CLICK! CABLE TV. Alternative Business Models. June 17, 2015

Transcription

1 CLICK! CABLE TV Alternative Business Models June 17, 2015

2 AGENDA Review (Chris Robinson) Alternative business models (Doug Dawson) Further discussion and summary (Chris Robinson) 2

3 WHERE WE LEFT OFF Original vision for Click! was optimistic, placed emphasis on cable TV and committed to an unsustainable hybrid business model The hybrid business model has not been able to withstand business environment and consumer consumption changes Wired network no longer needed to support AMI industry shifted to wireless, as will Tacoma Power A recent review of network use indicates that Click! is responsible for 94% of total telecommunications costs Moss Adams confirms that the utility s updated allocation methodology is consistent with the current use of network Under the current business model, Click! revenues do not cover the cost of Click! services 3

4 STRATEGIC PLANNING HISTORY 2009 Limited Click! and ISP customer growth, stopped build-out of network Hired CCG Consulting to develop strategic plan 2012 Based on strategic plan, proposed that Click! compete with ISPs, offer cable and Internet 2013 Launched Plan B ISPs to grow customers CCG Consulting analysis of long-term business models 2015 CCG Consulting analysis of alternative business models 4

5 Alternative business models Doug Dawson CCG Consulting More than 800 telecommunications clients including over 100 municipalities Worked with cable and Internet companies across the nation Fiber-to-the-Home Top 100 by Broadband Communities Magazine Has been working with Click! since

6 Business Model Analysis Meeting with TPU Board June 17, 2015

7 Purpose of the Study To explore alternatives including: Status Quo (same as today). Accepting the lease. Wholesale only. Data only. Retail scenarios. 7

8 Summary After reviewing the results of all of the various scenarios I conclude that when considering the cash flows, the NPV of cash flows and the relative risk of each scenario that accepting the lease is the only financially sustainable scenario for Click! 8

9 How to Interpret the Study Results I concentrate on: Cumulative Cash Flow how much money is required to make it work over ten years. Trend in Cash Flow does a scenario ever become profitable? Net Present Value The value today of future cash flow. 9

10 Status Quo Looks at continuing the business like today. Provides a base case against which to compare all other scenarios. Assumed continued moderate growth of wholesale data connections to ISPs. Assumed continued loss of cable TV customers. Accumulated Cash Flow 2024 Cash Flow Net Present Value Status Quo $(47.0M) $(4.0M) $(37.7M) 10

11 The Lease Scenario Payment of $2M per year for 40 years, adjusted for inflation. Reduces staff to 6. Lessee must spend at least $1.5M per year on capital, and TPU has no future capital costs. Lessee takes over full maintenance of the network. Lessee will maintain open access for the ISPs. Lessee will offer lifeline video, data and voice product. This and all other scenarios do not include internal debt. Accumulated Cash Flow 2024 Cash Flow Net Present Value Lease $13.1M $1.6M $10.3M 11

12 Wholesale Only Scenario Exits the cable TV business. Continues to sell connections to the ISPs. Low staff scenario reduces staff to 27 through reductions and outsourcing, high staff scenario to 60 with no outsourcing (staff at 100 today). High revenue scenario ISPs continue to sell at same rate as today. Low revenue scenario ISPs lose customers when Click! exits cable TV business. Accumulated Cash Flow 2024 Cash Flow Net Present Value Wholesale-Only $(46.7M) - $5.8M $(5.2M) - $2.4M $(36.9M) - $3.6M 12

13 Data Only Scenario Exits the cable TV business. Sells retail data. Continues to sell connections to the ISPs if you compete with the ISPs (not if you buy them). Reduces staff to between 77 and 87. Accumulated Cash Flow 2024 Cash Flow Net Present Value Wholesale-Only $(58.0M) ($38.4M) $(4.4M) ($1.1M) $(47.4M) ($32.9M) 13

14 Major Assumptions in Retail Models Two versions of scenarios Buy ISPs or Compete with ISPs. Assumes one-time cost of $4.5M to buy all three ISPs and $2M to integrate ISPs into Click! And then two versions of each of those: Moderate growth grow data about the same rate as ISPs today at about 100 net new customers per month. Aggressive growth adds roughly 160 net new data customers per month. 14

15 Major Assumptions in Retail Models Penetration Rates: Today Cable TV is at 12.9% and the ISPs are at 16.0%. Assumes 141,100 homes passed. Data penetration rates grow to be between 21.2% (moderate) and 30.8% (aggressive) in the various scenarios. Click! has no history of retailing triple play services, but if Click! was able to perform like other overbuilders it would be able to achieve the expected penetration rates. 15

16 Major Assumptions in Retail Models Click! becomes retail ISP. Sales to business accomplished through new contracted door-to-door sales staff. Resale voice purchased wholesale. HFC Construction and Engineering costs are considered part of Click! Used newest allocations 94/6. Based upon current capital budgets. 16

