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Op-ed: Is Macquarie a good deal for UTOPIA cities? The math says yes

By Jesse Harris

First Published May 19 2014 07:48 pm • Last Updated May 19 2014 07:48 pm

It’s not very surprising to see Royce Van Tassell attack UTOPIA. ("Latest UTOPIA proposal could push costs above $2 billion," Opinion, May 4)

He is, after all, vice president of the Utah Taxpayers Association, a group that receives contributions from Comcast and CenturyLink. It is surprising, though, to see him make up his own facts and numbers.

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The Australia-based Macquarie Group is in the process of making a proposal to the cities that created UTOPIA to complete building the network, and operate and maintain it for 30 years in exchange for a monthly fee assessed on a per-address basis. A fair look shows that this deal is much better than even Macquarie is willing to say out loud.

A lot of hay has been made over the requirement in the deal to have the utility fee rise with CPI. The criticisms, however, assume that the cost to provide service and the revenues from subscribers are both static. Why is it a reasonable assumption that neither of these things will also rise with inflation? It isn’t, so inflation is entirely a non-argument.

Royce also gets some very basic facts wrong about the deal. This covers 163,000 addresses, not 157,000. Macquarie has stated clearly that the utility fee will include network refreshes every seven years at a cost of about $60 million each time, but Van Tassell is claiming that it’s not included and that equipment refreshes will happen as often as every three years. He claims that upgrades will be incredibly expensive, yet 100 Mbps electronics from 10 years ago were more expensive than 1 Gbps electronics are today.

There are so many errors of fact in Van Tassell’s op-ed that it’s hard to take any of his conclusions seriously.

And so let me break down the very simple math of how the deal works and what it will actually cost subscribers.

Let’s take a worst case-scenario first. Assuming a take rate of only 30 percent and a monthly utility fee of $20, the total cost of the Macquarie deal will be $1.173 billion while revenues are estimated to be $1 billion. Less $500 million to pay for the existing bond obligations, you’re looking at a total cost over 30 years of $673.6 million, or an effective utility fee of $11.48 per month per address. That’s a lot less than the stated fee.

But what about the best case scenario? That’s assuming a take rate of 50 percent and a monthly utility fee of $18. This brings the total cost to $1.056 billion, and total revenues to $1.5 billion. Less the $500 million for existing bond obligations, you’re looking at $56.2 million over 30 years, or a scant 96 cents per month per address. That’s quite a bargain, considering that Comcast slashed rates in Provo at least 50 percent in response to Google Fiber.

So really, it all depends on the take rate. The question is what take rate we can reasonably expect. Brigham City got a 28 percent take rate with a $3,000 installation charge, but Macquarie will eliminate it. Provo managed to keep 35 percent despite having disastrously bad Internet service providers like MSTAR and Broadweave, but Macquarie has well-respected ISPs like XMission, Veracity and many other local companies.


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If Macquarie achieves this take rate, the cities hit the "wash" point where their costs are the same whether or not they opt to go with the deal.

Even at the point where the deal is a wash financially, cities still get a completed network with an included basic level of service for every resident. Comcast and CenturyLink will slash their prices substantially in response to the competition so that every citizen benefits regardless of if they use the network.

Given the very easily attainable goals and the high likelihood of reaching them, it would be ridiculous for cities to not move forward with negotiations under Milestone Two. Or to listen to a naysayer like Mr. Van Tassell who is paid to say the things he says.

Jesse Harris, Sandy, is senior editor of FreeUTOPIA and has been doing citizen reporting on broadband in Utah since August of 2006. He is independent of UTOPIA and its sponsoring cities.

freeutopia.org



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