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HomeMy WebLinkAbout2005-1129 Study Session Packet CITY OF ASHLAND CITY COUNCIL STUDY SESSION AGENDA Tuesday, November 29, 2005 at 5:00 p.m. Council Chambers, 1175 East Main Street AFN Options Committee Presentation In compliance with the Americans with Disabilities Act, if you need special assistance to participate in this meeting, please contact the City Administrator's office at (541) 488-6002 (TTY phone number 1-800-735-2900). Notification 72 hours prior to the meeting will enable the City to make reasonable arrangements to ensure accessibility to the meeting (28 CFR 35.102-35.104 ADA Title 1). r~' CITye)F ASHLAND Council Communication . Study Session - Ashland Fiber Network Options Committee Report Meeting Date: November 29, 2005 Primary Staff Contact: Lee Tuneber~1 ;1"'- cJ Department: Administrative S~' s E-mail: tuneberl@ashland.or.U1sK./"{' Contributing Departments: Secondary Staff Contact: Approval: Gino Grimaldi (""' E-mail: Estimated Time: 60 Minutes Statement: Attached is the report from the Options Committee established in July to consider alternatives provided by Council for the future operations of the City of Ashland's Fiber-optic Network. Committee members will be in attendance to provide input and answer questions. Background: The attached report provides an overview of AFN's history and interesting insight into the review process and analysis. We thank them for their willingness and dedication through this process to work on difficult issues, asking even more difficult questions in order to provide Council with critical information regarding the City's options. Staff has worked with the six-member panel providing support to comply with open meetings and records laws. Minutes have been take and circulated and all information requested was drawn from archives or created after research to assist the committee with their charge. Also attached is a memo from staff making a recommendation to proceed with hiring a Technology Director. Related City Policies: None Council Options: None. This is a study session so no formal action can be taken. Council can direct staff to: 1. Pursue an option, or options, evaluated by the Options Committee. 2. Provide additional information regarding the options evaluated. 3. Schedule this topic for a regular session of the City council so that public input can be obtained prior to directing staff to implement an option, or options. Staff Recommendation: Council identify additional information needed and direct staff to present it at the December 20, 2005, regular session to allow full discussion and public input. Potential Motions: None Attachments: AFN Options Committee Report Staff memo recommending filling the Director position. ~A' . I TO: Ashland City Council FROM: AFN Options Committee DATE: November 17,2005 RE: Initial Report The purpose ofthis report is to describe the activities ofthe AFN Options Committee (the "Committee") since its formation, and to present what it believes are the city's best options with regard to AFN. The Committee has met in formal session 11 times since its initial meeting on August 2, 2005. During these meetings, the Committee received significant public input. Moreover, the Committee had discussions with other parties about the future of AFN. These parties included: 1) several of the local ISPs; 2) Hunter Communications; 3) the Programming Committee; 4) AFN's former Director; and 5) the Director of the Spanish Fork, Utah system. In addition to these public meetings, the Committee conducted extensive due diligence with both City administrators and AFN staff. The members of the Committee collectively spent several hundred hours not only in discussions with these individuals, but in reviewing relevant financial, market and other information on AFN, its competitors and comparable municipal systems in other regions of the country. The Committee also reviewed valuation data for certain publicly-held companies engaging in the provision of CATV and Internet services and applied such information to derive a theoretical valuation for AFN. Committee members also interviewed current and former directors of Ashland Community Hospital, the director of OSF and members of the Mt. Ashland Board regarding these public-private partnerships, their establishment, business models, legal relationship to the City and mission of service to the community. The purpose: of these interviews was to better understand how community experience with these models might apply to a spin-off and how such a business can fare in a competitive market. During this process, the Committee kept in mind the context of AFN's current situation, including the original rationale for its creation. Key reasons given at the time for AFN were: 1) the need to quicken the pace of the introduction of broadband st;:rvices to Ashland; 2) the use of the system to attract new employers to the community; 3) the retention of local control over content; 4) the avoidance of a communications tinal mile defacto corporate monopoly; and 5) the benefits of competition to the community at large. However, not only did the original construction cost run significantly over budget, but Charter became an unexpectedly fierce competitor, adversely impacting AFN's subsequent financial performance. Additionally, major employers, projected to be an 1 ---~- - ------r- important source of revenues for AFN, are currently not an important source of AFN revenues, with little prospect of improvement in sight. CURRENT SITUATION Community The City of Ashland now finds itself with a citizenry that is extremely divided and . increasingly vocal over the future of AFN. Ballot measures forcing divestiture have been threatened and the City finds its alternatives narrowing with regard to fundingf AFN's annual cash deficits due to citizen protests. Indeed, other municipalities wh{:re such systems enjoy broad community support have significantly outperformed AFN. Industry Layered on top of these community dynamics are certain industry dynamics which are perhaps more pronounced today versus the time of AFN's conception. These industry dynamics include: . Rapid technological change; . High degree of capital intensity; . Deep-pocketed competitors; . Intense and growing near-term competitIOn from alternative provid1ers (e.g. satellite, wireless, bundled telecom); and . Uncertain longer-term competitive environment, since It IS unclear whether satellite and/or RF distribution technology will be able to provide all future video requirements, and if not, this could