! Austin, Minnesota.! Ultra-broadband Feasibility Study March 27, 2014!!!

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1 Austin, Minnesota Ultra-broadband Feasibility Study March 27, 2014

2 Table of Contents Page Summary of the Results... 3 Scope of Work for the Project Section I Basic Research A. Business Interviews B. Incumbent Providers C. Competitors Prices in Austin D. Pricing Strategy E. Marketing Strategy Section II Preliminary Engineering A. Active versus Passive Fiber Networks B. Network Design C. Austin Specific Network Assumptions D. Using Existing Assets Section III Financial Business Plan Analysis A. Business Plan Key Assumptions B. Business Plan Results C. Financing Options D. Best Business Model Section IV Other Issues A. Legal and Regulatory Issues B. Benefits of Broadband C. Time Line Addendum I The Technology A. Comparing Existing Broadband Technologies B. The Future of Broadband Technologies Addendum II Maps for Wireless Broadband Page 2

3 A. Maps Page 3

4 Summary of the Results of the Study and Dain International submit this report of our findings and recommendations concerning the creation of a broadband network in Austin. OVERVIEW The results of our analysis show that there is a reasonable expectation for a fiber business to be successful in the community. We recommend that if the community has the financial and leadership capacity to build a fiber optics system to every home and business in the City of Austin and the Austin Public School District it would be well advised to do so. It will be one of the most important steps you can take to securely underwrite the economic, educational, and health future of the community. Fiber today is the equivalent to building railroads in the nineteenth century and electricity in the twentieth century. In the United States community-wide fiber optics is happening community by community. Fiber is not generally being built by commercial firms except those communities lucky enough to be selected by Google or Verizon FiOS. If the Austin community can t find a way to build fiber it is very unlikely anyone else will ever build it here. There is a new digital divide in this country and it is one where urban areas, like the Twin Cities get the latest technology and the fastest broadband while rural cities have technology that is several generations old and delivers far less bandwidth. There is a secondary digital divide between cities like Austin and the rural areas surrounding them, which in many cases still suffer with dial-up and satellite as the only broadband option. In much of the Twin Cities both the cable and telephone companies provide newer and better technology. Comcast has cable modem service there up to 100 Mbps download and the telco has introduced DSL as fast as 30 Mbps. These speeds are far faster than what is available in Austin today. Our analysis shows that there are numerous financial scenarios that can be successful. We looked at scenarios for offering the triple play, for offering only data and telephone and finally at data only. In all three cases there are scenarios which have the chance to be reasonably successful. We also looked at numerous financing scenarios that include financing with bonds, with various commercial loans and using some or all equity. The method of financing has a significant impact on profitability of each scenario. Our financial analysis focused on the breakeven scenario, meaning that we calculated the percentage of residences buying services that are required for each scenario to pay for itself. The various scenarios varied widely and the breakeven percentages range from a low of 20% to over 60%. Experience in other communities suggests that there should be a very realistic opportunity to achieve a customer penetration rate of between 40% and 50%. Some municipal and commercial fiber networks have done even better. Nevertheless, we very strongly recommend that before you decide to move forward that you measure the public s desire for a fiber network using a canvass of all households. We suspect the demand will be higher than the breakeven number of customers required for most scenarios. Page 4

5 The report also demonstrates that fiber is the ultimate bandwidth technology and that there really is no alternative that can compete with it. Claims are made that wireless technologies providing fast bandwidth are an alternative but this is not the case. Verizon is a premier wireless provider and its CEO says the way we think about (fiber) is even though we have this great 4G mobile network, you still need to have fiber to the premises because we think your home will utilize a gigabit of bandwidth. Today in Austin there is scattering of fiber connections to the schools and some connecting the Austin Utilities and City of Austin government. Further, Jaguar Communications has brought private fiber to some of the larger businesses in the community. But nobody has brought fiber to residences or small and medium businesses in the community. The RFP made it clear that the next step is to bring fiber to all residences in the Austin Public School District within city limits and outside of city limits and to all small and medium businesses in the community. The steps that would accomplish that are outlined in this report. The report has presented a wide range of possible business structures that will work for a fiber business providing state of the art connection to all homes and businesses in the project area. We have analyzed the pros and cons of each alternative structure including a cooperative, a municipal venture, a for-profit corporation, a non-profit corporation and public-private partnerships. For various reasons we believe that the non-profit corporation fits the community s needs best, but the community is in the enviable position where all forms of ownership could be made to work. One thing fundamental for the success of any community fiber project is that there must be champions in the community, meaning a group of people who will embrace the results of this report and do all of the heavy lifting needed to bring a fiber project to completion. While outsiders can be hired to help along the way, community champions are needed to bring this from concept to fruition. Following are our specific recommendations: RECOMMENDATIONS 1. There are a number of specific steps that should be taken if the decision is made to move forward. Those steps are detailed at the end of the Summary under Next Steps. 2. We very strongly suggest a pre-sign-up sales and marketing campaign should you decide to get into the business. As can be seen by the breakeven penetration rates needed by various business plan models, it is not an automatic situation that the business by successful. While the required penetration rates needed to be successful are achievable, we strongly suggest that before you spend any significant money that you make sure that there are enough customers in the community that want to buy the service. Additionally, knowing the identity of the customers before designing and building the network will save money in the construction process. If the project has any component of debt financing the lenders will want some assurance that you are going to get enough customers. Page 5

