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UTOPIA continues to fail

As I have mentioned before, UTOPIA is bound for failure.  I can’t find the original post I made about UTOPIA, but I remember posting that when it failed the burden would be placed back on the citizens.

Well, the failure is eminent, and the burden is already falling on to the backs of the citizens.

First let me address why UTOPIA is failing.  And while I don’t wish to discount the flawed business model, it appears from this article, that the failures are from the directors of UTOPIA who are making very poor financial decisions:

It happened because UTOPIA was forced to refinance using a 30-year, variable-rate bond, which it then tried to stabilize by contracting with a bank for credit swaps, with the net result being “a wash” for the fiber-optic company’s finances, according to UTOPIA finance director Kirt Sudweeks. When Lehman Brothers declared bankruptcy and the credit markets went haywire last autumn, that deal fell apart, leaving UTOPIA with monthly interest payments between $50,000 and $300,000 higher than planned.

I am no financial expert, but I do know better than to get involve in variable-rate loans. But when you start bouncing money around like a child’s toy ball, you need to really start asking yourself if it is worth the effort, let alone the risk.  While one can’t discount the struggling economy as part of the problem, that is a risk that you take when you get a variable-rate loan, and then move it around like they have.

The saddest part of this whole ordeal is that the tax payer is going to have to pay the brunt of it.  In order for a city to sign on to UTOPIA, they had to set aside money as a back back up for the project.  It was promised to the cities that this money would go untouched until the project became financially stable.  And yet, the promise is now broken.

At least one of the cities is now reporting that they only have a third of their city cover with fiber-optic networking.  With only a third of the project done and they need more money.  It makes one wonder.  Even if this money was enough to get the second third built, where are they going to get the money for the last third of the project. It most likely isn’t going to happen.

This brings me back to the fundamental point I have always made about government involvement in the private sector.  Get your hands off. If this was bound to be successful, then banks or venture capital or some other form of private funding would have funded the project.  But because they couldn’t get private money to build the fiber optic infrastructure, they went to the cities.  And city council members bought the idea because they were promised big returns for a small investment.

It’s time for the UTOPIA cities to wisen up.  They need to get out of this project now.

Unfortunately, it is probably too late because the building has begun.  Sorry, if you live in a city that is funding UTOPIA, you might as well start preparing to pay more taxes, because your neighbor wants a fiber optic line that he can’t afford.

Update (22 Jun 2009): Representative Craig Frain offers a brief commentary on this same article.

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5 comments to UTOPIA continues to fail

  • There’s plenty of correction to go around here. I’ll go ahead and take a stab at it.

    Most of us know better than to get involved in a variable-rate loan. But you seem to have missed this little tidbit:

    UTOPIA was forced to refinance using a 30-year, variable-rate bond

    The bank is the one that said “variable rate or bust”, not UTOPIA. And the situation that happened in the bond market is without any kind of precedent excepting MAYBE during The Great Depression. Given the turmoil that the financial markets were in during the summer of 2008, this is the best the bank could have come up with. Blaming UTOPIA’s directors and its financing bank for the meltdown in the bond market is pure nonsense.

    As for private industry, let’s take a look at that. It takes around a 30% take rate for an overbuilder to break even on their investment. In other words, the market will always fail to support more than 3 competing wireline providers in any given market. Companies are also usually required as a condition of their franchise agreement to provide service to a specific percentage of the city within a certain number of years. This usually requires capital in the hundreds of millions of dollars and has a return on investment of 10 years or longer. Then you have the incumbents using lawsuits and legislation to impede your progress every step of the way, not to mention that they will often sell services below-cost just to drive you out of the market. How on earth can any new telecom expect to attract investors for that, much less succeed? I’d really like to know. The only way Verizon and AT&T are making anything happen is by cross-subsidizing using expanding wireless revenues.

    Speaking of wireless, it’s not the answer. It never will be the answer and it never has been the answer. Wireless has very high latency, extremely limited bandwidth, and it still requires some kind of backhaul to get that data to the rest of the world. Want to know why wireless data often comes with very low caps? It’s because a T3 or DS3 costs an arm and a leg. Why do 4G networks offer speeds barely competitive with low-end DSL? Because once you sign up enough customers, the spectrum is too saturated to support more. Using wireless in place of fiber-optic wireline is like trying to use extension cords to substitute for a transmission line.

