The City of Geneva, Illinois
Broadband Network Initiative
United Telesystems, Inc. 1 Greatcoat Lane Savannah, Georgia 31411 912 598-7223
September 20, 2002
RESTRICTIONS ON DISCLOSURE OF DATA
The data furnished in this document shall not be disclosed outside the organization or government to which it is submitted and shall not be duplicated, used, or disclosed in whole or in part, for any purpose other than to evaluate the document and to implement the plan that it sets forth. This restriction does not limit any right to use information contained in this document if it is obtained from another source. United Telesystems, Inc.
THE CITY OF GENEVA, ILLINOIS BROADBAND NETWORK INTITIATIVE TABLE OF CONTENTS SEPTEMBER 20, 2002
1 TAB - Executive Summary of Business Plan
2 TAB - Broadband Services Industry Overview
3 TAB - Partnering Opportunity
4 TAB - Qualifying Statements and Plan of Financing
5 TAB - Municipal Administrative and Utility Applications
6 TAB - Broadband System Development & Marketing Plan
7 TAB - Proposed Video, Data and Telephone Services
8 TAB - Geneva Only Financial Projections Years 1 - 10
9 TAB - Geneva Only Financial Projections Months 1 - 12
10 TAB - Geneva Only Financial Projections Months 13 - 24
11 TAB - Tri-Cities Combined Financial Projections Years 1 - 10
12 TAB - Tri-Cities Combined Financial Projections Months 1 - 12
13 TAB - Tri-Cities Combined Financial Projections Months 13 - 24
14 TAB - Broadband Network Equipment Costs Detail
15 TAB - Video Service Provider Overview
16 TAB - Incumbent Telecommunications Provider Overview
17 TAB - Illinois Competitive Local Exchange Carrier Overview
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THE CITY OF GENEVA, ILLINOIS BROADBAND NETWORK INTITIATIVE TABLE OF CONTENTS SEPTEMBER 20, 2002 (Continued)
18 TAB - Service Area Franchise Agreements
19 TAB - Federal and State Legal Review
20 TAB - Broadband Terms Glossary
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THE CITY OF GENEVA, ILLINOIS BUSINESS PLAN FOR THE PROVISIONING OF BROADBAND SERVICES SEPTEMBER 20, 2002
EXECUTIVE SUMMARY
A. The Role of Municipalities and the Broadband Initiative
1. Improve and Maintain Local Infrastructure - In the past, one of the fundamental missions of municipal entities such as the City of Geneva, Illinois (the “City”) and the City of Geneva has been to improve and maintain local infrastructure to facilitate the provisioning of utility services in order to promote the quality of life for local citizens in and around the City of Geneva (the “Geneva Service Area”). While the passage of years can sometimes cause many daily conveniences to be taken for granted, municipal officials have often determined that the capitalization and deployment or construction of infrastructure was in the best interest of the community and its citizens. In addition to the capitalization of utility infrastructures, municipal officials have previously elected to construct and maintain such infrastructure as roads, bridges, sidewalks, and more recently, fiber optic based broadband telecommunications systems. In each case, decisions to provide these various components of local infrastructure have been generally based upon the desire to serve a public need and/or demand.
2. The Broadband Business Plan - UTI has provided this independent Broadband Business Plan to assist the City in the process of converting the advent of technological advancements and regulatory freedoms into financially sound decisions and policies designed to enhance the local infrastructure and to enhance the quality of life for the citizens of Geneva. To enable the City to accomplish its objectives while protecting its core services, UTI has provided the information necessary to support the deployment of a technically advanced fiber optic based broadband network (the “Broadband Network”) that is cost effective and capable of satisfying market demand.
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This Broadband Business Plan incorporates information associated with facility-based service provisioning opportunities. The primary objective of the Broadband Business Plan is to provide the City with information to allow decisions to be made associated with pursuing existing and potential broadband services opportunities through a defined course of action and implementation plan.
The deregulation of the telecommunications industry presents new challenges and opportunities as municipal entities like the City seek to define and achieve strategic objectives in evolving competitive markets. This Broadband Business Plan represents the first step in the progressive efforts undertaken by the City to enhance the local infrastructure in the Geneva Service Area to allow for the provisioning of advanced video, data, and telecommunications service offerings to residential and commercial consumers.
B. The Municipal Broadband Services Opportunity
1. The Commercial Broadband Services Opportunity - The City has the opportunity to achieve the long-term objectives of enhancing the local infrastructure, keeping service fees reinvested locally, revenue diversification, and improving the quality of life for local residents in the Geneva Service Area through developing a commercial broadband service offering for residential and commercial customers. To allow these services to be provided, the City may elect to construct a state-of-the-art fiber optic based Broadband Network with a capable of delivering advanced video, telephone, Internet, and data services to residents of the Geneva Service Area.
2. Industrial Growth Opportunity - As another primary justification for deploying a broadband infrastructure, the City must seek to promote commerce and local industrial growth through providing existing local businesses and businesses seeking to expand or locate in the Geneva Service Area with access to an enhanced fiber optic based broadband infrastructure.
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3. Internal Operations and Utility Enhancement Opportunity - While providing advanced video, data, and telecommunications services to consumers, the City will also improve the cost effectiveness, efficiency, and productivity of existing municipal operations through supporting internal needs such as those associated with the operation of existing utilities.
4. The Educational Opportunity - Another of the City’ initial justifications for deploying a broadband infrastructure should be founded upon the need to develop and promote new local educational opportunities through the enhancement of communications capabilities between educational facilities in the Geneva Service area and between those facilities and available global educational resources.
C. Broadband Services - The Broadband Business Plan prepared by United Telesystems Inc. (“UTI”) for the City anticipates that the City will capitalize, construct, and operate a 113 mile all optical fiber-to- the-home/fiber-to-the-business (“FTTH/FTTB”) Broadband Network as follows over a period of twenty-four (24) months and will provide the following services in and around Geneva, Illinois (the “Geneva Service Area”):
Broadband Video Services (Cable Television) High Speed Broadband Internet Access Competitive Local Exchange Carrier Telephone Service Long Distance Telephone Service Local & Wide Area Telecommunications Networking Fiber Optic Transport Utility Management
D. Broadband Network Architecture – In this the City Broadband Business Plan, UTI has incorporated a FTTH/FTTB Broadband Network architecture option. The FTTH/FTTB architecture refers to an all-optic network with fiber optic cable deployed from the headend/central office facility directly to the residential and commercial customer premise. The FTTH/FTTB architecture utilizes an all fiber design from the headend/central office to the customer premise. The increased capital cost of developing a FTTH/FTTB network over a deep fiber-coaxial FTTC/FTTB network may be offset
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by the operating and service benefits derived from the architecture through improved signal quality, capacity, reliability, scalability, interactivity, flexibility, potentially lower operating costs, and the extended operational life of the infrastructure. The FTTH/FTTB approach eliminates the need for active electronics and network power supplies. Should the City adopt a FTTH/FTTB architecture, it will be necessary to acknowledge a certain element of vendor and technology related risks associated with the decision as there have been a limited number of FTTH/FTTB systems developed, most of which have been developed in relatively small service, and the vendors supporting most of these projects are new entrants to the market place. The following diagram sets forth the proposed FTTH/FTTB architecture:
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E. Project Services Summary - The financial projections in the City Broadband Business Plan anticipates that the City will provide the aforementioned services to customers over a period of twenty-four (24) months and includes the following residential and commercial customer assumptions:
Geneva Service Type Distribution Residential Category Type Video Telecom Data
H omes Passed 8,247 8,247 8 ,247 Projected Residential Subscribers 2,804 666 1 ,088 Service Penetration 34% 8% 13% Video, Telecom and Data Subscribers 152 152 1 52 Video and Data Subscribers 325 - 3 25 Video and Telecom Subscribers 290 290 - Telecom and Data Subscribers - 24 2 4 Video Subscribers - Analog Only Customer 530 - - Video Subscribers - Analog & Digital Video Only Customer 1,507 - - T eleco m O nly C u sto m er - 200 - Data Only Customer - - 587
Subscriber M ix Derived Assumptions Analog Video Only (Percent to Total Video) 18.90% T o tal Installed V id eo , D ata & T eleco m S u bscribers 3 ,6 1 5 Installed S u bscribers to P o tential S u bscribers P assed 4 3 .8 3 % CPE to Video Subscribers 128.92%
Commerical Category Type Video Telecom Data
Commercial Units Passed 1,994 1,994 1 ,994 Projected Commercial Subscribers 20 241 3 49 Service Penetration 1% 12% 18% Video, Telecom and Data Subscribers 2 10 1 0 Video and Data Subscribers 6 - 2 5 Video and Telecom Subscribers 2 11 - Telecom and Data Subscribers - 50 5 0 Video Subscribers - Analog Only Customer 6 - - Video Subscribers - Analog & Digital Video Only Customer 4 - - T eleco m O nly C u sto m er - 170 - Data Only Customer - - 264
Subscriber M ix Derived Assumptions T o tal Installed V id eo , D ata & T eleco m S u bscribers 504 Installed S u bscribers to P o tential S u bscribers P assed 2 5 .2 8 %
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Notes to Customer Assumptions:
1. Potential Residential and Commercial Customers Passed: This information was derived from existing the City customer information, an on-site assessment of the proposed service area, and a review of information available about incumbent service providers.
2. Video, Data, and Voice Service Penetrations: Knology, Inc. currently stands as the only significant private entity in the Southeastern US that operates competitive broadband systems similar to the project as set forth in this Broadband Business Plan. On March 31, 2002, in its 10-Q filing with the Securities and Exchange Commission, Knology, Inc. reported customer information as follows:
Knology, Inc. As of March 31, 2002
MARKETABLE HOMES PASSED 425,197
CONNECTIONS Video 122,823 29% On Net Voice 66,014 16% On Net Data 37,829 9%
RCN Corporation (Nasdaq: RCNC) is the nation's first and largest single-source facilities-based competitive provider of bundled local and long distance phone, cable television and high-speed Internet services. RCN is currently delivering broadband services or designing and building its network on the East and West coasts as well as Chicago. RCN currently offers service in selected geographical areas of Massachusetts, New York, New Jersey, Pennsylvania, Maryland, Virginia, California, and Illinois. In its March 31, 2002, 10-Q filing with the Securities and Exchange Commission, RCN reported customer information as follows:
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RCN As of March 31, 2002
MARKETABLE HOMES PASSED 1,199,829
CONNECTIONS Video 459,702 38% On Net Voice 208,860 17% On Net Data 117,839 10%
In addition to Knology, Inc., several UTI municipal clients have launched competitive broadband systems in the Southeastern US since 1996. To date, broadband networks developed by UTI municipal clients have achieved higher service penetration levels than UTI private clients and other entities providing similar competitive services. UTI feels that this can be primarily attributed to market presence of the municipal service providers and the impact of the perception of community ownership of the broadband networks among potential customers. The following sets forth information available on two UTI municipal clients that have launched competitive broadband systems in the Southeastern US. The City of Acworth broadband network was launched in February of 2001 and the Scottsboro Electric Power Board broadband network was launched in December of 1998.
City of Acworth, Georgia As of July 10, 2002
MARKETABLE HOMES PASSED 6,036
CONNECTIONS Video 2,563 42.5% On Net Voice 0 0.0% On Net Data 542 9.0%
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Scottsboro Electric Power Board As of July 31, 2002
MARKETABLE HOMES PASSED 6,172
CONNECTIONS Video 4,145 68.7% On Net Voice 0 0.0% On Net Data 1,682 27.9%
F. Capital Budget and Project Summary - Following, are major capital categories and a project summary from the City Broadband Business Plan financial projections:
1. The following capital budget summary reflects a FTTH/FTTB Broadband Network architecture. The assumptions in the projections have been derived from pricing and purchase orders for equipment and services for similar projects.