create significant potential future value for AFN's hardwired bandwidth. AFN AFN's historical financial performance has been disappointing but understandable given the tenacious competition it has encountered from Charter as well as from other providers. The result of this competition has been a stalemate somewhat analogous to the situation encountered on the Western front in World War I: prolonged "trench warfare" with neither side able to gain significant additional ground (i.e., market share). Our understanding of AFN's situation includes the following points: . AFN is currently performing near breakeven on an operating basis; however, operating expenses are significantly burdened by the amount of the City's annual Central Services Fee; . If AFN were sold, most of the annual $500,000 Central Services Fee it pays would remain as current staff are shifted to other responsibilities; . AFN is significantly cash negative after debt service, with such payments scheduled to increase; 2 . The City's ability to subsidize AFN is certain to be controversial and, therefore, difficult, due to increasing opposition by some of Ashland's citizenry; . AFN does not currently offer either clearly differentiated products or programmmg; . AFN will require additional capital to become competitive in programming, products and customer service; . AFN as it currently operates appears to have limited ability to capture additional market share even if it were to offer differentiated and competitive products and servIces; . AFN is under constant rate pressure from Charter, thereby limiting its ability to increase rates in order to earn a margin more consistent with those earned in other parts of the country; . AFN's past actions to improve profitability in response to the Navigant study failed to produce the desired results; ~ AFN's decision-making process is particularly cumbersome and inefficient when compared to that of private enterprise; . AFN is competitively disadvantaged because all deliberations are madl~ in full public view; and . AFN currently does not have service available to 10% of the Ashland market. OPTIONS As a result of the findings noted above, the Committee has reviewed a number of options. Unfortunately, there is no perfect alternative, as each option has plusses and minuses that will be either accepted or rejected by opposing factions within the community. The following list shows the major options currently considered to be plausibh: by the Committee. In addition to these options, the Committee explored a myriad of sub- options. Major options considered were: . Sale of AFN; . Spin-off of AFN to another non-profit entity ("Spin-Off'); . Continued City ownership of AFN with an enhancement of products and programming ("Maintain and Enhance"); . Convert AFN to a Common Carrier . Purchase of Charter's Ashland subscriber base ("Purchase"); . Status Quo; and . Immediate Shutdown. In an effort to winnow this list to the best possible options, the list was further broken down according to financial impact and likely business risk. This simple illustration is shown in Appendix A. It is the opinion of the Committee that the Status Quo, Immediate Shutdown, and Purchase options are either financially untenable, entail significant controversy or both. It is also the opinion of the Committee that significant controversy will lead to substantial delay which will cause a substantial decrease in AFN's value. 3 Moreover, although the Committee was intrigued by the Common Carrier alternative, we concluded that this option is not germane to the fundamental organizational and debt service issues and possesses so many unknowns that we did not adequately analyze this option to make a recommendation. Instead, this option should be explored further under either the Maintain and Enhance or Spin-Off options, should either of those two options be chosen. While we would be pleased to discuss the four rejected options in more detail, the Committee has decided to focus on the remaining three options: 1) Continued city ownership of AFN with a new director and enhancement of products and services ("Maintain and Enhance"); 2) Spin-off of AFN to a non-profit entity ("Spin-Off'); and 3) Sale of AFN. Each of these options will be discussed in turn. One possible way to evaluate each of the three remaining options is to consider the following questions: 1. The Committee believes that the key question for the Council to decide is whether the future savings, local content control and local service are worth leaving taxpayer funds at risk, and perhaps more likely, adding new taxpayer funds to this burden; 2. Using the three-pronged course of action recommended on pages 10 and 11 of this document, the Council should consider these actions in light of the expected sale price, the amount of debt reduction and the risks of continuing or tenminating AFN; and 3. Should the Council decide to continue funding AFN with taxpayer monies, then it is the strong recommendation of this Committee that the Spin-Off option be exercised. Maintain and Enhance Option The primary change under the Maintain and Enhance Option would be the hiring of a seasoned executive with CATV and Internet experience. However, even were the salary offered to be increased to attract such person, the Committee believes that the l~aintain and Enhance Option is the least attractive alternative of the three options selected for further review and should not be pursued. The primary reasons for this opinion are as follows: . The new AFN director will become part of a management structure geared towards stewardship and maintenance, rather than competition and cost control; . The new AFN director will likely require significantly more autonomy and less oversight in matters of programming, staffing, and rate setting than has been acceptable to the City Council; . As a public official, the new director may be constrained in his/her role of speaking as an advocate of AFN's community mission; . AFN faces significant organizational development and communication issues, such as different, unresolved opinions between council, staff, and the 4 programming committee as to what policy and strategies can be decided and executed, by whom, and how. These issues are systemic, not easily changeable and to some degree, reflect Ashland's culture. . AFN will remain subject to public meetings laws, public procurement and public process in general, severely constraining its ability to compete and continuing the inefficiency of the public decision process; . AFN, by its nature, will continue to consume a