Fibrant: Growing pains in first year

Published 12:00 am Saturday, February 11, 2012

By Emily Ford
SALISBURY — After one year of operation, Salisbury’s ambitious high-speed broadband network has a 13 percent market share and more than 1,700 customers.
But Fibrant, which billed its first customer in December 2010, has fallen behind revenue and subscriber projections.
City officials say the current numbers are strong, considering Fibrant launched during the worst economic downturn since the Great Depression.
“It’s a start-up and it’s a battle, and we have not arrived yet,” said David Treme, the former city manager who helped create Fibrant. “But we have taken the first year and I would have to say, it has been good.”
Slow out of the gate, the project launched six months late. The city struggled with technical issues, and private companies stalled when the city asked them to move their lines on utility poles to make room for Fibrant.
The city had to redesign the new Customer Service Center, which houses most of Fibrant, to withstand natural disasters.
Salisbury didn’t expect Rowan County to categorize the entire building as “essential,” and the upgrade cost the city several months and an extra $1 million, Mayor Paul Woodson said.
Until Fibrant generates enough revenue to cover operating costs, the fiber-to-the-home network will borrow an estimated $7.5 million from other city funds. So far, that money has come from the water and sewer reserve fund.
Including internal loans and interest on $35.86 million in bonds, Salisbury will pay close to $70 million for the network. The debt payment increases from $1.7 million this year to about $3 million annually from 2013 to 2029.
The utility operated with an outdated business plan for months, and the original director and marketing chief are both gone. The city hasn’t found a great candidate to lead the utility at a critical time, Woodson said.
Yet city officials remain optimistic, and Fibrant continues steady growth. An average of 30 people sign up for the service each week, and the utility’s retention rate is 99 percent.
“We’ve made tremendous progress in the last three months,” Woodson said.
City Council members named Fibrant their top priority during last week’s strategic planning retreat, and they have urged staff to treat Fibrant as a competitive business, not a municipal utility.
It’s working, Woodson said.
“I’m very encouraged about what’s happened down there,” he said. “They are thinking like businessmen now.”
Perception changing
Many Fibrant employees have come from the private sector. Some even came for less salary.
“They believe in what we’re doing as a municipal broadband provider,” said Jim Behmer, interim Fibrant director.
Woodson said these employees are helping change the perception of Fibrant.
Jenny Waisner, new sales and customer service manager, said the city’s technology is second to none. For any enterprise to achieve the coveted triple play — Internet, cable TV and phone services — within two years is remarkable, she said.
“I don’t know if folks here really realize how impressive this is, what the city has done,” Waisner said.
Waisner joined the city after marketing Lexcom (now Windstream) for 12 years, which sells fiber-to-the-home in Davidson County. She also has experience in economic development.
Not all broadband companies make decisions based on what’s best for customers, she said.
“The private sector is obviously there to make money. They answer to their stockholders,” Waisner said. “But here we are, doing things for the benefit of local residents.”
Barry King said that’s what drew him to Fibrant. He also left Lexcom and works as Fibrant’s outside plant manager.
The city was underserved, and Fibrant has provided competition and lowered rates for everyone, regardless of their provider, he said.
“This is for the citizens of Salisbury, and I think it is a very noble thing to do,” said King, who runs the Klumac Road facility. “I’m extremely proud of what the city has done.”
Fibrant spent a year educating people and soon will launch the sales and marketing core phase, Waisner said. The city’s marketing team will create and deploy a strategy presenting Fibrant as a flexible, economical and multifunctional service for everyone from residents to schools to medical facilities, she said.
As Waisner advances the marketing program, Behmer has started to renegotiate contracts with service providers to cut costs.
Raising rates isn’t an option for Fibrant, which is already undercut by private providers for the first year. To help close the gap between revenues and expenditures, Woodson said he would like the utility to cut between $500,000 to $1 million in costs.
“In this economy, what you save is what you earn,” he said.
With one year under its belt and 1,700 customers, Fibrant is in a better position to renegotiate contracts, city officials said.
Vendors are offering new equipment that could cut installation costs, and the evolution of video technology will bring down the cost of Fibrant’s IPTV service, Assistant City Manager John Sofley said.
Right now, Fibrant pays about $1,350 for each residential installation. Commercial installations can cost even more. All installations are free for Fibrant customers, unless they unsubscribe within the first year. Then they pay $360.
“If I can save $100,000 in costs, I don’t have to raise that in revenue,” said Doug Paris, interim city manager.