    You also mistakenly assume that the telecommunications market is somehow private sector. In fact, it is anything but. AT&T had a de facto monopoly from the 1880s through 1917. At that point, the federal government declared that AT&T should be THE phone company and left it that way until 1984. Even then, their weak attempt at creating competition ended up in the formation of regional monopolies instead of a national one. In an effort to correct the issue, the feds came up with the Telco Act of ’96. Huzzah! Local phone and DSL competition FTW! Except that it wasn’t. The feds ended up giving the telcos over $300B (yes, BILLION) in benefits through equipment depreciation and user fees (like the much-abused USF) in exchange for promises of a full-fiber network to all customers, increased competition, lower prices, 45Mbps bidirectional Internet service, video phone calls, and 500+ channels of video service. Instead, the opposite happened. Telcos and cablecos have consolidated almost to the point of new national monopolies, prices have risen significantly faster than inflation, we have fewer ISP choices now than we did in 1997… get the picture? Where’s the outrage of well over a century of THAT government-sponsored monopoly and extensive corporate welfare? (Seriously, read Bruce Kushnick’s expose of how we’ve been had: http://www.newnetworks.com/broadbandscandals.htm )

    It’s also duplicitous to argue against municipal telecommunications while ignoring municipal electricity. Or is there no criticism for that because it’s *currently* making money? It wasn’t always that way, and, not-so-coincidentally, the arguments against municipal telecom sound a lot like the arguments against municipal eletricity. http://www.baller.com/pdfs/Baller_Utah_9-26-07.pdf

    This is not some simplistic “government bad, private sector good” kind of argument. There’s a lot more going on here than you have acknowledged and it is important to include that detail in the discussion. Most of all, you’ve got to have more than just complaining. Don’t like the UTOPIA solution? Come up with one of your own. A specific one, not some simplistic “let the markets do it” cop-out. Less Craig Frank, more Steve Urquhart.

    (P.S. I just edited this so that one of your links would work.)

    • Whoa hold up here for a minute. I never blamed the financial meltdown on UTOPIA. I am not that niave. But if I were UTOPIA and was “forced” into a variable rate loan, I would have taken my business elsewhere, or I would have gone bust. Actually don’t get me started on starting a business on debt. That is a major cause of most business failures. If I ever start up my own business it will be with solid money to back it up and NO debt.

      What are you talking about with lawsuits and lawyers? That only happens if you are doing something illegal. Where does starting up a business become illegal? I am completely confused by your comments. I get it I may be dumb on this whole issue, because I am not in the telecom industry.

      Who said anything about wireless? But since you brought it up. If wireless is so bad, home come it seems to be succeeding with only private money? Sure it has problems, but it is succeeding, where it appears that UTOPIA is failing. Supporting my theory that private sector is more likely to succeed.

      Your explanation of the history of AT&T is a wonderful example of why government should get out of the private sector. AT&T was doing quite well on it’s own, that’s how it became a monopoly. But the government decided that it knew better than the private citizen and it created the mess we common refer to as Ma Bell. I still contend that if the government had gotten out of the market to begin with, then we wouldn’t have the communications fiasco that we had in the past.

      I am a support of competition, but if the market can’t bare it then let the monopolies work. Why is it okay for the government to have a monopoly but not the private sector? What is it about government monopolies that are okay, but private sector monopolies are bad? I would rather a private sector monopoly than a public monopoly.

      I didn’t mention municipal electricity, because that isn’t the subject. To be completely honest with you, I don’t like municipal electricity either. But I don’t see a point in making an argument about electricity when the subject is Internet. Seems to me going down a road that need not be discussed.

      What do we need a solution to? I don’t get it. I work in an office with huge fiber optic availability? As far as I know there is no UTOPIA involved in the move. I know that there is an office building in Riverton (a non-UTOPIA city) that has fiber-optic lines. The LDS church now owns that building. Fiber optics will come to all of us, we just need to be patient and wait for the market to demand it, instead of having the government screw it up for us.

  • The point of the refinance was to not go bust and call the full bond amount immediately. The cities decided that wasn’t a tenable solution at all. Now they only need to call a small portion of the bond pledges, an amount much less than what would have been called a year ago. Cities have already had that money set aside, it won’t be drawn until needed (which is next year), and it won’t need to be replenished until a year after that. If UTOPIA revenues increase in short order (which, based on my meeting with them yesterday, seems possible), the cities might not be out much of anything.