City of Geneva Geneva, Ilinois FTTH/FTTB Broadband Financial Projections - Base Case 2002 Capital Expenditures
Year 1 Year 2 Total
Project Consulting $150,000 $15,000 $165,000 Plant, Make Ready & Design $5,819,718 $63,603 $5,883,320 Headend, Telephone Switch & Test Equipment $4,647,842 $104,975 $4,752,817 Installs & Customer Premise Equipment $5,633,765 $114,132 $5,747,897 Contingency & Special Project Fund $849,628 $17,293 $866,922 Office & Billing $155,000 $16,500 $171,500 Sales $183,745 $31,660 $215,405 Vehicles $402,500 $0 $402,500 Total $17,842,198 $363,163 $18,205,361 Total Capital Expenditures $17,842,198 $363,163 $18,205,361 Total Capital Expenditures to Date $17,842,198 $18,205,361
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City of Geneva 2. Geneva, Ilinois FTTH/FTTB Broadband Financial Projections - Base Case 2002 Project Summary
Service Area Summary Percentage Aerial Plant Miles: 53 47.1% Underground Plant Miles: 60 52.9% Total Plant Miles: 1 13 Total Potential Residential Customers Passed: 8, 052 80.5% Total Potential Commercial Customers Passed: 1 ,947 19.5% Total Potential Customers Passed: 9 ,999 Total Potential Customers Per Plant Mile: 8 8.30
Projected Customers Video Services - Residential 2 ,738 34.0% High Speed Data - Residential 1 ,062 13.2% Telepone Service - Resdidential 604 7.5% Video Services - FCC Equivalent Commercial Units 2 0 1.0% High Speed Data - Commercial 341 17.5% Telephone Service - Commercial 2 19 11.3% Total Customer Service Units: 4, 983
Total Project Capital Budget: $18,205,728 Total Project Capital Per Plant Mile: $160,774 Total Project Capital Per Customer Service Unit: $3,654 Total Project Capital Per Potential Customer Passed: $1,821
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Following, is a chart that breaks down the percentage of capital allocations attributable to the Broadband Network in the City Broadband Business Plan financial projections by category of capital expenditure in the financial projections:
Broadband Network Capital Allocations
Vehicles Office & Billing 2.22% 1.01% Sales Project Consulting 1.19% 0.96% Contingency & Special Project Fund Plant, Make Ready & Design 4.76% 32.11%
Installs & Customer Premise Equipment 31.54%
Headend, Telephone Switch & Test Equipment 26.20%
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G. Proposed Analog Video Services: Following, are the proposed analog video services to be provided by the City in the Broadband Business Plan. The analog video services proposed by UTI are based upon an assessment of analog video services currently available to potential customers in Geneva Service Area along with experience with similar projects in other markets.
Geneva Fiber Network Geneva, Illinois Analog Channel Lineup
Channel Service Channel Service 2 WBBM (2) CBS Chicago 43 ABC Family Channel 3 WFLD (32) FOX Chicago 44 Lifetime 4 The Weather Channel 45 Women's Entertainment 5 WMAQ (5) NBC Chicago 46 Oxygen 6 WCIU (26) IND Chicago 47 HGTV 7 WLS (7) ABC Chicago 48 The Learning Channel 8 WPWR (50) UPN Chicago 49 DIY Network 9 WGN (9) WB Chicago 50 ESPN 10 Local Community Channel 51 ESPN 2 11 WTTW (11) PBS Chicago 52 ESPN Classic Sports 12 WCPX (38) PAX Chicago 53 The Golf Channel 13 WJYS (62) Christian Chicago 54 Outdoor Life Channel 14 HBO 55 Speed Channel 15 HBO 2 56 Fox Sports Midwest 16 HBO Family 57 Outdoor Channel 17 WGBO (66) UNIVISION Chicago 58 Inspirational Network 18 TBS 59 TBN 19 WSNS (44) TELEMUNDO Chicago 60 EWTN 20 WYCC (20) PBS Chciago 61 CMTV 21 Educational/Govt. Access Ch 62 Great American Country 22 TV Guide Channel 63 VH-1 23 Headline News 64 BET 24 QVC 65 MTV 25 HSN 66 Comedy Channel 26 Fox News 67 Court TV 27 CNN 68 C-Span 28 MSNBC 69 C-Span 2 29 CNBC 70 Tech TV 30 The Disney Channel 71 Sci- Fi Channel 31 USA Network 72 National Geographic 32 The National Network 73 Discovery Health Network 33 fX 74 Food Network 34 The History Channel 75 Travel Channel 35 The Discovery Channel 76 Bravo 36 Animal Planet 77 Fine Living 37 TV Land 78 E! Television 38 Nickelodeon 79 Game Show Network 39 Cartoon Network 40 American Movie Classics 41 A & E 42 TNT Confidential Page 11. 9/20/02 United Telesystems Inc.
H. Proposed Digital Video Services: Following, are proposed digital video services to be provided by the City in the Broadband Business Plan. The digital video services proposed by UTI are based upon an assessment of digital video services currently available to potential customers in Geneva Service Area along with experience with similar projects in other markets.
GENEVA FIBER NETWORK Digital Video Services
Service Service Service
Digital Basic Tier Services Digital Premium Services Digital Premium Services Discovery Kids Encore Group HBO Group Discovery Science Encore HBO East Discovery Home & Leisure Encore Westerns HBO Plus Discovery Wings Encore Action HBO Signature Discovery Civilizations Encore True Stories HBO Family East SoapNet Encore Mystery HBO Comedy East BBC America Encore Love Stories HBO Zone East Much Music Toon Disney Starz!/Encore Group Cinemax Group Noggin Encore Cinemax Nick Games & Sports Starz! More Max East WAM! Starz! Theather Action Max East Boomerang Starz! BET Movies Thriller Max East Bloomberg Television Starz! Family CNN/FN Starz! Cinema The Movie Channel Group CNN en Espanol The Movie Channel East Inspirational Life TV Digital Audio The Movie Channel 2 Style Music Choice (45 Channels) The Movie Channel West Lifetime Movie Network IFC Digital Pay-Per-View Channels Showtime Group BET on Jazz In Demand PPV Preview Showtime East VH 1 Classic Rock In Demand (21 Channels) Showtime 2 East VH-1 Country ESPN Sports Packages Showtime 3 East VH 1 Soul NBA/WNBA League Pass Showtime Beyond East MTV 2 NHL Center Ice Package Showtime Extreme East MTV S Video On Demand Channel(s) MTV X Showtime Digital Package Biography Channel Showtime Group History International The Movie Channel Group Goodlife Television Network Flix Fox Sports World Sundance Channel Wisdom Network BET Gospel Shop NBC FamilyNet
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I. Video Services Rates - Following, are the proposed the City residential and commercial video services and rates in the Broadband Business Plan. The video services rates proposed by UTI are based upon an assessment of rates for video services currently available to potential customers in Geneva Service Area along with experience with similar projects in other markets.
GENEVA FIBER NEWORK Video Services Rates and Charges
Basic Services Rate Equipment Rental Rate Limited Basic (18 Channels) $10.95 Standard Converter with Remote $1.00 Expanded Basic (57 Channels) $23.55 Digital Converter (Additional Set) $5.95 Standard Basic (75 Channels) $34.50 Digital Converter with Music Choice & PPV $6.95 Line Maintenance Plan $1.95 Total Basic (75 Channels) $36.45 Installation of Residental Service Digital Basic Tier (35 Video Chs. + 45 Audio Chs.) $10.95 Unwired Home $30.00 Premiere Basic (110 Video Chs. + 45 Audio Chs.) $47.40 Prewired Home $20.00 Multi-Family Residence $15.00 Premium Services Additional Outlet (same trip) $10.00 HBO, HBO Plus, HBO Family (Analog Service) $11.95 Additional Outlet (separate trip) $15.00 HBO Digital Group (6 Channels) $11.95 Relocate Outlet (same trip) $10.00 Showtime Group (5 Channels) $10.95 Relocate Outlet (separate trip) $15.00 Cinemax Group (4 Channels) $9.95 Wiring Within Walls (per outlet) $40.00 The Movie Channel Group (3 Channels) $8.95 Digital Converter (same trip) $5.00 Starz Group (6 Channels) $8.95 Digital Converter (separate trip) $10.00 Encore Group (6 Channels) $5.95 Reconnect Residential Service $20.00 Digital Basic Tier (35 Video Chs + 45 Audio Chs) $10.95 Other Charges Packaging Returned Check Charge $25.00 Showtime Digital Combo (Show, TMC, Flix & Sundance $12.95 Hourly Service Call $30.00 HBO Digital Group and Cinemax Digital Group $19.50 Late Fee $2.95 Starz Group (6 channels) $8.95 Franchise Fee (City) 5.00% Encore Group (6 channels) $5.95 FCC Fee (Monthly) $0.00
Digital Premium Discount: (Digital Basic Tier plus) Two Premium A La Carte or Packaged Services $2.00 Three Premium A La Carte or Packaged Services $4.00 Four or More Premium A La Carte or Packaged Services $6.00
Digital Pay-Per-View Services IN Demand PPV Movies (21 Channels) $3.95 Video On Demand Movies $4.50 Sports Packages (Varies) Special Pay Per View Events (Varies)
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J. Residential Data and Internet Access Services - Following, are the proposed the City residential data and Internet access services and rates in the Broadband Business Plan. Residential data and Internet access rates proposed by UTI are based upon an assessment of services currently available to potential customers in Geneva Service Area along with experience with similar projects in other markets.
GENEVA FIBER NETWORK High Speed Data Service Residential Rates and Charges 2002
Services Rate Services Rate Residental: w/CATV Residental: No CATV
Platinum Service - Downstream to 3.0 Mbps $64.95 Platinum Service - Downstream to 3.0 Mbps $69.95 Gold Service -Downstream to 2.0 Mbps $44.95 Gold Service -Downstream to 2.0 Mbps $49.95 Silver Service - Downstream to 1.0 Mbps $34.95 Silver Service - Downstream to 1.0 Mbps $39.95 Standard Service - Downstream to 512 Kbps $26.95 Standard Service - Downstream to 512 Kbps $31.95
Other Charges: Other Charges:
Additional Email Address (Monthly Fee) $5.00 Additional Email Address (Monthly Fee) $7.50 Charge for Data Transfer Over Cap per 50 MB $1.00 Charge for Data Transfer Over Cap per 50 MB $1.50
Installation Services: Installation Services:
Installation (Includes NIC Card & Software) $99.00 Installation (Includes NIC Card & Software) $125.00 Installation (No NIC Card & Software) $75.00 Installation (No NIC Card & Software) $100.00 Dedicated High Speed Cable Outlet $50.00 Dedicated High Speed Cable Outlet $75.00
Residental Service Packages Residental Service Packages
Platinum Service $64.95 Platinum Service $69.95 includes: Speeds Up to 3.0 Mbps Downstream and includes: Speeds Up to 3.0 Mbps Downstream and 512 Kbps Up, Dynamic IP Address, 512 Kbps Up, Dynamic IP Address, Up to 4 Email Addresses, 7.5 MB Personal Web Up to 4 Email Addresses, 7.5 MB Personal Web Space, Data Transfer Cap of 10 GB Space, Data Transfer Cap of 10 GB
Gold Service $44.95 Gold Service $49.95 includes: Speeds Up to 2.0 Mbps Downstream and includes: Speeds Up to 2.0 Mbps Downstream an 256 Kbps Up, Dynamic IP Address, 256 Kbps Up, Dynamic IP Address, Up to 3 Email Addresses, 5 MB Personal Web Up to 3 Email Addresses, 5 MB Personal Web Space, Data Transfer Cap of 7.5 GB Space, Data Transfer Cap of 7.5 GB
Silver Service $34.95 Silver Service $39.95 includes: Speed Up to 1.0 Mbps Downstream includes: Speed Up to 1.0 Mbps Downstream and 128 Kbps Upstream, Dynamic IP Address and 128 Kbps Upstream, Dynamic IP Address Up to 3 Email Addresses, 3 MB Personal Web Up to 3 Email Addresses, 3 MB Personal Web Space, Data Transfer Cap of 5 GB Space, Data Transfer Cap of 5 GB
Standard Service $26.95 Standard Service $31.95 includes: Speed Up 512 Kbps Downstream and includes: Speed Up 512 Kbps Downstream and 128 Kbps Upstream, Dynamic IP Address 128 Kbps Upstream, Dynamic IP Address 2 Email Address, Data Transfer Cap of 3 GB 2 Email Address, Data Transfer Cap of 3 GB
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K. Commercial Data and Internet Access Services - Following, are the proposed the City commercial data and Internet access services and rates in the Broadband Business Plan. Commercial data and Internet access rates proposed by UTI are based upon an assessment of services currently available to potential customers in Geneva Service Area along with experience with similar projects in other markets.
