May 16, 2010
Royce Van Tassell

Recently, UTOPIA announced that it wants taxpayers to back another $60 million in bonds, on top of the hundreds of millions in debt taxpayers backed just two years ago. This time, it claims, things will be different. This time, it knows how many subscribers it needs to get to operational break even, and it will focus laser-like on that goal.

Don’t believe it. Given UTOPIA’s inability to succeed with the hundreds of millions of taxpayer dollars it has already received, there’s no reason to believe another round of bonding will help. In fact, if UTOPIA gets the subscribers it hopes for, its debt load will only increase.

UTOPIA now has 10,000 subscribers, and to break even operationally it claims to need 15,000 subscribers. To also pay their operational, debt service and interest costs, it claims it needs just 25,000 subscribers.

Even if UTOPIA increases its subscribers by 50 percent, and gets to 15,000 subscribers, the numbers don’t add up. According to its 2009 financial report, UTOPIA’s average customer pays $417 per year. However, UTOPIA incurs $1,528 in operating expenses per customer, which means every customer UTOPIA attracts increases its operating deficit. UTOPIA’s hurdle is not just attracting more customers, but either lowering its cost curve, or getting more revenue from each customer. Neither of those possibilities seems likely.

In evaluating UTOPIA’s ability to lower its cost curve, a comparison with iProvo’s new owner, Broadweave, is instructive. Unlike UTOPIA, Broadweave’s network is complete. Its network runs by every business and residence in Provo. Nevertheless, Broadweave has not been able alter its cost curve. In fact, it had to ask Provo to subsidize its interest payments for two years, so it would have more operating cash to sign up and install more customers.

Unlike Broadweave, UTOPIA has to complete its network, and lower its operating costs. UTOPIA’s record of profligate spending argues strongly against its ability to lower its operating costs. (Remember that in UTOPIA’s offices, cubicle walls are electronics equipment it spent millions on, but which is now worthless.) If even Broadweave can’t lower its operating costs, then UTOPIA won’t be able to either, and will instead have to rely on higher prices to narrow the gap between revenues and expenses.

In attracting customers, UTOPIA already has the low-hanging fruit. Most of its customers are in areas that previously had little service from incumbent providers. As customers have demanded greater coverage and higher speeds, though, new providers have entered the market, and incumbents have expanded their service. Today, the defining characteristic of the telecom market is cutthroat price competition.

With competition so stiff, it’s difficult to imagine UTOPIA attracting new customers willing to pay substantially more than they currently are. Importantly, the need for a higher price also applies to its current customers, which means UTOPIA will lose at least some of its existing customers, if its prices go up.

Unless UTOPIA lowers its operating costs or increases its operating revenue per customer, another $60 million in bonding will not change UTOPIA’s financial performance. UTOPIA’s FY 2009 audited financial report couldn’t emphasize its financial plight any more clearly. After more than five years of operations, UTOPIA has a deficit of $126 million in net assets.

To understand what that deficit means, imagine selling all your assets — home, cars, etc. — and using the proceeds to pay your outstanding debts. If UTOPIA did that, it would still owe $126 million.

The revenue/cost per subscriber data described above show that UTOPIA is digging a deeper hole for itself. Its own FY 2010 budget anticipates an operational deficit of $2 million per month. The time has come for UTOPIA’s member cities to stand up for taxpayers. UTOPIA has had more than eight years to demonstrate an ability to succeed. It hasn’t. The city councils in UTOPIA cities must protect taxpayers, and refuse UTOPIA’s latest bond request.