17 Pricing Assumptions in the Models Cable TV Standalone customers same as today with annual 5.5% rate increases. Bundled customers get discount for bundle of $ Voice $13.50 residential local-only. $23.50 residential including unlimited long distance. Full suite of business phones available at competitive market rates. 17

18 Pricing Assumptions in the Models Data New $9.95 lifeline data product. Average price for residential data at $45 (includes charge for cable modem). Gigabit product priced at $75. Average revenue from business data (mix of products) is $85. 18

19 The Retail Scenarios Considers getting into the retail business and keeping the current staff levels (100 staff today). Scenarios include: Adding retail data. Adding retail data and voice (triple play). Triple play plus upgrading the network to offer Gigabit speeds. Triple play plus building citywide WiFi network. 19

20 Results of the Retail Scenarios Accumulated Cash Flow 2024 Cash Flow Net Present Value CATV + Data ($73.5M) ($46.3M) ($5.9M) ($1.5M) ($59.8M) ($39.3M) Triple Play ($59.3M) ($23.4M) ($3.4M) $3.1M ($49.2M) ($22.5M) Triple Play + Gigabit $(57.9M) ($17.2M) ($2.5M) $5.2M $(48.6M) ($18.4M) Triple Play + WiFi $(64.5M) ($27.9M) ($2.7M) $3.9M ($54.7M) ($27.4M) 20

21 Results of the Retail Scenarios All moderate scenarios (Buy ISPs and Compete with ISPs) perform worse than the Status Quo. Due in part to new bundling discount for Cable TV (assume 60% take bundle). But also incur new capital and expenses to get into the various business lines. All moderate scenarios all still are losing money by

22 Results of the All-in Scenarios In every case it looks better to buy the ISPs rather than compete with them. But buying the ISPs could be worse if you overpaid for the ISPs. Biggest difference is that when you compete you have to buy new cable modems for every customer plus you start the business with zero retail data and voice customers. But even buying the ISPs does not create a profitable scenario. 22

23 Upgrade to Gigabit Speeds Details of this upgrade included in separate engineering report. There are several reasonable paths to upgrade the network to provide a gigabit data product. The company has already reclaimed enough channels to be able to do this. Upgrade costs vary between $3.5M and $6.0M depending upon the specific scenario. 23

24 Upgrade to Gigabit Speeds Best Option: Overlay a DOCSIS 3.1 system while keeping the older versions of DOCSIS still running. You could migrate older customers over time to DOCSIS 3.1 and would be in no rush to do so unless at some point the older DOCSIS stopped being supported. In case any part of the network gets too busy to support the gigabit products, the easiest solution would be to just split the nodes that run into issues. Gigabit upgrade does not the whole business profitable. 24

25 Offer Citywide WiFi Details of this upgrade included in separate engineering report. We are currently at an in between time in the industry. Outdoor WiFi is migrating to Hotspot 2.0 which allows for WiFi roaming. None of the equipment on the market is fully Hotspot 2.0 compliant today and will require additional upgrades later. The older WiFi technologies are still available but obsolete. 25

26 Offer Citywide WiFi There are only a few makers of the gear today and it s incredibly expensive. It s really designed for busy hotspots like stadiums, shopping districts and other busy public places. We obtained current quotes of over $19M to implement in Tacoma. In our models we assumed a lower cost of $7M, assuming cheaper gear will hit the market in a few years. 26

27 Expanding the Footprint There are still about 28,300 residences in the Power footprint that are not passed by Click! You received a quote a few years ago to construct to 15,200 passings at a cost of $30M. That still looks to be a good estimate. Remaining passings without the HFC network are in apartments and condominiums where there is an exclusive contract with Comcast and Click! is not allowed in. 27

28 Expanding the Footprint Several issue to consider in expansion: Where do you find needed funds? It probably cannot be paid back just like the original investment If you are not in the retail business, this expansion would increase the losses. Even in the retail scenarios you should only consider expanding to neighborhoods where enough people agree to pre-sign for service (the new Google sales model). In any event, Click! should first get fully comfortable being in the retail business before contemplating this expansion. 28

29 Risks to Consider There are potential threats to the business over a ten-year horizon: If Comcast gets better. If CenturyLink upgrades. If somebody builds competitive fiber in the City. If there is a collapse of cable TV with no replacement. 29

30 My Conclusions The lease is clearly superior to all scenarios that continue to lose money for the foreseeable future. Wholesale Only. The certainty of the lease is more attractive than wholesale only. Only the most optimistic wholesale only scenario can produce positive cash flow. This scenario relies on the ISPs doing as well as today without having Click! as a partner in the CATV business, which is unlikely. It also requires a staff cut to 27 people which may be impossible to achieve. 30