GENEVA FIBER NETWORK High Speed Data Service Business Rates and Charges 2002
High Speed Data Services Monthly Installation Business Rate Charges Rate
Standard Business Service - Level 1 $49.95 Standard Business Service - Level 1 $150.00 Standard Business Service - Level 2 $69.95 Standard Business Service - Level 2 $200.00 Business Plus Service - Level 1 $89.95 Business Plus Service - Level 1 $300.00 Business Plus Service - Level 2 $99.95 Business Plus Service - Level 2 $350.00 Business Elite Service - Level 1 $129.95 Business Elite Service - Level 1 $500.00 Business Elite Service - Level 2 $169.95 Business Elite Service - Level 2 $550.00 Direct Business Service - Customized Quote Direct Business Service - Customized Quote
Other Charges Charge
Additional Static Email Address (Monthly Fee) $15.00 Charge for Data Transfer Over Cap per 50 MB $1.50
Monthly Monthly Business Service Packages Rate Business Service Packages Rate
Standard Service Level 1 $49.95 Standard Service Level 2 $69.95 includes: Speeds Up to 512 Kbps Downstream and includes: Speeds Up to 2.0 Mbps Downstream and 128 Kbps Upstream, One Static IP Address 256 Kbps Upstream, One Static IP Address Up to 4 Email Addresses, 5 MB Web Space Up to 5 Email Addresses, 7.5 MB Web Space Space, Data Transfer Cap of 10 GB Space, Data Transfer Cap of 10 GB Installation Charge $150.00 $200.00
Business Plus Service Level 1 $89.95 Business Plus Service Level 2 $99.95 includes: Speed Up to 512 Kbps Downstream includes: Speeds Up to 2.0 Mbps Downstream and 128 Kbps Upstream, Three Static IP Addresses and 256 Kbps Upstream, Three Static IP Addresses Up to 10 Email Addresses, 10 MB Web Space Up to 10 Email Addresses, 10 MB Web Space Space, Data Transfer Cap of 15 GB Space, Data Transfer Cap of 15 GB Installation Charge $300.00 $350.00
Business Elite Service Level 1 $129.95 Business Elite Service Level 2 $169.95 includes: Speed Up to 2.0 Mbps Downstream includes: Speeds Up to 3.0 Mbps Downstream and 128 Kbps Upstream, Five Static IP Addresses and 512 Kbps Upstream, Five Static IP Addresses Up to 15 Email Addresses, 15 MB Web Space Up to 15 Email Addresses, 15 MB Web Space Space, Data Transfer Cap of 20 GB Space, Data Transfer Cap of 20 GB Installation Charge $500.00 Installation Charge $550.00
Business Direct Service The City of Geneva can provide customized service tailored to the high speed data needs of growing organizations including fiber connnectivity directly to the business within the designated service area.
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L. Residential Telephone Services - The following is a summary of the City residential telephone services. Residential telephone rates proposed by UTI are based upon an assessment of services currently available to potential customers in Geneva Service Area along with experience with similar projects in other markets.
Batavia Residential Telephony Packaging and Pricing
A La Carte Basic Standard Family Family Plus A La Carte A La Carte Features Rates Service Service Service Service Percentages Avg. Rate Basic Touch Tone Service-Primary Lin $16.95 x x x x Basic Additional Line $12.95 x 15% $1.94 911 Free x x x x Call Waiting $4.00 x x x 10% $0.40 Caller ID (name and number) $4.00 x x x 7% $0.28 3 Way Calling $4.00 x x x 3% $0.12 Call Forwarding $4.00 x x 3% $0.12 Preferred Call Forwarding $4.00 x x 1% $0.04 Prioirity Ring $4.00 x x 1% $0.04 Distinctive Ring $4.00 x x 1% $0.04 Selective Call Blocking $4.00 x x 1% $0.04 900/976 Call Blocking Free x x x x 1% Last Call Return $4.00 x x 2% $0.08 Speed Dial 8 $3.00 x x 3% $0.09 Speed Dial 30 $4.00 x 2% $0.08 Non-published number $2.75 $0.00 Listing Omitted from Phone Directory Free x x x x Standard Directory Listings Free x x x x Additional Directory Listings $1.55 x 5% $0.08 Inside Wire Maintenance $2.00 x 15% $0.30 Continuous Redial *66 $2.00 x x x 2% $0.04 Anonymous Call Rejection $0.00 x x $0.00 Customer Code Restriction $0.00 x x x $0.00 Voice Mail $4.00 15% $0.60 Voice Mail with Extensions $4.50 x 2% $0.09 Voice Mail with Pager Notifications $6.95 2% $0.14 Voice Mail with Pager Notifications & E $7.95 x 1% $0.08
Monthly Service Rate $16.95 $22.95 $32.95 $42.95
Subscription Percentage 5.00% 60.00% 20.00% 15.00%
Average Per Customer Type $0.85 $13.77 $6.59 $6.44 $4.60
Average Rate Per Phone Customer $ 27.65 $32.25
Note: All rates are exclusive of Taxes, Charges, Fees, and Accessments
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M. Commercial Telephone Services - The following is a summary of the City commercial telephone services. Commercial telephone rates proposed by UTI are based upon an assessment of services currently available to potential customers in Geneva Service Area along with experience with similar projects in other markets.
Batavia Small Business Telephony Packaging and Pricing Basic Standard Business Business Deluxe A La Carte Business Business Plus Advantage Business A La Carte A La Carte Features Rates Service Service Service Service Service Percentages Avg. Rate Basic Touch Tone Service-Primary Lin $24.95 x x x x x Basic Touch Tone Service-Secondary $24.95 3% $0.75 Basic Additional Line -Roll Over $9.95 $0.00 $1.00 $2.00 $3.00 10% $1.00 911 Free x x x x x Call Waiting $6.50 x x x x 5% $0.33 Caller ID Deluxe $10.00 x x x 5% $0.50 Caller ID Enchanced $15.00 x x 1% $0.15 3 Way Calling $5.00 x x x x 2% $0.10 Call Forwarding - Busy Line $4.25 x x x 2% $0.09 Call Forwarding - No Answer $4.25 x x x 1% $0.04 Prioirity Ring $9.00 x x x 1% $0.09 Distinctive Ring $9.00 x x x 1% $0.09 Selective Call Blocking $5.00 x x x 1% $0.05 900/976 Call Blocking Free x x x x x Call Return $5.00 x x x 2% $0.10 Call Trace $6.50 1% $0.07 Speed Dial 8 $4.00 x 3% $0.12 Speed Dial 30 $5.00 x x 2% $0.10 Non-published number $2.75 1% $0.03 Listing Omitted from Phone Directory Free x x x x x Standard Directory Listings Free x x x x x Additional Directory Listings $2.00 x x 5% $0.10 Foreign Directory Listings $2.00 x 2% $0.04 Inside Wire Maintenance $4.00 x x 25% $1.00 Continuous Redial *66 $2.00 x x x x 2% $0.04 Anonymous Call Rejection $2.00 x x x $0.00 Customer Code Restriction $2.00 x x x x $0.00 Voice Mail $15.00 x 10% $1.50 Voice Mail with Extensions $17.50 x 2% $0.35 Voice Mail with Pager Notifications $20.00 2% $0.40 Voice Mail with Pager Notifications & E $22.50 x x 1% $0.23 Information at 411 $0.75 Courtesy Complete for 411 $7.50
Monthly Service Rate $24.95 $49.95 $79.95 $109.95 $139.95
Subscription Percentage 2.50% 30.00% 40.00% 12.50% 5.00%
Average Per Customer Type $0.62 $14.99 $31.98 $13.74 $7.00 $7.24
Average Rate Per Phone Customer $75.57
Note: All rates are exclusive of Taxes, Charges, Fees, and Accessments $68.33
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N. Staffing - The following is a the City broadband services division organizational chart representing proposed staffing as set forth in the Business Plan follows:
City of Geneva Page: 38 Geneva, Ilinois FTTH/FTTB Broadband Financial Projections - Base Case 2002 Broadband Service Staffing
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Telecommunications Service Employees Switch Techs 11111111 1 1 Overtime eligible 11111111 1 1 Field Techs 12222222 2 2 Overtime eligible 12222222 2 2 Provisioning Reps 11111111 1 1 Overtime eligible 22222222 2 2 Total Telecommunications Employees 45555555 5 5
Cable Service Employees General Managers 00000000 0 0 Office Manager 00000000 0 0 MIS Director 00000000 0 0 Customer Service Representatives 22222222 2 2 Support Staff 11111111 1 1 Technical Manager (s) 11111111 1 1 Headend Technicians 11111111 1 1 Construction Manager/Plant Manager 11111111 1 1 Broadband Service Technicians 22222222 2 2 Installer/Service Technician 22222222 2 2 Contract Installers 41111111 1 1 Marketing and Sales Manager 11111111 1 1 Contract Field Representatives 30111111 1 1 Total 1812141414141414 14 14
Total Telecommunications and Cable Service Employees 2217191919191919 19 19
Confidential Page 18. 9/20/02 United Telesystems Inc.
O. Project Capitalization and Debt Service Schedule – Following, is debt service schedule from the City Broadband Business Plan financial projections for the proposed FTTH/FTTB Broadband Network Architecture:
GENEVA FIBER NETWORK BOND DEBT SERVICE SCHEDULE Issuance Amount: $20,720,000 Annual interest rate: 4.75% Interest only period: 36 Months Term in years: 15 Payments per year: 2 First principal payment due: 7/1/2005 Calculated payment: $973,527.25 Payment Beginning Ending Cumulative No. Date Balance Interest Principal Balance Interest 1 1/1/2003 20,720,000.00 492,100.00 0.00 20,720,000.00 492,100.00 2 7/1/2003 20,720,000.00 492,100.00 0.00 20,720,000.00 984,200.00 3 1/1/2004 20,720,000.00 492,100.00 0.00 20,720,000.00 1,476,300.00 4 7/1/2004 20,720,000.00 492,100.00 0.00 20,720,000.00 1,968,400.00 5 1/1/2005 20,720,000.00 492,100.00 0.00 20,720,000.00 2,460,500.00 6 7/1/2005 20,720,000.00 492,100.00 0.00 20,720,000.00 2,952,600.00 1 7/1/2005 20,720,000.00 492,100.00 481,427.25 20,238,572.75 3,444,700.00 2 1/1/2006 20,238,572.75 480,666.10 492,861.15 19,745,711.60 3,925,366.10 3 7/1/2006 19,745,711.60 468,960.65 504,566.60 19,241,145.00 4,394,326.75 4 1/1/2007 19,241,145.00 456,977.19 516,550.06 18,724,594.94 4,851,303.95 5 7/1/2007 18,724,594.94 444,709.13 528,818.12 18,195,776.82 5,296,013.08 6 1/1/2008 18,195,776.82 432,149.70 541,377.55 17,654,399.27 5,728,162.78 7 7/1/2008 17,654,399.27 419,291.98 554,235.27 17,100,164.00 6,147,454.76 8 1/1/2009 17,100,164.00 406,128.90 567,398.36 16,532,765.65 6,553,583.65 9 7/1/2009 16,532,765.65 392,653.18 580,874.07 15,951,891.58 6,946,236.84 10 1/1/2010 15,951,891.58 378,857.42 594,669.83 15,357,221.75 7,325,094.26 11 7/1/2010 15,357,221.75 364,734.02 608,793.23 14,748,428.52 7,689,828.28 12 1/1/2011 14,748,428.52 350,275.18 623,252.07 14,125,176.44 8,040,103.46 13 7/1/2011 14,125,176.44 335,472.94 638,054.31 13,487,122.13 8,375,576.40 14 1/1/2012 13,487,122.13 320,319.15 653,208.10 12,833,914.03 8,695,895.55 15 7/1/2012 12,833,914.03 304,805.46 668,721.79 12,165,192.24 9,000,701.01 16 1/1/2013 12,165,192.24 288,923.32 684,603.94 11,480,588.30 9,289,624.32 17 7/1/2013 11,480,588.30 272,663.97 700,863.28 10,779,725.03 9,562,288.29 18 1/1/2014 10,779,725.03 256,018.47 717,508.78 10,062,216.24 9,818,306.76 19 7/1/2014 10,062,216.24 238,977.64 734,549.62 9,327,666.63 10,057,284.40 20 1/1/2015 9,327,666.63 221,532.08 751,995.17 8,575,671.46 10,278,816.48 21 7/1/2015 8,575,671.46 203,672.20 769,855.05 7,805,816.41 10,482,488.68 22 1/1/2016 7,805,816.41 185,388.14 788,139.11 7,017,677.29 10,667,876.82 23 7/1/2016 7,017,677.29 166,669.84 806,857.42 6,210,819.88 10,834,546.65 24 1/1/2017 6,210,819.88 147,506.97 826,020.28 5,384,799.60 10,982,053.63 25 7/1/2017 5,384,799.60 127,888.99 845,638.26 4,539,161.34 11,109,942.62 26 1/1/2018 4,539,161.34 107,805.08 865,722.17 3,673,439.17 11,217,747.70 27 7/1/2018 3,673,439.17 87,244.18 886,283.07 2,787,156.10 11,304,991.88 28 1/1/2019 2,787,156.10 66,194.96 907,332.29 1,879,823.81 11,371,186.84 29 7/1/2019 1,879,823.81 44,645.82 928,881.44 950,942.37 11,415,832.65 30 1/1/2020 950,942.37 22,584.88 950,942.37 0.00 11,438,417.53
Confidential Page 19. 9/20/02 United Telesystems Inc.
