The Problem with Cherry Picking
Successful businesses mostly pursue profitable activities and avoid activities that are not profitable. Of course. Businesses exist to make a profit.
Infrastructure providers, however, typically don’t enjoy that luxury. Treating all citizens as equals, governments typically require infrastructure providers to provide uniform and equal services to all citizens. The theory is that, for the privilege of using public resources (e.g., pole attachments, public rights-of-way, etc.), infrastructure providers have to figure out a service model where the profitable areas will subsidize the areas that are not profitable, so that everyone will receive the same level of service.
It is not rocket-science to figure out which areas will be the most profitable. When it comes to telecommunications infrastructure, the most profitable areas typically are new, affluent neighborhoods – where people pick advanced services and add-on features and pay their bills in higher percentages.
In 2004, UTOPIA argued that Qwest was cherry picking, by rolling out DSL in some neighborhoods and ignoring other neighborhoods. UTOPIA argued that cherry picking is an awful thing, and that UTOPIA’s driving impulse was to provide great services to everyone (i.e., ubiquitous service).
UTOPIA now has abandoned that philosophy. In communities where UTOPIA has to stand on its own (meaning, in cities where its bonds are not backed with taxpayer money), it – along with Qwest – wants to repeal ordinances requiring ubiquitous service, so that it can cut exclusive deals with developers. In the comments to the last post, someone asks what’s wrong with that.
A key question is who should the infrastructure benefit – consumers or developers? Once a developer picks a provider, consumers lose all other options. Fees for the chosen provider are included in homeowner association (HOA) fees that residents are forced to pay. Thus, those homeowners aren’t “customers” to the provider picked by the developer; they are hostages.
Instead of homeowners deciding whether they want cable, satellite, or cable antenna – and, then, deciding which provider they want in that arena (based on cost, service, neighbors’ recommendations, etc.) – those hostages can choose between whoever the developer picked and whoever the developer picked.
Developers typically base their pick on the basis of one thing – their wallet. Whether it is water, power, trash pick up, telecommunications, or anything else where homeowners will pay a fee, developers want to control the selection and the billing. They will pay one cost, and charge homeowners a different (i.e., higher) cost. It is a way for a developer to stay in a buyer’s pockets long after the house is sold – “residual income.”
Consumers, not developers, should control choices and enjoy discounts.
Infrastructure providers, however, typically don’t enjoy that luxury. Treating all citizens as equals, governments typically require infrastructure providers to provide uniform and equal services to all citizens. The theory is that, for the privilege of using public resources (e.g., pole attachments, public rights-of-way, etc.), infrastructure providers have to figure out a service model where the profitable areas will subsidize the areas that are not profitable, so that everyone will receive the same level of service.
It is not rocket-science to figure out which areas will be the most profitable. When it comes to telecommunications infrastructure, the most profitable areas typically are new, affluent neighborhoods – where people pick advanced services and add-on features and pay their bills in higher percentages.
In 2004, UTOPIA argued that Qwest was cherry picking, by rolling out DSL in some neighborhoods and ignoring other neighborhoods. UTOPIA argued that cherry picking is an awful thing, and that UTOPIA’s driving impulse was to provide great services to everyone (i.e., ubiquitous service).
UTOPIA now has abandoned that philosophy. In communities where UTOPIA has to stand on its own (meaning, in cities where its bonds are not backed with taxpayer money), it – along with Qwest – wants to repeal ordinances requiring ubiquitous service, so that it can cut exclusive deals with developers. In the comments to the last post, someone asks what’s wrong with that.
A key question is who should the infrastructure benefit – consumers or developers? Once a developer picks a provider, consumers lose all other options. Fees for the chosen provider are included in homeowner association (HOA) fees that residents are forced to pay. Thus, those homeowners aren’t “customers” to the provider picked by the developer; they are hostages.
Instead of homeowners deciding whether they want cable, satellite, or cable antenna – and, then, deciding which provider they want in that arena (based on cost, service, neighbors’ recommendations, etc.) – those hostages can choose between whoever the developer picked and whoever the developer picked.
