AT&T: Don't Be Like Tacoma

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Almost three years after its launch, the nation's largest municipal overbuild has come up short of expectations, according to a study commissioned by principal rival AT&T Broadband.

An analysis of Tacoma, Wash.'s Click Network found that it failed to reach its expected subscribership, revenue and profit targets, while capital spending grew from an estimated $55 million in 1997 to $86.5 million by October 2000.

Conducted by Arthur Andersen LLP, the study compared actual results with estimates contained in a 1997 study commissioned by Tacoma Public Utilities.

The results also mirrored findings contained in the 1997 Coopers & Lybrand study, which found that a municipally owned network would still have 5 percent negative cash flow after 20 years.

AT&T Broadband executives hope to use the latest study to discourage local governments that may be considering overbuilds of their own.

"It [Click] hasn't made a profit, so we thought it made sense to tell the other side of the story," said AT&T Broadband Northwest division executive director of communications Steve Kipp. "We want to show other cities what has happened in Tacoma."

What has happened, according to Arthur Anderson, is that Click had 17,260 subscribers at the end of 2000, compared with 1997 projections of 34,312 customers. At the end of 1999, its revenues totaled $2.7 million against earlier estimates of $22.7 million.

An expected profit of $1.9 million after one year of operation turned out to be a loss of $15.7 million after three years. Meanwhile, TPU's capital spending plan calls for another outlay of $36.2 million, pushing the overall cost of the network to $138 million by the end of next year.

In order to reach its projected subscriber numbers, the study concluded, the Click Network would need to pirate away a significant number of AT&T cable customers while capturing the bulk of the area's nonsubscribers.

"We must be doing something right, or they would be ignoring us," said Click general manager Dana Toulson, adding that the municipal network has penetrated 28 percent of the 63,000 households it passes.

Click also offers five Internet-service provider alternatives to AT&T's Excite@Home Corp. service over its network.

Toulson accused AT&T of obscuring the original purpose of the network-to provide TPU with remote meter-reading capability and better outage control.

Tension between Tacoma and its cable operator date back to the days when the system was owned by Tele-Communications Inc., an MSO not revered locally for its customer service.

Former TCI and AT&T Broadband president Leo J. Hindery, himself a Tacoma product, tried to head off an overbuild by offering a partnership between TCI and the city. But it turned out that cable wasn't what city officials were most interested in selling.

Instead, the city envisioned a network that would offset the effects of pending electric-industry deregulation, which threatened to torpedo Tacoma by allowing its customers to shop for the best possible deal on power.

But AT&T responded to the competitive threat by upgrading to 750-megahertz capacity. For the last year, it has offered high-speed AT&T@Home service and a cable telephony product throughout the city.

Kipp said some residents subscribe to Click for video and AT&T for telephone service, "so our customers are their customers as well."

As operator of the nation's 19th-largest municipal electric utility-with some 140,000 customers-Tacoma had a lot to lose if it didn't protect its share of the power market.

"But now [AT&T] can't make their argument without ignoring the fact that we're here to serve Tacoma Power Utilities, and that anything we make from cable and Internet service is incremental revenue," Toulson said.

From the beginning, city officials had their own studies to fall back on.

The Stanford Research Institute, for example, found in 1996 that 73 percent of Tacoma's cable viewers were prepared to jump to a comparable service offered at a lower price. More importantly, 44 percent said they would specifically take a service offered by TPU, which was then known as Tacoma City Light.

CLICK STARTED STRONG

Evidence of the public's confidence in the local utility surfaced in an early market study by Market Data Research Corp. and Dethman & Associates. A telephone sampling of area households found that 81 percent of respondents supported a municipally owned telecom network, while just 7 percent opposed the idea.

Early on, TPU gave TCI a run for its money. In its first 11 months, Click siphoned off 6,000 TCI customers, growing at a rate of 660 subscribers a month.

But AT&T now argues that the failure of the telecom network to generate any profit was at least an indirect factor in the city's decision to impose a 50-percent surcharge on local electric bills. The city also had to give TPU authority to borrow $100 million to keep buying power.

Toulson said the study falsely claimed that Click's first full year of operation was 1998, and that it failed to produce a profit.

"It's disingenuous to claim that our first full year was 1998, when we didn't even finish construction until June 2000," she said, adding that the city expects the network to generate an operating profit this year.

Meanwhile, industry sources predicted that the Arthur Andersen study's effect on other jurisdictions is unclear, given that the report will certainly be labeled as self-serving.

Such was the fate of a similar study conducted several years ago at the University of Denver. That study was dismissed as industry propaganda when it reached the conclusion that municipal overbuilds are poor investments.

"We thought that the Denver study would have an impact and it didn't," said Tom Graves, director of the Iowa Cable Telecommunications Association, an industry trade group that has seen its share of municipal overbuilds. "And because it's AT&T, people are going to be suspicious."

Graves said cities might be more inclined to believe other municipalities that have seen their telecom networks become a drain on city coffers.

"We've got them coming up to the capital all the time and saying, 'We're not making any money on these things,'" he said.

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