P. Bond Compliance Flow of Funds – Following, is a Bond Compliance Flow of Funds statement from the City Broadband Business Plan financial projections based upon the foregoing assumptions and the development of a FTTH/FTTB Broadband Network architecture:
City of Geneva Page: 1 Geneva, Ilinois FTTH/FTTB Broadband Financial Projections - Base Case 2002 Bond Compliance Flow of Funds
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Customer Revenues Video $537,202 $1,879,926 $1,941,624 $2,023,871 $2,090,676 $2,160,084 $2,251,585 $2,326,758 $2,404,874 $2,506,744 Residential High Speed Data $96,450 $454,219 $578,084 $602,063 $609,328 $617,084 $643,945 $652,904 $662,331 $692,239 Commerial Video and High Speed Data $670,638 $1,003,011 $1,015,414 $1,058,285 $1,070,984 $1,083,835 $1,129,599 $1,143,154 $1,156,871 $1,205,724 Telecommunications $669,344 $2,451,084 $2,527,452 $2,654,089 $2,787,314 $2,926,535 $3,072,824 $3,226,595 $3,386,702 $3,556,319
Total Customer Operating Revenues $1,973,634 $5,788,240 $6,062,574 $6,338,308 $6,558,302 $6,787,538 $7,097,954 $7,349,411 $7,610,777 $7,961,025
Customer Operating Expenses Video $933,777 $1,723,027 $1,800,932 $1,862,421 $1,925,745 $1,991,376 $2,060,919 $2,131,466 $2,204,587 $2,282,019 Residential High Speed Data $91,914 $202,988 $243,607 $249,612 $254,024 $258,767 $265,545 $270,693 $276,032 $283,549 Commerial Video and High Speed Data $68,063 $210,379 $205,152 $210,035 $221,457 $223,358 $228,518 $230,487 $232,473 $237,945 Telecommunications $532,657 $1,054,998 $1,038,968 $1,076,582 $1,114,972 $1,154,943 $1,197,263 $1,240,587 $1,285,595 $1,333,487
Total Customer Operating Expenses $1,626,413 $3,191,393 $3,288,660 $3,398,649 $3,516,198 $3,628,444 $3,752,245 $3,873,233 $3,998,688 $4,137,000
Net Revenues Before Other Resolution Income & Expenses Video ($396,575) $156,898 $140,691 $161,450 $164,931 $168,708 $190,667 $195,292 $200,287 $224,725 Residential High Speed Data $4,536 $251,231 $334,478 $352,451 $355,304 $358,317 $378,400 $382,211 $386,298 $408,690 Commerial Video and High Speed Data $602,575 $792,632 $810,262 $848,250 $849,527 $860,478 $901,081 $912,667 $924,398 $967,779 Telecommunications $136,686 $1,396,086 $1,488,483 $1,577,508 $1,672,342 $1,771,592 $1,875,562 $1,986,008 $2,101,107 $2,222,832
Total Net Revenues Before Other O&M Under Resolution $347,222 $2,596,847 $2,773,914 $2,939,659 $3,042,104 $3,159,094 $3,345,709 $3,476,178 $3,612,090 $3,824,025
Other Income & Expenses Interest Earned $182,064 $41,123 $54,954 $77,464 $95,856 $107,558 $121,419 $138,201 $157,158 $178,385 Other O&M Expenses Under Resolution $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Net Revenues As Defined By Resolution $529,286 $2,637,971 $2,828,868 $3,017,123 $3,137,960 $3,266,652 $3,467,128 $3,614,379 $3,769,247 $4,002,410
Uses of Net Revenue Debt Service (Defined as Principal and Interest) $0 $0 $492,100 $1,465,627 $1,947,055 $1,947,055 $1,947,055 $1,947,055 $1,947,055 $1,947,055 Utility Plant Improvement Fund $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Fund Transfer $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Net Available for Flow of Funds $529,286 $2,637,971 $2,336,768 $1,551,496 $1,190,905 $1,319,598 $1,520,073 $1,667,324 $1,822,193 $2,055,356
Debt Service Coverage 0.00 0.00 5.75 2.06 1.61 1.68 1.78 1.86 1.94 2.06
Confidential Page 20. 9/20/02 United Telesystems Inc.
Q. Operating Cash Flow – Following, is an Operating Cash Flow statement from the City Broadband Business Plan financial projections based upon the foregoing assumptions and the development of a FTTH/FTTB Broadband Network architecture.
City of Geneva Page: 20 Geneva, Ilinois FTTH/FTTB Broadband Financial Projections - Base Case 2002 Cash Flow Statement
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Video Services Revenue $537,202 $1,879,926 $1,941,624 $2,023,871 $2,090,676 $2,160,084 $2,251,585 $2,326,758 $2,404,874 $2,506,744 Video Services Operating Expenses $933,777 $1,723,027 $1,800,932 $1,862,421 $1,925,745 $1,991,376 $2,060,919 $2,131,466 $2,204,587 $2,282,019 Video Services Customer Cash Flow ($396,575) $156,898 $140,691 $161,450 $164,931 $168,708 $190,667 $195,292 $200,287 $224,725
Residential High Speed Data Revenue $96,450 $454,219 $578,084 $602,063 $609,328 $617,084 $643,945 $652,904 $662,331 $692,239 Residential High Speed Data Expense $91,914 $202,988 $243,607 $249,612 $254,024 $258,767 $265,545 $270,693 $276,032 $283,549 Residential High Speed Data Cash Flow $4,536 $251,231 $334,478 $352,451 $355,304 $358,317 $378,400 $382,211 $386,298 $408,690
Commercial Video and High Speed Data Revenue $670,638 $1,003,011 $1,015,414 $1,058,285 $1,070,984 $1,083,835 $1,129,599 $1,143,154 $1,156,871 $1,205,724 Commercial Video and High Speed Data Operating Exp. $68,063 $210,379 $205,152 $210,035 $221,457 $223,358 $228,518 $230,487 $232,473 $237,945 Commercial Cash Flow $602,575 $792,632 $810,262 $848,250 $849,527 $860,478 $901,081 $912,667 $924,398 $967,779
Telecommunications Revenue $669,344 $2,451,084 $2,527,452 $2,654,089 $2,787,314 $2,926,535 $3,072,824 $3,226,595 $3,386,702 $3,556,319 Telecommunications Expenses $532,657 $1,054,998 $1,038,968 $1,076,582 $1,114,972 $1,154,943 $1,197,263 $1,240,587 $1,285,595 $1,333,487 Telecommunications Cash Flow $136,686 $1,396,086 $1,488,483 $1,577,508 $1,672,342 $1,771,592 $1,875,562 $1,986,008 $2,101,107 $2,222,832
Total Revenue $1,973,634 $5,788,240 $6,062,574 $6,338,308 $6,558,302 $6,787,538 $7,097,954 $7,349,411 $7,610,777 $7,961,025 Total Operating Expense $1,626,413 $3,191,393 $3,288,660 $3,398,649 $3,516,198 $3,628,444 $3,752,245 $3,873,233 $3,998,688 $4,137,000 EBITDA $347,222 $2,596,847 $2,773,914 $2,939,659 $3,042,104 $3,159,094 $3,345,709 $3,476,178 $3,612,090 $3,824,025
Interest Earned $182,064 $41,123 $54,954 $77,464 $95,856 $107,558 $121,419 $138,201 $157,158 $178,385
Municipal Bond - Interest $492,100 $984,200 $984,200 $984,200 $949,627 $901,686 $851,442 $798,782 $743,591 $685,748 Municipal Bond - Principal $0 $0 $0 $481,427 $997,428 $1,045,368 $1,095,613 $1,148,272 $1,203,463 $1,261,306 Municipal Bond - Total $492,100 $984,200 $984,200 $1,465,627 $1,947,055 $1,947,055 $1,947,055 $1,947,055 $1,947,055 $1,947,055
Net Operating Cash Flow $37,186 $1,653,771 $1,844,668 $1,551,496 $1,190,905 $1,319,598 $1,520,073 $1,667,324 $1,822,193 $2,055,356 Cummulative Cash Flow $37,186 $1,690,957 $3,535,625 $5,087,121 $6,278,026 $7,597,624 $9,117,697 $10,785,021 $12,607,214 $14,662,570
Operating Expense Ratio 82% 55% 54% 54% 54% 53% 53% 53% 53% 52% Operating Income Ratio 18% 45% 46% 46% 46% 47% 47% 47% 47% 48%
Debt Service Coverage Ratio 0.00 0.00 2.87 2.06 1.61 1.68 1.78 1.86 1.94 2.06 Rate of Return on Depreciated Assets 3.06% 16.00% 18.14% 20.58% 22.76% 25.39% 29.06% 32.95% 37.76% 44.61% Outstanding Debt Ratio to Assets 0.95 0.97 1.00 1.04 1.09 1.15 1.24 1.34 1.48 1.67
Cable Services Percentage of Total Revenue 66% 58% 58% 58% 57% 57% 57% 56% 56% 55% Telecom Services Percentage of Total Revenue 34% 42% 42% 42% 43% 43% 43% 44% 44% 45%
Cash on Hand $2,373,025 $3,663,629 $5,164,280 $6,390,393 $7,170,549 $8,094,606 $9,213,383 $10,477,167 $11,892,320 $13,536,924
Confidential Page 21. 9/20/02 United Telesystems Inc.
