
The
Advocate reports that LUS Fiber is going before the City-Parish Council Tuesday evening seeking final approval to bond out the remaining $14.5 million of the bonds of the $125 million the voters approved back in 2005. Articles in the Advocate and the Advertiser report parallel stories. The tale boils down to Huval explaining that the new utility is paying its operating expenses but isn't yet generating enough income to comfortably pay its ongoing debt service to the bondholders while at the same time acquiring new customers.
That's going to seem counter-intuitive to some; after all, new customers is supposed to be what every growing business needs, right? Yes, but there's the long run and the short run—and laws and regulations that simply stink. We need to dig a little deeper to even begin to understand what is going on here.
Customer acquisition costs
Here's a term to store away: "customer acquisition costs." It's an update on the old saw: "It takes money to make money." In the world of telecommunications networks this is particularly true; it takes a
lot of money to make money. The biggest chunk comes from simply paying to build the network; but even then there will be a continuing capital cost for paying to supply each user with their own fiber link, putting an expensive Optical Network Terminal on each house to support video, voice, a IP translation onto copper wiring, bringing wiring into the house, and to set most users with an nifty light-weight computer in the form of a set-top box. That part of the "start-up cost" is taken
each time a customer signs up. Estimates for the cost of supplying a household after "passing" them with the basic network are variable but
start at 650 dollars per customer and range up from there to figures like a 1000 dollars.
It will typically take years to payback that extra cost; it's a great (and absolutely necessary) investment since you're not going to make money in the long run unless you have plenty of customers but each customer you pick up means years of short-term debt load. It's worth noticing that all of LUS Fiber's competitors long ago paid off all these costs. It's a testament to the basic business plan that the community utility is able to offer generally better services to the city at a lower cost than the private competition.
Still, why not go ahead and take out the whole amount that the citizens authorized? Why take some early and then take more later? Doesn't that just sound bad—like LUS didn't anticipate the need?
The economy, smart business and lousy politics
It's perfectly possible, and even probable that LUS
didn't anticipate the need: the long legal delays imposed by the incumbents lawsuits skewed their initial estimates and nobody anticipated the Wall Street crash and subsequent financial chaos and recession.
Cable lost a record number of subscribers this year largely as a consequence of that recession according to analysts. Not the best market in which to begin a new network.
But there are also some smart business reasons to not put all of your financial eggs in one basket of borrowing. First, and most obviously, it's a good practice not to borrow money before you really need it—you just end up having to pay interest for a longer period of time so it is cheaper to space borrowing. But there are also federal regulations to take into account. According to the Advertiser's interview with Huval the IRS wants to be reassured that municipal bonds are actually being spent on building what they are supposed to build—in this case a fiber-optic utility—and they want to see the product that the bonded indebtedness is meant to build built within about three years or the issuer faces penalties. (Presumably this is meant to prevent using tax-exempt bonds to "arbitrage" or leverage the purchase of taxable but higher-yielding investments thereby defeating the purpose of having tax-exemptions for municipalities to build basic infrastructure instead of using the piles of money to invest in the open market.) But a fiber-optic network has a longer period of capitalization than your typical road or damn construction; as already noted each brand-new customer imposes a large acquisition cost. So it makes smart business sense to split out some of that downstream capitalization and only use it when it becomes necessary; you get an additional three years of capitalization for the investments you have to make in bringing late-adopters online.
So while it might be lousy politics to go back to the well, it can be smart business.
(Note: The Advertiser has their article running in the print edition but it's not appearing online yet...look for an update here when the on lie copy appears. —
Here you go.)