Cities Take Telecom Into Own Hands

Author:
Updated:
Original:

It's heard more and more frequently: A city, miffed by the local cable operator, vows to enter the broadband business itself.

In another town, frustration with a slow high-speed-data rollout compels the city council to approve a fiber deployment that will beat the local phone company and cable operator to the home.

And it's become less of an idle threat.

In 1995, the American Public Power Association, which tracks municipal utilities' broadband activities, listed 62 cities that sold video service to residential homes.

Often, those companies entered the video business because no commercial company showed interest in building in those towns — often rural communities with a low ratio of homes per mile.

The APPA's list of such projects for 2002 runs 23 pages long, and names broadband providers in virtually every U.S. state, plus America Samoa.

This surge in activity can be attributed to the utilities' discovery that for a relatively small incremental cost, they could improve their infrastructure and add these commercial services.

In order to remain competitive in their core businesses, most municipal utilities needed to upgrade to fiber-optic plant, anyway. Adding some extra strands allowed them to claim a sliver of the booming tech sector as well — or so they thought.

Those cities collected decent revenues selling excess fiber capacity for data traffic. That helped convince nascent tech businesses to set up shop locally.

But with the crash in that sector, business clients have vaporized.

There will always be residential consumers, though. And some cities — which did not want to be identified in this story, for fear of alerting investor-owned competitors — are re-examining residential service.

Not all of these communities have hung up a cable shingle, though. Many utilities limit their broadband activities to status monitoring and remote meter reading.

Others viewed high-speed-data as a business with potential. The Sylacauga, Ala., Utilities Board used its 12,000-customer fiber upgrade as the impetus to branch into high-speed data delivery.

"We got in it 'cause we had to," said general manager Dale Baker.

At that time, city residents could get Internet access from dial-up provider MindSpring (which later merged with EarthLink Inc.). When that ISP moved its connection hardware miles away, to Birmingham, local residents needed to pay long-distance charges to reach the dial-up number.

The city was also paying a "considerable amount" to BellSouth Corp. for a T-1 phone line for connections to remote monitoring stations.

As a result, Sylacauga rebuilt its system five years ago, and launched commercial and residential data delivery.

The utility now serves 500 residential customers, who pay anywhere from $6.95 a month for 60 minutes of dial-up access to $22.95 for a high-speed connection. About 50 business customers pay $70 a month.

The project did help the local economy, said Baker, who noted that a local check-processing facility moved to town, in part because of the connectivity.

CHARTER FIGHTS BACK

But the utility no longer operates in a vacuum. Charter Communications Inc. bought the local cable system in Sylacauga from AT&T Broadband a year ago. Since then, it's introduced both cable-modem service and digital cable.

"They've been extremely aggressive," said Baker, who added that his Internet business continues to grow at a modest rate. And the City Council — apparently pleased with the success of the current businesses — is pushing the utility to add video service.

But video service isn't in the near-term cards, said Baker.

"We've looked into all aspects," he said. "There's just too many embedded providers, both wired and wireless."

The utility is satisfied with its current businesses, including selling fiber capacity to independent telcos.

New businesses — and moves to economize, such as cutting a full shift from the local wastewater plant — have allowed the utility to pay for the fiber upgrade ahead of schedule.

A pre-construction consultant's report estimated payback in five years. Sylacauga recouped its costs within three and a half years, and the new enterprises are now making money.

Other utilities are more willing to go head-to-head with local cable operators. Many report that their businesses have grown steadily, even when they're at a technological disadvantage. Older municipally owned cable operations were launched in the analog era, and now must decide whether to invest in a digital upgrade.

For instance, the Coldwater, Mich., Board of Public Utilities is the only municipal operator in the state to go head-to-head with a privately owned operator, said communications manager Linden Cox.

Coldwater's analog-only system competes with Charter, which has upgraded its system to digital.

The utility serves 2,289 customers in the 10,000-resident town in Southwest Michigan despite its technological disadvantage.

The utility understands its local market — that's its strength, Cox said. The muni has not upgraded to digital because there is no clamor for it, he said.

Consumers also embrace the muni's interdicted services. Because premium services can be added and dropped by the company with technology on the pole, consumers don't have to deal with set-top boxes and related electronic incompatibility.

The utility's cable customers choose to pay $26.25 for 74 basic and expanded-basic channels.

55% DATA PENETRATION

Coldwater also got a jump over its cable competitor on the Internet side. Branch County's library system was the first in the state to launch an ISP, enabled by a state loan.

