[Ww-snww-regional-list] Wired West Response to Otis Withdrawal

Robbie Leppzer robbie at turningtide.com
Sat Aug 29 13:46:25 EDT 2015


Hi All:
 
            Below I’ve attached a detailed statement sent out today by the Wired West executive committee in response to the recent withdrawal of the town of Otis from Wired West.
 
            I’ve also included below some email discussion that took place earlier in the week about the Otis withdrawal by broadband committee members from Warwick, Colrain, Ashfield and Shutesbury.
 
         I think that the questions, concerns and issues discussed here are very relevant and will add much “food for thought” to our current broadband deliberations here in Wendell, as well as our regional meetings with broadband committees from Shutesbury, New Salem and Warwick, so I’m including everyone in our eastern Franklin Country mini-region on this email.
 
         I look forward to continuing our discussion in person at our next Wendell Broadband Committee meeting on Wednesday, September 2 at 7pm in the Wendell Town Offices - in which we invite BB committee members from Shutesbury, New Salem and Warwick to attend.
 
Robbie
 
---------------
 
Subject: From: Town Liaison <wiredwesttownliaison at gmail.com>
Date: August 29, 2015 9:45:48 AM EDT
To: delegates at wiredwest.net
Subject: [WWC Delegates] Otis Withdrawal from WiredWest
 
Dear Delegates,
 
As you may know, Otis recently notified the Executive Committee that the town is withdrawing from WiredWest.  Attached is a document we have prepared for our Delegates in response to that action and to the reasons for doing so as stated by the Otis Select Board in an announcement they issued. 
 
WiredWest Executive Committee
 
-------------------
 
Wired West Response to the Withdrawal of Otis
 
The withdrawal of Otis from membership in the WiredWest cooperative may raise questions from your town officials and townspeople.  We are providing this response to help you in answering any questions about this matter.  The action by Otis has in no way shaken our resolve to build and operate a regional network, and if anything has underscored the many reasons for our member towns to work together toward that goal.
 
By going it alone rather than as part of the WiredWest regional network, Otis will face higher costs to build and operate a network serving the town, will be exposed to greater financial and operating risk, including lower potential revenues, and will be able to offer fewer services to its citizens.
 
Here are specific responses to the seven reasons given by Otis in its withdrawal announcement.
 
“1) Otis’ $1.8 million share of MBI funds does not require that it be part of Wired West.”

That is true.  However, MBI will require any town seeking to have its own network to demonstrate that what it proposes is sustainable, as WiredWest has done exhaustively in our detailed business plan for a regional network.  Because of its high proportion of second-home owners (about 60%), most of whom will only take service on a part-time basis, Otis is likely to have lower average revenue per residence than most other towns in the region and a higher per-customer cost.  As part of a regional network, Otis would in a sense be subsidized by higher revenues per residence in other towns.  Moreover, on its own Otis will not be able to afford the equipment needed to offer its customers TV service, which 62% of presubscribers to WiredWest have indicated they are interested in. 

“2) Under Wired West’s proposal, Otis taxpayers would pay for the entire cost of the network (aside from the MBI funds) but Wired West would own and control the network; the Board believes the Town should own and control a $5.5 million dollar asset funded solely by taxpayer dollars; this way Otis can choose its own network operators and internet service providers on a short term competitive basis.”

 Under the WiredWest plan, towns participating in our regional network will own and control it, with shares in the network proportional to their investment in it.  It makes no sense to speak of WiredWest as an entity separate from the towns.  We are a cooperative of the towns run by the towns for the benefit of the towns.  The economies and efficiencies inherent in a regional network reduce the costs of building and operating in a town and by doing so provide a built-in financial safety margin, and spread the risk.  Otis is very likely to spend more money than the town would as part of a regional network. And along with sole ownership and control, the town will face alone the administrative burden of overseeing the construction and operation of the network.

“3) Wired West proposes to only provide “drops” to residents and business owners who pre-subscribe instead of all premises; the Board prefers that all taxpayers receive the same benefit to the greatest extent possible; MBI’s total project costs assumes drops to all premises.”

The WiredWest network will be attached to every utility pole in a public right of way in a participating town.  Service will be available to anyone who wants it via fiber “drops” from the road, and will not be limited to those presubscribing in our Fiber Town campaign, the purpose of which is to demonstrate that there is sufficient demand in a town to justify building there.  “MBI’s total project costs” were derived from a modeling exercise (which assumed aerial drops to all premises as well as the associated customer premises equipment to which they attach) for the purpose of determining the upper bound of the cost to build in a town.  To actually provide drops to all premises, whether or not they take service, is not an economically-sound business practice and will undermine the financial stability of a single-town network.  Nonproducing assets are referred to in the financial world as “stranded capital,” an ironic phrase in the case of the strands of fiber in those drops.

