Thanks to Jeff Hoel for providing the transcript for the episode 45 of the Community Broadband Bits podcast with Andrew Cohill on common mistakes in community networks. Listen to this episode here.
Lisa Gonzalez: Hi, and welcome again to the Community Broadband Bits Podcast, from the Institute for Local Self-Reliance. I'm Lisa Gonzalez.
Christopher recently spoke at the Broadband Properties Conference in Dallas, and met with Andrew Cohill, President and CEO of Design Nine. Andrew's firm advises local communities that want to create their own next-generation networks. With years in the field, Andrew has a rare, unique perspective. The two talked about some of the dos and don'ts of planning and owning community-owned networks. Here are Andrew and Chris.
Chris Mitchell: Howdy, and welcome back to another episode of Community Broadband Bits. Today, we're in Dallas, and I'm sitting here with Andrew Cohill, of Design Nine. We're here at the Broadband Properties Conference. Andrew, can you tell me a little bit about what you do?
Andrew Cohill: Design Nine helps local communities design and build networks. We're also beginning to operate those networks, on behalf of those communities. So, we'll come in, do a business plan, do the financial pro formas, spec out the network, identify the right engineering and construction firms to actually get the network built, and then we'll help the community operate it.
Chris: When you and I first met -- 2008, Danville, Virginia -- Danville is one of your longer-term clients, I think. Why don't you tell us a little bit about Danville?
Andrew: Danville's one of the first municipal open access networks in the United States. They were a community with almost 20 percent unemployment at the time. And they saw that fiber was going to be key to changing the local economy. And so we helped them put together the business plan and the technology they needed. And, today, there's been a real revival in Danville. They're attracting new jobs, new high-tech companies. And they're continuing to expand the fiber network to homes and businesses.
Chris: Right. And it's been about four or five months since we spoke with Jason Gray on this show. So, people who are wanting to know more about Danville can go back and check out that show.
But it's been maybe three or four months since you and I had a conversation about some of the common mistakes that communities can make. And I was really interested in getting you to speak about those. Can you identify one common mistake that communities have made? And before I turn it over to you for that, let me just specify that in all of the successful networks that we've seen, we've seen many mistakes. Just because communities make mistakes doesn't suggest that the network has somehow failed. It's just, in dealing with these very complex processes, mistakes happen along the way, and they're corrected. But, ideally, you're not making the same mistakes that someone else has made. So, I think that's the point of the show.
So, let's start with a common mistake that we've seen in the field.
Andrew: One of the biggest issues we see is staffing. Some community projects overstaff. They hire too many people too soon. They don't have the revenue to support the staff. They get into financial problems.
The other big issue we see is hiring unqualified people to either manage the network or manage the business of the network. And there's a tendency to think that, well, this is a local community effort; we need to spend -- you know, we need to hire somebody local.
Andrew: And that's good if they're qualified, and they have the right background and experience to do the work. But sometimes, there's a little too much focus on getting somebody local, at the expense of getting somebody qualified.
Chris: OK. So, let's say that I'm setting up a network in my community. And I really want to make sure I have great customer service. It's commonly a strong desire. How do I know the right number of people to hire so that I can provide that high quality of service, without getting caught overstaffing?
Andrew: Well, it's always got to start from the financial pro formas, and, you know, a realistic budget. We often see people get into the overstaffing situation because they've set very unrealistic revenue expectations. So, you've got to start your staffing plan from a very conservative estimate of what you think your revenue's going to be. And that's got to be the number-one driver. You know, after you've figured out what you can afford, then you've got to -- as you say, you've got to look at making sure you can deliver the right quality.
But that sort of leads to a second problem, which is, we see communities don't do good, solid financial and business planning. We've gotten calls from networks that have been up and running for, you know, months, or a year or two. And the first thing we say is, well, let's see your business plan. And the community goes, what? We don't have one. And so, you can't even tell if you're spending the right amount on staffing.
Chris: Um hum. You know, and, actually, it brings up an interesting point, where, recently, I served with a number of other people to help a community in metro area -- Prior Lake, south of Minneapolis -- develop a sense of how they can build a network. And what it would take. And we came together with a plan. They had hired a consultant to help them with that plan. And you were in the running. And then, after they developed a form of a plan and a report, then they actually put out ANOTHER request. And they came to you, and you went over the report, to give some feedback. And how common is that, for a city to get reviews from different consultants, and to have multiple levels of review?