disproportionately large amount of attention from the City Counsel and Staff relative to its size and budget; . AFN, as a City entity, may be precluded from entering profitable business partnerships that could enhance revenues without putting such initiatives out to bid; . Debate about AFN's existence will likely remain a highly controversial issue for years to come, further adversely impacting public perceptions about AFN's fortunes and limiting its potential; . Despite the new director, the City may not be able to operate the business any better than in the past, despite potential new revenue sources; . Charter will continue to be a tenacious competitor, putting a ceiling on the amounts able to be charged by AFN. Furthermore, given the tremendous amount of industry consolidation, Charter and/or its CATV operations may also be sold to an even more formidable competitor; . AFN will require additional funds to provide competitive products and services like HDTV and DVR, but still may not be able to capture any additional market share; . The recommendations of the Navigant study failed to produce any significant increase in revenues: there can be no assurance that future efforts to increase revenues will be successful either; . The City will still be burdened with its $15.5 million debt obligation, will likely have to continue subsidizing AFN if rates can not be raised sufficiently, and will have to spend additional funds to upgrade the system periodically. In contrast, the Committee found very few benefits to pursuing this option: . Because continued competition with Charter and others is assured, AFN as well as Charter subscribers will likely get a break in the rates they pay versus others in the Rogue Valley; . Local content and service control continues; and . The community will retain an asset for future applications. As a consequence of these findings, the Options Committee strongly recommends against pursuit of the Maintain and Enhance Option as it is likely to result in continued financial shortfalls, continued requirements for City subsidies, limited, if any, progress in capturing additional market share, and a further decrease in the value of the asset. Moreover, and perhaps of equal importance is the likelihood of continued community divisiveness over AFN. 5 Spin-Off In contrast to ~he likely outcome of the City retaining ownership of AFN and sec~king to improve its products and services, the Spin-Off option provides the community with a higher, but not necessarily quantifiable, probability of success. Not only would the community retain local control over content, but the problems associated with being a public entity subject to public meeting law requirements and financial disclosures would be eliminated. As a result, the Committee believes that this option, unlike the Maintain and Enhance Option, should be seriously considered by the City Council. The pursuit of the Spin-Off Option would require that the City create a non-projfit entity for providing telecommunications services for the Ashland community as a public service. This new non-profit entity would have the city as its sole member, similar to the Community Hospital, with a Board of Directors initially appointed by the Mayor and approved by the City Council. The Board, in turn, would hire an experienced executive capable of articulating a vision and building support within the community while formulating and executing a successful business plan in Ashland's competitive environment. The Board and the CEO will be charged with leveraging the unique strategic marketing advantages of this non-profit entity, with decisions regarding programming and services remaining under local control guided by a public service motivation, not shareholder profit. The new non-profit entity will provide an annual report to the Mayor and City Council outlining its performance in achieving its mission and the outlook for years to come. Unlike the Maintain and Enhance Option, the new non-profit entity could conceivably assume part of the City's $15.5 million obligation based on our estimates of the potential cost reductions it could implement once it was spun-off and still be marginally economically viable. According to Staff, approximately $6.5 million of the total borrowed resulted from subsidies by the City to cover AFN's initial operating losses plus an initial debt payment. Under this scenario, the City would contribute the remaining $9 million in capital assets and construction costs to the new non-profit entity, as well as an estimated $725,000 in cash in the form of a loan to the new non-profit entity for its initial working capital. The City, however, would still be liable for the annual debt service on $9.0 million and on the entire $15.5 million should the new non-profit entity default on its payments. It is the Committee's opinion that forcing the new entity to immediately assume a debt service obligation would place it under financial stress at a time when it should. be focusing on revitalizing its business. The Committee recommends that an assessment be made regarding scheduling of any debt service costs. The potential for assumption of 6 any further additional debt should be addressed 10 the conditions attached to the formation of the non-profit entity. In evaluating the Spin-Off option, the City gains numerous benefits, some of which have been previously addressed. These benefits include: . Separation from the City should provide more focus, paSSIOn and specific expertise; . AFN will be able to operate without either competitive scrutiny or the I:::onstant second guessing of certain factions of the citizenry; . The new CEO will not be saddled with the cumbersome decision process necessitated by City ownership; . The new CEO will be able to become an effective advocate of AFN's community mission without worrying about potential conflicts of being a public official; . The new CEO and Board may decide that, upon further analysis, pursuing the Common Carrier Option makes more sense than enhancing products and programming and pursue this change in strategy; and . As part of the franchise agreement, the City could require the non-profit entity to offer community-specific products and services. Key negative conclusions include: . The Committee believes that the success of this venture would be inextricably linked to the success the new CEO has in marshalling community support that will, in turn, lead to an appreciable increase in market share; . There is no guarantee that the new non-profit entity would be able to be more successful in either