Monticello FiberNet Attempts to Adapt Business Plan

Monticello, a small community of 13,000 about 40 miles northwest of Minneapolis, built one of the most advanced broadband networks in the midwest and delivers some of the fastest connections available in the state at incredibly competitive rates. The Twin Cities metro area, stuck mostly with Comcast and Qwest, cannot compare in capacity or value.

Monticello is fairly rare in the publicly owned FTTH region because it does not have a public power utility and services on the network are provided by a third party, Hiawatha Broadband Communications -- a Minnesota company with an excellent reputation and track record.

Unfortunately, Monticello's network suffered costly delays due to a frivolous lawsuit filed by the incumbent phone company in a bid to bleed the publicly owned network while it suddenly invested in its own second generation network (that it previously maintained was totally unnecessary for a small town like Monticello).

Monticello lost a full year on the project, which has hurt its finances significantly. More unexpectedly, it has become the only community in North America where all residents have a choice between FTTH networks. They also have Charter in the mix. Add to this the economic downturn that hit just after they financed the network in 2007 -- the population growth has been much lower than forecast. The predictable result? Much lower prices, lots of community savings, and a publicly owned network that is behind its projections.

The local paper recently ran a story about the project, "FiberNet struggles in a sea of red. Should you read the full piece, please be aware that the inaptly named "Freedom Foundation" has no credibility, existing solely to defend massive corporations like cable and telephone companies.

For those who wonder why incumbents filed absurd lawsuits that have a vanishingly small chance of winning, note this discussion from the story:

“It stopped us from really building the system by about a year,” said Finance Director Tom Kelly, “which put our revenue collections about a year behind. Obviously if you don’t have a system, you can’t bill people for it.”

“The delay has created a substantial impact in our ability to cash flow because money had to be spent paying for costs related to the lawsuit,” added O’Neill.

At the same time, Kelly said, they still had to make interest payments on their bonds, leaving them with expenses but no revenue source. He said if the city had pushed its business plan back about a year, they actually would be ahead of the game from a revenue standpoint. From an expenditure standpoint he said they would still be behind. This is happening, he said, because of the added cost the city incurred when it tried to build the system in 18 months versus the two to three years it had planned on before the lawsuit.

The City operates a municipally owned liquor store and is using proceeds from that fund to cover shortfalls in FiberNet currently. In time, they plan for FiberNet to get back on its feet and repay the liquor loans. Should the problems continue, Monticello will have to make a choice. It issued non-recourse revenue bonds, meaning the City has no obligation to cover shortfalls. However, there are credit implications of that decision.

FiberNet Monticello

In 2007, voters overwhelmingly supported the network with a 74% yes referendum vote. Unfortunately, people often have short memories when they suddenly see all the prices in the market drop and billboards advertising a free TV for those who switch away from the publicly owned network.

In response to the story, and more generally, the less enthusiastic response to the network than was demonstrated in the referendum, Mayor Clint Herbst published an op-ed in which he notes that they followed the will of the people and TDS sued the town, disrupting their plan.

He finishes strongly, with a personal example as the owner of a video rental store:

Those operating dollars were counted on to get this system past its first couple of years. Anyone that has started a business knows that the first couple of years are critical. In FiberNet’s case, many dollars have to be expended to get the system in place before revenues can be realized. Our business plan showed that it would be close to dipping into the red as our expenditure exceeded our revenue and that is why we needed the full $26 million - not the $20 plus million left after our battles in court.

The whole idea behind this system has been to bring in some competition and it has been a successful mission. Monticello has gone from paying some of the highest rates in the nation with miserably slow speeds, to some of the lowest rates in the nation with the highest speeds available. FiberNet will not be sending your dollars out of the city or even the state. We will keep those dollars local and when the bond is paid off, those dollars will go back into our parks, programs, aid in lowering the levy and so on. FiberNet cannot compete with the predatory pricing that others use. We are charging a fair price for great service and a top-of-the-line system. Others have come in to offer great deals at prices that are designed to put your company out of business. It is no different than what Netflix and Red Box did to the video stores. Now that the video stores are out of business, the prices have started and will continue to increase. You are fooling yourself if you think it will be any different in the telecommunication industry.

People have to make adult choices. They city chose to build a publicly owned network that significantly lowered prices by all competitors in the market (if not list prices, the competition has increased the use of promotional discounts). If people choose to then turn their backs on the network, that is their decision. But they should not fault elected officials if the network fails to break even. The community will likely have gained on net -- the lower prices everyone pays keep real money in the community that almost certainly adds up to more than the unpaid debt of the network. But complaining about government is a far easier exercise than a full evaluation of the fiber-optic network.