A New Way to Finance Fiber

I recently was part of a team that brought the financing to build fiber in Dallas, Oregon. The new fiber business is operating under the name Willamette Valley Fiber. Dallas is a community of over 15,000 located near to the state capital of Salem. As the title of this blog suggests, this project was funded in what I am sure is a new way for the industry.

The funding uses what might best be described as private activity bonds. This are municipal-like bonds that are distributed in the public bond market. In this case the bonds, and the network, are owned by a non-profit corporation. The primary benefit to this financing structure is that the City doesn’t have to go onto the hook for the new debt – something that many cities are reluctant or unable to do. Building fiber networks is expensive and many cities are unable to tackle the size of the needed debt. In this case, the City of Dallas, while thrilled to be getting the fiber network, is not associated with or a party to the bond financing.

If there is any one hurdle to the financing structure it’s that these are pure revenue bonds – meaning that they only are supported by the revenues of the project. There are no backdrop guarantees by a City or anybody else to support the bonds if the project doesn’t perform as expected. That means that any business plan funded this way must be solid and conservative to make sure that revenues will cover costs. That leads to a few key characteristics for a project to be funding in this way:

  • Bond financing generally will have higher up-front costs than other kinds of financing, but they are usually offset by lower interest rates. The high up-front costs mean this kind of financing is only cost effective for projects the size of Dallas or larger.
  • It’s essential that there are no cost overruns from construction because there is no party, like an underlying City, that can step in to make up for any cash shortfalls. This means that engineering must be done before funding, and that a design-builder must be found that’s willing to build the network for a guaranteed price. This means tying down not only fiber costs, but the costs of drops and electronics.
  • It’s also mandatory to understand the community, and that means doing surveys and other market research to make sure that the community is receptive to buying from a new fiber network. It’s easy to just assume that fiber sells, but one of our products at CCG Consulting is doing surveys and we’ve seen major differences from market to market, sometimes even within the same region.
  • It’s also mandatory to have a cost structure that minimizes expenses. The best way to do that is to find an ISP operator who’s already successfully operating a fiber business. There are significant expense saving when an ISP opens an additional market. The fiber business is largely an economy of scale business and there are huge benefits to an operator for spreading joint and common costs across an additional market.

This means that the best structure for this kind of financing is to find an existing ISP willing to tackle operating the new market. That operator will benefit financially by allocating costs to the new market, and the new venture benefits by lower costs. As an example, if an ISP opens up a new market that doubles their size, the cost for something like the salary of their CFO effectively is halved for the original business as half of the CFO’s cost is allocated to the new market. The new market benefits by getting a CFO for half of the cost compared to hiring one.

In Dallas the operator is MINET, a municipal ISP that is owned jointly by the nearby cities of Monmouth and Independence Oregon. MINET has been effective as an ISP with a market penetration in their own markets of nearly 85%. The Dallas expansion offers the opportunity to double their customer base, meaning that they can allocate a high percentage of existing costs to the Dallas venture – a win-win for both parties.

Our team is interested in developing more fiber ventures that meet the above criteria. I’d like to hear from communities that want fiber and that already know of a nearby quality ISP that would be interested in operating the business.

I’m also interested in hearing from existing ISPs that can meet our criteria. We’re only interested in ISPs with a track record of success. An ISP can benefit two ways from such a venture – they can gain economy of scale and allocate a lot of existing expenses away from their current business. An ISP-operator also can benefit from profit sharing if the new venture is successful.

You can contact me at blackbean2@ccg.comm if you think you have a project that can benefit from this kind of financing.

See You in Austin

BBC%20Summit%202014pink_woDATE%20-%20regonline-HDerrel Duplechin of CCG and I will be in Austin this week at the Broadband Communities Summit. We will be putting on a seminar on Wednesday afternoon on the topic of Revenues Beyond the Triple Play. If you happen to be coming to the convention we’d love to see you at the session, or look us up.

I feel lucky to have gotten this topic to discuss. If you have been reading this blog you know that we at CCG feel strongly that every triple play provider should be putting energy into developing new products. The revenues we derive from voice are continuing to decline and cable TV is headed down the same path. The time to react to this eventual train wreck is now, while you still have the margins from those products, and not wait until your cash is squeezed.

Every triple play carrier is going to face a pretty simple choice at some time in the near future – either retract your company and become an ISP and sell nothing more than fast data pipes to your customers, or else start implementing new products to replace the sinking triple play products. If you choose to become a dumb pipe provider your future is really simple. You’ll need to strip out employees and systems and become a pure ISP and do nothing but provide the fastest pipe you can create.

If you elect to remain as a full-service provider you have a much more challenging task. No one or two or even three products is going to replace the revenues and margins you have been getting from voice and cable. Rather than have a few products that most of your customers buy, you are going to need a lot of products that only have a 5% to 10% penetration. There are no more big magic bullets. I offered to help one company look at their future was told that they would pay to have me come see them if I could tell them what the next big product is. That is exactly the wrong question to ask because there isn’t going to be one. The small carrier industry has frankly gotten a bit spoiled in that we had products that were relatively easy to sell. But those days are over and we are going to have to do what many other businesses do and scramble for every customer and every dime we can make

Both choices I have laid out are probably valid ones, and both are very different than what we do today. For instance, if you choose to be nothing more than an ISP you are going to have to dismantle most of your company and staff to stay profitable.  It can be done. and if you want a model of what that looks like look at the many WISPs in the marketplace today.

But if you choose the full service provider route what will you sell? There are a number of potential products you can sell today and many more coming in the future. Today you can consider products like security, energy management, home automation, wireless MVNO, IP Centrex and OTT Video. You can also do what we call crossing the threshold, meaning that you make a product out of having your technicians do whatever businesses need in the telecom and computer space. We know companies doing each of these products and they can all be moderately successful.

There are also a lot of interesting things coming. Home automation is the very first step of getting into the Internet of Things. This is going to quickly grow into areas like medical monitoring, crop monitoring, flock and herd monitoring. And mostly the things that are coming we haven’t thought of yet as carrier products.

The biggest challenge of transitioning to many new products is to figure out a way to be efficient with new product development. You can no longer take a year or two to put together a new product. You have to roll them out quickly and learn how to sell them efficiently. You will have to do this in-house or collaborate with other carriers. If you can figure this out you will probably thrive and survive. But if you don’t do anything and stay blindly on today’s path, at some point you will no longer be viable and will fail. Our industry has never faced such a divergent set of options and this is both a scary time and an exciting time to be in the business.