Andrew: Um, I wouldn't say it's common. But I will say, we do get called in from time to time to review somebody else's work. And we're always happy to help out.
Chris: Right. I mean, from my perspective, I just think, having a little extra sanity check makes a lot of sense, particularly when you may not have someone else locally that can provide that level of oversight.
One of the things that I've identified previously, and you've brought up as we've talked about some of the common problems, is overreliance on grant funding. At the Institute for Local Self-Reliance, we focus really rigorously on the economics, and trying to make sure that these things are sustainable. And I've long been -- discouraged communities to go after grant funding, in part because we think the business model can often be made to work without grants. And we worry about an overreliance on grants. So, it's a sentiment that we share with you. And I'm curious if you can share some of your experience with how one should work with grants, and common pitfalls.
Andrew: Well, I think -- you know, grants can be quite useful. They can be very important for getting a project started. But it goes back to my earlier comments about a business plan. If the business plan is, get a grant, and then run the network and hope good things happen, you're in trouble. If the business plan says, we're going to -- we've got realistic revenue expectations, we've got a "basket" of funding, and a grant is just one of several sources of funding, then, you know, a grant can work out very well. But we see a lot of communities rush out, get a grant, spend the money, and then ask themselves, how do we run the network? And that almost always leads to difficulties.
Chris: One of the -- one of those difficulties, I think, comes from maybe having a business plan that's not adequate. And so, you may not be tracking the right metrics. So, for a community that's trying to figure out if they have a right business plan, or how to put a right business plan together, what sorts of things should they pay attention to?
Andrew: Well, the first thing you really need is what we like to call an investment-quality financial pro forma. You need an income statement. You need a balance sheet. You need a cash flow statement. It's the usual stuff that accountants and bankers want to see from a business. Um ...
Chris: Puts the rest of us to sleep. But it's important, right?
Andrew: It's important stuff. Then you need take rate projections. You need an operational expenses section. And you need a capital expenses section. The capital expenses section is driven by your take rate projections, and tells you, you know, over a period of, you know, three or five or ten years, how much money it's going to take to build the network. And then, of course, your operational expense section tells you what it's going to take to operate the network on a day-to-day basis.
We recently got called in. Again, it was a community that had hired a local consultant. They were having trouble getting started. And we said, let's see your financial statement, or your pro forma. And it was it was literally about a ten-cell spreadsheet.
Chris: Um hum.
Andrew: Didn't cover even a whole page. Our financial pro formas typically run 35 or 40 pages. And so, when we go to a banker with a community, and talk about lending money, the bankers pay more attention, because we've got the right level of detail.
Chris: So, once you've developed a good business plan, and you feel comfortable with it, is that all there is to it? Or does it just run itself? How does one deal with this as the network starts to turn on customers and go through the years, where you've -- you start off by connecting customers, and then you hit a point where you're sort of leveling off. What sorts of things do you have to do along the way?
Andrew: Well, that's an interesting question. If your new customer acquisition is leveling off, there's only one of two possibilities. One is, you've been extremely successful, and you've built out everywhere that needs to be built out. That's the good one. But what we see is, a lot of communities get started, and then they can't expand. And most startup community projects have to expand and add more customers to get into the black. And so, having a plan to -- and so, here's one of the issues, particularly with open access networks we've seen, is, you can't rely entirely on the service providers to do all of the marketing.
Chris: Um hum.
Andrew: The service providers in an open access network certainly have to make their own sales, acquire their own customers. But an open access, or community-owned, network has to take on an ongoing role for what we like to call marketing and public awareness. We've gone into communities where there's been a community network for three or four years, and when you do a little survey, you find out nobody even knows it exists.
Chris: Um hum. Right. And, in fact ...
Andrew: And they were quite surprised.
Chris: So, a common situation, I think, is, you start a network, and you feel like you're doing really well, because you very quickly get 10, 15, 20 percent of the population. And then it starts to level off, because you've sort of exhausted the people who are already aware of it. They're enthusiastic about it. They've had a bad experience with the incumbents. They're technologically aware. You know, that's commonly a chunk of about 20 percent of the population. And you need to have a plan for connecting them first, but then penetrating beyond them, right?
