Tag Archives: sifi networks

Competition will make or, likely, break Pacific Grove muni FTTH business model

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The business case for a muni fiber-to-the-home play is the number one worry as the Pacific Grove city council considers whether to pay SiFi Networks about a million dollars a year for the next 30 years to build and operate a system.

At its meeting on Wednesday evening, the council heard a presentation from Lee Afflerbach, principal engineer with CTC Consulting, who was asked to evaluate the technology. The questions afterward, though, were all about the business model: would the system make enough money to pay the lease, or would taxpayers be on the hook?

“We have not been engaged to look at the business plan yet”, Afflerbach replied. That said, he talked about muni FTTH projects he’s worked on, saying that the successes he’s seen have been in rural areas with no cable operator, and where the local agency involved already runs an electric utility or similar. Even getting to 30% penetration – SiFi says it needs at least 38% – is difficult when there are already two competitors in the market.

“Where this has been most successful is where there’s only one [competitor] and there’s a successful utility operator”, Afflerbach said. “You don’t have [utility] infrastructure, you don’t have a utility”.

The problem is compounded by the fact that Pacific Grove is served by AT&T and Comcast, which will respond aggressively.

“They are very proficient at changing their rates and such. Predatory is the word, I think”, Afflerbach said. When a small city takes on Comcast or AT&T, the disparity in resources and aggressiveness can be fatal. “It’s sorta like infinity versus zero. Your odds aren’t very good on that”.

There are other factors that, on the surface at least, don’t tend to work in Pacific Grove’s favor. Thirty percent or a little more – call it a third – of households are second homes, and the demographics of the other two-thirds skew older.

The next step is for city staff to dive deeper into SiFi’s proposal; that process was expected to begin the next day.

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

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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.