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Utahns who dream of some day seeing their computers and homes connected to the high-speed Utopia fiber-optic network may want to start saving now.
It is going be expensive.
Utopia's board of directors is developing a new business model it hopes finally will place the struggling, municipally owned network onto a solid financial footing. As part of that plan, it wants to require each new customer to pay a hefty fee upfront.
"We've identified a range of around $1,000, but eventually it could be two to three times that amount," said Utopia's chairman Alex Jensen.
Utopia's board is negotiating with several banks about providing financing for the connection fee so that customers who don't want to pay upfront can make payments over time. "If that [financing] is what customers want, it would be like going down to RC Willey and buying a piece of furniture," said Jensen, the Layton city manager.
Five years after 18 Utah municipalities formed the Utah Telecommunications Open Infrastructure Agency to explore construction of a wholesale fiber-optic network, big changes are under way. And they are happening even as competitors such as Qwest and Comcast, which charge nominal fees if any to connect to their systems, introduce technology to compete with the speeds offered through Utopia.
Along with its plans to start charging connection fees, Utopia will:
* Ask its 11 remaining member cities (seven declined to pledge money and dropped out) to up their financial commitments by $300 million - or around half a billion dollars in total - to back the fiber-optic network's bonds for the next 32 years.
* Revamp its network build out plans to favor those neighborhoods and communities where large percentages of residents have committed to sign up for services once the network arrives.
* Launch an advertising campaign to increase awareness of the Utopia network.
Utopia critics view its move to get member cities to increase their pledges as an attempt to double down on a losing proposition in a desperate attempt to keep the project afloat.
Utopia proponents see it otherwise.
"We need to get a financial structure in place that will support our business model," Jensen said after a Utopia board meeting in mid-March. The board had just voted to approve issuing $189 million in taxpayer-backed bonds and to ask its member cities to back that debt for 32 years by increasing their pledge amounts.
The $189 million bond issue would be used to retire $135 million in previously issued notes that carry a higher short-term interest rate. Once all fees and other debts are repaid, the bonds should provide Utopia another $11 million or so to continue the construction of its massive fiber-to-the-home network.
"We believe the $11 million will be enough to finish the development of our network," Jensen said.
Once construction is complete, Utopia is counting on the revenue from service providers who use the network to meet their customer's needs and the revenue generated from hook-up fees to provide it with the necessary cash flow to cover the network's debts.
It will be a couple of years, though, before taxpayers find out if that plan works.
After the network completes its bond refinancing, it intends to use $24 million of the proceeds to pay its bills - including the interest payments on its bonds - for the next two years. The risk to taxpayers in Utopia's 11 member cities is that if the network fails, residents could be called upon to pay around $500 million in extra taxes over the next 32 years to retire the $189 million in bonds.
Born in 2002
Utopia was born in 2002 amid a sense of frustration by community leaders that the state's private telecommunication providers were too slow in bringing high-speed Internet and other broadband services to their cities. Utopia was envisioned as a wholesale network that would provide a connection that outside retail service providers could use to deliver their broadband products to eager customers.
To date, though, Utopia's presence hasn't helped much.
Network construction began three years ago. Yet the number of customers who have signed on or who have access to the network is far below projections.
And the network, which promoters initially promised would be cash-flow positive from early on and a sure-fire success, desperately needs to refinance its debt so it can get the $11 million in capital to continue construction.
"We have to do this [refinance] and we have to be successful" with the new business plan, Jensen said. "We have no other choice."
Centerville resident Mike Nielsen, a retired Qwest employee, said he has a hard time believing that any Utopia city, including Centerville, could seriously be considering increasing the amount of taxpayer-backed money committed to Utopia.
"This looks to me as if all they [Utopia] want is for everyone to throw good money after bad," Nielsen said. "They certainly didn't keep their initial promises. So what makes anyone think we can believe them this time?"
Longtime Utopia critic Howard Stephenson, a Republican state senator from Draper and president of the Utah Taxpayers Association, said the request that cities increase their pledge amounts, even as Utopia shows signs it is turning into a financial catastrophe, suggests an almost "Twilight Zone" mentality among the system's promoters.
"They are ignoring reality," Stephenson said, adding he believes that rather than doubling the financial exposure faced by their residents, the 11 cities involved should accept that they made a bad investment, get what they can from liquidating Utopia's assets and move on.
Leaders optimistic
Still, Utopia leaders remain confident. "While our critics point out we've made mistakes, what they don't point out is that we've learned from our missteps," Jensen said. "We believe we've developed a business strategy, a marketing and organization strategy, that gives us a good chance for success."
There are 7,200 Utah households and businesses that receive Internet, telephone and video services over the network. That number is below the 24,200 customers Utopia projected for this point.
That said, there are plenty of potential customers who say they want to be connected. But are there enough of them to ensure that network will be able to one day cover operating costs and ensure that taxpayers won't have to dig into their pockets to bail it out?
"One question I have is why it has taken so long?" said Dennis Knoles, an orthodontist who wants to hook up his home and office. "I'm eager to see what it can do for me."
However, with Utopia contemplating a large hook-up fee, Knoles said he will have to take a look at the cost and benefits and weigh that against a slower connection from other providers.
Utopia's board, which sees the network's future in its new business model, believes it eventually will provide 140,000 Utah homes and businesses with the opportunity to have ultra-high-speed connections.
To help that future arrive more quickly, Utopia operators are counting on a new deployment strategy. By concentrating construction in those neighborhoods where large numbers of residents have already committed to becoming users, they hope to be able to generate enough cash from operations to aid in build out efforts.
"It would be irresponsible to build first in areas where there is little or no demand," said Paul Cutler, Utopia's acting deputy director.
Yet Royce Van Tassell, also of the Utah Taxpayers Association, sees the new strategy as a violation of Utopia's earlier pledge to build a "ubiquitous" network accessible to all residents of the member cities.
"When Qwest used that strategy [to roll out is DSL service], Utopia's supporters accused the company of 'cherry picking' the best neighborhoods. Now they want to do the same thing."
But Cutler said focusing on the profitable neighborhoods isn't cherry picking, given that Utopia intends to build out its network even eventually in those areas where it would not be profitable.
Utopia's Jensen concedes there is a need to increase the public's awareness about the network. Utopia plans to start its own advertising campaign to herald the benefits of receiving broadband services.
"We have to be more effective in marketing," Jensen said, emphasizing that Utopia will not be taking over any of the advertising responsibilities of the retail service providers that use the network.
Despite the criticisms, Cutler and other Utopia leaders see the system's problems only as short-term challenges.
"We must keep focused on the long-term goal, rather than short-term setbacks," Cutler wrote in a recent e-mail. "Utah has a big head start deploying fiber infrastructure through UTOPIA. Our future looks very bright."
$1,000 to set up fiber-optic Internet in your home? Why the Utopia project thinks you'll break the bank to live file in the fast line:
The strategy
To get Utopia on solid financial footing, the board of directors wants to do the following:
* Require each new customer to pay a hefty up-front fee.
* Ask member cities to increase financial commitments by $300 million.
* Revamp building to favor areas where more residents have committed to sign up for services.
* Launch an advertising campaign.
* High-tech rivalry - how it began. E8