R. Balance Sheet – Following, is the Balance Sheet from the City Broadband Business Plan financial projections based upon the foregoing assumptions and the development of a FTTH/FTTB Broadband Network architecture:
City of Geneva Page: 23 Geneva, Ilinois FTTH/FTTB Broadband Financial Projections - Base Case 2002 Balance Sheet Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
ASSETS Current Assets Cash and cash equivalents $2,373,025 $3,663,629 $5,164,280 $6,390,393 $7,170,549 $8,094,606 $9,213,383 $10,477,167 $11,892,320 $13,536,924 Short Term Investments $0$0$0$0$0$0$0$0 $0 $0 Receivable, Net $0$0$0$0$0$0$0$0 $0 $0 Inventories, Net $0$0$0$0$0$0$0$0 $0 $0 Other Current Assets $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Total Current Assets $2,373,025 $3,663,629 $5,164,280 $6,390,393 $7,170,549 $8,094,606 $9,213,383 $10,477,167 $11,892,320 $13,536,924 Fixed Assets Land and Buildings $20,000 $21,500 $23,000 $24,500 $26,000 $27,500 $29,000 $30,500 $32,000 $33,500 Leasehold Improvements $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Towers, Earth Stations and Headend Equipment $4,512,842 $4,595,817 $4,678,792 $4,761,767 $4,844,742 $4,927,717 $5,010,692 $5,093,667 $5,176,642 $5,259,617 Distribution Plant and Subscriber Drops $6,851,193 $6,926,199 $7,010,571 $7,096,058 $7,182,678 $7,270,452 $7,359,398 $7,449,536 $7,540,887 $7,633,472 Customer Premise Equipment $4,602,635 $4,705,368 $4,788,679 $4,874,263 $4,962,208 $5,052,607 $5,145,557 $5,241,156 $5,339,512 $5,440,735 Computer Equipment and Software $135,000 $150,000 $165,000 $180,000 $195,000 $210,000 $225,000 $240,000 $255,000 $270,000 Vehicles, Machines, Mobile Comm. and Other Equipment $402,500 $402,500 $420,000 $420,000 $500,500 $564,900 $632,520 $699,496 $766,601 $833,680 Test Equipment and Special Tools $135,000 $157,000 $179,000 $201,000 $223,000 $245,000 $267,000 $289,000 $311,000 $333,000 Furniture, Fixtures and Other Equipment $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Other Equipment $0$0$0$0$0$0$0$0 $0 $0 Other Assets $1,183,391 $1,247,344 $1,284,703 $1,317,540 $1,351,748 $1,383,241 $1,413,548 $1,442,899 $1,471,652 $1,500,042 Less accumulated depreciation and amortization ($517,625) ($1,720,710) ($2,957,360) ($4,215,702) ($5,501,427) ($6,813,521) ($8,152,369) ($9,518,119) ($10,911,005) ($12,331,275) Total Fixed Assets $17,324,937 $16,485,018 $15,592,385 $14,659,426 $13,784,450 $12,867,896 $11,930,346 $10,968,135 $9,982,289 $8,972,771 Other Assets Other Assets $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Cost of Bond Financing & Insurance $541,600 $541,600 $541,600 $541,600 $541,600 $541,600 $541,600 $541,600 $541,600 $541,600 Total Assets $20,239,561 $20,690,247 $21,298,265 $21,591,419 $21,496,599 $21,504,103 $21,685,328 $21,986,902 $22,416,208 $23,051,294
LIABILITIES AND FUND EQUITY Current Liabilities $0 $0 $0 $0 $0 $0 $0 Accounts Payable and accrued liabilities $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Due to other Funds $0$0$0$0$0$0$0$0 $0 $0 Other Current Liabilities $0$0$0$0$0$0$0$0 $0 $0 Total Current Liabilities $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Long Term Debt Bonds Payable $20,720,000 $20,720,000 $20,720,000 $20,238,573 $19,241,145 $18,195,777 $17,100,164 $15,951,892 $14,748,429 $13,487,122 Other Payables $0$0$0$0$0$0$0$0 $0 $0 Total Long Term Debt $20,720,000 $20,720,000 $20,720,000 $20,238,573 $19,241,145 $18,195,777 $17,100,164 $15,951,892 $14,748,429 $13,487,122 Total Liabilities $20,720,000 $20,720,000 $20,720,000 $20,238,573 $19,241,145 $18,195,777 $17,100,164 $15,951,892 $14,748,429 $13,487,122 Fund Equity Reserved Funds: $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Total Reserved Funds $0$0$0$0$0$0$0$0 $0 $0 Unreserved Funds: $0$0$0$0$0$0$0$0 $0 $0 Designated Funds $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Undesignated Funds $0$0$0$0$0$0$0$0 $0 $0 Total Unreserved Funds $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Total Fund Equity ($480,439) ($29,753) $578,265 $1,352,846 $2,255,454 $3,308,326 $4,585,164 $6,035,010 $7,667,780 $9,564,172 Total Liabilities and Fund Equity $20,239,561 $20,690,247 $21,298,265 $21,591,419 $21,496,599 $21,504,103 $21,685,328 $21,986,902 $22,416,208 $23,051,294
Confidential Page 22. 9/20/02 United Telesystems Inc.
S. Revenues Per Residential Customer - The following table sets forth video, data, and telephone service revenue per residential video customer. Also, telephone service revenue and expenses per telephone customer are listed separately.
City of Geneva Page: 17 Geneva, Ilinois FTTH/FTTB Broadband Financial Projections - Base Case 2002 Key Operating Statistics - Residential
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Monthly Revenue All Services Per Video Customer Video Services $59.58 $51.86 $52.92 $54.51 $55.64 $56.81 $58.51 $59.75 $61.02 $62.86 High Speed Data Access Services $7.80 $11.70 $15.65 $16.10 $16.10 $16.11 $16.62 $16.65 $16.69 $17.24 Telecommunications Service $10.11 $9.03 $9.20 $9.54 $9.91 $10.29 $10.67 $11.07 $11.48 $11.91 Average Monthly Revenue All Services Per Video Customer $77.49 $72.59 $77.77 $80.16 $81.66 $83.21 $85.81 $87.47 $89.19 $92.01 Average Annual Revenue All Services Per Video Customer $929.87 $871.07 $933.27 $961.93 $979.95 $998.53 $1,029.66 $1,049.65 $1,070.32 $1,104.09 Average Monthly Revenue Per Telecommunications Custome $45.79 $40.89 $40.94 $40.92 $41.00 $40.95 $41.00 $40.97 $40.97 $40.95 Average Annual Revenue Per Telecommunications Customer $549.42 $490.73 $491.25 $491.08 $492.04 $491.41 $491.95 $491.60 $491.65 $491.44
Monthly Programming Expense Per Video Customer Basic Programming $15.20 $13.62 $14.03 $14.45 $14.89 $15.33 $15.79 $16.27 $16.76 $17.26 Premium Programming $6.07 $5.44 $5.60 $5.77 $5.95 $6.12 $6.31 $6.50 $6.69 $6.89 Pay Per View Programming $1.38 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 Channel Guide $0.28 $0.09 $0.09 $0.09 $0.09 $0.09 $0.09 $0.09 $0.08 $0.08 Total Programming $22.92 $20.36 $20.93 $21.51 $22.12 $22.74 $23.39 $24.05 $24.73 $25.43
Monthly Operating Expense Per Video Customer Sales & Advertising Expense Per Video Customer $14.16 $3.77 $3.43 $3.49 $3.55 $3.62 $3.68 $3.74 $3.81 $3.88 Field & Technical $42.26 $14.48 $15.83 $16.06 $16.33 $16.60 $16.87 $17.15 $17.44 $17.73 General & Administrative $29.05 $8.45 $8.48 $8.62 $8.77 $8.93 $9.07 $9.24 $9.40 $9.56 Total Operating Expense $85.47 $26.70 $27.74 $28.17 $28.65 $29.14 $29.63 $30.13 $30.65 $31.17
Monthly Telecommunications Oper Exp Per Video Customer Cost of Goods Sold $0.83 $0.41 $0.42 $0.43 $0.44 $0.45 $0.46 $0.47 $0.48 $0.49 Facility Based $6.16 $3.51 $3.19 $3.24 $3.29 $3.34 $3.39 $3.44 $3.49 $3.54 Commercial & Marketing $3.01 $0.24 $0.27 $0.27 $0.28 $0.29 $0.30 $0.31 $0.32 $0.33 Administrative $1.48 $0.38 $0.39 $0.40 $0.41 $0.42 $0.43 $0.44 $0.45 $0.47 Total Telecommunications Oper Exp Per Video Customer $11.48 $4.54 $4.26 $4.34 $4.42 $4.49 $4.57 $4.66 $4.74 $4.83
Monthly Cash Flow All Services Per Video Cust ($42.39) $20.99 $24.84 $26.14 $26.48 $26.83 $28.22 $28.63 $29.07 $30.58
Monthly Revenue/Expenses Per Channel Total Channels 131 131 131 131 131 131 131 131 131 131 Revenue Per Sub Per Channel $0.59 $0.55 $0.59 $0.61 $0.62 $0.64 $0.66 $0.67 $0.68 $0.70 Programming Exp. Per Sub Per Channel $0.17 $0.16 $0.16 $0.16 $0.17 $0.17 $0.18 $0.18 $0.19 $0.19
Monthly Telecommunications Oper Exp Per Telecommunications Customer Cost of Goods Sold $1.00 $1.86 $1.85 $1.83 $1.80 $1.78 $1.75 $1.73 $1.71 $1.69 Facility Based $7.37 $15.86 $14.21 $13.89 $13.60 $13.29 $13.01 $12.72 $12.45 $12.18 Commercial & Marketing $3.60 $1.07 $1.18 $1.17 $1.17 $1.16 $1.15 $1.14 $1.14 $1.13 Administrative $1.78 $1.70 $1.72 $1.71 $1.69 $1.67 $1.66 $1.64 $1.62 $1.61 Total Telecommunications Oper Exp Per Telecom Customer $13.73 $20.50 $18.97 $18.59 $18.26 $17.89 $17.57 $17.23 $16.92 $16.61
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T. Revenues Per Commercial Customer - The following table sets forth video, data, and telephone service revenue per commercial telephone customer.
City of Geneva Page: 18 Geneva, Ilinois FTTH/FTTB Broadband Financial Projections - Base Case 2002 Key Operating Statistics - Commercial
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Monthly Revenue Per Customer Per Service Average Video Service Per Video Service Unit $445.16 $774.62 $774.99 $798.23 $798.23 $798.23 $822.18 $822.18 $822.18 $846.85 Average High Speed Data Revenue Per Data Customer $440.56 $766.63 $766.99 $789.99 $789.99 $789.99 $813.69 $813.69 $813.69 $838.11 Average Telecommunications Revenue Per Telecommunicatio $201.06 $701.00 $703.20 $704.07 $706.39 $704.63 $704.67 $706.39 $704.59 $707.06
Monthly Expense Per Customer Per Service Programming Expense Per Video Service Unit $1.54 $2.77 $2.85 $2.94 $3.02 $3.12 $3.21 $3.31 $3.40 $3.51 High Speed Data Expense Per Data Customer $0.92 $1.66 $1.71 $1.76 $1.81 $1.87 $1.92 $1.98 $2.04 $2.10 Telecommunications Expenses Per Telecom Customer $160.02 $238.27 $220.29 $216.25 $212.77 $208.22 $204.29 $200.94 $196.79 $193.85
1. Notes to Revenue Per Customer: The following average revenue per service category of customer information has been derived from a review of financial information provided by Knology, Inc. in its March 31, 2002, 10-Q filing with the Securities and Exchange Commission. It is important to note that the Knology, Inc. markets of Columbia, Georgia, Montgomery, Alabama, and Panama City, Indiana, were classic cable television systems acquired by Knology, Inc. between 1995 and 1997. Knology, Inc. subsequently rebuilt the systems and added data and voice to their video service offering.
Knology, Inc. As of March 31, 2002
Revenue Per Service Category
Video $38.40 Voice $46.28 Data $40.13
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The following average revenue per service category of customer information has been derived from a review of financial information provided by Knology, Inc. in its March 31, 2002, 10-Q filing with the Securities and Exchange Commission.
RCN As of March 31, 2002
Revenue Per Service Category
Video $42.47 Voice $52.52 Data $42.10
The following average revenue per service category of customer information has been derived from a review of financial information provided by the City of Acworth. The City of Acworth system, located north of Atlanta, Georgia, was launched in February of 2001. The system represents the first UTI client to launch with a complete lineup of analog and digital video services. The City of Acworth direct facility based competitors are AT&T and BellSouth.