Service was launched in 1996, but by 1998 — when the utility upgraded to fiber — the Internet business had grown too large for the library system, so the utility assumed control.

Due to the early start, the Coldwater BPU claims a high-speed-data penetration rate of 55 percent. Coldwater has taken a page from the cable industry's marketing book, as the utility's customers get a price break for bundled broadband services.

Cable customers pay $26.15 for high-speed data (including modem rental), while data-only customers pay $32.10.

Cox said the utility lost some customers when Charter went digital, but it also gained a few. Some customers were put off by Charter's higher digital rates, as well as the need to obtain a converter.

"It was a wash," he said.

The electric utility in Murray, Ky., also competes without digital, but closely monitors its consumers to swiftly detect any interest in the product.

"Our customers are interested in keeping rates constant. That's why we haven't raised rates," Murray Electric System supervisor Tony Thompson said. "We're studying a digital tier, but our customers will dictate."

Even if the utility upgrades to digital service, he added, premium services will remain on the analog tier. Forcing consumers to get digital service is not user-friendly, he said.

Murray Electric Services launched video in December 2000 and added high-speed data in February 2001.

Now, 2,000 of its 7,200 electrical customers buy cable service. It also has 900 high-speed data customers.

Cable customers buy 70 analog channels for $28.95. That's $5 cheaper than the published rates offered by its competitor, Charter.

But like other overbuilders, the electric utility has heard rumblings that Charter is quoting its customers unpublished, deeply discounted rates.

The utility bundles its high-speed-data product with video service. Data fees are cut to $26.95 for cable customers. A la carte data service is $36.95, including modem fees.

Perhaps the highest-profile public-private competition is in Tacoma, Wash. That community's profile was raised when Leo Hindery — at that time, the president of Tele-Communications Inc. — went to his former hometown to lobby personally against the utility's advance into the video business.

Hindery's bid was unsuccessful, so consumers can now buy cable services either from AT&T Broadband (TCI's successor company), or Tacoma Power & Light's Click! Broadband division.

"AT&T, from the time we began, had bundled products where they could have motivated customers to take more than one product," said Click! government and community relations manager Diane Lachel. "They are very creative, a very formidable foe."

Despite that pressure, Click has attracted 20,000 customers in the city of Tacoma, where it passes 64,000 homes.

The utility's most popular cable package consists of 76 channels, including music services, for $23.50. But customers can buy a stripped-down broadcast basic package for as little as $5.95.

AT&T NIXES CLICK

AT&T Broadband questions the utility's success, noting that Click!'s initial proposal would have expanded the system into unincorporated county territory by now. Also, the plan predicted that Click! would have had 33,000 video customers by March of 2000, noted AT&T spokesman Steve Kipp.

Click! launched at a time when the TCI system hadn't been upgraded and was plagued by complaints, Kipp said. Since then, the MSO has launched digital, cable-modem service and telephony, and "we have more customers than when Click! came on," he said.

"An extremely small number have gone over and we believe those are $5.95 broadcast basic," said Kipp. "That's fine, but you can't make money [charging $5.95]. More likely, they poached [direct broadcast satellite]."

And AT&T's Tacoma system reports a higher level of nonpayment in areas in which consumers have a choice of provider. MSO executives surmised that once bad customers wear out their welcome with Broadband, they move on to Click!.

AT&T Broadband claims that it serves a more desirable demographic than its public competitor, and that customers are still attracted by the MSO's suite of services and packaged prices. The company works to differentiate its entertainment offerings as well. Its latest unique addition has been a cluster of ethnic networks from International Channels Inc.

"Whether they're a success or not if for the citizens to determine," Kipp said of Click!

Click! claims the upper hand in high-speed data. Lachel said 20 percent of the utility's customers take the WorldGate Communications Inc.-provided Internet-over-TV product.

The broadband division also has 250 data circuits that deliver voice, video and data to business customers.

The latter business was launched to poach subs from local telco Qwest Communications International Inc. When Qwest launched its data product, local businesses often had to wait from 12 to 18 months for service, noted Lachel.

The utility offers installations within 30 days, a window that drops to 15 days if the business customer can brings in other users for the same visit.

Tacoma Power & Light is also a "carrier's carrier," selling transport to certified local exchange carriers (CLECs) within Tacoma's city limits.

Aside from WorldGate users, 4,300 customers take high-speed data, which Click! offers on an open-access basis.

"We've seen a tremendous growth in that product," Lachel said, noting that many cable-modem customers abandoned AT&T due to the problems that stemmed from Excite@Home Corp.'s bankruptcy and eventual shutdown.