Developers typically base their pick on the basis of one thing – their wallet. Whether it is water, power, trash pick up, telecommunications, or anything else where homeowners will pay a fee, developers want to control the selection and the billing. They will pay one cost, and charge homeowners a different (i.e., higher) cost. It is a way for a developer to stay in a buyer’s pockets long after the house is sold – “residual income.”
Consumers, not developers, should control choices and enjoy discounts.
posted by steve u. at 11/14/2007
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13 Comments:
We need to redefine ubiquitous. Instead of meaning everywhere, ubiquitous should mean "being where you are." For example, if UTOPIA covers a certain area 100%, they would be ubiquitous in that area.
This is a logical extension of the old phase "wherever you go, there you are."
OK, so UTOPIA can only keep its original promises by redefining ubiquitous. No big deal.
UTOPIA has also redefined the meaning of "no risk to taxpayers". Originally, "no risk to taxpayers" meant that taxpayers would not have to fork over any money under any circumstances.
Now, "no risk to taxpayers" means that taxpayers will only have to fork over money if UTOPIA's business plan doesn't go as planned.
"In member cities, it seems that UTOPIA is sticking to its commitment to ubiquitous service, though I’d be wondering what was wrong with me, if I were in some of the less affluent areas of Orem or West Valley."
Summarizing your quote, I read, "UTOPIA is ubiquitous, though it isn't." Please present the evidence that the less affluent areas of Orem and/or West Valley aren't intentionally being served by UTOPIA.
Private contracting in private developments with private dollars is not the same as ignoring low-income areas backed by municipal bonds. You deride this as cherry picking, but there is a distinction. If UTOPIA is to be banned from private contracting with private dollars, I would like a detailed reason as to why Qwest/Comcast/Baja are permitted.
I've tried very hard to answer your two questions. My answers seem to be skipped over. Just for clarity, here they are again. (1) UTOPIA is on a 20-year plan and there is no indication at this point that tax-dollars are going to be called on. (2) Private contracting with private dollars is not the same as ignoring less-affluent neighborhoods with municipal bonds.
Now please answer my questions: (1) Why does Baja want UTOPIA restricted from private contracting? (2) Why does Baja refuse to use UTOPIA for the delivery of their services?
Pete,
I thought I was pretty clear that no one (UTOPIA, Qwest, Baja, or anyone else you could name) should be allowed to build only in parts of town where they deem they can pick cherries. I believe in ubiquitous service. So, it doesn't work to avoid my clear point by saying that I'm trying to hobble UTOPIA in favor of anyone else.
Again, I believe ALL providers in a city should provide to ALL residents. Did I misunderstand you and UTOPIA in 2004? Wasn't that the argument?
On the financial issues, I'm trying to get you or someone to explain how UTOPIA thinks it can survive with costs so high. I understand it has a 20-year plan. Hooray! Lots of defunct companies had long-term plans. (According to my 20-year plan, I'm now 70 pounds lighter, good looking and rich). I'm just not aware of viable telecom companies that have costs per subscriber so high. And, please note, in calculating those numbers, I'm granting UTOPIA an even higher take rate than it is optimistically projecting. I think UTOPIA and its backers are so reluctant to discuss the numbers -- because they realize UTOPIA is playing out the string. This is not responsible.
As to your last question, just because a company builds something, why should competitors be forced to use it? Most successful companies want to own accountability from start to finish. That way, the buck isn't passed.
I would assume that companies that understand the finances of the telecom industry think UTOPIA won't be around for the long haul. Why would they want to abandon their infrastructure and be completely dependent on the infrastructure of a company that won't/can't explain how it plans to defy basic economics and survive its mosterously high costs per subscriber?
In any event, turning your question around, UTOPIA's competitors would ask UTOPIA why it doesn't abandon the subsidies and join them in the open market. If consumers prefer UTOPIA's infrastructure and services, surely it would win in head-to-head competition.
If any of the private companies you compete against had such bad numbers, its stockholders and directors would demand a plan. Case in point, Qwest attempts to mollify its stockholders, by telling them that its plan is to cherry pick. Is anyone asking any hard questions of UTOPIA? Who is in charge? Who would ask those questions? Do those people have experience that would help them know what questions to ask?
Here's a question for Pete:
If iProvo is losing money with 10,000+ subscribers and a $39.5 million bond, how can UTOPIA be breaking even with fewer subscribers and a much larger debt?