6 3. We looked at both a wireless and a fiber option for the rural addresses within the Austin Public School District and we recommend the fiber option if the capital can be found to build it. While the wireless options costs $7.2 million less to build, the speeds that can be delivered are dramatically less than what can be delivered by fiber. Furthermore as has been seen by the existing WiFi network operated by Austin Utilities, wireless is not as reliable as fiber and would also have to be upgraded and maintained more often. If you do build a wireless system we recommend using the 3.65 GHz spectrum. This is a licensed spectrum but is available for this kind of purpose that will avoid some of the interference issues associated with building a standard unlicensed WiFi network. 4. We looked at various business structures and our preference, in descending order of preference would be to organize as a non-profit corporation, a cooperative, a for-profit corporation or a municipal entity. A non-profit corporation offers the most flexibility on what to do in the future with profits. A non-profit corporation can have various parts of the community on its board and can easily represent the whole community. According to the City Attorney, the Austin community already has experience with contractual arrangements with non-profits serving community interests. A cooperative is our next choice because a cooperative is owned by all customers on the network. However, the downside to a cooperative is that it is more difficult to use profits of the business for wider community benefits. Plus, in some cooperative structures the investor entities that supply the initial funding for the project have lesser say in how the business is operated than one would expect by the size of their investment. We rank a for-profit entity next due simply to the added burden of having to pay taxes. We are not tax experts and there might be versions of for-profit ownership that could be acceptable, so this option would require more analysis. Finally, the downside to municipal ownership is that municipal financing is the most expensive way to fund a business. Our analysis shows that this network would be difficult to launch with all bond-financing and that a municipal venture would need the infusion of equity to work. 5. If a decision is made to build a fiber optic network in Austin the new network will need to attract users with better services, better customer service and reasonable prices. Specifically we suggest the following pricing strategy if you decide to get into the business. First, we think the Charter telephone rates are so low that the best strategy is to match their prices. On cable TV the business should offer very modest discounts because the margins on the cable product are so slim that a new business can t afford to give much of a discount. On high-speed Internet we recommend setting rates at or just below current rates but give gigantically faster speed to customers for the same price. The biggest advantage of a fiber network is data speeds and the business should offer products up to 1 gigabit per second download. We recommend an overall strategy which builds on the chief strengths of an ultra-broadband network which is the huge capacity of the network Page 6

7 for economic development, health care home services, education uses and all other home and business uses. FINDINGS We report the following findings: 1. The financial business plan analysis makes it look feasible to operate a fiber business in Austin. We focused our study on looking at the breakeven penetration rates needed at various options and the percentage of customers you need to make the business pay for itself vary widely. Breakeven is defined as the lowest percentage of residential data customers needed for the business to be self-sustaining in terms of cash flow. Following are the results of our analysis for various financing options and for different product mixes: Triple No Data Play Cable TV Only Revenue Bond 46% Does Not Work General Obligation Bond 40.5% Does Not Work Normal Bank Financing 40% 46.5% 65.0% $5 Million in Equity 39% 49.0% 61.5% $20 Million in Equity 29% 35.0% 44.0% $35 Million in Equity 18% 20.0% 28.0% It s quite obvious that the breakeven penetration rates vary by the method of financing. There are various reasons for the difference including the up-front costs of financing, the interest rate charged on debt and the terms of any loans. We would judge all of these various penetration rates to be achievable. To put this into context, it is our experience that almost any new fiber network that brings competition will get a 30% penetration rate from customers who do not like the incumbents. If this new network was to be locally owned and operated, then getting to a penetration rate in the 40% to 50% range seems reasonably achievable. This simple chart also demonstrates that there is a positive contribution to margin from both the cable TV and telephone business. If you take either of these out of the business plan the number of customers needed to break even increases. 2. The large entities in Austin already have access to fiber. There is a fiber ring jointly built by Austin Utilities and Austin Public Schools that brings fiber to Austin Utilities, various schools and some other city locations. Additionally Jaguar Communications has built fiber to some of the other large entities in town such as Hormel Foods and the Hormel Institute. Page 7