Andrew: That's right. And that means, typically, having the right mix of services. We're seeing that, you know, being able to offer some kind of TV offering is critical. The good news on TV is, there's now, you know, some very interesting IPTV-based offerings that are very competitive with cable at much lower prices. So --
You've got to market awareness of the network. You've got to market awareness that we've got two or three or seven providers on the network.
Chris: Um hum.
Andrew: Here's the services. Here's how you find out about the prices. And you've got to have the right providers with the right services.
Chris: So, let's end on a bit of an upbeat note, I think. One common thing that I think some networks struggle with is telling others how the network should be evaluated. Any network that is owned by a local government is always going to be evaluated based on whether it's being sort of a net drag on the budget or whether it's creating positive revenue to feed into other programs. And so, every community is always going to be evaluating their project on the basis of that. But smart communities remind the local voters -- the constituents -- that the network should be evaluated on a variety of criteria, right? No one's building this network just to make money. It's a terrible way to just make money. They're doing it for a variety of reasons. So, what are some of the things that a community can do, to make sure a network is being evaluated properly?
Andrew: Well, that's a tough one, Chris. But it's an important issue. You know, we get asked a lot, well, can you show us the ROI on a network?
Chris: Return On Investment.
Andrew: Yeah, return on investment. And the irony is -- in that question is, nobody asks, what's the ROI on a park? What's the ROI on sidewalks? And, to be fair -- I mean, this is a business. If the community or the local government is doing this, it needs to be run in a business-like manner. You know, putting in sidewalks is an amenity, it's not a business. But at the same time, you're absolutely right, there's some benefits beyond just, you know, making money for the General Fund. And it's an education process, particularly for elected and appointed officials. So that, particularly, they're not surprised, once the network's up and running, that, you know, it may take 12 or 18 months to get into the black. But we've seen a number of networks -- community networks -- get into the black in Year 1. Because they had the right business plan, they had the right financial projections. And, you know, they identified the right CAIs -- community anchors -- and the right early mix of customers, ...
Chris: Um hum.
Andrew: ... that generate the cash flow to cover operating expenses.
Chris: I'm curious if you'd be willing to identify some of those. I just want to throw out there that in our experience, the incremental builds, I think, can achieve that well. But if you're bonding for a lot money to build a full-blown fiber-to-the-home -- connect-everyone-very-quickly-type approach, I think often they take multiple years before they can break even. So, maybe, can you just clarify a little bit, what kind of projects fit that mold of being able to break even in the first year?
Andrew: Well, I think you said it right. It's -- I think, for any community project now, the days of bonding for, you know, $10, $20, $40 million -- building everywhere and then hoping you get the take rate -- is over. Large or small project, now, you've really got to take an incremental approach. You've got to identify and test the marketplace, split your neighborhood up into areas. Make sure that you know, in an area, you're going to get -- you're going to meet your take rate projections. And you don't build, until you know you're going to meet your take rate projections. And what we're seeing is, that's what works. No matter whether the project's large or small, you've got to do an incremental approach. And that doesn't mean you can't have a fairly high-speed build-out. But the days of -- we've bonded, or we've got our grant money, and we're just going to build and hope good things happen -- I think they're over.
Chris: OK. Yeah, I think some might object that -- the idea that those days ever existed. I think a lot of the communities that we know of -- they have taken greater care after those days. So, I don't think you're -- I think you're making a very good point that communities have to be more careful, without suggesting that the existing networks were somehow reckless, right?
Andrew: Oh, right. And, you know, that's true. The good news is, there's a lot of community projects, as you started off. They've made some mistakes. Most of them have recovered ...
Chris: Um hum.
Andrew: ... and are doing very well now, or are doing better. And, you know, the rest of us are learning from those early pioneers.
Chris: Right. Thank you so much for joining us for a Community Broadband Bits Podcast. It's really helpful having someone who has worked with so many networks to offer these thoughts on how they can learn from each other.
Andrew: Thanks, Chris.
Lisa: That was Andrew Cohill, President and CEO of Design Nine, visiting with Chris in Dallas. For more on Design Nine, go to their website at designnine.com . The firm also has a tag on muninetworks.org , where you can see projects that we've discussed that use Design Nine.
Send us your questions and comments. You can e-mail us at firstname.lastname@example.org . Our handle on Twitter is @communitynets . This show was released on May 7th, 2013. We want to thank Mount Carmel for their song, "Oh, Louisa / Slow Blues," licensed using Creative Commons.