Kevin Mayberry and Drew Peterson, Veracity's principle owners, have been trying to get me in for a conversation for a few days now. We finally succeeded in getting together this morning. I've done business with these guys for a number of years now, and I have a lot of respect for them. They have always been honest and upfront with me, and have lived up to their agreements. They also have done a good job navigating Veracity through various difficulties associated with its involvement in iProvo and UTOPIA.
I currently am doing contract work for Veracity, so at the moment these guys write my paycheck. They could have pulled me in and told me that if I didn't stop commenting negatively about the iProvo deal they would terminate my contract. I consider that a fair response to my actions, and would lose no respect for them if they did do that. But they didn't. They pulled me in and laid out their reasoning as to why this purchase agreement is the best thing for Provo and the best thing for me personally. They had some good arguments:
First, to my personal interest - Broadweave's offer to purchase Nuvont's customers. Kevin & Drew pointed out to me that Veracity also holds a significant piece of debt that is secured by Nuvont's customers. That secured position takes priority over the other creditors. I was aware of that, but comments from Nuvont's side put me under the impression that the majority of that debt to Veracity had been retired. From what Veracity told me today that is not the case. As part of the purchase of Nuvont's customers Broadweave would be in effect forgiving that debt, which greatly increases what I thought was the ultimate purchase price.
That said, I'm still not very happy with the way that Nuvont's options are being limited under this purchase agreement. I don't think that's right. But given the total debt load I'm thinking that Broadweave's offer may be the best Nuvont can hope for. If Nuvont ended up choosing to maintain its iProvo operations to pay the debt it would likely not succeed in getting all of the obligations paid.
So I'm in a quandary. I feel it would be the moral thing to structure the agreement such that Nuvont has a choice for its future, but I'm pretty sure that even if it did, the result would be the same. Suddenly the effort to affect change on this item doesn't seem worth it. Maybe there's some other piece of information out there that would change my mind, but at this point I doubt it.
UPDATE: I'm now told that Nuvont is not going to be released from the debt to Veracity, that it will still be expected to be paid the outstanding amount, though it may come personally from Nuvont's owner. There is certainly a big difference between the one or the other.
Second, to the interest of Provo's citizens. We talked a little bit about the other potential offers I detailed in an earlier post. Qwest is certainly a buyer of last resort and would most likely give the least favorable terms (their point, but I agree). MStar has the big problem that they are a failed business. They pursued a business model that didn't work and kept pursuing it. With that track record it's hard to hand them over the keys to the whole store. I haven't heard who else made offers.
Broadweave is a dubious choice as well. But Broadweave + Veracity, as I've said before, is as likely to be able to make a success of the network as anyone. They aren't a sure thing, but they're as good of a bet as you'll get. The only thing you can hope for beyond Broadweave + Veracity is a company with as much likelihood of success with a deal that is better financially for Provo.
Any other potential buyers should be making themselves known right now. The city should take a good look at each one, and if one looks credible and is offering something better than Broadweave is, the city should take a closer look. Broadweave should be willing to be patient. If this is really not a sweetheart or backroom deal, it will stand up in the light of day. Of course, it's hard to wait too long, so Provo needs to be quick about it.
I was really pleased with the change in the terms regarding the ability for Provo to foreclose on assets added to the network without extra charge. The new agreement is fair and shifts some risk from Provo to Broadweave. I also still think Provo should get a voting member of the board (unless there's a legal reason this can't happen) and that Provo should not be paying $500K for customer transition.
Overall, I'm with most of the iProvo Review Committee members. This looks like a good deal, with Veracity it looks like a good buyer, but the devil's in the details. Once we have the rest of the agreement, and we see that it really works the way we've been told, with no surprises, I won't have any problems supporting the sale.
I know there are those who don't like the sale on more philosophical grounds. They think the network should be open as a matter of principle, or feel that government should maintain it to ensure that the original goals continue to be met. I understand that those goals are: 1) universal access and 2) increased competition to bring better services to the city. I see those goals as having been attained, and that won't be lost with a sale of the network. Private business may not have been willing to put fiber into low income neighborhoods, but now that it's there, they certainly won't rip it out. And the fiber is there to compete with Qwest and Comcast. As long as the competitors are still there market incentives will continue to bring down our cost per unit of bandwidth. The government jump started the process. Private business can, in this case, keep it going.
Tuesday, May 27, 2008
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8 comments:
Count me as one who disagrees with a rush deal on philosophical grounds. I for one don't like giving away the fiber network to a shot-gun wedding corporate merger. The combined company may look good on paper, but it has exactly zero days of operational experience as a whole.
To permanently give away open access to this new corporation, however excellent the Veracity staff may be, is still a huge unknown.
Also, I disagree with the assumption that broadband will automatically be accessible just because the "fiber is there". There is a big difference between pricing to break even as a utility and pricing as high as the market will bear that the investors will want.
In the tripleplay space this will give Provo two real players--cable and Veraciweave. Qwest is reliant on a third party for TV. I don't feel 2.5 providers is sufficient competition--and that is in the neighborhoods that have 2.5. Much of Provo will only have Veraciweave and Comcast for high-speed broadband.
There is a reason that Google is spending millions to ensure open access for wireless and that space sure has more than 2 providers.
Handing off operation to Broadweave + Veracity is an unknown, but considerably less of an unknown that HomeNet was. Also, it isn't permanent. If they don't pay the debt the network comes back and we try something else.