Cost cutting has a greater impact on Fibrant’s budget than adding subscribers, because with every subscriber comes programming costs — the price the city pays to offer some 450 TV channels, Internet and phone service. Programming costs this year will top $1.2 million.
Installation costs will total more than $2.5 million, and debt service will cost $1.7 million, for total expenditures of about $5.5 million by the end of the fiscal year, June 30.
“What’s driving our costs right now is subscriber acquisition — the cost of growing the system,” Paris said.
Once the city has made the investment to wire a home or business for Fibrant and run the fiber optic line, that one-time expense is complete, he said. The cost of expansion means Fibrant can’t grow too quickly, he said.
“We are looking for conservative growth,” Paris said.
Fibrant is expected to generate $2.4 million in revenue this year, enough to cover the debt payment. Paris said that’s an important milestone.
He projects Fibrant will continue to make enough money to cover the debt payments. Sofley said he expects to stop loaning Fibrant money from other city funds by 2015.
Fibrant must repay those internal loans at one percent interest. There is no deadline.
Critics unconvinced
Fibrant has become the fastest growing broadband service in the city, officials say.
But critics continue to hound the city about a perceived lack of technical expertise, non-competitive prices, too little transparency and too much debt.
Opponent John Bare compares Fibrant to welfare.
“If you are obligating the group to pay for someone to get something because it’s not economical to do it in the private system, you are subsidizing the service,” he said.
Treme said he warned city leaders they would face staunch opposition.
“Do not get into this if we are not willing to go the distance, take the heat and know and believe we are doing something for the community,” Treme said he told City Council. “This is not for the faint-hearted.”
Salisbury leaders do not back down from a challenge, Treme said, but he knew launching a project this ambitious would test the city.
“I knew this would be harder than we thought before we started,” he said. “I knew it was going to be the most difficult thing we’ve ever done.”
The city first looked into fiber-to-the-home in 2006 as a way to lure new business and bring jobs to Salisbury. Textile mills in the city had closed, billionaire David Murdock was launching a research campus in Kannapolis, and NASCAR was growing in Concord and Mooresville.
“We had to differentiate ourselves,” Treme said. “What is going to be our niche?”
City leaders believed a fiber-optic network with lightening fast Internet speeds and reliable service to all parts of the city would attract small businesses that could end up hiring hundreds or even thousands of people. They asked incumbent providers to build the network and were turned down, so they decided to consider building it themselves.
A feasibility study looked promising, and city leaders heard from experts and held public hearings.
“The opportunity would be greater if it was on everybody’s front steps,” Treme said. “The plan was to make sure we could get it in front of everybody.”
The city’s largest ever one-time capital expense, Fibrant was built entirely with borrowed money. The city did not hold a referendum, and the lack of a vote continues to fuel critics.
In September 2008, the U.S. Treasury seized control of mortgage giants Fannie Mae and Freddie Mac and bailed out American International Group Inc. with $85 billion. Lehman Brothers filed for Chapter 11 bankruptcy protection.
On Dec. 4, 2008, with the nation’s economy in shambles, Salisbury sold $35.86 million in bonds, including $33.56 million for Fibrant. The Great Recession hit. The N.C. Research Campus stalled, NASCAR put on the brakes and development in Salisbury slowed to a trickle.
“The timing has been very unfortunate,” said Susan Kluttz, mayor at the time of the bond sale.
When the extent of the economic crisis became clear, it was too late for the city to pull out, Treme said.
“We were already in it and had already issued the debt,” he said. “The die was cast and we had already crossed the Rubicon.
“We had to go foward and know we were in battle.”
The city’s greatest fight came last year when, after four years of trying, cable companies found support in the newly Republican N.C. General Assembly for a bill to limit municipal broadband.
The city had to vigorously defend Fibrant and hired Salisbury’s first lobbyist. Kluttz, Treme, Paris and others traveled to Raleigh repeatedly to sway legislators and testify before committees.
Although the bill passed, the city won the David-and-Goliath battle and came away with the most favorable exemption of any city with a publicly-owned broadband network.
An amendment to the bill allows Salisbury to sell Fibrant nearly anywhere in Rowan County, as long as town aldermen, county commissioners or school board members vote to approve the expansion. While city officials say they have no immediate plans to sell Fibrant outside Salisbury, the exemption preserves an important growth strategy.
With 1,700 customers and 13 percent of the broadband market, Fibrant’s future is bright, Treme said.
“Look at the success rate for start-up businesses,” he said. “Many of them do not make it. We are one that is going to make it.”
Contact reporter Emily Ford at 704-797-4264.