gaining additional subscribers or increasing its margins than the City has been, given the fierce competition of Charter as well as AFN's negative public relations history; . The Committee's projections suggest the new non-profit entity would operate on the slimmest of profit margins, with little margin for error; . If the non-profit entity is unsuccessful, the City could be forced to repossess the business with the value of the business damaged even further; . If the new non-profit entity chooses to compete with local ISPs by offering Internet services, indications are that at least one of the seven local ISPs, employing three individuals, may no longer be viable; and . The City would remain ultimately liable with respect to the entire amolmt of the $15.5 million bond obligation. Consequently, while the Spin-Off Option is superior to the Maintain and Enhan<;e Option given the removal of some of the current impediments to effective decision making, it is not without risks. Charter will still remain a tough competitor and AFN will still likely require frequent additional capital expenditures to stay competitive. Key to the success of this new non-profit entity, as noted above, will be the ability of the new CEO to enlist community support and thereby attract both incremental market share and market rates. However, given the past community division over AFN, it is far from clear whether the 7 ..T -_._-~-_.._---~.- level of community support needed to ensure the long-term success of this non-profit entity can be achieved. Sale of AFN Community considerations notwithstanding, sale of AFN to either Charter or some other party, would result in the most predictable financial outcome for the City overall, even if the result of such a sale would be an increase in every Ashland citizen's current cable rates to market levels and the possibility of reduced competition in the provision of CATV services to Ashland. To that end, discussions have been initiated on a preliminary basis between Staff and three potential financially qualified buyers in an attempt to ascertain the interest of each party. While we currently do not know whether any or all of these parties would be interested in acquiring AFN, and if so, at what price, we are nonetheless attempting to create a competitive situation among these three most likely buyers. The intended result will be to produce one or more purchase proposals at market or better. On the other hand, there is the possibility that none of these three parties will either have any interest in purchasing AFN or interest at an acceptable price and on acceptable terms. Either way, the Council will have a much better view of its options following receipt of this preliminary feedback. As part of its assignment, the Committee discussed the theoretical valuation of AFN using data from publicly-held comparables. This analysis suggests that AFN could theoretically be worth as much as approximately $10 million, using the per-subscriber enterprise valuation of Charter. Utilizing the per subscriber valuations of certain cash flow negative comparable public companies produces a theoretical value of about $5 million. The valuation will vary significantly depending on a number of factors, including but not limited to: 1) who the buyer is; 2) whether the sale includes both subscribers and assets; and 3) whether only subscribers are sold and all physical assets (including head-end and hybrid fiber coax network) remain with the City. If a sale is to be pursued, these factors will need to be quantified as part of the sale negotiations. Moreover, other variations are also possible. One important element in the determination of value is the fact that the vast majority of cable modem users do not have a billing relationship with the City but are actually customers of the ISPs. It is unclear how many of those customers could be counted in a subscriber sale nor how much of the whole-sale revenue stream would remain once AFN is not a community-owned asset. Thus, the key reasons for pursuing the sale are as follows: · A competitive selling process, as opposed to a forced sale, maximizes value thereby reducing the debt as much as possible; · The City can still pursue other alternatives if the sale is unable to be consummated at an acceptable price; 8 - T . Uncertainty as to AFN's future is eliminated if a sale is consummated; . The time and financial drain on City, the Council, Staff and the community will be eliminated once and for all if the asset is sold; . A franchise agreement could be written to protect community interests. . The buyer may have the financial resources to pursue the introduction of new services in a more timely fashion than the city. Key risks associated with the sale of AFN include: . Risk of rapid deterioration of customer base (and valuation) if sale process is drawn out; . Possible negative impact on employee morale; . The City will likely be unable to recover some or most of the debt if AFN is sold; . There is the possibility that the City will not generate either any interest in AFN or interest at an unacceptable price, further tarnishing its ultimate marketability and forcing it to pursue the Spin-Off option; and . The buyer may gain sufficient control over Ashland's market to reduce competition significantly and may increase rates, decrease services, exert control over content, and delay introduction of new services. The present and near-term markets for television and Internet services are sufficiently competitive (see Appendix C) that, if this were a static situation, further risk to taxpayer dollars should be eliminated, recovering as much of the debt as possible. Howev(~r, future technology and business changes may eliminate the present competitive market, leading to a monopoly which, once again, would need taxpayer dollars to provide reasonable rates, content, and service. 9 .. T --..........-,-- KEY RECOMMENDATIONS The Committee strongly recommends that the City Council pursue the following courses of action. In particular, the Committee believes the City Council should direct the: staff to present the City Council with its legal and financial findings with regard to the following options no later than January 15, 2006, so that a decision to pursue one of the following courses of action can be followed with due haste. 