Muni FTTH pitch in Pacific Grove goes from no cost, no risk to pay us $1 million a year

by Steve Blum • , , ,

Bawtree-Jobson in Pacific Grove yesterday.

A fiber to the home plan for the Monterey Peninsula city of Pacific Grove has transformed from a commercial business venture into an appeal for public money. SiFi Networks, a British company with a corporate heritage of real estate development, began last year by putting a simple proposition in front of several Californian cities: give us unlimited access to your streets, sidewalks and, yes, sewers and we’ll build fiber to every home and business in town.

Like Macquarie’s offer for Utah’s Utopia system, SiFi’s business model is to take a low risk middle position in the deal and flip it to institutional investors. Initially, the risk would have been offset by signing long term operating agreements with incumbent cable and telephone companies. But as company CEO Ben Bawtree-Jobson said with classic English understatement yesterday, “there’s been some kick back from those tier one service providers”.

In other words, Comcast and AT&T said no. Which was completely predictable: their business model is 180-degrees away from buying a ride on someone else’s fiber.

Equally predictable, the next step was for SiFi to go back to the city and ask it to finance the deal and take on the risk. With all due humility – oh, okay, with barely sufferable smugness – I’ll take credit for making those predictions last year when a couple of other cities hired me to evaluate SiFi’s offer. Not preternatural clairvoyance on my part – pretty much anyone who understands the business made the same call.

Bawtree-Jobson laid out the new deal:

  • SiFi builds the network for $15 million and Pacific Grove leases it for 30 years at a price in the $1 million a year range (ramps to $852,000 in year 3 with cost of living increases after that).
  • Third party ISPs resell services, with a residential gigabit pegged at $90 a month.
  • If the system hits a 38% take rate in five years, it’ll pay for itself. If it doesn’t, taxpayers pick up the difference.

In very round numbers, each of the 8,000 or so homes and businesses in Pacific Grove would be on the hook for a bit over $100 a year. Call it $10 a month. That’s just for the lease payments if things don’t work as planned. Service is extra. So is the added cost of maintaining 60-plus miles of microtenched streets.

Thirty-eight percent is optimistic for a system starting from zero in a market dominated by AT&T and Comcast. Even more so in an ageing resort town with a high proportion of second homes. On the other hand, the cost – at about $2,000 per premise, assuming the estimate is good – is reasonable. At least from a broadband development perspective. Whether the same is true from Pacific Grove’s perspective is a question for the city council to answer next week.