“4) Wired West is not needed for the design and construction that will be performed by engineers and firms retained by MBI; The Town will enjoy any economy of scale cost benefits derived from MBI’s regional design and construction project regardless of whether or not is part of Wired West.”

MBI will be designing and constructing the network, but WiredWest is already participating in that process through regular meetings at MBI headquarters in Westborough, whereas individual towns do not have the available personnel or expertise to do so.  It is not true that a town going it alone will enjoy the same economies of scale as a town in a regional network.  There are many savings in a regional build.  For example, Otis will need its own equipment hut or huts (at a cost of several hundred thousand dollars each), whereas several WiredWest towns can share a hut.  Likewise, Otis will need to pay Axia for its own redundant connections to the internet through MBI’s middle-mile network, whereas towns in the WiredWest network can achieve redundancy through connections in adjacent towns.  

“5) Wired West would not operate the network or provide internet services; it will contract out for those services; The Town can contract out for these services itself with assistance from MBI.”

WiredWest has not determined to what extent it will build internal operations and service capabilities, or contract them out.  This is a decision that will be made by its member towns on the Board of Directors, in light of the costs and benefits of internal vs. external approaches.  The Board has the technical, financial and managerial capability to make and implement that decision.

“6) Wired West’s business plan includes a substantial sales and marketing staff as well as four officers earning six figure salaries; the Board believes a closed network that will constitute a monopoly on badly needed broadband services does not require a substantial sales and marketing staff; it also believes that a payroll in excess of $1.5 million per year is excessive considering that Wired West will neither operate the network or provide internet services.”

To the extent WiredWest needs internal staff will be determined, as noted above, by which functions we take in-house or outsource.  The payroll numbers in the business plan are based for now on the assumption that everything is done in-house.  Actual salaries will be approved by the town representatives on the Board of Directors, but the numbers in the plan are conservative to make sure we budget sufficient funds in the plan, and are based on the kind of salaries executives and professionals are paid in this business.  As anyone in this business will affirm, success is directly related to the “take rate,” the percent of potential customers who sign up.  Yes, many people will be eager for service and sign up quickly.  But beyond acquiring these early signups, the business will fail if we do not actively market our products, price and sell them to new customers, offer existing customers higher tiers of internet service as well as telephone and TV, and market and sell new services which will inevitably become available as the technology evolves.  Sales and marketing is essential to successfully operating a fiber network.  This is not a “monopoly”.  Networks that have not been effective at marketing have failed.  We are in direct competition with Verizon Wireless for internet, telephone and television customers.

“7) The Board does not expect that Wired West will be able to generate the revenues needed to repay towns’ debt service as it proposes.”

This conclusion is an opinion not based on facts.  WiredWest’s business plan demonstrates in great detail how we will achieve the take rate necessary to generate sufficient revenues to reimburse the towns’ debt service.  It is not a guarantee, of course, but has a high probability of success.  On the other hand, the profit margins required by a private contractor to a town will reduce the revenues available to repay debt service.

All of us in WiredWest have worked for many years to achieve a viable solution for our lack of broadband.  We can all be proud that without the tireless advocacy of WiredWest, we would still lack a last-mile solution for our towns.  We have come this far by standing together.  We will reach our goal by continuing to work together as a cooperative committed to achieving our goal.        

--------------------

Email discussion earlier in the week about the Otis withdrawal by broadband committee members from Warwick, Colrain, Ashfield and Shutesbury:

 
From: "Tom Wyatt" <tom at tomwyattphoto.com>
Date: August 25, 2015 3:16:28 PM EDT
Subject: FW: Otis Wired West withdrawal
 
I’m forwarding this to our BB committee and to a few others in WiredWest. The fact that Otis is a large town (2nd highest population of the 32 towns, I believe) is likely effect the strength of the whole regional WW network. It would be difficult for smaller towns to do this; debt service repayment doesn’t appear to be a concern for Otis. Their critical issues seem to be ownership & control of the town’s network, salaries, lack of confidence in WW’s ability to generate projected revenues. It will be interesting to see how this effects the model, take rates needed etc.


Tom
 
----------------
 
From: David Greenberg <david.greenberg3 at gmail.com>
Date: August 25, 2015 10:20:13 PM EDT
Subject: Re: FW: Otis Wired West withdrawal
 
Thanks for sending this along Tom. I knew that Otis had dropped out of WW, but was curious as to why and this explains it pretty well. As you point out, Otis is the second largest town in the WW cooperative and probably can afford to build a network on their own. Otis has about the same population as Colrain, but twice as many housing units, although only about a third are occupied. I assume they collect taxes on the others though. There are a number of points that are almost right, but not quite:
 
2. Who owns the network? Yes, it is true that WW would prefer to own the network assets, but it is not a done deal until all the members agree to do it that way. One could almost certainly set up a cooperative situation in which WW runs and maintains the network but does not own it.
 