City of Acworth, Georgia As of July 10, 2002
Revenue Per Service Category
Video $50.27 Voice NA Data $38.35
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U. Sources and Uses Statement – Following, is a sources and uses statement from the City Broadband Business Plan financial projections based upon the foregoing assumptions and the development of a FTTH/FTTB Broadband Network architecture:
City of Geneva Page: 22 Geneva, Ilinois FTTH/FTTB Broadband Financial Projections - Base Case 2002 Sources and Uses
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Sources Begin Cash on Hand $0 $2,373,025 $3,663,629 $5,164,280 $6,390,393 $7,170,549 $8,094,606 $9,213,383 $10,477,167 $11,892,320 Paid In Capital - Broadband Service Provider $100,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 Revenue Bond Issue Proceeds - Capital Budget $18,205,728 $0 $0 $0 $0 $0 $0 $0 $0 $0 Revenue Bond Issue Proceeds - Capitalized Interest $1,968,400 $0 $0 $0 $0 $0 $0 $0 $0 $0 Revenue Bond Issue Proceeds - Debt Service Reserve $0$0$0$0$0$0$0$0 $0 $0 Cost of Revenue Bond Financing $174,048 $0 $0 $0 $0 $0 $0 $0 $0 $0 Original Issue and Underwriters Discount $257,736 $0 $0 $0 $0 $0 $0 $0 $0 $0 Revenue Bond Financing Insurance $109,816 $0 $0 $0 $0 $0 $0 $0 $0 $0 Excess Revenue Bond Proceeds $4,272 $0 $0 $0 $0 $0 $0 $0 $0 $0 Subordinated Debt - Broadband Service Provider $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Interest Earned $182,064 $41,123 $54,954 $77,464 $95,856 $107,558 $121,419 $138,201 $157,158 $178,385 Utility Plant Improvement Fund $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 EBITDA $347,222 $2,596,847 $2,773,914 $2,939,659 $3,042,104 $3,159,094 $3,345,709 $3,476,178 $3,612,090 $3,824,025 Total Sources $21,349,286 $5,010,996 $6,492,497 $8,181,403 $9,528,353 $10,437,202 $11,561,734 $12,827,761 $14,246,414 $15,894,730
Uses Capital Expenditures $17,842,561 $363,167 $344,016 $325,383 $410,749 $395,541 $401,297 $403,540 $407,040 $410,752 Operating Loss $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Revenue Bond Issue Interest $492,100 $984,200 $984,200 $984,200 $949,627 $901,686 $851,442 $798,782 $743,591 $685,748 Revenue Bond Principal Reduction $0 $0 $0 $481,427 $997,428 $1,045,368 $1,095,613 $1,148,272 $1,203,463 $1,261,306 Cost of Revenue Bond Financing $174,048 $0 $0 $0 $0 $0 $0 $0 $0 $0 Original Issue and Underwriters Discount $257,736 $0 $0 $0 $0 $0 $0 $0 $0 $0 Revenue Bond Financing Insurance $109,816 $0 $0 $0 $0 $0 $0 $0 $0 $0 Subordinated Debt - Broadband Service Provider Interest $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Subordinated Debt - Broadband Service Provider Principal $0$0$0$0$0$0$0$0 $0 $0 Reimbursement - Broadband Service Provider $100,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 Utility Plant Improvement Fund $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Property Tax Expense $0$0$0$0$0$0$0$0 $0 $0 GG Fund Transfer $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Total Uses $18,976,261 $1,347,367 $1,328,216 $1,791,011 $2,357,803 $2,342,596 $2,348,351 $2,350,594 $2,354,094 $2,357,806
End Cash on Hand $2,373,025 $3,663,629 $5,164,280 $6,390,393 $7,170,549 $8,094,606 $9,213,383 $10,477,167 $11,892,320 $13,536,924
Total Amount of Revenue Bond Financing: $20,720,000
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V. Income Statement – Following, is an income statement from the City Broadband Business Plan financial projections based upon the foregoing assumptions and the development of a FTTH/FTTB Broadband Network architecture:
City of Geneva Page: 19 Geneva, Ilinois FTTH/FTTB Broadband Financial Projections - Base Case 2002 Income Statement
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Subscriber Revenue $1,973,634 $5,788,240 $6,062,574 $6,338,308 $6,558,302 $6,787,538 $7,097,954 $7,349,411 $7,610,777 $7,961,025 Interest Earned $182,064 $41,123 $54,954 $77,464 $95,856 $107,558 $121,419 $138,201 $157,158 $178,385 Total Revenue $2,155,699 $5,829,364 $6,117,528 $6,415,772 $6,654,158 $6,895,096 $7,219,373 $7,487,612 $7,767,935 $8,139,410
Operating Expenses $1,626,413 $3,191,393 $3,288,660 $3,398,649 $3,516,198 $3,628,444 $3,752,245 $3,873,233 $3,998,688 $4,137,000 Depreciation Expense $517,625 $1,203,086 $1,236,650 $1,258,342 $1,285,725 $1,312,095 $1,338,848 $1,365,750 $1,392,886 $1,420,270 Property Tax Expense $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Operating Income $11,661 $1,434,885 $1,592,218 $1,758,781 $1,852,235 $1,954,558 $2,128,280 $2,248,628 $2,376,361 $2,582,141
Interest Expense $492,100 $984,200 $984,200 $984,200 $949,627 $901,686 $851,442 $798,782 $743,591 $685,748
Net Income ($480,439) $450,685 $608,018 $774,581 $902,608 $1,052,871 $1,276,839 $1,449,846 $1,632,769 $1,896,392
Fund Transfer $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Net Income After Fund Transfer ($480,439) $450,685 $608,018 $774,581 $902,608 $1,052,871 $1,276,839 $1,449,846 $1,632,769 $1,896,392
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W. Project Development Phases - Following, is are the various phases of completion of the development of the City broadband network:
THE CITY OF GENEVA, ILLINOIS BROADBAND NETWORK PROJECT DEVELOPMENT
Month-Year Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04
Complete Business Plan
Internal Review & Approval
City Council Review & Approval
Close Project Financing/Bond Issue
Selection of Vendors & Contractors
Design of Network
Order Material & Delivery
Make Ready Construction
Construction of Network
Construction of Building
Installation of Headend
Connect Customers
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CITY OF GENEVA, ILLINOIS BROADBAND NETWORK INITIATIVE BROADBAND INDUSTRY OVERVIEW SEPTEMBER 20, 2002
I. BROADBAND INITIATIVE OVERVIEW
A. Market Opportunity
1. General
Following, is an industry overview associated with and independent broadband telecommunications system feasibility study (the “Feasibility Study” or “Broadband Business Plan”) prepared by United Telesystems, Inc. (“UTI”) which assesses and evaluates opportunities available to the City of Geneva (“the City”) associated with the construction and operation of a broadband telecommunications network (the “Network” or the “Broadband Network”) in and around the City of Geneva (the “Service Area”). The Feasibility Study evaluates opportunities associated with the provisioning of video, data, telecommunications, and energy management services by the city to residential and commercial customers.
2. Current Services Available
Through the proposed Broadband Network, existing technology will potentially allow the City to economically provide the following:
Broadband Video Services (Cable Television) Local Area Telecommunications Networking Wide Area Telecommunications Networking Competitive Local Exchange Carrier Telephone Service Fiber Optic Transport Long Distance Telephone Service High Speed Broadband Internet Access Utility Management Point to Point
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3. New Service Offering & Technology
The Broadband Network, as proposed, is capable of delivering large amounts of analog and digital information from point to point. The limiting factor associated with any and all service offerings is only attributable to the capability of end user components and economic feasibility. The proposed Broadband Network will provide a platform which will accommodate new developments in broadband and telecommunications technology, potentially allowing the city to provide such things as interactive video services and utility enhancements such as remote meter reading, outage detection and appliance monitoring.
Broadband Network technology will also allow users to access the Internet and Internet-related services at speeds significantly higher than allowed by traditional narrowband modems. At present, Internet users typically connect at speeds of less than 56kbps. Broadband Network technology allows users to access the Internet at speeds that range from fifty to several hundred times faster than typical dial-up speeds. This increased speed will provide consumers with a range of enhanced services, including streaming video and telephony services. Analysts predict that Broadband Network technologies will produce applications that will change the way consumers communicate, shop, educate and entertain. By the year 2008, the number of households that will have access to a broadband network is predicted to reach 78 million.
4. The Broadband Service Opportunity
a. Internal Justification
One of the City’s initial justifications for deploying a broadband infrastructure should be founded upon the need to enhance local educational communications capabilities and to support internal needs such as those associated with the operation of existing utilities.
b. Industrial Growth Justification
As a second justification, the City must seek to promote local industrial growth through providing new businesses seeking to expand or locate in the area with access to an enhanced telecommunications infrastructure.
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c. Commercial Justification
The City has the opportunity to achieve long-term objectives through developing commercial broadband service offerings. To allow these services to be provided, the City may elect to construct a state-of-the-art Broadband Network with a fiber-to-the-home (“FTTH”) and fiber-to-the-business (“FTTB”) architecture capable of delivering advanced video services, telephone services, and high-speed data services to residents of the community. While providing advanced video, data and telecommunications services to consumers, the City will also improve the cost effectiveness, efficiency and productivity of existing internal operations.
5. An Assessment of the Municipal Role
In the past, one of the fundamental missions of municipal entities, such as the City of Geneva, has been to improve and maintain local infrastructure to facilitate the provisioning of utility services in order to promote the City and to enhance the quality of life for local citizens. While the passage of years can sometimes cause many daily conveniences to be taken for granted, municipal officials have often determined that the capitalization and deployment or construction of infrastructure was in the best interest of the community and its operations. In addition, municipal officials have previously elected to construct and maintain such infrastructure as roads, bridges, sidewalks, electric, water and sewer systems, and more recently, broadband telecommunications systems. In each case, decisions to provide these various components of local infrastructure have been generally based upon the desire to serve a public need and/or demand.
UTI has provided this independent Feasibility Study to assist the City in the process of converting the advent of technological advancements and regulatory freedoms into financially sound decisions and policies designed to enhance the local infrastructure and to enhance the quality of life for the citizens of Geneva. To enable the City to accomplish its objectives while protecting its core services, UTI has provided the information necessary to support the deployment of a technically advanced Network that is cost effective and capable of satisfying market demand.
This Feasibility Study incorporates information associated with facility-based service provisioning opportunities. The primary objective of the Feasibility Study is to provide the City with information to allow decisions to be made associated with pursuing existing and potential associated opportunities through a defined course of action and implementation plan.
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The deregulation of the telecommunications industry presents new challenges and opportunities as municipalities seek to define and achieve strategic objectives in changing competitive markets. This Feasibility Study represents the first step in the progressive efforts undertaken by the City to enhance the local infrastructure to allow for the provisioning of advanced video and telecommunications service offerings to consumers.
6. Broadband Services Overview
The 1984 Cable Act (the “1984 Act”) effectively deregulated the cable television industry, limiting a municipalities’ ability to potentially use rate increase requests to gain such things as increases in channel capacities, improvements in service and infrastructure upgrades. While the 1984 Act may have resulted in the addition of new programming services, it also fostered significant rate increases and numerous highly leveraged financial transactions as system values increased. The dramatic increase in speculation in cable television properties caused acquisitions and consolidations in the industry to accelerate at a rapid pace, thus increasing the debt burden on many systems.
The Cable Television Consumer Protection Act of 1992 (the “1992 Act”) re- regulated certain aspects of the industry, most notably, rates charged for basic and standard service programming tiers. Under the 1992 Act, the regulation of rate increases, other than those associated with the basic tier of services, came under the jurisdiction of the Federal Communications Commission (“FCC”). Therefore, municipalities no longer have any significant direct regulatory authority over cable television providers, outside of those typically associated with the renewal and enforcement of franchise agreements.
The Telecommunications Act of 1996 (“The 1996 Act”) has effectively deregulated cable television operators serving smaller markets and deregulated the entire cable television industry in March of 1999. Like many of the major telecommunications providers, most cable television operators in secondary markets have generally elected not to capitalize infrastructure improvements. Coupled often with a pattern of aggressive rate increases, a high level of customer dissatisfaction with cable television service providers remains prevalent throughout the U.S.
The market and demand for telecommunication related services is growing at a tremendous pace as the United States continues to evolves from a manufactured based
Confidential Page 4. 9/20/02 United Telesystems, Inc. economy into a service-based economy. Competition is increasing across all telecommunications business sectors. Since the divestiture of AT&T in 1984, numerous opportunities associated with the provisioning of local and long distance telephone service have been created. Regional Bell Operating Companies (“RBOCs”) like Ameritech are moving rapidly into various new telecommunications sectors. At present, Ameritech is generally focusing capital resources and efforts in their largest markets, pursuing international opportunities and seeking entry into the long distance business.