8 3. There are two incumbent providers today for voice, video and data services in Austin CenturyLink and Charter. The technology that both of them deploy for providing data service in Austin is at least several generations behind the kind of equipment that the incumbents deploy in the Twin Cities. It was the slow data speeds in the community that prompted this study, and the speeds you have are quickly falling behind a lot of the rest of the world. 4. The rural areas in the Austin Public School District but outside of the city limits have very few options for data, none of them good. Customers might be able to get DSL, but because they are at the end of the copper lines the speeds are very slow. Everybody else is limited to dial-up, satellite or using their cell phones for data. None of these are good options meaning that these areas can be considered as unserved with data. 5. Telephone rates are already competitive in the community due to competitive pricing by Charter. 6. Cable rates from Charter are very typical of the rates seen most places. They offer a decent channel line-up, but they don t offer all of the newest bells and whistles. 7. The biggest opportunity for building a fiber network is to bring very high-speed data to households. The data speeds offered by Charter and CenturyLink are significantly slower than the speeds that are available to customers in the Twin Cities. However, with fiber you can leapfrog to having the best speeds in the nation and you can offer speeds up to 1 gigabit per second. 8. Both incumbents and Jaguar have a policy of offering bundling discounts. They also don t always charge the same rates to everybody, so you can find customers in the community paying significantly different rates for the identical services. As anti-intuitive as it is, the customers who have been with the incumbents the longest pay some of the highest rates because the service providers provide incentive rates to new customers. 9. If you build a fiber network, Charter is likely to be your strongest competitor. In other competitive markets they offer very low-priced specials to keep customers away from the competitor. But your biggest advantage over Charter will be data speeds of up to one gigabit per second. 10. If you build a fiber network, then using a Passive Optical Network (PON) technology makes the most sense for the community. The alternative is an Active Optical network. The biggest difference between the two is that an Active network requires a single fiber to be strung to each customer while a Passive network will share one fiber with up to 32 customers. This greatly reduces the size of the fiber bundles that must be constructed. 11. There are 152 miles of streets in the City of Austin and they would need to have fiber constructed. There are 89 miles of roads in rural Freeborn County and rural miles in Mower County. We have estimated that 92% of these roads would need fiber. Page 8

9 12. For fiber construction we are recommending burying 50% of the fiber build. Today about 30% of the utilities in the city are buried with the rest on poles with some transition to underground planned. It make sense to bury the new fiber any place where it is planned to moved underground in the next decade since it s an unnecessary cost to put fiber on poles and then bury it later. 13. There were several different local estimates for the number of residential housing units and businesses. We ended up using an estimate of 10,600 housing units in the city, 1,767 in Mower County and 355 in Freeborn County. We estimated that there are 1,100 businesses in the city and 150 outside the city. 14. The dollar estimate for the cost of building the network varies according to how many customers the business gets. This ranges from $34.0 million at a 50% penetration rate to $35.6 million at a 65% penetration rate. 15. The network cost estimates include building fiber past all homes and businesses, the electronics needed to light the network, the cost of a new head-end building, the fiber drops and electronics at each customer, and the other assets it takes to operate a business such as furniture, computers, vehicles, etc. 16. The network costs are slightly conservative but are just a little higher than our estimate of the cost to build the network. Additionally there is a $2.2 million construction contingency built into the above estimates to be safe with our estimate. This contingency could probably be reduced if you were to obtain a second estimated cost of building the network. 17. We looked at the option of using aerial or buried cable in the rural areas. The net savings from using aerial fiber is about $1 million. We recommend burying the fiber because of lower maintenance costs, security of the network and longer life of buried fiber versus aerial fiber. 18. We also looked at the option of using wireless technology in the rural areas instead of fiber. There would be a trade-off between reduced capital dollars and reduced data speeds. The cost of the rural network would be $7.2 million less with wireless. But fiber can deliver speeds up to 1 Gigabit per second download while the wireless would deliver a minimum speed of only 10 Mbps with some customers getting a little faster speeds. 19. It would be possible for the incumbents to put in upgrades that would increase their data speeds. However, we see very few such upgrades being done in any rural communities by the large carriers anywhere in the country But if they decided to spend the money, then using today s technology CenturyLink could increase data speeds to about 40 Mbps download and Charter could get speeds over 100 Mbps. We find it unlikely that they will make the necessary investments to make those improvements, and even if they did these are still far slower speeds than are available today on fiber. Page 9