1. Pursue on an expedited basis the sale of AFN to one of the three entities with which Staff is currently holding discussions. The objective of these discussions should be to elicit a non-binding letter of intent. Bidders should include the following in their indication of interest: a) proposed purchase price range; b) required due diligence necessary to firm up their bid; c) estimated time range to complete such due diligence; d) any contingencies that might affect their proposal. Staff should contact each bidder to ask that these non-binding indications of interest be recl~ived no later than December 15, 2005. Staff should provide each bidder with any basic information necessary for such bidder to submit its indic:ation of interest. Once these indications are received, Staff and the Committee can clarify and evaluate the letters and make appropriate recommendations to City Council; 2. Contact three or more qualified investment banking firms specializing in the sale of CATV/Internet systems similar in size and scope to AFN. The purpose of this exercise is to: a) solicit input on the salability of AFN to third parties and, perhaps more importantly, the likely proceeds to be received; b) to understand the length of time required to complete such a process if undertaken; c) to understand the costs involved in completing such a process; and d) to exert additional pressure on the three parties above to consummate the transaction; and 3. At the same time the Council pursues the two recommendations above the City should simultaneously pursue the Spin-Off option, initially by having counsel analyze various options, and ultimately by putting in place all necessary measures so that, should AFN not be sold, the City Council is in a position to move quickly to pursue this option with a minimum of delay, but in no event later than January 15, 2006. 10 APPENDIX A Illustrative Rankings of Options Considered Se.t J l ,r Worst Compari.son of Major Options tl'llpltCt on Outstanding RIll.....,.,....... Sale Spitl-Off Common Osmer Etlhanoe Status Quo Purd'lase Immediate StltL'tdown Impact on Annu.aJ cab....,Eld., Sale Spin-Off Enhaoo9 Common Cattier Purchase $taNs Quo lmmEidiate ShtL'tdQwn Suslne.s limit.", Immedilate Stlu1down Sale Purchase Common Cattier; Spin-<>ff Enhance Status Quo 11 APPENDIX B Spin-Off Entity: A Financial Sketch Saliariee: Persooal SeMces Mellriaf .. Sttvlc:et: PrograIMling Costs Sroadband Costs Franchise Fees MatkeIifl9 Vehides ~ Vehides Costs (Gas, Repairs} BadOebt expenses ~ High Speed -Cisco Malntmanoo High Speed . MlaWl Maintenance Incidental.Costs: 0fIk:e ~raveI Cemraf Services: Rant. Office SpacelMgmt Rent . Headend 8. Satslllile Oishes in yanI Uli/ities legal. Accoonling 8iIirg So1tware am &Ipplles Management HR ElecIed 8om'd Capital: Capilal Total ExpenHS Total ~ Gron profit (loss) Lesa Debt. Payment Net Proflt (Loss) ..r SiaM Quo 787,332.00 800,000.00 108.000.00 65.000.00 211,408.00 00.939.00 48.951.00 11 .:220.00 36.302.00 16.000.00 22,000.00 28,483.00 0186,261.00 100,000.00 2,84 t902.00 2.823,320.00 (18,582.00) if ,234,24~OO} (t.~,830.00} Spin Off MoUe: 618,305.00 l!OO,ooo.oo 100,000.00 65.000.00 200,000.00 3 Buclmt trucks.. ReplaceJOOnt cllsls and Original pay back 30,000.00 Gas, lnsurance and Maintenanoe tor 1hme 11,220.00 Could be lower if biDed in advarn:ed 16,000.00 22.000.00 15,000.00 42,000.00 Office space at 1.15 x 2OOl) sq ft 10,000.00 To be negotiated 'Wih !he CRy 18,000.00 ElectricfWllteriPt10ne 45,000.00 25.000.00 Eslinate one _expense to pl..lrchase the 10,000.00 software. Future eS!imated expenses at 25k. 0.00 0.00 0.00 200.000.00 2.235,525.00 2,823,~O.00 Revenue !be sam& as 05.(l6 tkldget 581,795.00 ~,llOO.OO} 261,795.00 12 APPENDIX C Potential Service Providers Pot8rrtlal Servtoe Provlder& T.I....'.lon 8rold'blIltd Q$L Programtng tRlernet PP'V HOTV DVR T.lepl101'1S Mr.'at'. Yofl~ Sar:vIQII...... r.leptu,lRs Idttlland Fiber Network eerthllnll x x x l( ~TV X X 111.",1,* X 0wcl5l )( OUlh NtlI. J( X J( l' 1 1 ? X ? 0ircc1. TV o-....!l\TV Dimll! TV X X l( X X F8Ilhlri; F:afll'llfllc X X J( Owest 0._ Cbllftlf ~lc"kln. Owe.. CtmmwnlG8lions OISI\ fMWot1( DlnKlI TV elM",," .Olsh NtlI. Olsh Net J( J( till""' C-u/lICldIOM PQIutt .. il)'lhed )( APPENDIX D Recommended Reading "Open Service Provider Networks: Taking America's Communities Into the Digital Age" http://www.broadbandproperties.com/2005issues/may05issues/Ben Gould The Open S ervice Provider.pdf or http://tinyurl.comI74068 (This article to be included with the printed report.) 13 .. T MUNI DEBATE: OPEN ACCESS Open Service Provider Networks: Taking America's Communities Into the Digital Age An answer to our broadband decline and to the need for fair telecom in a free-market economy By Ben Gould. \!tce President and Chief Marketing Officer, DynamicCity, Inc. From the telegraph ro the tele- phone to the cell phone; from commercial radio to the televi- sion set; from the personal com- puter to the Internet, America has paved the way toward bringing new forms of communication, entertainment, and education to the home and workplace. But America's current telecommunica- tions business models are sending the nation into broadband decline relative to the rest of the world. While U.S. consumers and businesses are struggling with decisions about DSL, T1, or other slow, limiting, and expensive broadband mechanisms, our global competitors are leaving us by the wayside as they deploy affordable, very high capacity broadband service. U.S. communities need to take notice and consider a new model for providing real, value-added broadband. I call it the Open Service Provider Networks'~ mod- el. These community-owned OSPNs can bring complete availability of true broadband connections, service provider independence, economic infusion, and life-enhancing services to residents and businesses. Despite being the electronic commu- nications pioneer, the United States has fallen woefully behind in global broad- band competitiveness. By some mea- sures, America has dropped as low as 20th in the world in proportion of premises served by broadband, down from as high as 4th a few years ago. The oft-cited ITU WW Telecommu- nications Indicators Database lists the United States as 13th but Charles Fergu- son of the Brookings Institute suggests a lower ranking. What Is Broadband? While a few communities get some level of "broadband service," there are misconceptions about what broadband really is. The Regional Bell Operating Companies as well as multi-service op- erators (cable companies) sell 256 Kbps to as high as 5 Mbps as broadband. Even as these speeds are touted, these are download speeds only and the top speed is rarely above 1.5 Mbps. Newton's Telecom Dictionary, the de- facto standard in the telecom industry, defines "broadband" as a minimum of 45 Mbps. The FCC says it is 200 Kbps. Many