News Story

Traverse City A Step Closer To City-Owned Broadband

Critic questions business assumptions of city contractor

Traverse City’s municipal-owned utility has selected the U.S. arm of Japanese telecommunications company Fujitsu to design, oversee the construction of, and possibly, temporarily operate a government-owned fiber-optic network.

Fujitsu Network Communications has been active in building out a number of government-owned fiber optic systems throughout the United States. The company cites some of these projects, including one in Fairlawn, Ohio, as evidence of its success.

At least one of its projects, a statewide internet project in Kentucky, has fallen behind schedule and experienced substantial cost overruns. KentuckyWired has faced four years of delays and cost Kentucky’s taxpayers at least $1.5 billion, instead of the initially estimated $30 million.

Traverse City Light & Power anticipates it will begin what it calls “Phase 1” of the system’s buildout in the late summer, according to Tim Arends, the utility’s executive director. This part of the project, which will cost an estimated $3.2 million, will cover the city’s downtown and one large, densely populated residential neighborhood.

The utility began to seriously consider operating a fiber network in early 2016 and hopes to eventually build out a fiber network that connects to every home and business in its service area.

On May 14, Fujitsu presented a cost-benefit analysis at the utility’s board meeting. The company expects the first phase to make a profit within five years. The total cost of that project, under what Fujitsu said was the most likely scenario, was $4.2 million to serve 503 customers.

The presentation did not address higher costs that could arise due to shortfalls in the municipal utility’s pension and retiree health funds, which are only 60% funded. Utility officials tripled their spending on pensions from 2014 to 2017.

In phase 1, Fujitsu assumes that for the project to pay for itself, 40% of customers in the service area must enroll for internet services and 28% sign up for digital phone service.

The telecommunications provider also ran a scenario in which 50% of customers sign up for internet and 35% for phone service. In a third scenario, 60% of customers sign up for internet and 35% sign up for phone service.

For the new network to hit its sales target, Fujitsu said, its marketing efforts would focus on “converting customers from Local Competitors and creating new broadband subscribers in the Traverse City area in order to build a substantial customer base.”

Gerald DeGrazia is a TCL&P customer and was a division president at Time Warner Cable until 2005. He said he is skeptical about how many people will sign up.

“The high-speed internet speeds provided more than meet the needs of the average residential customer (like me). I highly doubt the average residential customer will be willing to pay 50% to 60% more for a competitive high-speed internet service, even if it has higher speeds,” DeGrazia said. “In addition, Fujitsu is assuming significant revenue from voice over internet protocol (VOIP). The major providers of VOIP in the United States are seeing declining customers and revenue as a result of people ‘cutting the chord’ and using only cell phones for telephone service.”

In its presentation, Fujitsu urged the municipal utility to serve as the internet service provider of the network it would be building. The utility had previously suggested that the fiber network would be open access, meaning that third-party companies would operate it.

Russell Schindler, a Traverse City-based entrepreneur and founder of the technology business group TCNewTech, favors the fiber build-out and said he believes government can legitimately enter the fiber infrastructure business as a way of encouraging commerce. But, he said, he is opposed to the utility acting as an internet service provider.

“[Traverse City Light and Power] should get in the business of providing the infrastructure that ISPs compete on,” Schindler said. “I’m not a proponent of a city-run ISP. I’m actually against it.”

Fujitsu plans to sell other services to the utility. In its presentation, Fujitsu described marketing, sales, and other services it could provide before handing over control of the network to the municipal utility.

Ted Bolema, executive director of the Institute for the Study of Economic Growth at Wichita State University, said the cost-benefit analysis presented by Fujitsu is based on dubious assumptions.

“The proposed term of the loans is 20 years (appendix A). But it is impossible to predict what the prevailing technologies will be in 15 or 20 years, and they may be very different. Already we see 5G wireless and satellite broadband becoming more competitive, and we don’t know what other technologies may emerge,” Bolema said. “I look back on how we were talking about the cable TV market in the 1990s, and we failed to anticipate the impact of satellite tv and the Internet, even though both existed back then.”