10 20. In our model we have assumed an electronics upgrade every eight years, which is conservatively a short time. What we are seeing today is that the vendors who are building fiber technologies are making them backwards compatible, meaning that it is likely in the future that you will be able to keep older customer electronics working alongside of newer units. This means that you should be able to phase new electronics in alongside older technology, meaning that you can keep older units working until they reach technical obsolescence and stop functioning. 21. We estimate that a fiber business will require 20 new employees to operate. 22. We believe the business plan estimates are conservative, meaning that is very likely that you will do better than our estimates. 23. We looked at the impact of financing the project in different ways including with revenue bonds, general obligation bonds, normal bank financing and finally a scenario that included even more equity than normal bank financing. What we see us that there is a big difference in the cost of the project under various scenarios. For example, it would require a $45.7 million dollar bond to finance the project with revenue bonds. It would cost $43.0 million to finance with general obligation bonds. A normal commercial loan would require a $10 million equity infusion and a loan of $29.8 million. If you were instead able to raise $20 million of equity, the loan would drop to $18.1 million. If the funding were found to do this without debt then the cost at a 65% penetration would be $35.0 million. 24. At penetration rates of 50% and higher all of these business plans generate significant cash over time. For businesses that carry debt it s not unusual that cash cannot be taken out of the business until the debt has been retired, so a natural use for cash is to use it to retire the debt early. After that excess cash could be used in many ways. If the business structure is a cooperative some of the cash could go to patrons as dividends. Some of the cash could be used to expand the footprint of the business or to add additional products and services. Under some ownership options, cash could also be given back to the community in various ways. 25. There are ways to get assistance in funding a project. Today there are only a few modest grant opportunities, but even a few million dollars in grants would help to pay for the project. There is a bill in front of the current Minnesota legislature that might bring a little more than that. Help is also available in a number of places in the form of loan guarantees that can get lower interest rates for the project and also lower the risk for banks to lend to the project. 26. You have many options on the business entity type to use for the business. If the business was funded by bonds it would have to be part of the City of Austin or Austin Utilities. Other structures include formation as a cooperative, as a for-profit corporation and as a non-profit corporation. We have discussed the pros and the cons of each of these options in the report. 27. The rule of thumb in the industry is that it takes roughly 18 months after the day that the project is financed before you can serve your first customer. However, in Minnesota construction of Page 10

11 fiber networks is generally only done in the summer construction season, so any timeline must pay heed to the seasonality issue. NEXT STEPS If you decide to move forward, following are some of the key next steps that come next beyond this report: 1. Choose the Type of Entity. Choosing between public or private, profit or non-profit or cooperative. 2. Determine Who Will Lead the Effort. The RFP for this study has been undertaken by a Committee. But it has been our experience that if you move forward that there will need to be a person or small team at your end who takes on all of the responsibilities of moving the process forward. Even if you decide to get external assistance to launch the new business there are a lot of decisions to be made and effort needed in Austin. 3. Find the Money. If it looks like there is a consensus to move forward, then the effort should be undertaken to find the money needed to build the network. This could be a little effort or a lot of effort and will probably require outside financial and legal advisors. 4. Consider a Second Engineering Estimate. The capital expenditures are the largest cost of getting into the business and you might want to get a second estimate of those costs. Such an estimate should cost less than what we charged because we have already been able to quantify some of the facts needed to make the estimate, such as the number of road miles in each area and the customers passed. 5. Make Yourself Comfortable With the Viability of the Business Plan. The most important result of the business plan is the calculation of the breakeven number of customers needed to make the business viable. For whatever option you end up choosing you need to make yourself comfortable that you can get the customers needed to at least break even. As discussed in our RFP response, telephone surveys are no longer very reliable as a way to predict the whole community. So you might want to consider a pledge card drive or a total canvass of the potential customers as a way to feel secure that the business will be a success. 6. A Few Operational Decisions are Needed. Before the project would go to financing there are a few operational issues that need to be decided. For example, one thing to consider is of you want to operate the business entirely with your own employees or consider bringing in an outside firm to operate the business. There are also decisions to be made about how to offer cable TV should you build your own head end or find one elsewhere to use? Should you offer a fully competitive cable television package or just a medium package? Page 11

12 7. Prepare a Final Business Plan. As you start making decisions on exactly how the business is going to operate you will want to update the financial business plan to reflect any changes in assumptions. It s not unusual to revise it several times before it is final and the business is financed. 8. Get Help Where Needed. We hope that one of the reasons you chose and Dain International is our experience in helping fiber businesses go from concept to reality. We would be glad to make a proposal to help you with any of the required ongoing tasks. We have experience in all of the next steps that are needed to get the business started. Page 12

