Carrier Evolution

Google Fiber is not the only instance of third party providers trying to create a third alternative broadband access alternative to cable and telco providers.

The Utah Telecommunication Open Infrastructure Agency (UTOPIA) is building a wholesale fiber-optic network that offers its users access to high-speed video, data, and phone services.

But it isn’t easy. A new audit shows the agency was unable to complete construction of the network as quickly as planned. UTOPIA originally planned to build a broadband network in three years and to achieve a positive cash flow in five years.

“However, it has not met that schedule,” the audit says. “Instead, the cost of financing and operating the network increased before UTOPIA could provide a substantial number of customers with service.”

As a result, revenues have not been sufficient to cover its costs. Year after year, as operating deficits have accrued and the agency has developed a large negative asset balance.

UTOPIA has issued $185 million in bonds to pay the cost of building its network, “but most of the bond proceeds have been invested in poorly utilized and partially completed sections of network,” the report says.

“As a result, the network is not generating sufficient revenue for the agency to cover its annual debt service and operating costs,” the report notes.

Worse, UTOPIA has had to use a large portion of its bond proceeds to cover operating deficits and debt service costs. “The use of debt to cover the cost of operations and debt service is symptomatic of an organization facing serious financial challenges,” the audit says.

Since 2003, when UTOPIA began work, only one third of the network has been completed. Buit that might not even be the biggest problem. “One underlying challenge is that UTOPIA’s infrastructure investment is not producing sufficient revenue,” the study notes. “In most areas where construction has been completed, UTOPIA has insufficient subscribers to cover the cost of building and operating the infrastructure.”

Though backers had expected to get adoption (penetration) rates of about 35 percent, so far the network has gotten penetration of only about 16 percent.

That has huge implications. A competitive network, facing both entrenched cable and telco suppliers, has economics that are hugely dependent on penetration rate. At 16 percent penetration, UTOPIA is getting half the revenue it had projected, and manhy would argue, as a rule of thumb, that penetration in the 20 percent to 30 percent range is probably requires for long term success, in the absence of additional revenues from voice or video entertainment services.

Among other problems, UTOPIA has used a wholesale model, and therefore has been highly dependent on its retail partners for sales success. And it turns out that many of its retail customers have defaulted on owed payments, which further puts pressure on UTOPIA revenues.

As a direct result, UTOPIA now also has switched to selling retail services directly.

Though the audit attributes much of the difficulty to management failures, and though that likely is an issue, the larger issue might simply be that customer demand for UTOPIA services is simply not as strong as expected, when there are other suppliers with a vested interest in meeting existing demand for high-speed access.

That might not be quite as big an issue for Google Fiber in Kansas City, Kan. and Kansas City, Mo., given the huge difference in access speed Google fiber is able to offer.

UTOPIA uses a “fiber to curb” network architecture that offers speeds similar to AT&T’s U-verse, but arguably less than what cable operators can offer, using DOCSIS and bonded channels.

Some might argue that UTOPIA’s market offer is not “better” than telco or cable offers, in terms of speed and experience. Google Fiber has different prospects, on that score. Google Fiber’s symmetrical 1-Gbps offer is an order of magnitude better than anything else in market.