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Rep. Urquhart and Jesse Harris have recently been discussing questions regarding the financial position of UTOPIA on their respective blogs, www.steveu.com and www.freeutopia.org. Jesse Harris has focused on what he perceives as the dearth of public information on UTOPIA’s financial position. Fortunately, UTOPIA has published much of the data Rep. Urquhart is asking for. Given the dismal story the data tells, however, it’s not surprising UTOPIA doesn’t like to talk about it.

UTOPIA’s original feasibility study projected that they would receive an average revenue per user (ARPU) of $58 (page 16). Page 29 of the same feasibility study anticipates that a take rate of less than 20% would jeopardize the $10.1 million annual sales tax pledges from member cities. Over the 20 years of the UTOPIA bonds, that means UTOPIA pledging members would have to pay $202 million.

During their June 2007 board meeting, UTOPIA’s representatives shared the current state of their finances. Page 2 of their 2007 financials show them with 6,493 customers, and $2.25 million in revenue. (Curiously, UTOPIA still hasn’t published that data online, though they did email these financials when Utah Taxpayers Association asked for it.) That means for 2007 their ARPU was just $29, or half of what they were projecting.

In a recent presentation to the Cottonwood Heights City Council, UTOPIA described their current take rate, both on a system-wide basis, and city by city. On slide 16, UTOPIA indicates that their current system-wide take rate is 16.4%. With their take rate below the break even threshold, and their ARPU just half of what their feasibility study projected, UTOPIA’s financial position seems precarious at best.

Their 2007 financial summary raises other serious questions. While they anticipated receiving $5.25 million in fees from subscribing members, their amended budget shows them only receiving 1/3 that amount, or $1.75 million. Similarly, they projected that they would spend $9.0 million in network operations, but their amended budget shows them spending just half that amount, $4.3 million.

The combination of much lower-than-projected subscriber revenue and much lower-than-projected expenses for network operations suggests that UTOPIA didn’t attract anywhere near the number of retail customers as they anticipated. In all of these cases, UTOPIA made much rosier projections than actual experience justifies. In testimony before the Legislature’s Government Competition and Privatization Subcommittee, UTOPIA general counsel David Shaw explained the dissonance between their projections and reality as the product of “externalities.” Perhaps a better word would be “competition.” Given this dissonance, the Legislature can and should ask whether UTOPIA is a going concern. If they aren’t, it’s hard to see why they should be allowed to expand.

A few clarifications if I may.

The amount that pledging cities would have to contribute, if anything, would depend entirely upon the shortfall in bond payments. Your figure of $202M presumes that UTOPIA is not able to make any of the bond payments, a worst-case scenario.

Yes, the take rate isn't near the break-even point. By their own projections, it's not supposed to be there yet. The break-even is currently projected for 2009 with a positive cash flow in 2012. They had to revise these numbers since construction was halted by the Qwest lawsuit.

I'm surprised that you consider a lawsuit from Qwest and obstructing access to telephone poles to be "competition". If anything, that sounds like anti-competitive behaviors.

Meanwhile, I'd like to hear your suggestions as to how to introduce true competition to the telecommunications space and get our infrastructure competitive internationally. It seems that the criticism of UTOPIA usually comes without an alternative proposal and it's certainly not all that debatable that something in this sector needs to change. Soon.

(As a side note, would you be able to publish the source material you got from UTOPIA? I'm sure that many of us wouldn't mind getting to take a peek at it.)

Unless UTOPIA is receiving state tax money, what business is it of the legislature to dictate to municipalities what they can or can't do in this regard?

The relevant question is not how to stimulate competition in the telecommunications industry. The sheer number of telecom providers--Qwest, Comcast, Verizon, T-Mobile, AT&T, etc.--suggests competition is alive an and well.

The more important question is whether this competitive industry requires municipalities to enter the industry. Given the competitive nature of the industry, and the very technological breakthroughs you've recently chronicled on your website, it's hard to justify risking taxpayer dollars on projects like this.

It's only competition if they sell similar products in the same markets. Qwest, AT&T and Verizon refuse to compete in each other's land-line territories and wireless data speeds come nowhere close to what land-based can do. What we're left with is a pair of vertically integrated monopolies selling a like product and barely competing with each other.

Yes, I've chronicled a lot of impressive technologies that are a good 3-5 years out. I've also chronicled how neither Qwest nor Comcast has the network to leverage those technologies. Even if Comcast went totally nuts with SDV, there is simply no way that they can cram 500 subscribers onto a single node with a bandwidth of 4Gbps and provide the kinds of services they're talking about. Qwest isn't even trying; their last president spent the last 5 years trying to put lipstick on the pig in hopes of selling it.

At the heart of it all, Qwest made a promise to build a network like UTOPIA to every single serviceable address in the state of Utah in exchange for $1.4B in tax breaks and increased fees. Since they broke that promise (and try to claim that they never made it), we have three options: bankrupt the company to get the money back with interest and penalties, bankrupt the company by forcing them to build it now, or start rolling it out ourselves. The last option is the only "sure thing" when it comes to getting the network we deserve.

I am rather befuddled by your seemingly endless criticism of incumbent providers. I don't know what "promises" were made, but until those "promises" are legally enforcible, it's hard to hold them accountable.