13 Scope of Work for the Project The Citywide Technology Committee of Austin engaged ( CCG ) and Dain International to study issues associated with building and operating an ultra-broadband network in the City of Austin and rural addresses within the Austin Public School District but outside of city limits. In its Request for Proposal the scope of work for the project as follows. Scope of Work 1) Provide an overview of the current providers: their services, marketing bundles, pricing strategies and coverage. Establish a pricing strategy for the feasibility study. 2) Pre-Engineering a) Pre-engineering study(s) at sufficient depth to estimate costs and approximate implementation timeframes for full ultra-broadband network. b) Determine if existing infrastructure can be leveraged. c) Recommend the best ultra-broadband technology to deploy. d) Assess the backhaul primary and redundant connection options. 3) Financial Business Plan a) Establish a market penetration rate needed for a successful ultra-broadband network. b) Clarify which benefits / services might be most important to the residents, businesses and organizations of Austin. c) Describe options for financing including bonds, public/private partnerships, Minnesota state sources, USDA RUS and other funding sources. d) Compare impact of public ownership and operation versus public-private business partnership to own and operate the network. 4) Legal Issues. Assess the legal requirements, risks and regulations relevant to building and operating an ultra-broadband network. Review city, state and federal regulatory requirements. To meet these objectives we took the following steps: We conducted interviews with key players in the market including the City of Austin, Mower County, Austin Public Schools, Riverland Community College and numerous businesses. We analyzed the products and prices of existing providers in the community. We examined pricing strategies the community ought to consider for a FTTP business and recommend prices to use in the feasibility report. We performed a high-level engineering design of a fiber-to-the-home system that can deliver the triple play (Cable TV, data and telephone) to the businesses and residences in the community. Page 13

14 We developed several versions of financial business plans to determine if there is a viable economic model that would work for bringing broadband to the community. We analyzed various ownership options for how the community might offer service directly or partner with others. We looked at legal issues that must be considered. We examined ways the community can get the project financed. We summarized our findings into key points and then make very specific recommendations on the next steps for the project. Page 14

15 I. BASIC RESEARCH In this section of the report we will look at the results of the research done by CCG. Specifically in this section we will cover the interviews with businesses, the products and prices of existing service providers in the market, and a strategy for the pricing of products. A. Business Interviews Doug Dawson of CCG talked with various large data user in the community. This included some large businesses, the various governments, Austin Utilities, the Austin Public Schools, Riverland Community College, the Hormel Institute and Mayo Clinic Health System Albert Lea Austin. These entities were volunteers and the results of these discussions were not intended to serve as a random sample or statistically significant survey. Rather, our goal was to find out several things. First, did larger businesses in the community have broadband available to them today? If so, were they getting the kind of broadband they need to operate their business? As in any community, there are a handful of large businesses but most businesses are small to medium businesses. But the biggest businesses are always of interest because they can be very large anchor institutions for a broadband business. We found out several things in our conversations: First, Austin Utilities, the Austin Public Schools and some government locations are connected by private fiber they have constructed. With their own fiber they have more or less unlimited bandwidth available between locations, and so there is no possibility of charging them to connect their various locations to fiber. All of these entities do purchase external connectivity to the Internet and there is the potential for competing for that business. Jaguar Communications has built fiber that connects some of the other larger businesses in the community. Places like Hormel Foods and the Hormel Institute are already connected to Jaguar Fiber. We believe that most or all of the other small and medium business in the community have access to broadband in the form of DSL or cable modem. This makes Austin different than some communities where there are businesses without decent broadband alternatives. This is not to say businesses are getting the bandwidth they subscribe to, an issue that will be discussed elsewhere in this report. The larger businesses in town use fiber connectivity for a broad array of purposes. They use fiber to connect to remote branches of their business. They use fiber to back up corporate data in more than one location. They use fiber to provide Voice over IP (VoIP) service between different business locations. We drew several different conclusions from the conversations we had with businesses: Page 15

16 The fact that there is already a private fiber used by Austin Public Schools and Austin Utilities means that a new fiber network could not automatically count on these kinds of businesses as anchor tenants. In many communities the ability to connect schools and utilities provides a significant revenue stream that supports the whole business to improve the ability to be profitable. A new fiber network would be a direct competitor with existing fiber built by Jaguar. Jaguar fiber runs past many of the larger businesses in town, and many of those larger businesses already have fiber connectivity at a decent price. This means that there might be some future business available at the larger business in town, but it would be in direct and heavy competition with Jaguar. Bottom line is that the larger businesses in town already have fiber and cannot be used as a reason to build a fiber network. There is still a substantial market for providing faster data to the many medium and smaller businesses in town that are not connected to fiber today. Those businesses are using DSL or cable modems and a fiber network could provide them with much faster data speeds at lower prices than what they pay today. B. Incumbent Providers There are two incumbent providers today in Austin CenturyLink and Charter. Charter offers the triple play while CenturyLink offers voice and data over their wires and bundles with DirectTV for cable service. Additionally, DirectTV and Dish Networks offer cable services directly in the area. Finally, there is one competitive provider Jaguar, in the market. CenturyLink Telephone service is provided in Austin today by CenturyLink. CenturyLink is a telecom company based in Monroe Louisiana that purchased Qwest several years ago. Qwest, which was formerly Mountain Bell was part of the Bell Telephone system. CenturyLink is a publicly traded company and is the third largest telco in the US. CenturyLink has projected annual revenues of over $16 billion in The company has around 7 million telephone subscribers, 6 million high-speed Internet customers and 150,000 cable TV customers a new line of business. As the incumbent provider, CenturyLink is considered as the provider of last resort. This means that CenturyLink is required to serve all residential and business customers for basic local services, and it must provide facilities to all customers. The rules that govern the way that CenturyLink serves customers in Austin are embodied in their General Customer Services Tariff, which is approved by the Minnesota Public Utilities Commission. This tariff contains all of the regulated products and prices, along with the terms and conditions under which CenturyLink will sell them to customers. The tariff sets forth rules for such customer service procedures as the manner and amount of customer deposits, the rules by which they will disconnect service for nonpayment, and the rules by which they will reconnect Page 16

