CLICK! NETWORK DRAFT PROPOSAL March/April 2015
FORMATION AND PURPOSE In the early 1990s, Tacoma Power needed a telecommunications network for its electrical system Monitoring and control, real-time data, shorter power outages, connect to homes with smart meters No high-speed data services available TCI only cable provider no competition, high rates, high demand for cable at that time Business plan: build own infrastructure, offer cable and Internet service Launched Click! Network in 1997 2
HOW THE NETWORK OPERATES Internet Downtown North Hub Large Business NW Hub NE Hub Large Business Cable TV Head End SW Hub Downtown South Hub SE Hub Internet 3
GOALS 1998 Now Electrical system data, substations connected, faster restoration Smart meter program Competition in market Lower rates Better service Financial self-support Wholesale broadband Open-access network 4
GROWTH TREND 1998 TO 2010 Cable TV & ISP Customer Counts 30,000 Cable TV ISP Market share Strategic Planning 25,000 22.6% 20,000 15,000 16.0% 10,000 5,000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Cable TV 690 10,654 16,841 19,834 21,483 22,742 23,342 23,625 24,327 24,553 24,507 24,737 24,002 ISP 0 0 1,256 2,986 6,310 9,525 12,763 14,420 15,955 16,862 17,141 17,519 17,659 Homes Passed 63,333 64,620 69,300 73,610 80,854 87,142 97,515 108,099 109,300 110,330 5
CCG CONSULTING ANALYSIS - 2010 I recommend the aggressive plan It is obvious that bundling is needed to succeed in the market because Comcast is thriving while Click! has been stagnating.further, I am recommending that Click! resell the voice and cellular products. - Douglas Dawson, President 6
STRATEGIC PLANNING 2010 Plan A Launch Click! branded Internet and telephone service Offer bundled package/great savings for customers Convenience of one bill, one call, one payment Creates operational efficiencies for Click! Promotes economic viability of enterprise 7 Plan B At the direction of the Public Utility Board, to collaborate with ISPs to devise and execute a plan that addresses Click! s financial deficit ISPs offered to grow 6,000 Internet customers between Aug. 1, 2012 and July 31, 2016 In exchange, ISPs sought a non-compete from Click! during the growth period and locked in wholesale rates
GROWTH TREND 1998 TO 2016 Cable TV & ISP Customer Counts 30,000 Cable TV ISP Market share Strategic Planning 25,000 31.3% 20,000 22.6% 22.1% 15,000 16.0% 16.6% 10,000 4.7% 5,000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Cable TV 690 10,654 16,841 19,834 21,483 22,742 23,342 23,625 24,327 24,553 24,507 24,737 24,002 22,983 22,449 20,619 19,506 19,196 18,578 ISP 0 0 1,256 2,986 6,310 9,525 12,763 14,420 15,955 16,862 17,141 17,519 17,659 17,753 18,627 20,211 21,769 23,262 24,762 Homes Passed 63,333 64,620 69,300 73,610 80,854 87,142 97,515 108,099 109,300 110,330 110,321 111,846 111,840 112,013 112,013 112,013 8
TODAY S CHALLENGES Escalating programming costs Retransmission consent license fees doubling, double-digit increases in network programming costs Declining cable TV customers (industry-wide) Cord cutters and cord-nevers Growth in competition from wired providers, satellite providers, overthe-top service providers Current business model Plan B doesn t work Click! invests in the capital and manages the system, ISP and MSAs enjoy the markup ISPs are Rainier Connect, Advanced Stream and Net Venture MSAs provide point-to-point services, local loops and last mile, and include Integra, tw Telecom, Century Link, Optic Fusion, Rainier Connect, Spectrum and Noel Communications ISPs continue to expect non-compete protection, no rate increases 9
TODAY S CHALLENGES Higher operating costs 10 Lack of scale Lack of negotiating power High personnel costs Deep diversification of labor union work rules Changes in Power s smart meter strategy Wireless technology wins Change in cost allocation to shift costs based on utilization of the network Evaporation of rate differential with competition Need to recover cost Financial challenges
FINANCIAL TREND CLICK! $ in millions 2009/10 2011/12 2013/14 2015/16 (Budget) 2015 (Budget) Revenue $46.2 $49.1 $53.5 $59.5 $29.8 Click! O&M ($43.1) ($44.7) ($46.2) ($51.8) ($25.9) Cash flow after O&M $3.1 $4.4 $7.3 $7.7 $3.9 A&R and capital ($22.9) ($5.6) ($3.5) ($5.2) ($2.6) Cash flow after A&R and capital ($19.8) ($1.2) $3.8 $2.5 $1.3 Debt service ($3.9) ($3.9) ($3.9) ($3.9) ($2.0) Net cash flow ($23.8) ($5.1) ($.17) ($1.5) ($0.7) 11
