Santa Cruz city council considers FTTH business plan and market data today

by Steve Blum • , , , ,

A business model and an outline of a deal to build a fiber to the home (and business) system in Santa Cruz will be on the table at this afternoon’s city council meeting. In June, the Santa Cruz council authorised city staff to negotiate a public/private partnership agreement with Cruzio, a local Internet service provider. The basic terms are now ready for review. The concept is for the City to pay for and own the fiber, and lease it to Cruzio. As the background report prepared for council members explains it…

  1. The City of Santa Cruz will be responsible for building and maintaining the dark fiber infrastructure (often referred to as the Outside Plant or Layer 1) while Cruzio will be responsible for the electronics (Layer 2) as well as the internet exchange and internet service provider as the exclusive retailer on the network (Layer 3)
  2. Cruzio will pay a combination of per passing and per subscriber fees (to be determined once final costs are established)
  3. Cruzio will share risk with the City of Santa Cruz by backfilling 80% of the debt service for bond payments should revenue fall short
  4. Cruzio will design as the network partner, in partnership with the non-profit National Development Council, Economic Development’s financial advisor and consultant for the bond issuance.

Links to the financial analysis and market research prepared for the meeting are below. The financial model uses a lease payment of $6 per premise passed and $30 per subscriber (both per month) as a working assumption. In other words, Cruzio would pay the City $6 a month for every home and business passed by the network, and another $30 if someone at that address subscribes. The City would use that revenue to make bond payments and pay for maintaining the core, dark fiber network.

The financial analysis puts the necessary take rate at 34%, a level the research shows could be reached at a price point of $85 per month for gigabit Internet service. The take rate jumps to 54% at $75 and 82% at $55 per month. Competition will have an impact. AT&T and Comcast are two of the three incumbents in Santa Cruz – Cruzio is the third – and will certainly target that demand as well. But Cruzio has been competing in that arena for more than 25 years and will be starting the game with a base of about 3,000 subscribers and only needs to raise it to 7,500.

City of Santa Cruz fiber project staff report, 2 December 2015
CTC market analysis, November 2015
CTC financial forecast addendum (with current deal terms), November 2015
CTC financial forecast, July 2015
Market survey prepared by Cruzio, November 2015

Documents from the 23 June 2015 council meeting:
City of Santa Cruz fiber project staff report, 17 June 2015
Cruzio FTTH proposal to the City of Santa Cruz, 23 June 2015
CTC costs estimates for a Santa Cruz FTTH system, May 2015

Tellus Venture Associates is assisting the City of Santa Cruz with its FTTH project. I’m not a disinterested observer. Take it for what it’s worth.