of our international competitors understand what real broadband is, and they are finding ways to make it avail- able to their businesses and citizens. For example, Japanese residents have access to Internet connections of 47 Mbps for only $26 per month. That speed is not generally available in the United States for less than tens of th'JUsands of dollars a month. On a monthly price per mega- bit, the United States averages around $35 while Japan averages 90 cents. But things are about to change for some communities in this country. Some innovative and dynamic communities, like those involved in Utah's UTOPIA project, have recognized the need for true broadband and are beginning to deliver connections of 100 Mbps of symmetri- cal (both download and upload capacity) bandwidth, to 1 Gbps and even more. On a price per megabit, UTOPIA citi- zens are receiving this capacity at prices as low as 89 cents per Mbps per month - comparable to Japan! The U.S. failure to keep pace is due in large part to our upsetting the laws of 40 I BROADBAND PROPERTIES I www.broadbandproperties.comIMAY 2005 .. T supply and demand -- violating a basic tenant of a free market economy. Re- gional telecommunications operators arc an ofEhoot of the original Bell System in America, an organization that was funded through a set of captive rate pay- ers, captive rights of way, and guaranteed rates of return on capital. This system was necessary for us to become competi- tive on a global scale. In 1984, Federal courts broke up the monopoly for the long distance market, but local "baby bells" were formed for lo- cal services and the monopolies contin- ued on a regional leveL The resulting local communications services have suffered since due to stifled competition. Impact on Local Communities The effects of the broadband deficit on local communities are immense. Mo- nopolistic service delivery is negatively impacting economic development op- portunities by creating barriers to the at- tractiveness of communities. What's more, many communities have limited or no access to broadband servic- es, with cable and phone companies by- passing small towns because of expensive installments and maintenance costs. This digital divide between Americans that have access to broadband services and those who don't .is becoming increas- ingly important. Forward-looking municipalities are se- riously looking at alternatives that bring true broadband networks to their com- munities to improve the local tax base, retain and attract residents and business owners, and deliver cutting-edge services at significantly reduced cost. Pitfalls of l>rivate, Retail Servicc- Provider Infra.'ltructure Of course the threat of open, com- petitive, high-capacity network infra- structures has led regional Bell operat- ing companies (RBOCs) and multiple service operators (MSOs) to vehemently oppose municipal fiber projects. The real problem is one of motivations. An in- cumbent provider is (and should be) mo- tivated by returning shareholder value. When it comes to building infrastruc- ture, the return for a shareholder is often low and long in coming. As a result, pri- vate industry rarely (if ever) funds infra- structure without some form of govern- ment involvement. That was exactly the situation when the legacy infrastructure we currently have was funded. The origi- nal Bell system was given, among other things, guaranteed rates of return and captive rate payers. It is unreasonable for us to think that baby Bells would be motivated by the public good when their shareholders are holding them to a dif- ferent standard. In other words, as a society we shouldn't expect private industry to fund an advanced communications network, because it is really infrastructure. We don't expect private industry to own and operate roads and highways, airports, water systems and other forms of infra- structure (although they occasionally do), so why should we expect it of the new information superhighway? 1hese infrastructures have generally been left to local governments with subsidization from state and federal governments when it makes sense. So what role should local government play in the broadband debate? The Bell companies argue that communities have no business being in the service delivery industry, as it is a conflict of interest. They argue that municipalities that own fiber deployments are not only their reg- ulators but are their competitors as well. "With so much money being invested for better services and more bandwidth into homes, cable and the Bells consid- er government efforts unfair to private businesses. '1he issue is (that the mu- .. T THE OS : Open and wholesale 'the key ingredient is that the: l1~tWQrk ownership is separated firom the private enterprises that provide CQntent and retail services. Principle 2: Carrier-class Quality of Service There is the need to assure the highest levels of reliability arrd redundarrcy. Ie 3: High, scalable hand width broadbarrd service. Principle 4: Openandind~pendent architecture Standards-based solurion to accommodate a broad range of service providers and the lowest possible cOst perrnegabit. nicipalities) control rights of way, and to regulate us at same time they're compet- ing with us is a recipe for trouble,' said Dave Pacholczyk, an SBC spokesman," according to a recent CNET article (at hup:/ /news.zdnet.com/21 00-1 035_22- 5471897.html). It is no surprise that the incumbents are actively influencing state legislatures to outright ban the practice. Pennsylva- nia has perhaps the most odious anti- municipal law in this regard. It started when the Borough of Kutztown, with a population of5,200, began a municipally led broadband project and Philadelphia soon followed. Veri7.0n initiated action against the projects in the legislature. "I cannot see justification for the legis- lation," said Frank P. Caruso, director of IT for the Borough of Kutztown. "1his legislation delays advanced technology from reaching rural Pennsylvanians. Ve- rizon has essentially bought time, again, and it accomplished its primary objec- tive to thwart competition by stopping flmher municipal deployments." The Open Provider Network That brings us to OSPN. The OSPN model has been developed arrd imple- mented by DynamicCity, an Open Access Architect company expert in designing, financing, building and operating trans- formational fiber-to-the-home projects. 