FINANCIAL TREND - OVERALL $ in millions 2009/10 2011/12 2013/14 2015/16 (Budget) 2015 (Budget) Revenue $46.2 $49.1 $53.5 $59.5 $29.8 O&M ($57.6) ($58.3) ($60.0) ($67.0) ($33.5) Cash flow after O&M ($11.4) ($9.2) ($6.5) ($7.5) ($3.8) A&R and capital ($25.8) ($7.4) ($5.4) ($7.6) ($3.8) Cash flow after A&R and capital ($37.2) ($16.6) ($11.9) ($15.1) ($7.6) Debt service ($3.9) ($3.9) ($3.9) ($3.9) ($2.0) Net cash flow ($41.1) ($20.5) ($15.8) ($19.0) ($9.5) 12
DEFICIENCIES: WHAT ARE CUSTOMERS MISSING OUT ON? One bill for cable, internet and phone Lower rates cost structure and economy-of-scale negotiating power Top technology DVR, TV Everywhere More programming One-call problem resolution 13
STRATEGIC PLANNING - 2013 Problem: Click! cannot meet its stated goals with the current business model Plan B Cannot improve products and services to customers Brought in experts to address deficiencies and develop strategies Addressing business viability, eliminating financial losses are critical drivers 14
ALTERNATIVES EVALUATED 1. Current operating model 2. Go fully retail compete with ISPs 3. Cut labor costs 4. Go fully retail buy out ISPs 5. Offer wholesale broadband only 6. Shut down Click! 7. Sell 8. Lease network to third party 15
GOAL AND NPV COMPARISONS Electric System Support Smart Meters Market Competition Rate Discipline Better Service Financial Self- Support Wholesale Broadband Open Access Network 10-year NPV in millions Current model ($59.6) Compete with ISPs ($48.7) Cut labor costs ($22.4 to $41.5) Buy out ISPs ($22.5) Wholesale only ($9.6) Shut down $16.4 Sell $36.4 Lease to 3 rd party $78.2 16
SHUT DOWN CLICK! Discontinue all commercial operations 10-year NPV = $16.4 million Pros Eliminate Power ratepayer subsidy (F) Retain network ownership and use (O) Cons Eliminates market competition (C) Potential rise in price for Cable TV, Internet and phone services (C) Displaces ISPs and MSAs (O) Loss of employment for Click! employees (O) O = Operational C = Customer F = Financial 17
SELL Sell network and customers to third party 10-year NPV = $36.4 million Pros Cons Maintain effective market competition (O) Provision of new products & services and bundled packages (C) Opportunity for continued employment for Click! employees (O) Proceeds from sale (F) Eliminate Power ratepayer subsidy (F) 18 O = Operational C = Customer F = Financial Relinquish ownership of nonutility portion of network (O) Network, and product and service improvements at the discretion of new operator (C) May not include employment opportunities for Click! employees (O) In-house support/maintenance of Power s fiber (O)
LEASE NETWORK TO A THIRD PARTY Cable customers would move to a third party 10-year NPV = $78.2 million 19 Pros Maintain open access network (O) Maintain effective market competition (C) Grandfather existing services & rates (C) Provision of new products & services and bundled packages (C) Continuation of low-income programs (C) Opportunity for continued employment for Click! employees (O) Generate positive cash flows from rent (F) Capital investments to upkeep network (O,C,F) Support/maintenance for Power s fiber (O) Eliminate Power ratepayer subsidy (F) Retain network ownership and use (O) Cons Status would change from network/owner operator to network owner/lessor (O) Click! Network, as a brand, would dissolve (O) Continuation of employment for Click! employees (O) O = Operational C = Customer F = Financial
CCG CONSULTING ANALYSIS - 2013 I see two reasonable alternatives for the business. Either lease the whole network to one party, or continue to operate the business but cut staff. Leasing returns the highest amount of cash to the bottom line and under a lease scenario even most of the cost for Power to maintain using the network would be covered. But it looks like continuing to operate, even with staff cuts will result in an ongoing subsidy to Click! and the company will need to get comfortable with the permanent subsidy. - Douglas Dawson, President 20
RECOMMENDATION: PRIVATE/PUBLIC PARTNERSHIP Why enter into a lease-like arrangement? Satisfies customer, operational and financial goals Maintains city ownership and oversight important for operation of electric system Assured continuity for customers Continued investment in network Improved long-term value Best opportunity for cost recovery, while maintaining essential customer components 21