31 My Conclusions Triple Play. The certainty of the lease is more attractive than the retail triple play options. Only the most aggressive scenarios have the potential to someday make more money than the lease, but they require a lot of subsidy to reach profitability and there is no assurance that Click! can ever achieve the aggressive sales goals. Success will also require being nimble enough to respond to future changes in the market and Click! is probably not capable of changing staffing or making the other changes that are expected of competitive companies to become and remain profitable in the future. The lease is the only financially viable option. 31

32 Contact Doug Dawson Doug Dawson, President CCG Consulting Ph: (202) Web: 32

33 Summary Chris Robinson Tacoma Power Superintendent 33

34 ALL SCENARIOS BUT LEASE REQUIRE SIGNIFICANT CAPITAL INVESTMENT FROM TACOMA POWER RATE PAYERS $40,000,000 Anticipated Capital Investment by Lessee PV at 5% Discount Rate ( ) $35,000,000 $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 Scenario Average $5,000,000 $0 Guaranteed Capital Investment Lease Wholesale Status Quo Data Only All-In Capital Paid by Tacoma Power Rate Payers Minimum Capital Paid by Lessee Anticipated Capital Investment by Lessee 34

35 ALL SCENARIOS BUT LEASE LOSE MONEY NET CASH FLOWS SCENARIO AVERAGES $4,000, $2,000,000 $- $(2,000,000) $(4,000,000) $(6,000,000) $(8,000,000) $(10,000,000) $(12,000,000) $(14,000,000) Annual Net Cash Flows $(16,000,000) Lease Wholesale Status Quo Data Only All-In 35

36 ALL SCENARIOS BUT LEASE LOSE MONEY CUMULATIVE NET CASH FLOWS SCENARIO AVERAGES $20,000, $10,000,000 $- $(10,000,000) $(20,000,000) $(30,000,000) $(40,000,000) $(50,000,000) $(60,000,000) Cumulative Net Cash Flows Lease Wholesale Status Quo Data Only All-In 36

37 OTHER IMPORTANT INFO Seattle Municipal Broadband Comcast rates in Tacoma vs. Seattle Click! rates vs. Comcast Click rates at breakeven points 37

38 MUNICIPAL BROADBAND - SEATTLE Municipal/retail data only Public-private partnership Consultant analyzed cost and feasibility $ million Would require 43% of market share and $75 monthly charge to pay for itself Major concern is ability to be competitive in market Determined building network is risky 38 Even the most successful municipal broadband utilities don t achieve that take rate, [City of Seattle Chief Technology Officer] Mattmiller said, referencing a reported 33 percent take rate in Chattanooga, Tenn. s widelycited municipal broadband network. When you think about the city trying to enter a competitive market as a third provider, (43 percent) sounds like a very high standard to reach. GeekWire,

39 39 COMCAST PRICING TACOMA

40 40 COMCAST PRICING SEATTLE

41 COMPARISON CLICK! TO COMCAST Click! Comcast Difference Broadcast TV Fee $0.00 $3.25 $3.25 Broadcast Service $22.49 N/A Digital Economy N/A $39.95 Standard Service / Digital Starter* $60.99 $57.99 $3.00 Click! ON Digital / Digital Preferred* $84.49 $75.99 $8.50 Click! ON 2 / Digital Preferred Plus* $ $ $0.50 EQUIPMENT AND INSTALLATION HD DVR Primary Outlet $14.00 $19.95 ($5.95) SD Receiver w/guide & VOD $5.50 N/A HD Receiver w/guide & VOD $7.65 N/A Installation $50.00 $99.00 ($49.00) 41

42 CLICK! BREAKEVEN ANALYSIS Cable TV Budgeted Without 2015 Increase Current Rate Per Month $99.40 $91.05 Breakeven Rate Per Month $ $ Per Month Increase Required $33.69 $42.66 Percent Increase 34% 47% - OR - 42 ISP Budgeted Without 2015 Increase Current Rate Per Month $23.77 $23.27 Breakeven Rate Per Month $50.48 $57.11 Per Month Increase Required $26.71 $33.83 Percent Increase 112% 145%

43 SUMMARY In all models except lease, subsidization would continue and possibly increase Current subsidy is $5.5 million 70% of customers do not support subsidization Tacoma Power business practice has been to avoid subsidies In all models except lease, Tacoma Power customers would need to fund capital improvements Click! has a competitive disadvantage Inability to bundle, capture market share no longer feasible Price differentials no longer exist Need to be nimble, fast-paced; government structure limits that ability Leasing is best for Tacoma Power customers 43

44 INFORMATION/DECISION TIMELINE June 17 June 23 July 7 Late July PUB Presentation - Public Outreach, Business Model Analysis Joint CC/PUB Presentation - Public Outreach, Business Model Analysis Joint CC/PUB Presentation - In-Depth Look at Click! Financials Joint CC/PUB Decision Leasing Alternatives Other Alternatives 44