Infrastructure is not a business. What do you think the cost to deliver rural roads was in 1960? Do you think the Federal Highway Act was a waste of money because of the cost-per-user was no doubt astronomical in 1960? How in the world did it defy the early high per-user costs and become the interstate of today Steve?!
I was against lack of ubiquity for tax-payer backed or funded services in 2004 and I'm against it now. Private contracting with private dollars is not the same as ignoring less-affluent neighborhoods with municipal bonds.
Are the roads, freeways and airports competition to FedEx? Are municipal water systems competition to Coca Cola? Because that is what you sound like when you claim UTOPIA is in competition to service providers. Keep talking.
Pete,
Of course telecommunications infrastructure is a business. It's not your business. But infrastructure does help capitalize other businesses, including UTOPIA. In fact, infrastructure is UTOPIA's entire business. Because others provide and capitalize that infrastructure, your company and thousands and thousands of others can do great things on the Internet. The key is to find the right balance in how that expensive and vital infrastructure is provided.
Like we do with electricity (with public companies, municipal companies, and cooperatives), I believe the market can benefit by having different options. But, that doesn't mean that we don't ask tough questions and constantly re-evaluate the borders between the various entities. I meet with electric providers routinely. If one of their providers has caught my attention with a turf issue, I raise it with the "other guys" and expect (and get) answers.
With UTOPIA, in the telecommunications industry, I only get hyperbole and indignation that questions are being asked.
I want telecommunications providers to provide various things: Comcast/Baja -- speeds and rates for their fastest Internet connections; Qwest -- evidence of investment anywhere in its territory to upgrade existing plant from twisted pair to fiber in order to provide advanced video services; and UTOPIA -- its plan to remain viable and its rationale for cherry picking.
On the issue of whether UTOPIA should cherry pick, you're revising history. In 2004, you and UTOPIA were not railing against govt-backed entities cherry picking. You were railing against the incumbent (Qwest) redlining neighborhoods based on profitability.
On financial viability, . . . (crickets).
If we're going to ignore UTOPIA's finances and talk broad philosophy, let's not lose sight of the fact that UTOPIA is significantly different than roads. If government didn't build a good, safe road between Panguitch and Escalante, who would? No one.
If UTOPIA didn't build broadband, would anyone? Yes. It's not that UTOPIA is the only one that builds fast Internet. It's that UTOPIA is subsidized, and that allows it, at present, to provide the fast service cheaper (while other companies charge those who want it higher rates; granted, Qwest muddles this discussion by not extending DLS everywhere, even though it is subsidized by the universal service fund). Is that a good thing? Maybe, maybe not. That's a very worthwhile dialogue. (Again, that dialogue stops, if UTOPIA goes under and drags a city or two with it -- or if it won't deal straight up with its financial situation).
Part of that dialogue, though, should examine UTOPIA's claims of uniqueness. Data is only 1 of 3 services provided on the UTOPIA network. Phone and video also are provided. If phone or video weren't provided over that network, would others provide it? Is the phone or video offered on UTOPIA's network better than that of its competitors?
The answers, respectively, are "yes" and "no," and that is why the take rates for municipal systems never match their rosy projections (though, in my financial calculations, I've granted UTOPIA an even-rosier take rate than it projects; I say that half of all customers it can market to actually do sign up -- just for discussion purposes).
"If UTOPIA didn't build broadband, would anyone? Yes."
I'm sorry, they aren't. Telecoms were supposed to roll ubiquitous broadband for the concessions that were granted in the Telecom Act of 96. They didn't. Qwest was supposed to make Utah a completely digital state for getting the Olympic contract. They didn't. Our ranking worldwide in broadband deployment continues to slip. Utah's largest market is underserved while Japan's smallest market is getting 100Mbit and Sweden is upgrading to gigabit service to the home. Utah legislators believe along with Jerry Fenn that people don't need or want fast cars on the Internet. Be happy with 256K!
Your insistence that private contracting is cherry picking is akin to the "How long have you beat your wife?" question. You believe it because your client, Baja says it is true. Yet the evidence of such is not present.
I was up front, concise and clear in answering your questions but they have apparently been written off as hyperbole and indignation.