SAGE CONSULTING ANALYSIS - 2014 The telecommunications industry is evolving rapidly with resultant increasing competition for incumbent suppliers. In addition to the industry structural changes, Click! has a number of competitive disadvantages (inability to bundle services, programming costs, overhead costs, labor costs, lack of scale). Click! has been, and is, experiencing a steady loss of customers and resultant financial deterioration due to industry structural changes. It appears that Click! cannot overcome the industry structural changes and its competitive disadvantages As a result of the industry changes and the competitive disadvantages, Power has been subsidizing Click! and the subsidies will likely grow over time. Recommendation Sell, lease, or close Click! as soon as reasonably possible, and within one year at the latest. - Dave Vondle, Sage Consulting LLC 22
PUBLIC/PRIVATE PARTNERSHIP FEASIBILITY Exploring feasibility options Theoretical recommendation not enough Wanted to understand if arrangement is implementable Conducted due diligence to bring a concrete plan for policymakers to consider and react Wave Broadband approached Tacoma Power about buying or leasing network Able to discuss options, determine possibilities Jointly developed draft letter of intent that outlines potential public/private partnership with policymaker approval 23 LOI is non-binding
PUBLIC/PRIVATE PARTNERSHIP OPTIONS Can TPU enter into a lease-like agreement? 24 Yes, it s not only the most financially sound option, it is legal Contract terms would include cancellation clause Performance measures built into contract for consumer and city protection Why not issue an RFP? Competitive bid not required Unique transition, few suitable partners Why not Google, Comcast, other company? Google not interested in this market Comcast would eliminate valuable market competition Few companies could meet goals City has ability to establish performance standards through the partnership agreement and the franchise agreement
WHY WAVE BROADBAND? Local, independent company: Headquartered in Kirkland, WA, operations along I-5 corridor Solid customer service: 24/7 Call Center and Network Operations Center Excellent suite of products and services: Largest gigabit provider in Washington state, gigabit service offered since 2008 Competitive, value-oriented pricing Experienced management: Operating telecommunications companies is their core business Financial strength: Raised over $1.2 billion in capital over the past two years Operational-scale economies: Three-state operation, 200,000 households; 400,000 plus subscribers Leadership role: National Cable Telecommunications Cooperative and American Cable Association to influence technology and regulations 25
WAVE S PROPOSAL 26 Long-term operation of the commercial telecommunications network (active plant and dark fibers) 40 years with one option to renew for 10 years, IRU (Indefeasible Right of Use) Agreement, APA (Asset Purchase Agreement), other controlling agreements Improved products and services Commitment to roll out gigabit service to condos, apartments and commercial complexes, limited to improvements made to the physical plant, cash value for unmet capital commitment Provisioning, support and maintenance of TPU s active fiber infrastructure Fiber network, legacy Gateway meters Avoids $6 million of the $9.5 million annual loss Debt service = $1.95 million Assessments and allocations from City $1.6 million
WAVE S PROPOSAL - FINANCIAL Annual * 40 Years * Lease payments $2.0 million $80 million Capital payments $1.5 million $60 million Avoided losses $6 million $240 million Total Value $9.5 million $380 million *Does not include 3% CPI (inflation) or NPV 27
HOW PROPOSAL BENEFITS CONSUMERS Consumers still have choice of service providers Access to better products and services More channels and more On Demand Better TV Everywhere TiVo DVR and multi-room solution Faster Internet speeds (plan for deployment of Gigabit Internet service) Competitive, fair pricing Grandfathering of services and Rate increases capped at 5% each year for 2 years Low-income program for cable and Internet Bundled pricing w/cable, Internet and phone 28
HOW PROPOSAL BENEFITS THE CITY Open Access Network Choice of ISPs Choice of telecommunications companies Net neutrality principles True market-driven competition Competitive pricing Value for consumers Advances economic development initiatives State-of-the-art network Regionally interconnected networks Better for resellers Better for local businesses Advanced products and services, like gigabit Internet service 29
HOW PROPOSAL BENEFITS THE CITY Support and maintenance of the INET Will assume Click! s INET obligations Local presence Local stores Local employment Maintain or improve tax base Franchise fee PEG fee B&O tax Sales and use tax Property tax 30
