Report: iProvo Strategic Summit, December 3 2007

The event on Monday turned out to be a public meeting to discuss where iProvo is going and what it plans to do to shore up operations. The scuttlebutt (that every single paper missed) is that Mayor Billings setup the meeting to try and sway the city council in general and Councilman George Stewart in particular to give more iProvo money, either as subsidies or loans. Given the intent, the goal was to show what iProvo has learned and what it's currently doing to try and turn this one around financially.

For starters is the financial picture. iProvo currently has operating income of around $195K per month or $2.34M annually. What's crushing it, however, are those bond payments. At $4.0M annually, iProvo is looking at an annual shortfall of $1.66M to cover the debt service. So what's causing this mess?

The first problem is in the financing. The 20-year bond for iProvo is currently at 6.375%. UTOPIA, through their volume, secured a bond at 6%. That might not sound like a lot, but it means an annual savings of about $120K per year on the same bonded amount. It's also unclear if iProvo secured the initial financing as a 1.5% construction loan like UTOPIA did, a move that saved interest up front.

Another aspect to the financing is the somewhat asinine way that iProvo is paid for. During the meeting, a lot of city uses for iProvo were discussed including electronic monitoring of the city power and water systems, enhanced telecommuting from any Provo residence for city employees, quick sharing of data between city departments… all things that have reduced city costs. So what did the city chip in for it's share of the network construction? Nothing. It seems that it expected private subscribers to pay off the infrastructure, a "hidden tax" of sorts. It also came out that the city doesn't pay their share of network usage, again expecting subscribers to subsidize city operations on the network.

The good news is that the city is evaluating how much other departments should chip in to use this shiny new network. The bad news is that there's no word on how much (if anything) will be chipped in to cover construction. Despite this, there are departments that will save a lot of money. The city power agency, for instance, expects to use the network to install new "smart" power meters that pay themselves off after 7 years in areas with a high resident turnover. After that, they save $43K annually on just 500 installed units.

With more accounting for city benefits like that (and making sure they pay their piece of the network), the financial picture could do an about-face. Why exactly such things haven't been accounted for to date is way beyond me. It's going to take a few months of waiting before we have that data in hand.

Another big problem is the churn rate. George Stewart passed out his own number-crunching that showed a 14% churn rate. Most ISPs with a greater than 3% churn rate end up in the dustbin of history, so tackling this problem is quite serious indeed. Understanding the churn rate means understanding the population of Provo. Specifically, it means understanding that the fluctuating student population doesn't exactly make for a stable subscriber base. Despite this, over half of all iProvo subscribers come from MDUs (Multi-Dwelling Units), the type of housing most likely to experience resident turnover.

The reliance on numbers from MDUs reveals a lot of problems. The average revenue per unit (ARPU) for an MDU subscriber is about $12.74 per month. The ARPU for a single-unit residence is nearly three times that at $35.64! Businesses are even further away at $83.69. Despite this, residences have a take rate less than half that of MDUs with businesses even lower! A large part of this is that MDUs subscribe to a single service at a much higher rate than other subscriber types.

So what accounts for the low participation rates by residents and businesses? It's a multitude of factors. Homeowners who may have subscribed to services previously may still have a bad taste in their mouth from the fallout over HomeNet and the subsequent rushed (and by many accounts botched) switch to MSTAR and Veracity. Business owners might be put off by the lack of multiple business-class service options or have worries about reliability. With all of the press surrounding the project, I can't imagine that ignorance is the cause of low subscription numbers despite the hesitancy of customers with switching providers.

Unfortunately, Provo seems to be on a path that won't entirely fix this host of problems. There are 14 different "strategic groups" consisting of about 25-30 individuals that are tasked with addressing 31 "key strategic tasks". I'm not exactly running an ISP or anything, but I can certainly tell that this is a lot of chiefs for the number of indians that must be working in the energy department. It's an unfortunate approach that reveals a certain level of disconnect from the average Internet user.

One particular approach I'm critical of is their plan to create a new certification program replete with incentives for meeting certain performance goals. I don't see that such a costly and complex move is going to really encourage the existing providers to improve customer service and reduce churn, especially since many Provo residents have negative opinions concerning both of the current providers. What Provo needs is to add more and more providers to encourage more competition and spur MSTAR and Veracity/Nuvont into getting their stuff together.

There's good news on this front. Remember that three companies had responded to the RPF asking for additional providers? Since that time, five more companies have reportedly expressed interest in joining iProvo. Kevin Garlick wouldn't name names, but it shows a lot of promise for future iProvo growth prospects. The bad news is that the aforementioned incentive process is what's holding up the show. Until they finalize this program, new providers are left on hold.

The final question is this: what will it take to make iProvo self-sustaining? Barring compensation from other city departments for their usage, It would take converting about 3872 residences (bringing the take rate from 23.2% to 42.9%) or about 1649 businesses (bringing the take rate from 14.4% to 66.0%). Given the low ARPU, even a 100% participation rate from MDUs wouldn't be able to bridge the gap.

Now the bigger question: is it possible? Absolutely, if Provo will get on board with implementing real solutions. In addition to new providers, they should be looking at offering new tiers of service. Right now, iProvo providers have a product that competes with DSL and Cable. They don't, however, have any appeal for dial-up users and those without Internet access. This has to change.

For starters, they need to follow UTOPIA's lead and raise the cap on Internet speeds to 50Mbps to match their capabilities to secure their lead in the mainstream broadband market. In order to capture the low-end market, they need to introduce a tier of service with lower speeds for a dirt-cheap wholesale rate. That's not a cash cow market, but some revenue from each home is better than none at all. A 5Mbps tier for $25/mo might snag a few of those laggards still paying that much for AOL and (now) AT&T. It would also convert households splitting a 15Mbps connection into a pair of subscribers. They also need to offer a low-price basic cable service to convert those users and a "normal" phone package with unlimited local calls and traditional (albeit lower-priced) long distance.

Such a differentiation in services will snag a lot of users who hadn't previously considered iProvo. There needs to be some work to make it happen at the wholesale end, but the real heavy lifting
will have to be done by retail providers. New providers. Again, we come back to introducing healthier competition into the network.

Despite the clear picture that things will improve shortly, the Deseret Morning News has again called for the project to be shuttered a la AFCNet. Reporters in all three major papers left out large chunks of the picture critical to understanding where the project is and where it's going. (See articles in the SL Tribune, Daily Herald and Deseret Morning News.) I remain unconvinced that their bleak outlook is what we have coming down the pike.