City Report Shows Highly Touted Monticello Fiber-Optic Network Facing Financial Challenges

Cash flow and customer shortage was Exhibit A in recent TonkaConnect decision

When a local government broadband proposal runs into controversy almost anywhere in Minnesota, proponents inevitably point skeptics to what’s become their go-to success story:  FiberNet Monticello.

Admirers of that $26 million municipal broadband system that won overwhelming approval in a city referendum were lining up to give a friendly quip or quote before FiberNet was even up and running in 2010.

“Communities who are interested in pursuing municipally-directed network might make talking to Monticello one of their first steps,”wrote Ann Treacy of Blandin Foundation.

“I wish more people knew about this,” said Senator Al Franken.  “And I will take this around the state with me and back to Washington, D.C.  Because people can learn from Monticello’s experience.”

“Buoyed by the success of Monticello and similar projects across the country, more communities are recognizing the need to build their own broadband infrastructure,” said Christopher Mitchell, a broadband activist with the Institute for Local Self-Reliance.

FiberNet bills itself as the fastest broadband available bundled with telecom and video services at a more competitive price than offered by private providers.  So it was no surprise that Monticello surfaced again in the heated debate over whether to move forward with the proposed $81 million TonkaConnect fiber optic network in the western suburbs of the Twin Cities. For the first time, however, Monticello was singled out for  different reasons than usual.

“Governmental bodies typically do not fare well in the competitive marketplace,” said Tom Fletcher, treasurer for the Lake Minnetonka Communications Commission (LMCC).  “Monticello may already be finding this out.”

At a decisive August 16th meeting over TonkaConnect’s future, FiberNet’s financial status was “Exhibit A” for the potential perils of government getting into the highly competitive telecom business. The discussion centered on recent financial filings indicating that FiberNet Monticello is incurring a greater than anticipated loss of nearly $250,000 a month, due to lower than projected revenues.

In the end, TonkaConnect was suspended by a unanimous vote.  “I’m hoping Monticello will be successful, I hope this will work out for them,” said Fletcher at the public meeting.  “This is not brought out to knock Monticello, but I would note the dangers in these things.”

The financial details surrounding FiberNet Monticello came from the city’s June 30th quarterly report, which serves as an important benchmark for evaluating the network’s performance in the marketplace to date.  As a start-up, FiberNet Monticello was projected to operate at a temporary loss while building up a customer base. Yet the report flagged the sizable subsidy FiberNet is receiving from other enterprise funds, namely the city's liquor store profits—a quarter million dollars per month.

“FiberNet will continue to have a negative cash flow and place a larger burden on other City funds to support the operations.  This too will require staff to monitor the FiberNet fund activity through the rest of the year,” according to the report.

City officials acknowledge FiberNet lags in projected cash flow and number of subscribers, forcing the city to draw down escrow accounts to make bond payments for the system. City leaders assign much of the fault for the negative cash flow to now settled litigation involving private provider TDS that set back construction of the network for a year.

“The actions resulting from that lawsuit really put us in a hole and we’re emerging from that hole with an aggressive plan,” said Jeff O’Neill, Monticello city administrator.  “We’re continuing to have an upward climb with our subscribers and take rates but there’s light at the end of the tunnel.”

Even after adjusting for FiberNet’s later than expected rollout, the network has much ground to make up (see prospectus for revenue bonds). The following table shows how many subscribers FiberNet was projected to have at the end of 2010 compared to the number customers signed up for service through June 30, 2011.  Of particular concern is the dramatic lack of land line phone customers, a vital source of revenue.

                                                    Phone      Cable TV       Internet
Projected Subscribers 2010         3,388           3,230           1,737
Actual Subscribers 6/30/11             774           1,043           1,354

“The jury is out when it boils down to whether FiberNet makes it from a business perspective and cash flow,” O’Neill said. “We hold out that hope that eventually we will get to that point.   But we’re not jumping up and down and saying everything is like sliced bread.”

In June, the network reported spending about $400,000, while collecting about $150,000 in subscriber revenue.  At that rate over the course of a full year, FiberNet Monticello would generate about half of the $3.8 million in annual revenue budgeted for this stage of development (2010 projections). Nevertheless, city officials say subscribers are increasing as they finish building out the system, leading to optimism about Fibernet’s long term future.

“FiberNet has shown if it can keep growing at the current rate it will start to cash flow end of next year or early 2013,” said Tom Kelly, Monticello city  finance director. “Right now we’re proposing using our liquor store operations which should have about $3.5 million in it to use until FiberNet starts cash flowing and then pay back to the liquor fund.”

Tips or comments?  Contact Tom Steward at 612-354-2192.

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For more information on the factors likely to shape the outcome of FiberNet Monticello, see below summary provided by Jeff O'Neill, Monticello city administrator.

Success Indicators

Business Plan
o   Subscriptions rates continue to climb
o   Developing ability to serve apartments will positively impact subscription volume and rate
o   High percentage of business electing to  take service (for those not under contract)
o   Businesses under contract indicating that they will take service when contract expires
o   Additional revenue sources anticipated involving intergovernmental partnerships, co-location and wi-fi service not identified in original business plan

General Benefits
o   Freedom of choice achieved with all three services successfully deployed
o   Correction of market-place achieved ---25-35% drop in telecommunication costs saving many hundreds of thousands of dollars per year
o   Savings available for other investment or spending within the community benefitting economic health of community
o   Greatly improved productivity for business community
o   Improved telecommunications ability for commuters
o   Customer service level is good and accountability for action is in place.  Few customer complaints coming through web access
o   Local business office and associated personal service resonating within community
o   Local programming and development of business conference call capabilities
o   School District receiving 100 meg service at no cost – good for education!
o   Enhancement of City communications and services through improved telecommunications

Challenges
o   General reduction in use of land-lines reducing associated revenue
o   General economic climate
o   Cost of video content
o   Lower than anticipated revenue from reinvestment  of bond fund proceeds during construction period
o   Delay created by lawsuit and resulting financial impact

Summary
The City has achieved many of the targets as requested by the business community and supported via citizen vote in 2007.   Taken as a whole, the project has been successful in achieving a number of important community objectives as noted above.  From a business plan standpoint there are indicators or trends both supporting and challenging the effort to reach a break-even point.  It is our view that the positives outweigh the negatives in this regard and that the break-even point will be achieved in a timely fashion.

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