ISP IMPACTS Click!/ISP current status Click and ISPs are collaborating, meeting (modest) customer growth targets 31 ISPs requesting new, long term contracts with non-compete clause, no rate adjustments Contract negotiations almost completed Some concern by Click! about entering new long term contracts at this time Implications of public/private partnership on ISPs Will continue to be an open-access network ISP contracts (term, pricing) will be honored by new network lessor New network lessor will compete with ISPs ISPs have committed not to oppose public/private partnership transaction
TAKING CARE OF EMPLOYEES Wave expects to hire 81 people, have committed to interviewing Click! employees TPU offering severance pay if no offer of employment by TPU or Wave Data request received from union keeping them in the loop 32
PROPOSED FOLLOW-UP ACTIVITIES Click! proposal presented to PUB or PUB/Council March 31 Discussions with Council members Union meetings Within 14 days Within 7 days Community Town Hall meetings April 9 & 15 Employee transition discussions Within 60 days Council and PUB deliberations Other community meetings (Community Council, business districts, etc.) 33 = public involvement /education opportunities
PROPOSED FOLLOW-UP ACTIVITIES PUB approves Wave non-binding LOI Council approves Wave non-binding LOI Negotiation of definitive agreements with Wave PUB approves Wave agreements Council approves Wave agreements Wave and TPU work to satisfy closing conditions Transaction closes TPU/Wave transition period Approx. 60 days post Approx. 60 days post Within 60-120 days post Approx. 120 days post Approx. 120 days post 120-180 days post Approx. 180 days post Approx. 180-270 days post 34
APPENDICES Pros and cons of alternatives 1 through 5 1. Current operating model 2. Go fully retail compete with ISPs 3. Cut labor costs 4. Go fully retail buy out ISPs 5. Offer wholesale broadband only 35
CURRENT OPERATING MODEL Reliance on ISPs for revenue generation 10-year NPV = ($59.6 million) 36 Pros Maintain open access network (O) Maintain effective market competition (C) Provision of new products and services (C) Continuation of low-income programs (C) Continued employment for Click! employees (O) Support/maintenance for Power s fiber (O) Retain network ownership and use (O) Cons Today s challenges still at play (O,F,C) Continued capital investments in the network (F) Continued subsidization by Power ratepayers (F) O = Operational C = Customer F = Financial
GO FULLY RETAIL COMPETE WITH ISPs Offer cable and Internet, compete with ISPs 10-year NPV = ($48.7 million) Pros Maintain open access network (O) Maintain effective market competition (C) Provision of new products & services and bundled packages (C) Continuation of low-income programs (C) Continued employment for Click! employees (O) Retain network ownership and use (O) Cons Today s challenges still at play (O,F,C) Continued capital investments in the network (F) Disrupt ISPs business model (O) O = Operational C = Customer F = Financial 37
CUT LABOR COSTS Reduce staffing levels by 11 to 22 10-year NPV = ($41.5 to $22.4 million) Pros Maintain open access network (O) Maintain effective market competition (C) Provision of new products & services (C) Continuation of low-income programs (C) Continued employment for most Click! employees (O) Retain network ownership and use (O) Cons Today s challenges still at play (O,F,C) Potential reduction in service levels (C) Continued capital investments in the network (F) Continued subsidization by Power ratepayers (F) O = Operational C = Customer F = Financial 38
GO FULLY RETAIL BUY ISPs Offer cable and Internet, buy out ISPs 10-year NPV = ($22.5 million) Pros Maintain open access network (O) Maintain effective market competition (C) Provision of new products & services (C) Continuation of low-income programs (C) Continued employment for most Click! employees (O) Retain network ownership and use (O) Cons Today s challenges still at play (O,F,C) Continued capital investments in the network (F) Incur cost of purchasing ISPs (F) Continued subsidization by Power ratepayers (F) O = Operational C = Customer F = Financial 39
OFFER WHOLESALE BROADBAND ONLY Cable customers move to third party, charge per customer 10-year NPV = ($9.6 million) 40 Pros Maintain open access network (O) Maintain effective market competition for broadband (C) Provision of new products & services (C) Continued employment for some Click! employees (O) Retain network ownership and use (O) O = Operational C = Customer F = Financial Cons Growth limited by growth in wholesaler business (O,F) Continued capital investments in the network (F) Majority of operation and maintenance costs absorbed by Click! (F) Limited return on investment at the 60/40 revenue split ratio (F) Continued subsidization by Power ratepayers (F)