17 service. We d note that a recent trend is to get states to deregulate many services as competitive and take them out of the tariff and the Minnesota tariff has had many products removed in recent years. As a telco CenturyLink sells the full range of residential and business voice services. CenturyLink also sells data products. They sell traditional TDM voice services based upon multiples of T1s. They also sell high-speed DSL service. In recent years CenturyLink has invested significant capital in improving data speeds in metropolitan areas. But in Cities like Austin, for the last decade CenturyLink has provided DSL speeds of between 1 Mbps and 3 Mbps. CenturyLink has been upping those speeds in some markets by installing new DSL equipment. For instance, in some parts of the Twin Cities CenturyLink now supports DSL products with speeds up to 25 Mbps. DSL speeds are advertised in terms of up to speeds and customers can get slower speeds than the speeds advertised. Some of the factors contributing to slower speeds include the distance the customer us from the CenturyLink central office, and the age and size of the copper wiring in a neighborhood. CenturyLink also builds fiber to some business customers and can sell a large range of vary fast data products to fiber-customers. CenturyLink has recently gotten into the cable TV business and they are delivering cable over bonded pairs of copper using IPTV technology. They market this new product under the name of Prism and the product is very similar to the AT&T cable product. Today this product is only available in a handful of major markets, but the company has plans to make the product available in all large markets within a year. There does not seem to be any announced plans yet for CenturyLink to bring Prism to any smaller markets like Austin. In most of the US CenturyLink partners with DirectTV for cable. The CenturyLink technicians install the satellite service and CenturyLink bills for the DirectTV on the telco bill. They also give a bundling discount, making it cheaper to buy cable through CenturyLink than buying it direct. Charter The DSL technology used by CenturyLink is described in detail below starting on page 50. Charter is a large cable TV provider based in Stamford, Connecticut with 4.1 million current cable customers. The company also has 4.3 million high-speed data customers and 2.2 million voice customers. Charter has annual revenues of over $8 billion. In July of 2013 the company purchased Bresnan Cable. Until recently the company has had financial problems. The company entered a structured bankruptcy in March 2009 and it took a number of years for that restructuring to be completed. During that time the company was not making a lot of investment in its network, and so in many markets they fell behind the competition. The company is now out of bankruptcy and is catching up. In many markets the company has converted the cable technology to all-digital which allows for much faster data products. These changes have been promised to all major markets. In many markets the data speeds they are marketing have been increased Page 17

18 up to 60 Mbps download. I cannot tell in the press releases, though, if these kinds of upgrades are going to come to the smaller markets like Austin. Charter is also now aggressively pursuing a growth strategy and very recently made an unsuccessful offer to buy the much larger Time Warner Cable, which has 14.4 million cable customers. Interestingly, the fact that Charter was in financial trouble for so many years, meaning that they have a large accumulated tax loss, made the deal attractive to Time Warner share owners. Though Comcast has outbid Charter for Time Warner, one can still expect Charter to try to grow through acquisitions. Charter is the third largest traditional cable TV company that provides service over a hybrid fiber-coax system. Customers are served at the home using coaxial cable. Charter is a major provider in Minnesota and has customers throughout the state. Charter still does not support voice services in all of the Minnesota markets, but does offer voice in Austin. Charter has been criticized for poor customer support and frequent billing consistency issues. In the 2013 customer satisfaction survey done by Temkin, Charter ranked dead last in the ranking of 235 large companies that included not just cable, but other industries. It is worth noting that all of the large cable companies had poor ratings with AT&T, Cox, Comcast, CableVision and Verizon all ranking at 222 or lower. DirectTV The cable modem technology used by Charter is described in detail below starting on page 53. DirectTV is one of the largest cable providers in the US with over 20.1 million customers at the end of the third quarter of The company has annual revenues in excess of $27 billion. The average customer bill on DirectTV just passed the $100 mark. The company also partners in other markets with other large telcos like Verizon and AT&T. In Austin the primary presence of DirectTV is as part of a bundle with CenturyLink, but customers are free to subscribe directly to the service. One would imagine that outside the city limits that most homes have satellite cable. Dish Networks Dish Networks is the other satellite provider who probably has customers in and around Austin. The company has over 14 million customers nationwide and annual revenues of over $14 billion. The company has average customer revenues of $81 per month. Jaguar Communications Page 18