'The OSPN starts with a principle- based business model that places owner- ship of networks in dle hands of cities while provisioning wholesale broadband service from competitive service carri- ers. Based on a clear set of principles, the OSPN business model avoids the problem of government competing with private enterprise; it f,)sters robust com- petition and innovation and introduces the laws of supply and demand into the delivery of advanced communications services. The principl,es are basic - and they work (see box above). The OSPN overcomes the monopo- listic forces of incumbent carriers by allowing a community to make its net- work infrastructure available to as many competing third-party service and con- tent providers as possible. 1he outcome is not only greater consumer choice, but also breakthrough telecommunications services and true broadband capacity to consumers at significantly reduced cost. Superior video, voice, and data services, distance education, telemedicine, and video conferencing aU become common- place in the dynamic cities that provide an OSPN. These typt:s of services are ac- tively sought in communities across the country; their proliferation is inevitable. From existing and prospective busi- ness and residential consumers to com- munity governments, to service carriers and content providers and even real es- tate developers, OSPN offers tremendous MAY 2005 I www.broadbandproperties.comIBROADBAND PROPERTIES I 41 MUNI DEBATE: OPEN ACCESS [J eleguide Get closer to your customers with TeleGuide. advantages. The open and wholesale ap- proach, combined with carrier class reli- ability, extremely high capacity, and an open architecture, deliver a municipal infrastructure model that is unparalleled (see box below). The OSPN model is being evaluated in dozens of municipalities throughout the nation and is already at work in the largest municipal fibet network project in the country, UTOPIA, including 14 founding cities and 160.000 potential subscribers throughout Utah. Open access works! . About the Author Ben Gould can be reached at bgould@)dynamiccity.com. Before joining Dynamic City, which aims to be the catalyst for the digital revitalization of metro mar- kets across America, Gould was chief execu- tive officer at Apollo Health, Inc., a manu- facturer of medical devices. What OSPN Stakeholders (;et Business & Residential Consumers · True broadband -100Mbps to 1Gbps cOIlnections and beyond. . Symmetrical service - faster data downloads and uploads. . Co - better service, lower cost, more choice. · ity video nce. · rough servi and content. oice, video, and data services. The TV Listings Channel displays two hours of current and upcoming programming. eTY ^'.~;;",-f~"," CTV provides a place to post community information, notices and ads. 800-737-0852 www.teleguide.tv Communities · More satisfied businesses and residents. infrastructure for economic growth and development: (higher values, bette environ empower unity in\' comp munity. nue s motes · Ubiquitous c e. · A community at the clltting edge - a Dynamic City. Carriers, Partners, Content Providers . An economically compelling, open and level playing field in which to compete for share of consumer wallet . A willing network partner with best possible infrastructure . A network owner that won't compete New, untapped networks and regions that might otherwise economical to reach · capital entry costs · Critica mass of subscribers · Success-based pricing model . services to attract home-buyers omote development in · orne marketing cept of dy orne Promote e nced lifesty · Differentiation for developers 42 I BROADBAND PROPERTIES I www.broadbandproperties.comIMAY 2005 with family/friends CIT'V Of ASHLAND Memo DATE: TO: FROM: November 29, 2005 Mayor and City Council ~:J-- Lee Tuneberg, Administrative Services & Finance Director RE: AFN Staffina Recommendation At the end of the budget process last Spring the City reworked the proposed budget to segregate all of Information Technology services into a separate department reporting directly to the City Administrator. Part of that change was to recognize the importance of technology and the leadership of that department. To balance that change there were several essential steps identified as the budget process was completed in approving the Telecommunications Fund resources and requirements. Since that time many of the essential changes have lagged or been deferred causing further problems in operating our telecommunications system, and just as important, progress with the City's own computer system. Much of this has been caused by too many processes going simultaneously, conflict on what decisions can and should be made before others, confusion on who should make those decisions and concern about the timing and longevity of decisions made when the long-term (even short-term) future is uncertain. In the coming weeks Council will be considering action of many issues relating to AFN and technology. The more significant issues are: 1. AFN operations alternatives 2. Technology leadership 3. AFN history and future regarding contracting 4. Rates, fees, surcharges and subsidies to meet AFN obligations: - Debt service -Overhead - Improvements - Needed repairs As important as the above operations or disposition of AFN are, another significant issue has stood outside the lime-light. The City's own network and operation has not received much attention in the recent past. This is understandable given the magnitude of the issues above but item #2 will have a significant impact on internal operations since all departments rely on the management and leadership of technology for the City. Remember that the internal network, its data and systems support also operates on the fiber optic network that is AFN. The delays we are experiencing in deciding what to do with AFN has delayed our hiring a technology director that could and should be helping Council in decision making and the rest of us in managing operations. We do not have Ashland Fiber Network 90 N. Mountain Avenue Ashland, Oregon 97520 www.ashland.or.us ria' that. Whether you believe it when staff says more people are needed, the Navigant study that said AFN was understaffed or members of the Option Committee who say that a different structure of employees could accomplish what is needed, all have agreed that a strong manager with technical and business sense is essential. In 1998 the City conducted a needs assessment on technology. The report called for many steps including a development of standards and a plan for improvements. In 1999 the consultant returned to help create the standards but no plan was developed. The City does not have a documented and approved CIP for AFN or its own internal technology. The reason for this