TDS did not start rolling fiber after the referendum. They waited. It was only after the City successfully bonded for the project that TDS acted (first by filing a lawsuit to block competition and second by investing in their network to be competitive when the doomed lawsuit would inevitably be dismissed). TDS did not change course because they suddenly realized that people wanted better broadband, they did it because they knew that they would have to invest or perish when confronted with actual competition.

Nate's article looks at other communities that have followed a similar trajectory. This story seems to have inspired another excellent post by Phillip Dampier at Stop the Cap: Municipalities: If You Threaten to Build It Yourself, Your Faster Speeds Will Come.

I take some issue with the title - hollow threats are rarely enough. While the threat of competition may be enough, in some circumstances, to temporarily boost investment from incumbents, only actual competition will ensure that investment continues and rates remain affordable.

Karl Bode picked up on the story which led to some interesting posts in the comment section ... especially toward the bottom when other TDS customers weigh in on their inability to get broadband at any speed. I have to fully agree with this commenter:

This might be one of the few instances when I feel a telecom did the wrong thing by offering FTTH. If TDS actually cared about being providing faster and better service to their customers they would be wiring cities that don't have a FTTH alternative.

After fighting, delaying and losing FTTH all in an attempt to maintain their monopoly, TDS has developed a new strategy. Undercut muni FTTH till it fails. They can subsidize FTTH in monticello with money from the rest of their network. As soon as muni fiber fails they can shut down or raise price of their own fiber network.

Maybe I'm wrong. Maybe Monticello MN population 10,000 (very rural) is such as lucrative market that TDS is a visionary by offering FTTH. That must be why verizon wires only rural cities and sells off urban and suburban ones. [sarcasm noted]

The commenter goes on to note that if people continue signing up with TDS (after overwhelmingly supporting the referendum to build the network), they will suffer from the fallout of not being able to pay off the revenue bonds and TDS will resume its poor practices if competition ceases.

fnm-prices.pngThough TDS grabbed headlines with its bold (read: predatory) 50/20 offering, Monticello Fibernet is no slouch. See prices on right - no contracts, no "introductory" prices, and all connections are symmetrical. Some have asked me how Monticello will respond to the new pricing and speeds from TDS and I do not know the answer.

I think it important to note that Monticello owns the network, but the network is operated by, and services offered by Hiawatha Broadband Communications, not the municipal government. Though HBC (a company out of SE MN with a great reputation for customer support and meeting community needs) is far more responsive that the incumbents, Monticello has different constraints upon it than most community fiber networks where the services are offered by the network owner.

TDS-fiber.pngMeanwhile, this graphic from the comments of Karl Bode's DSL reports story reveals a fundamental truth: Monticello citizens have a unique opportunity. No one outside the community has access to faster speeds or lower prices. They have the deal with same annoying practices where the user very rarely achieves the advertised speeds and price spikes following the "introductory" period. Further, many of the DSL packages require a phone package as well, making prices higher than advertised.