19 Jaguar is a regional privately-held communications provider that serves various towns in Minnesota. The company started a decade ago in Owatonna, MN and has grown to provide services in a dozen Minnesota communities. The company services some customers in the city with DSL technology using copper lines leased from CenturyLink. However, Jaguar has also built some fiber to service customers directly. In Austin Jaguar has a fiber that runs through the city and that connects to several large businesses. C. Competitors Prices in Austin In this section we review voice, video and data prices available to customers today in Austin. It used to be very easy to analyze the prices that people pay for services. Just a few years ago you could go to the web and find the prices charged by any telco or cable provider, and except for the rare special, most customers in a given town paid about the same thing for service. But this is no longer so. Most telco providers have removed their standard prices from the web and so there is no baseline cost you can compare to. Further, companies have developed strategies to freely charge different rates to different customers. CCG had asked for copies of customer bills as part of the study, and looking at those bills confirmed our belief that we would find prices all over the place in the community. The way the carriers price products is almost anti-intuitive. The customers who have been with them the longest and are loyal tend to pay the highest prices because they have gotten rate increases over the years and no special deals. Brand new customers pay the lowest amount and the carriers all have specials that are good for one or two years as an introductory price for first-time customers. These special prices are what you find on the web sites for these companies and these low prices do not reflect what most customers pay. In between are customers who have somehow negotiated special prices. This is a fairly routine occurrence. For example, when a new customer s contract expires and they get charged a much higher price, a call to customer service may result in a price that is somewhere in between the original special price and the higher price paid by older customers. Pricing is further complicated due to bundling discounts. CenturyLink, Charter and Jaguar all have bundling discounts that apply when customers buy multiple services. These bundling discounts maybe levied in addition to any special pricing. And bundle discounts vary as much as the regular pricing. In the bills we sampled I saw bundling discounts for Charter vary between $10 and $30, and so the discount varies according to when a customer connected and the deal they negotiated at the time. This means that prices vary widely in the community, even with customers of one provider. There are Charter customers in town who pay significantly more or less than other Charter customers who have the same exact product mix. So in the pricing discussion below I am going to report what I found in pricing, but with the caveat that prices can and do vary significantly from these standard prices. Page 19

20 CenturyLink CenturyLink is the incumbent telephone company. Historically the telephone rates they charged were filed under a tariff on file at the Minnesota Public Utilities Commission. A few years ago every telephone customer in Austin would have been billed exactly the same rate for the class of service they were using (residential and business rates are different). We would have been able to look at bills for Qwest at the time and would have seen the same rates for every resident. But CenturyLink now has bundling discounts and they also run specials, and so you will be able to find different telephone rates in town. Because telephone is so competitive, the tariffed rates are now generally viewed as the highest rate that CenturyLink can charge and there will be customers paying less than the tariff rate. The regulated telephone rates contain several components. First the base telephone rate. This generally includes just a plain telephone line with no extra features. Telcos have traditionally then sold features a la carte or in some sort of packages. CenturyLink also charges something called the Subscriber Line Charge (SLC). This fee in Minnesota is currently at $6.50 per telephone line per month. Customers often assume that this fee is some sort of tax, but the revenue from this charge goes to CenturyLink just like the base rate. This charge was originally created in the 1980 s. At that time the telcos charged a substantial fee of about one cent per minute for long distance carriers to use the local wires. This fee is called an access charge and the specific access charge was called the carrier common line charge intended to pay for the wires. Starting in the 80 s the FCC ordered this access charge to be lowered each year and eventually eliminated in one of many steps they took to get cheaper long distance rates in the country. Telcos were allowed to transfer some of this lost revenue to customers in the form of a SLC charge and this rate has remained on customers rates since then. But again, this is local revenue for the telco, and so if there is a $20 local rate and a $6.50 SLC, the real local rate is $ This is important to understand because if Austin gets into the phone business they would be competing against the combined price of the two elements, not just the base rate. Finally, there is a new local access element that is similar to the SLC called the Access Recovery Charge or ARC. This fee is similar to the SLC and was just created a few years ago. Starting in August 2012 telephone companies are going to phase out terminating access charges. These are the fees they charge long distance carriers from terminating a call to their networks. As those revenues are being phased down the telcos are going to be allowed to transfer some of that loss to the newly created ARC charge. The maximum ARC charge for now is $1.00 per month per line, but this will get larger over time. Carriers have the option of adding the ARC charge to their existing SLC charge or else showing it separately. Almost everybody is combining this with the SLC. Again, the ARC element is revenue for the telco and is not a fee that is paid to somebody else. The telco bills and keeps the ARC revenue. Finally, there are a large numbers of features that can be added to a telephone line. There are dozens of these features in the CenturyLink tariff, but only a few of these features are popular enough for many customers to buy them. The three most commonly sold features are voice mail, called ID and call Page 20