Broadband video service providers are also upgrading their networks in the larger markets to provide enhanced video services, as well as Internet access and telephony service, to their established customer base. Many electric utility companies are also currently identifying and pursuing telecommunications opportunities. In many cases, the entry into new “non core” businesses by electric utility companies is designed to develop new sources of revenues while serving to enhance relationships with existing customers in anticipation of the pending deregulation of the industry.
Several municipalities have been operating communications infrastructures for many years. At present, 300 municipalities throughout the U.S. are either actively constructing broadband telecommunications infrastructures or are engaged in the planning stages. Municipalities are motivated by the failure of existing service providers to offer adequate service at reasonable prices along with the lack of reinvestment in infrastructures and new technology. It is likely that many of these secondary communities may not see significant capital investment by private industry into their local infrastructures in the near future.
Many community leaders feel that it is imperative to the growth and stability of secondary cities and towns to have access to a technically advanced broadband telecommunications infrastructure. Therefore, many municipalities are electing to construct and operate their own infrastructure to meet the needs of their communities. Without pursuing similar initiatives, it is likely that the City may not have access to a comparable level of new telecommunications technology and associated services for many years to come.
In addition, telecommunications service providers often seek to form alliances and to expand their relationships with municipalities beyond rights-of-way and facilities based arrangements to leverage customer relationships into new distribution channels for providing communications services. Through forming strategic alliances, the City could possibly benefit from established telecommunications service offerings
Confidential Page 5. 9/20/02 United Telesystems, Inc. and existing support infrastructures to provide services while increasing ties with consumers and facilitating revenue diversification.
The City will have a unique advantage in providing these services in the community. One key advantage is that the Network would actually be “community owned.” The City has an established relationship with their customers through the provisioning of utility services and also owns the right-of-ways in the community. In addition, the City has real estate, office facilities, warehousing, and personnel that could be utilized in the operations of the Broadband Network.
B. Capital Budget
As part of the Feasibility Study, UTI utilizes a 350 page proprietary Feasibility Study model to develop a detailed capital and operating budget, including projected capital costs, revenues and expenses, associated with the provisioning of the Services set forth herein to residential and commercial consumers. The Feasibility Study capital and operating budget includes:
1. All labor, materials, and equipment capital costs associated with the deployment of the Network based upon the level of service to be provided, predicated upon an overall assessment of the Geneva Service Area.
2. Revenue projections based upon recommended service offerings and proposed rates.
3. An operating budget including all marketing expenses, technical expenses, general and administrative expenses, and service related recurring costs.
4. UTI has provided financial projections, which assume capitalization and operation of the Network by the City.
The projected capital cost of the City of Geneva Broadband Network, which consists of 113.24 miles of broadband plant placed in service in Geneva passing 9,999 serviceable residential and commercial customers is $18,209,243. The financial projections anticipate the issuance of revenue bonds by the City with a general obligation pledge from the City to capitalize the infrastructure and two (2) years of interest. Terms and interest rates used are derived from debt service schedules from
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II. THE VIDEO SERVICES INDUSTRY
A. General Assessment
Following, is an assessment of the video services industry. Some of the information in this section and others to follow was included in various FCC reports assessing the multichannel video services market and video service providers. For purposes of analysis, competition in the delivery of video services involves local markets in which consumers can choose among particular multichannel or other video programming distribution services. The products that are sold in these markets consist of bundles of attributes: antenna service, basic or optional tiers or packages of video programming channels, premium per-channel charge services, pay-per-view channels, and others. Providers of these services increasingly will participate in a broader telecommunications market that includes both video and non-video products as new communications services are added to their offerings. National, regional, and local markets are also involved in the video programming purchasing activities of these video providers.
In recent years, consolidation within the cable industry maintained a dramatic pace as cable operators acquired and traded systems. The seven largest operators now serve almost 90% of all U.S. cable subscribers. The national concentration of the subscriber base maintained by traditional cable television operators, however, has declined since 1998 when compared to the overall subscriber base including all multichannel video programming distributors (“MVPDs”). Among the MVPD systems or techniques discussed are direct broadcast satellite (“DBS”) services and home satellite dishes (“HSDs”), wireless cable systems using frequencies in the multichannel multipoint distribution service (“MMDS”), private cable or satellite master antenna television (“SMATV”) systems as well as broadcast television service. DBS operators DirecTV and EchoStar or DISH rank among the ten largest MVPDs in terms of nationwide subscribership along with eight cable multiple system operators (“MSOs”). As a result of system acquisitions and trades, cable MSOs have continued to increase the extent to which their systems form regional clusters. Currently, 40.4 million of the nation’s cable subscribers are served by systems that are included in regional clusters. By clustering their systems, cable operators hope to achieve efficiencies in existing operations and to facilitate the provisioning of new services such as telephony.
The 1996 Act removed barriers to local exchange carrier (“LEC”) entry into the video marketplace to facilitate competition between incumbent cable operators
Confidential Page 8. 9/20/02 United Telesystems, Inc. and telephone companies. At the time of the 1996 Act, it was expected that LECs would compete in the video delivery market and that cable operators would provide local telephone exchange service. Previously, there had been an increase in the amount of video programming provided to consumers by telephone companies, although the expected technological convergence that would permit use of telephone facilities for video service had not yet occurred. As of 2001, incumbent local exchange carriers (“ILECs”) have largely exited the video business, instead mainly reselling DBS service. A few smaller LECs offer, or are preparing to offer, MVPD service over existing telephone lines. Some competitive local exchange carriers (“CLECs”) continue to pursue MVPD entry and competition. Alternatively, several cable MSOs offer telephone service. Circuit-switched telephony is still the only type of commercially deployed cable telephony, but trials continue for cable-delivered Internet Protocol (“IP”) telephony. MSOs, such as Cox and AT&T, continue to deploy circuit-switched cable telephony. Others, like Cablevision and Comcast, continue to offer cable telephony where it has already been deployed, but generally are waiting for IP technology to become widely available before accelerating their rollout of telephone service. AT&T, AOL Time Warner, Comcast, and Charter currently are testing IP telephony
The total number of subscribers to both cable and non-cable MVPDs continues to increase. A total of 88.3 million households subscribe to multichannel video programming services as of 2001, up 4.6 percent over the 84.4 million households subscribing to MVPDs in 2000. This subscriber growth accompanied a 2.7 percentage point increase in MVPDs’ penetration of television households to 86.4 percent as of 2001. The number of cable subscribers continued to grow, reaching almost 69 million as of 2001, up about 1.9 percent from the 67.7 million cable subscribers in 2000. The total number of non-cable MVPD subscribers grew from 16.7 million as of 2000 to 19.3 million as of 2001, an increase of more than 15 percent.
Consolidations within the cable industry continue as cable operators acquire and trade systems. The ten largest operators now serve close to 87 percent of all U.S. cable subscribers. In terms of one traditional economic measure, national concentration among the top MVPDs has decreased since last year as the largest MSOs have become more equal in size, and it remains below the levels reported in earlier years. DBS operators DirecTV and EchoStar rank among the ten largest MVPDs in terms of nationwide subscribership along with eight cable multiple system operators (“MSOs”). As a result of acquisitions and trades, cable MSOs have continued to increase the extent to which their systems form regional clusters
Confidential Page 9. 9/20/02 United Telesystems, Inc. whereby the largest MSOs concentrate their operations in specific geographic areas. Currently, close to 55 million of the nation’s cable subscribers are served by systems that are included in regional clusters. By clustering their systems, cable operators may be able to achieve efficiencies that facilitate the provision of cable and other services, such as telephony.
Cable operators and other MVPDs continue to develop and deploy advanced technologies, especially digital compression techniques, to increase capacity and enhance the capabilities of their transmission platforms. These technologies allow MVPDs to deliver additional video options and other services (e.g., data access, telephony, and interactive services) to subscribers. MVPDs are beginning to develop and deploy interactive television (“ITV”) services. In particular, this year, cable operators and other MVPDs have devoted most of their attention to the development of video-on-demand services.
Since 2000, there have been a number of developments regarding navigation devices and cable modems used to access a wide range of services offered by MVPDs. Most notably, cable operators are favoring less powerful and less expensive set-top boxes. It is unclear how these modified plans will affect advance service offerings. CableLabs is continuing its efforts to develop next generation navigation devices with its initiative for the OpenCable Application Platform (“OCAP”) or “middleware” specification. The Consumer Electronics Association maintains that until this software standard is complete, manufacturers will not be able to build advanced set-top boxes for a retail market. In another effort intended to facilitate retail availability of set-top boxes, cable operators announced an initiative to encourage their set-top box suppliers to make their digital set-top boxes with embedded security available at retail.
The growth of non-cable MVPD subscribers continues to be primarily due to the growth of DBS. DBS appears to attract former cable subscribers and consumers not previously subscribing to an MVPD. The continued growth of DBS is, in part, attributable to the authority granted to DBS operators to distribute local broadcast television stations in their local markets by the Satellite Home Viewer Improvement Act of 1999 (“SHVIA”). Between 2000 and 2001, the number of DBS subscribers grew from almost 13 million households to about 16 million households, which is nearly two and a half times the cable subscriber growth rate. DBS subscribers now represent 18.2 percent of all MVPD subscribers. Over the last year, the number of subscribers to, and market shares of, MMDS, SMATV, and OVS have remained relatively stable. However, the number of HSD subscribers continues to decline.
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According to the Bureau of Labor Statistics, between 2000 and 2001, cable prices rose 4.24 percent compared to a 3.25 percent increase in the Consumer Price Index (“CPI”), which measures general price changes. Concurrently with these rate increases, capital expenditures for the upgrading of cable facilities increased, the number of video and non-video services offered increased, and programming costs increased. It is important to note that Cable operators’ pricing decisions may be affected by direct competition. Available evidence indicates that when an incumbent cable operator faces “effective competition,” as defined by the Communications Act, it responds in a variety of ways, including lowering prices or adding channels without changing the monthly rate, as well as improving customer service and adding new services such as interactive programming.
The most significant convergence of service offerings continues to be the pairing of Internet service with other service offerings. There is evidence that a wide variety of companies throughout the communications sector are providing multiple services, including data access. Cable operators continue to expand the broadband infrastructure that permits them to offer high-speed Internet access. The most popular way to access the Internet over cable is still through the use of a cable modem and personal computer, though a small number of users continue to access the Internet through their television and a specially designed set-top box, rather than the personal computer. Virtually all of the major MSOs offer Internet access via cable modems in portions of their service areas. Like cable, the DBS industry is developing ways to bring advanced services to their customers. For example, DirecTV currently offers a satellite-delivered high-speed Internet access service with a telephone return path called DirecPC. EchoStar now offers its subscribers a similar service, called Starband, in cooperation with a subsidiary of Gilat. Many SMATV operators offer local and long distance telephone service, and Internet access along with video service. In addition, digital technology makes it possible for MMDS operators, who provide video service in limited areas, to offer two-way services, such as high-speed Internet service and telephony. Broadband service providers are building advanced systems specifically to offer a bundle of services, including video, voice, and high-speed Internet access.
The number of satellite-delivered programming networks has increased by 13, from 281 in 2000 to 294 in 2001. Vertical integration of national programming services between cable operators and programmers remained at 35 percent after several years of decline. Although AT&T spun off its Liberty Media programming interests, Liberty Media is still included in this percentage since it owns several cable
Confidential Page 11. 9/20/02 United Telesystems, Inc. systems in Puerto Rico. In 2001, four of the top seven cable MSOs held ownership interests in satellite-delivered programming services. Sports programming warrants special attention because of its widespread appeal and strategic significance for MVPDs. Many of the total of 80 regional networks, 29 of which are sports channels, are owned at least in part by MSOs. There are also 29 regional and local news networks that compete with local broadcast stations and national cable networks.