There is a problem with pricing as things stand now. HomeNet was bankrupted, MStar will soon be, Nuvont is profitable but has no capital to grow. Veracity won't touch the residential market because of the margins. If all of the private businesses that partner to provide service fail as a business it's either because they were all horrible businesspeople or the price/service structure is broken. I'm going to say that with this many attempts failed, it's a structure problem.
Given that, there are 3 possible courses of action: Cut costs, raise prices, or admit the ongoing tax subsidy. There appears to be no political will for the ongoing tax subsidy, so there will likely be attempts at the other two. The take rate problem shows us that prices can't go up very far. Comcast and Qwest have done a great job competing against the fiber threat. So the best way to change the structure to be able to support and grow a business will be to cut costs. This deal tries to do that by eliminating the tripod of network provider, service provider, and service seller and condensing it down to one company with the best ability to manage costs.
Whether or not this will work is an open question. We have to evaluate the alternatives and pick the best option.
Triple play has never lived up to its promise. No one company provides the triple play at service levels high enough to be considered best in class for each service. Not to mention the savings are pretty small. The competition has to be evaluated on each separate service, and there are far from 2.5 competitors.
In the TV space there is iProvo, Comcast, Dish Network, DirecTV, and other smaller satellite offerings. There is also over the air HDTV. 5+ competitors, all with decent offerings.
In the Internet space there is iProvo, Comcast, Qwest, a couple of point to point wireless companies, and the 3rd party DSL providers that offer DSL over Qwest's lines. Overall 4+ competitors.
In the Phone space there is iProvo, Qwest, Comcast, a whole bunch of VoIP providers that will provide phone over internet connections, and the increasingly popular cellular only option, with AT&T, Verizon, T-Mobile, Sprint, etc. There are lots of good choices there, all competitive.
The problem is in getting someone to make the investment to overbuild a network and give us a jump in bandwidth. That's done. Making sure there will be competition in services to keep the prices as reasonable levels is not a problem.
Good points overall. However, all Broadweave+Veracity have to do is avoid bankruptcy. That gives them three years of venture capital to stem the losses while the prices are raised. Not $10 month for service but $40-50 higher. And if they don't pull it off (including converting the customers to one system), or if they fail at 3.1 years then Provo City gets back a damaged network with less subscribers. We are then back to the starting point with more debt and less momentum. It will also be a more hostile environment for new providers.
Also, Qwest will apply for and end the requirement of sharing their copper lines. This has already happened in most markets where they have faced fiber competition. This will end the days of DSL line sharing.
The end of DSL line sharing will then allow Qwest dampen the options of VOIP providers.
Perhaps WiMax or another wireless technology will provide good wireless internet access. That said, my experience here in Idaho doesn't give me optimism. Most yards that have trees can't get reliable throughput without placement of a 30-50 foot tower. And presently wireless speeds aren't in the ballpark of fiber.
Other sections of the U.S. that have fiber haven'
t seen prices approach that of other developed countries. And these areas have greater numbers of competitors. Somehow I don't feel we'll get another result.
To me the sad part is that Provo City is in the final stages of this deal and yet no meaningful public debate has occurred. Will the public be allowed to examine the deal for a month even? To me it appears that Joe Q. Public will be given two weeks max if the deal isn't covered up in "trade secrets".
There is no way the price goes up $40-$50. Even on triple play. I am currently a double play internet/tv customer and if my price went up by more than $10-$15 I would take a serious look at other options. I might end up sticking with iProvo, but I'd definitely look around.
I would say public comment is what we're doing now. I've been commenting for at least two weeks via this blog. You can certainly make an argument that there needs to be more time, but there seems to me to be vigorous debate about each part of the agreement.
I agree that many in the public have been commenting. This blog seems to be one of the few sources of information and perhaps the best. But this is different than the "public comment" that the city should be engaging in.
For a fundamental shift in Provo City public policy, one that changes 75 years of local utility control, I would expect a series of pre-announced public comment sessions with both the citizens committees and the council itself.
Instead the mayor states that this is like the high school prom, and you say "yes" to the first person who asks because if you wait for someone better, no one else may ask.
Though in the mayor's defense, he did say no (and correctly so) to Qwest and M*.
But as you stated above, if this is a good deal it will stand up to the light. I haven't gotten any feeling that Broadweave/Billings want lots of light.
While it may not be in Broadweave's interest to open their books and plans for competitive reasons, they have to overcome technical hurtles and rely on public goodwill to get them through the firestorms that may include people losing their phone numbers, unforeseen outages due to the new equiptment and possible corperate clashes within the new Velociweave. If they alienate public opinioin by giving this the appearance of a backroom deal, they will lose public favor. The low price offerings from last night I thought were a great idea to keep public favor. Kudos to them. A good first step to keep public confidence.
I still stand by the idea that a good deal will stand up to the light. But I also agree with George Stewart's comments that increasing the period of uncertainty in a business can really kill the business. I've been through a couple of acquisitions as an employee and it's brutal. You lose productivity as soon as the deal gets leaked, and as uncertainty continues you start to lose your best people. Customers also start to wander off.
The only way to stop this is to manage down the uncertainty as much as possible. The best thing is to plan secretly, then quickly execute the plan and move to a new stable state.
The problem is that while this is best for business, it's absolutely not what you want in government.
So we have to balance the two problems. We have to make sure the government is transparent, the public informed, and other options duly considered. But we also have to move expeditiously to a new business stability to minimize the harm to the business.
So while I still don't think Broadweave would walk away from this deal if we took some time to consider it, George's points have moved me to agree that we should be quick but thorough in making a decision.
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