It isn't easy to build a wholesale or retail fiber access business when competing with entrenched cable and telco competitors, as Google Fiber will do in Kansas City, Mo. and Kansas City, Kan. But Google Fiber at least has a couple of advantages.
Its symmetrical 1-Gbps access speed, plus free 5-Mbps service, can be differentiated from what cable and telco providers offer in the Kansas City markets. Where rival service providers cannot do that, they sometimes run into trouble. UTOPIA provides a possible case in point.
The Utah Telecommunication Open Infrastructure Agency (UTOPIA) is building a wholesale fiber-optic network that offers its users access to high-speed video, data, and phone services. Operational mistakes aside, UTOPIA might have made a fundamental mistake, namely building a network that, although pitched as a "faster" alternative at the time, has fallen behind as cable and telco competitors have boosted their access speeds, in response.
To be sure, UTOPIA says it offers a symmetrical 50 Mbps service costing $35 a month, far less than the 50 Mbps service offered by Comcast in Salt Lake City, for example. Still, some would argue that differentiation is less the issue than the degree of difference. At that level, UTOPIA access prices are an order of magnitude better than offered by Comcast.
All venture capitalists are familiar with the problem, namely that a new contestant challenging market leaders has to offer user experience benefits that are perhaps 10 times better than what currently is available. Those benefits can include pricing or performance improvements, but the point is that an order of magnitude better experience is necessary for an upstart to have a chance of unseating a market leader.
In part, the reason is that incumbents, faced with significant new competition, typically will boost their offers, slicing the advantage the new upstart offers, before the upstart has a chance to gain critical mass. That might be the case for Utah's UTOPIA effort.
A new audit shows the agency was unable to complete construction of the network as quickly as
planned. UTOPIA originally planned to build a broadband network in three years and to achieve a positive cash flow in five years.
“However, it has not met that schedule,” the audit says. “Instead, the cost of financing and operating the network increased before UTOPIA could provide a substantial number of
customers with service.”
As a result, revenues have not been sufficient to cover its costs. Year after year, as operating deficits have accrued and the agency has developed a large negative asset balance.
UTOPIA has issued $185 million in bonds to pay the cost of building its network, “but most of the bond proceeds have been invested in poorly utilized and partially completed sections of network,” the report says.
“As a result, the network is not generating sufficient revenue for the agency to cover its annual debt service and operating costs,” the report notes.
Worse, UTOPIA has had to use a large portion of its bond proceeds to cover operating deficits and debt service costs. “The use of debt to cover the cost of operations and debt service is
symptomatic of an organization facing serious financial challenges,” the audit says.
Since 2003, when UTOPIA began work, only one third of the network has been completed. Buit that might not even be the biggest problem. “One underlying challenge is that UTOPIA’s infrastructure investment is not producing sufficient revenue,” the study notes. “In most areas where construction has been completed, UTOPIA has insufficient subscribers
to cover the cost of building and operating the infrastructure.”
Though backers had expected to get adoption (penetration) rates of about 35 percent, so far the network has gotten penetration of only about 16 percent.
That has huge implications. A competitive network, facing both entrenched cable and telco suppliers, has economics that are hugely dependent on penetration rate. At 16 percent penetration, UTOPIA is getting half the revenue it had projected, and manhy would argue, as a rule of thumb, that penetration in the 20 percent to 30 percent range is probably requires for long term success, in the absence of additional revenues from voice or video entertainment services.
Among other problems, UTOPIA has used a wholesale model, and therefore has been highly dependent on its retail partners for sales success. And it turns out that many of its retail customers have defaulted on owed payments, which further puts pressure on UTOPIA revenues.
As a direct result, UTOPIA now also has switched to selling retail services directly.
Though the audit attributes much of the difficulty to management failures, and though that likely is an issue, the larger issue might simply be that customer demand for UTOPIA services is simply not as strong as expected, when there are other suppliers with a vested interest in meeting existing demand for high-speed access.
That might not be quite as big an issue for Google Fiber in Kansas City, Kan. and Kansas City, Mo., given the huge difference in access speed Google fiber is able to offer.
UTOPIA uses a “fiber to curb” network architecture that offers speeds similar to AT&T’s U-verse, but arguably less than what cable operators can offer, using DOCSIS and bonded channels.
Some might argue that UTOPIA’s market offer is not “better” than telco or cable offers, in terms of speed and experience. Venture capitalists are familiar with that problem. UTOPIA did not offer an order of magnitude better experience, when it started.
Google Fiber, on the other hand, does have that advantage, clearly, in terms of "speed," and arguably in terms of price, as well. That means Google Fiber might have a better chance of taking 30 percent share, than UTOPIA has been able to do, at least so far.
Friday, August 3, 2012
Do UTOPIA Failures Mean Anything for Google Fiber?
Gary Kim has been a digital infra analyst and journalist for more than 30 years, covering the business impact of technology, pre- and post-internet. He sees a similar evolution coming with AI. General-purpose technologies do not come along very often, but when they do, they change life, economies and industries.
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2 comments:
Why don't you include our response to the audit? http://utopianet.org/blogs/news/utopia-s-response-to-legislative-audit
UTOPIA is fiber to the home, not curb. And yes, it's a much better experience for our subscribers: A 50/50 connection for $35 a month? Like Google, we offer a 1-gig connection. Perhaps you are not fully up-to-speed (literally) on what we offer.
Untopia is 37 feet from empty conduits GIVEN to them by neighboring homeowners. Can't get it, no timeframe, new fees from Untipia. Orem is into them for millions, and now Google is coming to Provo. This is a great article.
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