    The cities had no choice of financial model. The legislature dictated the terms: bonding only and for no more than 50% of the total construction cost. If a city wanted to sink more of their own money on it, they were threatened with lawsuits from Qwest and/or Comcast even if the installed infrastructure was open to their use. They got locked into the “free lunch” model that actually PROHIBITED spending money and REQUIRED debt load. Thank the legislature for that one.

    Frivolous lawsuits happen all the time. Qwest sued UTOPIA over pole access and lost, but not without causing 18 months of construction delays. Incumbents know that they don’t have to win the lawsuit, just delay any possible competitor long enough to bleed their cash. Incumbents also agree to and vigorously enforce franchise agreements against competitors to force them to build too much, too fast. It’s part of their standard operating procedure to use the courts and legislative bodies to protect their businesses and cash-poor new entrants stand little chance against it.

    I brought up wireless because, inevitably, someone says that it’s just as good as another wireline competitor. Just wanted to debunk it ahead of time. I’m not saying that wireless is bad. I love getting wireless data on my phone when I’m away from a fixed location. I would never, however, use fixed wireless for a home or business. The transfer caps and speeds are too low to allow me to make off-site backups, the prices are not competitive with incumbent wireline providers, and the signals are often spotty. Wireless is “succeeding” because the price of entry is very low and it fulfills the growing demand for mobile data. It is not a substitute for fixed wireline services. I should also note that a significant number of wireless operators have started and gone bankrupt in the last 8 years and even large operators like Sprint are struggling. It’s not a slam dunk.

    AT&T was a legally sanctioned and recognized monopoly from 1917 to 1984. I seriously doubt that they had to compete much during that period. I think we would have been much better off had this not happened, but that is also second-guessing history. Now that we have collectively spent decades shoring up a monopoly and entrenching them against competition, how do we undo that mess? Seriously, I’d like to know. Nobody in opposition to muni telecom seems to have any kind of adequate answer.

    UTOPIA is not, has never been, and will never be a government monopoly. Not only is it contrary to their core mission, it is legally prohibited. UTOPIA can provide wholesale service only, transport from one point on their network to another. The retail services sold to customers is provided by private companies like XMission, FuzeCore, and Integra. UTOPIA is up to seven service providers with more in the pipeline. Qwest and Comcast are still in business in the areas served by UTOPIA. So tell me, where is the monopoly? I don’t see it.

    The argument about electricity is entirely relevant. When cities tried to start their own power systems when private companies wouldn’t provide what they needed, those companies argued that electricity was a private enterprise and not infrastructure or a utility. (Seriously, read the presentation from Jim Baller.) Now, almost a century later, how silly does that argument sound? Telecom is at the same crossroads. It’s critical infrastructure and it needs to be upgraded, but incumbent carriers are refusing to do it even when they are offered payments by the city to do so. Lindon tried to pay either Qwest or Comcast to deploy fiber to the entire city. Their response? “No thanks.” What choice was left?

    If you don’t think there is a problem with telecommunications, you need to do some reading. (You claimed ignorance of the industry in the second paragraph.) The United States has some of the lowest average broadband speeds of any industrialized nation with some of the highest prices per megabit. The Eastern Seaboard is more dense than Japan, yet they can get inexpensive 100Mbit service and we cannot. Something is very wrong with that picture. Yes, fiber is available, but the cost is astronomically high because of limited availability and even more limited provider choice. Again, fiber is not available right now because the telcos made off with $300B that was supposed to pay for it without bothering to deliver, not because of any kind of “market reality”. The federal and state governments screwed up when it trusted the telcos and didn’t hold them to their promises. It’s time to let cities and counties take a whack at it.

    • You are obviously more versed on this subject than I am, and I can’t argue your facts. However, I find them at least suspect, because your sources seem to have as much bias as those they accuse.

      Simply put, I honestly believe it isn’t the proper role of government. I think that it will fail. You don’t. The only thing that will prove which of us is right is time.

  • Ronald D. Hunt

    City’s need to be able to get access to the Telecommunications services their citizens need and want. These services must meet a minimum service level thats defined by the City. If the free market denies a city’s access to modern services that its citizens need, then their needs to be an alternative to get the services it needs, if the city is forced to invest tax payer dollars to this end then the city should own the infrastructure that they install.

    Do you have an alternative idea that would create market competition?

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