UTOPIA is unique because anyone is free to compete on it. I have no option with Comcast or Baja. Qwest is a walled garden that we must pass our customers through. You want free-market competition? You need free-market conditions.
Have the crickets brought you any answers on the per-user cost of the Federal Highway Act in 1960?
"If we're going to ignore UTOPIA's finances and talk broad philosophy, let's not lose sight of the fact that UTOPIA is significantly different than roads. If government didn't build a good, safe road between Panguitch and Escalante, who would? No one."
That is where you just don't "get it" Steve. They are no different from roads. In fact, good data services take people off the roads and allow them to work from home. Who is running fiber to Panguitch and Escalante these days? (crickets) I can tell you who is doing it to Tremonton and Centerville.
"Utah legislators believe along with Jerry Fenn that people don't need or want fast cars on the Internet. Be happy with 256K!"
If only we were as smart as, say, you. You are dialed in, to suggest that Jerry and I are bosom buddies. I'd guess anyone paying attention would say you don't "get it," Pete.
When it comes to UTOPIA's finacial numbers and UTOPIA arguing that cities should change build-out franchises to cherry-picking franchises, the only thing I'm not getting is answers.
As for the highway analogy, don't you think it might be a bit of an overstatement to argue that Centerville is technologically isolated from the rest of the world? UTOPIA will be just another competitor there, as it is in most of its cities. And before you get too wound up about UTOPIA's secret sauce being the only acceptable alternative, you might want to explain why all citizens aren't flocking to it where it is available. Maybe consumers don't "get it" either.
On take rates, I must add that you should never underestimate the power of inertia. Provo released a breakdown of who was signing up for service. In areas with high resident turnover (apartments and other MUDs), the take rates were upwards of 55%. In single-family residences, the take rates were much lower, around 25-30% if I recall correctly. The reasoning behind this is that when you move, you do a bit more research into your service options. When you aren't moving and your services are working more-or-less okay, you aren't going to look for the alternatives.
Another thing to consider is that Qwest and Comcast have been going in ahead of UTOPIA with service contracts that include early termination fees, something that discourages switching. Some of these contracts can be as long as two years and include provisions to retroactively charge you the full price of the service in addition to the ETF. That's a pretty shady way to compete.
The thing that seems to work best in rural communities the is the buyer's coop model.
Speaking of rural communities. These communities tend to prefer wireless communications. Sparsely populated communities tend to have more available bandwidth than big cities. Going wireless saves the expense of installing and maintaining wires.
The fact that wireless is better suited for the needs of rural communities brings up an interesting critique of the rural telephone subsidies.
Radio (wireless technology) evolved concurrently with the telephone. Connecting radio to telephone is not that difficult.
I believe that, if it were not for the rural telephone subsidies, we would have seen the evolution of wireless decades earlier.
IMHO, the legacy of rural telephone subsidies is that the subsidies stiffled the natural evolution of wireless.
Back to Utopia:
I am now of the opinion that the best way to spur competition would be to allow for small buyers coops. In a buyers coop, a group of homes would own the last mile. They would own the cable from the houses to a communications closet. The service providers could then provide services to the CC.
If the homeowner either directly owned the wires to a central communication closet or they owned it jointly in a buyer's coop, then the service providers would have to compete on the service they provide and not on their ability to control the last mile.
I may be way late on this but how come no one answered the question posed by "damn straight" regarding the comparison of iProvo's problems with the UTOPIA situation? Is UTOPIA headed for the same problems iProvo has experienced? Are the two entities doing pretty much the same thing, or are there significant differences in business plans, services, etc?
wondering: There's some VERY different financial pictures going on there. iProvo spent about $1200 per household to get the project complete even though the feds paid for the main fiber optic rings years earlier. UTOPIA's per-home installation is the same, but that includes the backbone and NOC, items already purchased with "free" money by iProvo. Provo is also using more of the network for city services (especially the energy department) than most UTOPIA cities. UTOPIA also secured a lower interest rate on the bond, 6% compared to Provo's 6.375%.
It's also worth noting the vastly different demographics. Provo has a huge student population which has lead to a higher customer churn and less stable customer base. UTOPIA is gunning for the 'burbs which means less churn and lower connection costs.
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