21 waiting. The telephone company sells these features a la carte or sometimes in large bundles, such as one fee for the ten most common features. Customers are less willing to pay for features today because they get all of these features for free with a cell phone and they are coming to expect the same from the telephone company. Historically the rates for basic telephone lines were in a tariff. This is a formal document that CenturyLink would prepare that would show the various rates that it charges to customers. The typical local tariff had hundreds of different prices for local products sold within the state. However, in 2010 CenturyLink was able to remove most of the prices from the tariff. This means that the state Commission in Minnesota has deemed the products to be competitive, meaning that CenturyLink is allowed to bundle products and charge different rates to different customers. It is useful to examine some older Qwest tariffs that applied before CenturyLink purchased Qwest. They had different rates for different parts of the state. But their basic rates were in the following range. This does not mean that these are the rates any longer and with a de-tariffed rate CenturyLink is allowed to charge whatever they want, within reason. The following rates were the last listing of the flat rate option, meaning a telephone line using these rates can make unlimited local calls. There used to be options available for customers who wanted to be able to make and pay for fewer local calls. Monthly Flat Rate Residential Phone Line $18 - $22 Flat Rate Business Telephone Line $42 - $45 PBX Trunk Lines $45 - $51 As mentioned earlier these rates do not include the Subscriber Line Charge. We think that rate is currently $6.50 for both a business and a residential line and would be added to the above rates. The rates also do not include the ARC charge. That is currently capped at $1 per month by the FCC and CenturyLink could be charging any amount up to and including the $1 rate. In addition to lines, the tariffs included a number of features that were sold on an a la carte basis. CenturyLink also sold these in bundles and packages. Some of the most commonly purchased features are call waiting, 3-way calling, voice mail and caller ID. CenturyLink offers dozens of features and they range in price from $2.95 to $8.50 per feature for residential service. These products are also now detariffed and CenturyLink can charge whatever it likes for these products. Long Distance CenturyLink sells long distance. But customers have also been free for decades to buy long distance from somebody else. Long distance used to be a major residential product, but today the majority of people make long distance calls from their cell phone since those calls are generally included in most cell phone packages. Buying long distance from CenturyLink was always the most expensive option for Page 21

22 households and anybody with significant long distance calling probably used or uses somebody else for the product. CenturyLink DSL CenturyLink sells high speed Internet using DSL technology. They sell both a bundled DSL product, meaning that you purchase it along with a telephone line and also a Pure product, meaning a customer can buy just DSL. As discussed above, CenturyLink has a lot of specials, and so there are special rates available on the web today for a new subscriber as well as older rates for those not on a special plan. Following are some of the rates charged for residential DSL. I say some of the rates, because there are certainly going to be customers in the market on older specials that have different rates than these. Note that the quoted speeds offered by CenturyLink DSL are best effort speeds, meaning they are not guaranteed. Residential DSL CenturyLink advertises three special DSL products on their web site currently. These are bundled prices that assume that the customer also buys a telephone line at the full regular price. Bundled Pricing Fast From 786k to 3 Mbps Download $14.95 to $24.95 for a one year contract $39.95 Regular Pricing Faster From 7 Mbps to 12 Mbps Fastest Over 12 Mbps $29.95 for 1-year contract bundled with DirectTV $39.95 Regular Pricing $29.95 for 1-year contract bundled with DirectTV $39.95 Regular Pricing It is the case that the specials on the web change all of the time, and so by the time this report is issued these specials might have changed. The specials are marketing prices aimed at attracting new customers. All of these products include $6.99 per month for a CenturyLink DSL modem. Customers can obtain their own compatible modem to avoid the fee, but the web is full of cautionary tales of customers who were unable to get compatible modems to work for them. Pure DSL Pure DSL is CenturyLink s name for a DSL line that is not bundled with telephone or DirectTV. The CenturyLink web site shows the following current prices for Pure DSL. A customer must sign a two-year contract to get the discounts. There is one price for the first year, a higher price for the second year, and after that the customer pays the list price: Page 22

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