"We can barely keep up," she said.

Kipp challenged that assertion.

"There's been no exodus," he said. "That doesn't track at all. We've more than made up for any of the losses we experienced.

"The vast majority stuck with us. Within a week after the plug was pulled, we were back to the same number of weekly connects," he said.

By now, Click! had hoped to expand beyond Tacoma. But the provider ran into something it didn't bank on — the 2001 West Coast power crisis.

Tacoma Power & Light was able to get through that tough period without incurring a tremendous amount of debt, though, so Click! is moving forward with its plan to compete with AT&T outside the city limits. Lachel said the utility is in franchise negotiations with several communities now.

LAGRANGE FOLLOW-UP

But while most public and private cable companies continue to glare at each other over the fence, stealing one another's customers whenever possible, such antagonism doesn't exist everywhere. The atmosphere in LaGrange, Ga., is downright cuddly.

In a now world-renowned partnership — the city is about to host an international broadband conference — the city cut a deal to buy Charter's transmission lines in 1998.

Using a $10 million capital bond — a less-expensive form of financing than Charter could have obtained in the private financial markets — the infrastructure was upgraded to become two-way, 750-MHz plant.

The city owns the plant, but Charter arranged and supervised the construction of the upgrade.

LaGrange leased back 70 percent of that capacity to the cable operator for video delivery. The city uses its portion to provide high-speed data services to business and residential customers.

For the first two years, LaGrange residents received free WorldGate ITV service with their basic-cable subscription. Residents who signed on after September 2001 are marketed data service for $39.95 for a download speed of 500 kbps.

Asked for an update on its Georgia partnership, Charter deferred to LaGrange officials.

The symbiotic relationship has been a boon to the city, said LaGrange director of community and economic development Joe Maltese. The plan pushed the city ahead on Charter's upgrade schedule, and brought services LaGrange feared it would never attract, he said.

"We looked at overbuilding, but the model didn't make sense," he said. "Charter would have been hurt financially and so would we. We decided to be more strategic."

The result: 9,100 subscribers out of 10,000 homes passed opted for Charter.

"We don't get happy with increases, but we kind of understand," Maltese said.

Further north, another community is no longer in antagonistic relationship with its investor-owned cable operator. That's because the municipality, Glasgow, Ky., bought out Comcast Corp.'s local operation in April 2001.

Glasgow is one of the oldest overbuilds in the nation. It went live in 1988, competing against then-incumbent Scripps Howard Cable TV.

During its life, the city system attracted 10,000 cable customers, or an estimated 75 percent of the market.

When Comcast bought Scripps's 450-MHz plant in the late 1990s, it tried to compete with a muni that had upgraded to 860 MHz.

"I was surprised when we got the buyout offer, because they have the financial wherewithal to wait us out," said municipal utility superintendent William Ray. "I guess the bean counters prevailed and said, 'Let's get out of there.' "

Ray claims the utility bought Comcast's 3,400 customers "for a fraction of the going rate." The companies agreed not to specify the buyout terms.

With Comcast gone, the city of Glasgow still maintains low prices. Consumers pay $18.95 for 63 cable channels and can add 30 more digital services for another $15.95. High-speed data is priced at $24.95.

Glasgow funded its buyout with 20-year revenue bonds. Given the city's cable rates, Ray joked, payback will take every day of that 20 years.

INTEREST STILL HIGH

Though the technology bubble has burst — eliminating one of the primary reasons for cable overbuilds — interest in municipal broadband operations continues to flourish.

Look for a city where consumer complaints have ballooned, and you'll find officials talking about an overbuild.

For example the neighbors of Braintree, Mass. — home to a longstanding municipal cable system — have peppered officials with questions about following suit, because of complaints about AT&T Broadband.

Neighboring Norwood has authorized its municipal electric department to borrow $10 million to launch a cable operation. And down the road, Taunton's light department may start a cable pilot project.

In May, Mansfield will hold a town meeting to discuss a study on municipal ownership. Other Massachusetts towns are mulling a regional, government-owned network.

City governments also continue to fight cable industry-sponsored legislation that tries to bar municipal utilities from venturing beyond their core businesses.

Virginia recently enacted legislation allowing municipal electric companies, industrial development agencies or economic development agencies to enter the telephone business in communities where there are three or fewer suppliers.

Cable is currently exempted from that list of new businesses. Given the fight that cities put up to get into the telephone business, operators worry that it's just a matter of time before they attack the cable exemption, said Virginia Cable Telecommunications Association president Kathryn Falk.

Related