For two years, National Public Broadband (led by Gary Fields and Tim Nulty) has worked with Lake County, Minnesota, to build a universal rural FTTH broadband network to everyone in the County and some nearby towns in Saint Louis County. Toward the end of 2010, the relationship became somewhat tense as some county commissioners questioned what NPB had told them about Burlington Telecom, and a number of media outlets raised questions about Nulty's relationship to BT's problems without actually investigating the story.

Now the Lake County News-Chronicle (which, over the course of this story, has taken the time to report facts rather than following the lazy lead of the Star Tribune and Duluth News Tribune), reports that Lake County and National Public Broadband are kaput. Lake County is seeking a new partner to build the project.

Lake County could not reach agreement on a permanent contract with National Public Broadband, its consultant firm for nearly two years. The two sides battled for nearly two months and couldn’t solve issues based on bonus payments and the ability for the county to fire NPB without cause and without penalty. The negotiations had bogged down work on the actual project, Commissioner Paul Bergman said, and the board wanted a fresh start.

Additionally, due to the state of financial markets, the County is planning to self-fund the $3.5 million local obligation required to access to the broadband stimulus award. Lake County hoped to bond for the matching funds but the current interest rates make that an fiscally unwise approach.

While this does not change the project, it will change the perception of the project and open it to increased attacks from those who don't want the County to build a network (despite the fact that private providers have no interest in providing anything other than slow DSL and cable networks).

The County had long maintained that no public money would be used. However, most people will likely not care as long as the project keeps its promise to deliver fast, reliable, and affordable broadband to the community. This is the need -- and people need to stay focused on achieving this goal.

At a commissioner meeting in late December, Gary Fields commented to the Board that they had to have trust in NPB if the project was going to work. It is hard to know without being at most of the previous meetings, but I suspect the problem came as a result of NPB being nuanced about Burlington Telecom (until late 2009, no one knew how badly the post-Nulty management had hurt BT). Some of the Commissioners apparently interpreted BT as an unqualified success and felt misled when they learned of BT's present problems.

Regardless of who was at fault (and to what degree), Fields was correct. These projects are necessary but still damn hard to build. There will be a lot of stress and it is better for NPB and Lake County to split now if they cannot heal the past. Otherwise, the inevitable bumps in the road of the project (that will occur no matter who builds the networks), would likely just open old wounds and hurt the project. The project needs to have the strong support (and unwavering oversight) of the community, particularly as incumbent providers (ahem, Mediacom) look for any weakness to derail the potential for residents to have actual choices in telecommunications services.

National Public Broadband should be credited with bringing the stimulus award to Lake County -- now it is on Lake County to follow through and make the project work. No one builds these networks because it is easy -- they build them because the future of the region requires fast, affordable, and reliable broadband.

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
Jericho, Vermont
December 20, 2010

The AP says Burlington Telecom may be a cautionary tale for cities around the the country that contemplate building their own networks.

It is fascinating that this article appears now, as we wait for the audit of Burlington to be published, where we hope to finally discover exactly what went wrong in the network. The Mayor used to allege that Tim Nulty (General Manager who built it) left it in ruin when he resigned.

However, it looked good (not great, but good) at that point. And after the transition, the Mayor's Administration ceased Nulty's policies of transparency, so we would have to take their word for it rather than any proof. For instance, BT ceased to work with citizen oversight committees. This is the same Administration that hid supposed transfers to the network from the City Council and the people.

The very fact that such secrecy was possible is troubling. These networks are intended to behave somewhat transparently and should be independently audited to ensure problems (which may be corrected when found) are not hidden for political reasons. Burlington had a unique structure that allowed the Mayor too much opaque control over the network - something rarely found in the structure of most community networks. (Some things, such as prices paid for content, should remain secret for competitive reasons, but that should not allow the Mayor to hide key metrics regarding the health of the network.)

There are reasons to believe the Mayor improperly accounted money to BT, which is why we await an audit from the state that we hope will clear up exactly how Burlington Telecom went from being a good example to the worst example of public ownership (something paid shills from telco and cableco groups critics love to point out).

Author Dave Gram has an odd passage regarding this situation:

In September 2009, BT notified the Vermont Public Service Board that it had used $17 million in city funds in violation of its state license. State officials have been mum about the details of their investigation, and an FBI spokesman, through an assistant, would not confirm or deny a Burlington Free Press report that that agency had stepped in. It's widely believed that apparent license violation may be at the center of the criminal probes.

A license violation brought in the FBI? Seems hard to believe - especially as every agent in Vermont should be investigating FairPoint if they are interested in license violations. But again, we hope to learn more about what really happened when the audit is published.

Unfortunately, Gram barely balances the bad example of Burlington with the wider experience of community ownership.

"There are some municipal systems that have done very well," said Michael Render, president of Tulsa, Okla.-based RVA Market Research, which follows development of fiber-to-the-home systems like Burlington's.

He noted, though, that the roughly 70 municipalities offering fiber-to-the-home have a combined market share of about 3 percent of the industry. More than two-thirds of fiber-to-the-home customers in the U.S. get their service from Verizon Communications, Render said.

Umm, perhaps that is because Verizon passes many many millions more than community networks do. Verizon's FiOS take rate is a joke compared to the average community network. But yes, most Americans on fiber-optic networks subscribe to FiOS. Not sure how that is relevant. After all, Americans eat more pizza than Italians (and more french fries than the French). Might have something to do with there being hundreds of millions more Americans…

Gram could have noted that the fastest broadband network in the U.S. is community owned (a cautionary tale for those communities who think they will be globally competitive by relying on private sector infrastructure investment), but he didn't.

He might have mentioned that in April, BT connected the Howard Center with a 10Gbps and 1Gbps connection [pdf]. Try getting that at an affordable rate from Comcast or Fairpoint.

Karl Bode was annoyed that Gram seemed to portray muni networks as leftist but I'm not sure I agree entirely (Gram alluded to Burlington's culture) and at any rate, I would love to see what happens to anyone who wanders into a City Council meeting in Opelika, Alabama or Wilson, North Carolina and calls everyone a bunch of hippies.

Burlington Telecom, what whatever reason, is the new poster child of those who want to deny communities the right to build the networks they need. To be frank, Burlington will not be the last network to suffer through bad leadership and mismanagement. But comparing the overall record of public ownership to that of incumbent telcos and cablecos shows that communities are better off when their infrastructure is directly accountable to them.