3. My understanding is that WW would prefer to provide drops to all houses, but as a possible cost-saving measure, if needed, WW would only provide drops to those who want service when the network is lit. Others, at additional cost, could be connected later. Keep in mind that the MBI forgot to include the industry standard of a 25 - 30% contingency in their quotes to the towns.
 
4. I'm not sure how a regional design for a single town works. Doesn't really make sense. I think Otis is wrong here, and in fact, the cost of the build will be more if none of WW's ideas for a truly regional network are incorporated into the design. My understanding is that MBI is counting on lots of connections to their middle mile network, connections that are not particularly inexpensive. This is one of the things that WW and MBI are negotiating I believe.
 
5. Actually, WW does intend to be the ISP and will hire out some of the Network Operator costs; although Jim says they will look at outsourcing the whole thing, in which case I would hope they wouldn't need to pay for such an extensive, and expensive, staff.
 
7. This, of course, is the $100,000,000 question, isn't it?
 
David
 
---------------------
 
 
From: David Kulp <dkulp at dizz.org>
Date: August 26, 2015 6:45:49 AM EDT
Subject: Re: FW: Otis Wired West withdrawal
 
Re Scott's question about drops for all or only subscribers:
 
My understanding is that WiredWest's position has been that capital should only go to those residents who want service. Everyone expects that most residents will take service given the opportunity, but there will be some who will choose to be skipped - presumably because they are content with nothing or what they currently have. If you wait until a later time after the trucks have rolled through your neighborhood, then you must pay a potentially high price (several $1000) to receive a drop. This has the advantage of encouraging more people to subscribe for service, while saving some capital. Folks in my town who are concerned about the high borrowing cost like this idea because taxpayers aren't paying for connections that aren't used. And those who are eager to see money come back to the town also like it because they want to maximize the take rate as early as possible.
 
"Pre-subscribe" is used ambiguously in the Otis summary. We aren't talking about only residents who signed up as backers through the Fiber Town campaign to reach the 40% goal. That campaign was indeed to show demand and good for the model makers. Here we are better just using "subscribe". If you sign a contract for service before the drops are made in your town, then installation is free.
 
It's my experience that Jim Drawe has mentioned this whenever he enumerates why the not-to-exceed capital cost is a conservative estimate.
 
All that said, I believe that this is a negotiation position with MBI. They ultimately may say that the regional design model requires a drop at every premise, whether the resident is ready to take service or not.
 
David Kulp
 
----------------
 
From: Craig Martin <cmartin at chem.umass.edu>
Date: August 26, 2015 10:15:43 AM EDT
 
The last two threads at the bottom explain some of the misconceptions apparently floating through Otis.
 
The Otis critique states that WiredWest will subcontract out all services and at the same time says that there will be numerous six figure salaries. As noted by David Greenberg, the latter assumes that WiredWest does not subcontract out the major services. If WiredWest ultimately decides to subcontract, then substantially less staff will be required. Jim Drawe has made all of this abundantly clear. Similarly, by including high salaries in the model, Jim is being conservative. When people are brought in, the Board may choose to offer lower salaries (it will be the Board’s call, not the model’s). Had Jim included low salaries in his modeling, he would have rightly been accused of cooking the books to make the model look good. Responsible modeling is not necessarily good politics. I’m glad that Jim has chosen the former, but it does create an opening for critics.
 
While Otis is a large town, a large fraction of those homes are seasonal. I’ve always worried how “profitable” those units will be (they’ll want reduced (or zero) rates while not occupied - this has also been discussed extensively in Board Meetings). Indeed, WW would compensate Otis fully for its bond payments, while many homes would be only partial subscribers. It may well me that the impact on WiredWest’s net “profit" is smaller than it appears.
 
The issue of whether only those who commit get the final drops has been debated extensively by the WW Board. Including drops to every premise, presusubscribed or not, has been seen by many as the “Cadillac option.” As in Leverett, everyone subsidizes expensive drops, even if those drops won’t net revenue. Richer towns (and richer homeowners, with long drops) like it, poorer towns (and homeowners with easy drops) don’t. There has certainly been a split within the Exec Comm, as well. In the end, I can see either option being the “right” path. I’m OK with the current plan.
 
Almost certainly what has happened here is that someone like Crocker (likely Crocker?) has gone in and sold them on the idea of going it alone. Clearly Crocker will try and pick off the larger towns.
 
I think that down the road, Otis may come crawling back to a very successful WiredWest.
 
Craig
 
 


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