is pretty clear. The director in 1998 managed the electric system, internal technology and embarked on building AFN. In the last six years AFN 's requirements have come first and the other needs have suffered. This year we separated management of the electric system from AFN but the internal network management is still under the IT Director, whose position has gone unfilled as we decide what to do with AFN. As in the other City departments, AFN and Computer Services have dedicated staff. Leadership with a sufficient balance of skills in technology, business and management has been lacking. Along with that balanc:e is the need for processes that allow for timely decision making and implementation of initiatives that work for tec:hnology and with other City initiatives and operational needs. Regardless of what happens with AFN, the city will need a director of technology who can: 1. Manage internal technology operations 2. Develop a technology plan that addresses all city needs 3. Advise departments as new technologies become more integrated in operations 4. Track and manage telecommunications in the community regardless of the path AFN goes down. It seems as though the ongoing city needs in the above areas would be sufficient justification for any other agency to have an IT Director even without AFN as a city operation or a direct report to this position. A key question in everyone's mind as we worked through interview process a few months ago surrounded the outcome of the Options review process and what decisions might be made changing the career decision of the applicant. It also seems potentially viable that any candidate for the Telecommunications Director position could be provided a contract that safeguards their career employment as they help the City with any path chosen. And, if AFN left the direct control of the City, the candidate would mange the City's interests in telecommunication technology through the transition and the City's own internal development as long as needed and beneficial to employee and employer. The candidate could even be given the choice of going with AFN in a spin-off scenario or staying with the City if the alternative path did work well for them. Even with the Options Committee completion of the initial assignment there could still be hesitation about hiring a technology director. It is important that a new manager, dedicated to moving the City's technology program forward, be recruited. Moving ahead with current applicants may be difficult due to a potential chanlge in the focus of the job announcement but existing applicants may welcome a change in conditions of employment that makes Ashland a more viable career opportunity regardless of alternatives the City faces with telecommunication services. Staff recommends that the City Administrator be directed to reactivate and complete the interview process for a new Telecommunications Director, negotiating and bringing to Council a contract for employment that provides sufficient continuity for employer and candidate. If such a contract can not be developed with an existing candidate then the City Administrator will start a new recruitment process. Ashland Fiber Network 90 N. Mountain Avenue Ashland, Oregon 97520 www.ashland.or.us r;., '1 Citizen Speaker Request Form Please complete this form and return to the City Recorder. THIS FORM IS A PUBLIC RECORD ALL INFORMATION PROVIDED WILL BE MADE AVAILABLE TO THE PUBLIC I Meeting Date:~~;eL- 4~^( SUBJECT: AGENDA NUMBER (if on tonight's agenda): LAND USE HEARING (Please check one): FOR: AGAINST: I )Jl/t1~lr~ ~ ~olt WRITTEN COMMENTS: ~.e /':;HACk~D IF YOU WISH TO ADDRESS THE CITY COUNCIL: 1. Please complete this form and return it to the City Recorder. 2. Address the City Council from the table podium microphone. 3. State your name and street address for the official record. 4. Please limit your comments to 5 minutes, unless otherwise instructed by Mayor. 5. If written documentation is presented, please furnish one copy to the City Recorder for the official record. IF YOU WISH TO SUBMIT WRITTEN COMMENTS TO THE CITY COUNCIL: 1. Please complete this form and return to the City Recorder. 2. Written comments will be part of the official record. -~._--_.__...._-- -_.._-~ To: The Ashland City Council Nov. 18,2005 From: C. M. Auble 542 Siskiyou Blvd. (541)488-0308 Subject: Comments on the financial failure of the Ashland AFN system The following are some thoughts on the AFN situation. I am sending this as a comment I would make in person, but I will not be in town for the next council meeting. First and foremost, the City should not try to be in business competing with a private enterprise. A city run business can only work if the City has a monopoly, and can set fees as needed. I suggest the new city charter specify these conditions and require: voter approval of any future forays into the commercial arena. All such proposals should be presented to the voters only if supported by a realistic business plan. Such a plan must consider a worst case as well as a most likely scenario. Consultants tend to base their analysis on assumptions most likely to give the result they know the customer wants. They tend to be optimistic. When an enterprise gets into as much financial trouble as AFN , it is unproductive to keep throwing good money after bad. Trying to shore it up without a viable, belie:vable business plan is simply delaying the inevitable. Any successful businessman will tell you to take your losses early and get out. The longer you delay, the more it is going to cost. Hundreds of dead dotcoms can bear witness to that fact. There is only one way AFN could succeed, and that is to get Charter out of town and secure a virtual monopoly. Only then can rates be set at a viable level, and a sufficient customer base developed. It may be illegal for Charter to sell their service below cost. If so, a lawsuit may be productive. I don't like lawsuits, as outcomes are always uncertain. Also, since Ashland is also selling below cost, there may not be a case here at all. However, it is one possibility that should be considered before abandoning it. No other way of coping with this problem is obvious to me. Tacking a surcharge: on everyone's electric bill is a terrible idea, and doomed to failure. It's a slippery slope that only goes downhill. The only other option is to sell the system for as much as YOlll can get, pay off the remaining bond service out of general fund cash flow, hopefully on re- negotiated terms, and make sure the City stays out of competitive businesses in the future. .'T