As for the Taxpayers Association's alternative proposal, I think your history is a little off. During the 2004 debates over UTOPIA, we published several op-eds outlining our solution, including this one: http://www.utahtaxpayers.org/UTA-news/2004/standard_4.14.04.pdf.

Finally, your definition of competition is awfully narrow. Consider this example. Imagine company X had a monopoly on providing horse and buggies just before Mr. Ford began mass producing the Model T. Does it really matter that horse and buggies aren't the same product as the Model T? No. They are competitors, even though they don't offer the same product.

I can certainly suggest some reading that would get you up to speed on the promises that the telco companies (including Qwest's predecessors) made in exchange for about $200B in increased fees and tax breaks. That will probably explain why I have little love for incumbent providers.

The problem with your tax break proposal is that it completely ignores market realities. Vertically-integrated monopolies require a take rate in the 30-35% range to break even. That means the market can, realistically, support only 3 of them in any given area. That doesn't introduce a whole lot of competition. Open networks like UTOPIA, however, provide that third network while increasing the number of competing providers substantially. Certainly it would be preferred to outlaw vertical telecommunications monopolies and require the wholesale network to be open to competitors, but getting that remedy in force still doesn't guarantee that we will have any kind of internationally competitive infrastructure anytime soon. That's why we have to build it ourselves.

Remember that the federal government built the Bell monopolies. Local governments used franchise agreements to build cable monopolies. We're stuck with only two major telecommunications providers because the government sanctioned monopolies. Now that the government created entrenched incumbents, why should it leave smaller competitors to flap in the wind when they try and go head-to-head? They created an uneven playing field; it's their job to level it out, no?

Now let's talk competition. Is satellite broadband offering 500Kbps/250Kbps for $80/mo competitive with a cable modem offering 12Mbps/768Kbps for $50/mo? Is a cellular data card offering 3Mbps for $100/mo competitive with DSL offering 8Mbps/1Mbps for $50/mo? No, neither of them is. They are different products for different purposes. Satellite is designed to serve areas without normal land-based connections. Cellular cards are designed for folks on the go that need data anywhere. Saying that they compete with cable and DSL is like saying that the Ford Focus competes with Peterbuilt in the automobile market. They are different products for different needs.

I understand your concerns about the way government has created historic monopolies. However, government intervention into the market is not the solution.

In my experience, the only enduring monopolies are those propped up the state. And allowing municipalities to be both regulator and competitor in a market will not make a more competitive market.

The number of participants in a market is just the first threshold in defining a monopoly. Not so long ago Yahoo! was thought to have an unassailable position in the search engine world. Until Google came along.

Now Yahoo! and MSN are struggling just to keep pace with Google. Why is this a competitive market? Because someone can "build a better mouse trap," without having to get permission from the state.

And how exactly would new entrants show up in the broadband market? With build-out requirements, stiff anti-competitive practices and a high price of entry, it's almost impossible for new companies to make their way into the market. What does it cost the next Google to get into the market? Some spare time to program and $10/mo in hosting fees. That sure does beat dropping hundreds of millions of dollars and several years on building a new network.

There's a reason that the airline industry is so vibrant: there's a common infrastructure open for all new entrants. Instead of each airline having to build its own system of airports, they instead lease out a small (or not-so-small) portion of a common exchange point. This model has given us cheap air travel from literally dozens of providers.

The same model should be our policy for telecommunications. There is no doubt at all that it's a critical infrastructure that we can't afford to continue to fall behind on. The UK adopted this "common infrastructure" model and most Britons can pick from one of 25 competing broadband providers. (See source.) Meanwhile, we're stuck with two land-line choices: phone or cable.

It may seem bass-ackwards to you, but a little regulation and government intervention could go a long way towards creating a truly competitive market.

these "anti-competitive" practices you cite are simply competitors doing what competitors do. Trying to take and hold onto market share. The term "anti-competitive" is just a pejorative label newcomers apply to in an effort to do the same thing: take and hold onto market share.

As for your assessment of what it takes to challenge Google, I suspect the venture capitalists at Kleiner Perkins Caufield & Byers would dispute the costs. They've invested hundreds of millions in software companies over many many years. Despite these high costs (both in time and money), the software industry is as competitive as any industry in the world.

This is really a great debate and I think both sides have valid arguments. I do however tend to agree with Jesse. I used to work in telecommunications and the roll out of any new technology is astronomically expensive. In fact for anyone new to get into the market they have to co-locate. This wouldn't be a problem if the government owned the co-location point because they would charge everyone the same. In Utah the owners of the co-location points are your competitors. So sure they will allow you to co-locate with them, but not at a price that would be competitive to theirs. I am definitely for less legislation, but in this instance I think a little is needed. It's really hard to understand until you have seen the amount of money and work that goes into keeping these systems up to date.

Fiber optic networks like Utopia are fantastic because they are just scraping the bandwidth surface of what fiber can do. Copper that is used in your phone lines for DSL or in the Coax for cable is already meeting its bandwidth limitations. Utopia may not be competitive at the moment but when people copper doesn't cut it anymore, they will be on the forefront with Comcast and Qwest struggling to catch up.

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