Lakeland officials questioning broadband's merit

LAKELAND — After two detailed studies of Lakeland's potential to become a “Gig City,” the city's leaders are questioning if they have the information to decide whether to launch a high-speed internet service. An academic expert says city commissioners are right to be skeptical.

Commissioner Bill Read peppered John Honker, the president and CEO of Magellan Advisors, with questions about his company's experience and success rate in launching municipality-owned broadband on Aug. 19.

“How many have you done? How many did you recommend and how many did you not recommend?” he asked. “Of the ones you did recommend, what's the failure rate? Why did they fail? Why did they succeed?”

The business plan drafted by city broadband consultant Magellan estimates Lakeland could build a citywide fiber optic system for roughly $97.5 million, split between $79.5 million for infrastructure and $17 million starting capital. Once fully built, the network could produce on average $9.5 million in revenue per year.

The business plan provided estimates, but the company warned those estimates should not be considered as a business recommendation.

“The city hired Magellan to develop a broadband business plan, not to recommend whether the city should move forward with the broadband business plan,” Magellan wrote in a letter to The Ledger. “Magellan provides studies and assumptions that show whether or not the business, if the business plan is followed and achieved, can be sustainable.”

That leaves city officials to ask themselves the question: What matters most when trying to determine if launching an internet service is the right move for Lakeland?

“We would measure success by what we are able to provide through services and net as a contribution to pay off the debt and to provide revenue to the city,” Mayor Bill Mutz said.

An expert weighs in

Christopher Yoo, a University of Pennsylvania law, communications, computer and information science professor, said he believes Lakeland commissioners should take the time to thoroughly review Magellan's report.

“Any city considering building a fiber network must study the track record closely and ask in a very skeptical manner how likely they are to be one of the winners or become one of the losers,” he said.

Yoo, also director of UPenn's Center for Technology, Innovation and Competition, co-authored a May 2017 study titled "Municipal Fiber in the United States: An Empirical Assessment of Financial Performance." It examines the financial status of 20 municipal fiber networks across the country.

“What we see in many examples are promises these projects will generate cash, when in the majority of cases they do the opposite,” he said. “The best justification for building fiber to benefit your citizens is to construct it on a break-even basis.”

The UPenn study found 11 out of the 20 municipal broadband networks had a negative cash flow over a five-year period from 2010 to 2014. Of the nine municipalities able to generate a profit, Yoo said five saw profits so small it would take more than 100 years for them to pay off their costs.

Mutz said based on his business and life experience, he's concerned that Magellan's projected costs are off the mark and may not fully account for changes in technology.

“I think we're 25-30% understated in costs in the study,” he said. “That's a scary number."

If the mayor is correct, it could add roughly another $30 million to the project's overall price tag.

Profit or not

Lakeland's cost of building a fiber optic network capable of gigabit-speed internet can't be stated without considering the city's potential profit.

Magellan's latest estimate states it would take 9-10 years for the city to begin seeing a net revenue if it chose to pay down its startup debt, or loans, as quickly as possible. Once the system is fully launched, Lakeland could make $9.5 million a year in revenue. That's providing that 38% of residents and 41% of businesses sign up with suggested pricing for internet service starting at $20 a month.

Commissioner Justin Troller said he anticipates the city will see a higher take rate, possibly capturing 50% of the market, based on preliminary interest and community feedback.

“I don't think it will be difficult for us to get our market share,” he said. “Our community is desperate for an alternative to the current providers.”

Honker said the sales and marketing aspect is one of the highest risks for the city moving forward. Magellan suggested Lakeland should consider hiring an outside company to assist in signing up customers.

That point was strongly echoed by Yoo, who said one of his key takeaways from his academic study is that municipal broadband utilities often fail in this area.

“What I find, by and large, is the networks are generally well run, but the biggest problem is they don't generate enough revenue,” he said.

Seeking examples

Magellan gave elected officials a list of three cities to look at as successful examples of municipal internet service providers. Whether these cities' models should be followed, based on their finances, may be questionable.

On page 9 of the city's draft business plan, Magellan cites Chattanooga Electric Power Board in Tennessee and Lafayette Utility Systems in Louisiana. It was not immediately clear in the report how these utilities were being measured.

“Community broadband generally has many goals, including improving competition, bringing better services to the community, providing lower prices through competition offerings, increasing economic development and building infrastructure for future applications that improve the quality of life,” the company said in a statement. “Broadband businesses must also be financially sustainable and cover their costs.”

Lakeland's elected officials have largely agreed the city needs to ensure residents and businesses have access to high-speed internet to become a smart city and add to its potential economic growth.

However, Yoo said based on his calculations of Chattanooga and Lafayette's finances, he would be cautious about either city being considered an example to follow. He estimated based on Chattanooga's financial statements from 2010 to 2014 that it will take the city more than 400 years for the project to pay for itself. Lafayette's financial reports through 2017 show the utility has yet to turn a profit, according to Yoo, and is losing an average of $5 million a year.

“I would regard Lafayette as a cautionary tale and a significant one at that,” he said. “When projects go bad, they can go bad in a big way.”

Yoo said he has obtained updated financial reports through 2017 for all 20 municipalities he studied, four of which have defaulted since 2014 on their loans. He plans to publish an updated report with his co-author in the next month or two.

“Revenue assumptions are what the cities struggle to meet the most,” he said.

Troller said he didn't think it was fair to compare Lakeland to other cities given its unique assets, such as its dark fiber network, and without full, detailed knowledge of how these other cities built their networks.

“It's a good opportunity to see how others have done it, but we are unique,” he said. “They may not have our infrastructure, we may pass that hurdle many others are still facing or their debt service may be higher.”

Lakeland's future

After Magellan's Aug. 19 presentation to Lakeland commissioners, city staff was instructed to look into legal and financial implications of launching a broadband utility in greater detail.

Troller said the city will also be scheduling community meetings in the upcoming months to discuss the proposed broadband plans and hear feedback.

“I will be a champion of this issue as long as I have breath in me,” he said. “It's that important not even for today, but for the generations to come.”

Troller said he has calculated if city residents are willing to accept a 0.5 millage increase for the next seven years, the city could pay back the $17 million it needs to launch broadband. This would increase the average Lakeland homeowners taxes by approximately $35 to $45 a year, according to Troller, and create $2.75 million a year additional revenue for the city.

“It has to be a commitment from our community,” he said. “With that level of commitment we can show we are serious, our people are serious and they are willing to invest in the infrastructure of our community.”

Troller said he believes those who signed up for the city-run broadband would make up the $35 to $45 in taxes their first month as customers, and then would continue to save. He would propose the millage rate sunset after seven years, or go on the ballot for a public referendum if needed.

“My goal is to have a decision made before I leave office whether we are going to do it or not,” he said. “We've talked about it long enough.”

Sara-Megan Walsh can be reached at swalsh@theledger.com or 863-802-7545.