The program access rules adopted pursuant to the 1992 Cable Act were designed to ensure that other MVPDs can access vertically-integrated satellite delivered programming on non-discriminatory terms. The terrestrial distribution of programming, including in particular regional sports programming, could have an impact on the ability of alternative MVPDs to compete in the video marketplace. Non-cable MVPDs continue to report that regulatory and other barriers to entry limit their ability to compete with incumbent cable operators. Non-cable MVPDs continue to experience some difficulties in obtaining programming from vertically integrated cable programmers and from unaffiliated programmers which continue to make exclusive agreements with cable operators. In MDUs, potential entry may be discouraged or limited because an incumbent video programming distributor has a long-term and/or exclusive contract. In addition, non-cable MVPDs report problems obtaining franchises from local governments and difficulties in gaining access to utility poles needed to build out their systems.
B. The Cable Television Industry
The cable industry has continued to grow in terms of homes passed, basic cable subscribership, premium service subscriptions, basic cable viewership, and channel capacity. The number of U.S. homes with at least one television ("TV households") was reported as 100.8 million during the 1999-2000 television season. During the 2000-2001 television season the number of TV households was reported as 102.2 million, an increase of 1.4 percent. The number of homes passed by cable was approximately 96.6 million at the end of 1999, 103.2 million at the end of 2000, and by the end of June 2001 was estimated to be 104 million. The most widely used industry measurement of cable availability, however, is the number of homes passed expressed as a percentage of TV households. Based on data from Paul Kagan Associates, homes passed as a percentage of TV households was estimated to be 97.1 percent as of June 2001.
Basic cable penetration, the ratio of the number of cable subscribers to the total number of households passed by the system, has declined slightly between 2000
Confidential Page 12. 9/20/02 United Telesystems, Inc. and 2001. Deployment of advanced broadband service offerings, however, continued during the same period. These services include offerings of digital video, Internet access through cable, interactive cable, and facilities-based broadband telephony. Cable television subscribership grew from 67.3 million subscribers at the end of 1999 to 68.5 million subscribers at the end of 2000, an increase of 1.8 percent. It continued to grow to an estimated 69 million subscribers by June 2001, a six month increase of approximately 0.7 percent. Cable penetration declined between 1999 and 2000, decreasing from 69.7 percent at the end of 1999 to 66.4 percent at the end of 2000, and 66.3 percent by June 2001. The percentage of TV households subscribing to cable also decreased over the last year, declining from 67.3 percent in 1999 to 64.4 percent of all TV households by the end of 2000 and 2001. The number of homes subscribing to one or more premium cable services increased from 35.5 million homes at the end of 1999 to 36.8 million homes at the end of 2000, an increase of 3.7 percent. In 2001, premium cable subscribers increased again, reaching 37.2 estimated subscribers, a six-month increase of about one percent. The number of premium services to which homes are subscribing (known as "premium units") increased 4.9 percent by the end of 2000 to 55.6 units and by June 2001, to 56.4 units.
In 2000, the cable industry spent a total of $15.5 billion on the construction of new plant, upgrades, rebuilds, new equipment, and maintenance of new and existing equipment. This represents a 45.9 percent increase over the $10.6 billion spent in 1999. Operators spent an estimated $14.7 billion in 2001, a decrease of 5.2 percent over 2000. Of the $14.7 billion to be spent industry-wide, approximately $850 million will be spent on new builds, $2.4 billion on rebuilds, $4.4 billion on upgrades, $4.4 billion on equipment and $2.6 billion on maintenance. A total of 48.8 million subscribers, or approximately 87 percent of all subscribers served by cable MSOs are served by systems that provided bandwidth of 550 MHz or higher, and more than 76 percent are served by systems that provided bandwidth of 750 MHz or higher. Cable operators have allocated this bandwidth in a variety of ways, using a portion of this bandwidth for the provision of analog video, and a portion for the provision of digital video, with the remainder allocated for services such as Internet access and telephony. For example, systems with 750 MHz system capacity on average allocated 478 MHz or approximately 80 channels to analog video. Also, on average, 750 MHz systems allocated 140 MHz for downstream digital video, which may yield a range of channels, depending on the modulation technique and compression ratio employed.
Viewership shares of non-premium cable networks have continued to grow
Confidential Page 13. 9/20/02 United Telesystems, Inc. over the past decade, while viewership shares of broadcast television stations have steadily declined. This trend continues. Audience share statistics for Monday through Sunday, 24 hours a day, show that non-premium cable audience shares rose 5.7 percent from an average 45.5 share between 1999 through 2000, to an average 48.1 share between 2000 and 2001. Broadcast television audience shares decreased 4.7 percent from an average 59.6 share from July 1999 through June 2000, to an average 56.8 share between 2000 and 2001.
Although the number of cable networks, on average, increased in 2000, several categories of networks decreased. For example, in 2000, the number of non- premium cable networks decreased from 147 to 130, an 11.6 percent decline. The number of premium networks also decreased during 2000, from 43 at year-end 1999 to 40 at year-end 2000. These decreases were coordinated to make room for the addition of digital tier channels for which there were, on average, none recorded in 1999, but 39 reported for 2000. The number of pay-per-view (“PPV”) services increased 4.8 percent in 2000 from 9 to 11 networks.
MSOs continue to spend substantially on maintenance, upgrades, rebuilds, and new services. In the case of Time Warner, AT&T, Comcast, and Cox, some or all of the expenditures in 2000 and 2001 were associated with commitments made by those MSOs pursuant to social contracts with the FCC. As of 2001, AOL Time Warner spent $2.2 billion by year-end. Comcast reported cable-related capital expenditures of $1.2 billion in 2000, and is expected to spend approximately $1.8 billion by the end of 2001. AT&T’s broadband unit reported capital expenditures of $4.2 billion in 2000, of which approximately $1.6 billion were related to the launch of new services and $1.3 billion for plant upgrades. AT&T Broadband spent $3.6 billion in capital in 2001, with the majority focused on providing advanced services and plant upgrades. Adelphia reported capital expenditures of approximately $1.5 billion in 2000. By year-end 2001, Adelphia spent a total of $2 billion. Cox reported total capital spending of $2.2 billion in 2000. By year-end 2001, Cox spent a total of $2 billion. Cablevision reported capital expenditures of about $912 million in 2000 and spent $1.1 billion in 2001. Charter reported cable-related capital expenditures of almost $2.83 billion in 2000, and spent approximately $2.9 billion during 2001.
Advanced services continue to be deployed at a rapid pace. With most systems able to deliver digital video, and many systems able to deliver cable modem and/or cable telephone service, MSOs are beginning to experiment with the deployment of other advanced service offerings such as video-on-demand (“VOD”) and Internet protocol (“IP”) telephony over cable systems.
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Most major cable operators currently offer a selection of digital video packages offered on the expanded capacity of cable systems that have converted to digital. The basic digital tier typically includes about 40 additional channels of audio and video. In addition, some MSOs have chosen to offer digital tiers of different genres, such as family, sports, or movie channels. Subscriber reception of digital video requires a set-top device to decompress and decode incoming digital signals and to translate the signals into the signals used by current television sets. While its primary purpose is to convert digital signals to analog form, these digital set-top boxes can allow cable operators to offer such additional services as PVRs, games, home networking, and e-commerce. The next generation set-top box were scheduled to be deployed in 2001, but its release has been delayed and is expected it will be deployed in 2002. Cable operators are still providing set-top boxes to the consumer for a monthly fee; though the FCC has undertaken a proceeding to facilitate retail availability of these devices to consumers. The FCC continues to evaluate its rules to determine whether changes are required to meet the statutory objective of creating a retail market for navigation devices. As of year-end 2000, it was estimated that there were more than 8.7 million digital video subscribers and reached 15.1 million by the end of 2001.
As of year-end 2000, Cox reported approximately 840,000 digital video subscribers and as of 2001, Cox reported approximately 1.3 million subscribers. Comcast reported 2.2 million digital video subscribers in 2001. Adelphia had approximately 1.8 million digital video subscribers by year-end 2001. As of year- end 2000, AOL Time Warner had more than 1.7 million digital video subscribers and by year-end 2001, AOL Time Warner had more than three million digital video subscribers. AT&T reported 3.5 million digital video subscribers as of year-end 2001. Charter Communications provided digital video service to approximately two million subscribers by year-end 2001. Cablevision was only conducting technical trials of digital video service in early 2001, but it offered the service commercially in October 2001 and had 50,000 digital video subscribers by year-end 2001.
VOD services allow subscribers to view movies at any time or on a time- staggered basis from a library of options. Many of the top MSOs are conducting trials of VOD or have moved to commercial offerings in some markets. VOD generated revenues of more than $65 million by year-end 2001 and is expected to generate revenues of $420 million in 2002. Cox continues to test VOD in its Hampton Roads Market, and has begun a market rollout in its San Diego markets. Comcast is currently conducting trials of VOD service in four markets and offered
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VOD to two million customers by year-end 2001. Adelphia has also been testing VOD in its Cleveland Heights, Ohio, market, covering an initial 1000 suburban Cleveland homes, with a planned commercial roll out to all its Cleveland area systems encompassing 284,000 cable subscribers. Charter has deployed VOD service in several of its major markets and by year-end 2001, it had VOD available to almost 40 percent of its customer base. Charter expects to complete VOD rollout in all its markets by year-end 2002. Time Warner Cable is continuing the trials it started last year in Tampa Bay/St. Petersburg, Florida, Honolulu, Hawaii; and Austin, Texas. The company is also conducting a subscription VOD trial in its Columbia, South Carolina, market featuring on-demand access to a library of HBO programming for an additional monthly fee of $3.95. AT&T is test marketing VOD is certain markets.
In October 2001, Comcast announced the launch of an HDTV service to more than 1.3 million customers. The service will provide access to high-definition broadcasts of ABC, NBC, CBS, HBO, and Showtime. Since most commercial television sets do not have built-in HDTV tuners, Comcast will make set-top tuners available to customers. Comcast digital cable customers who have HDTV-ready sets will now be able to rent or purchase a set-top box similar to their current digital tuner, which will allow them to view all channels broadcast in high-definition. Time Warner has agreed to carry HDTV signals that will be broadcast by television stations owned and operated by the ABC, CBS, NBC, and Fox networks, and also by nearly all public television stations, in Time Warner Cable’s operating areas. Time Warner Cable is also carrying the HDTV versions of HBO and Showtime in certain areas.
While dial-up Internet access remains the most popular way to access the Internet, as of year-end 2000, 84.6 percent of all Internet households were accessing the Internet using dial-up modems. It is projected that telephone dial-up will remain the principal means of accessing the Internet until about 2004, when it is expected that only 44.4 percent of Internet households will use dial-up access, with the remaining 55.7 percent accessing the Internet through broadband facilities. While cable modem access is the primary means of accessing the Internet over broadband networks, cable’s share of the broadband Internet access market continues to decrease. DSL is the most significant broadband competitor to cable modem service. As of year-end 2000, cable modem service was available to 58.5 million homes and there were approximately 3.9 million cable subscribers, whereas DSL was available to 37.6 million homes and had approximately 1.9 million subscribers. As of year- end 2001, cable modem service was available to more than 81 million homes with
Confidential Page 16. 9/20/02 United Telesystems, Inc. more than 7.2 million subscribers, whereas DSL is expected to be available to as many as 51.5 million homes with approximately 4.3 million subscribers. Satellite and wireless technologies currently have eight percent of the market and are not expected to increase market share over the next several years.
CableLabs created the cable modem standard, DOCSIS (Data Over Cable Service Interface Specification) in an effort to ensure the interoperability and retail sale of cable modem technologies. Equipment conforming to the DOCSIS standard is eligible to be CableLabs Certified. There are now 193 cable modems and 26 cable modem termination systems that have been certified by CableLabs on the DOCSIS 1.0 standard. As of 2001, certification for DOCSIS 1.1 had begun, and as of December 2001, seven companies had achieved certification for nine modems that comply with the DOCSIS 1.1 specification, and two more companies had gained qualification status for their DOCSIS 1.1 cable modem termination systems. In August 2001, CableLabs announced the establishment of DOCSIS 2.0, which incorporates standards to increase cable bandwidth for data transmissions without requiring any physical rebuilding of cable networks. Certification testing for DOCSIS 2.0 equipment is expected sometime next year.
Virtually all the major MSOs offer cable modem service in portions of their nationwide service areas. As we reported last year, unlike high-speed access offered over the telephone network where the customer can select the Internet Service Provider (“ISP”) of his own choice, the cable ISP is selected by the cable provider and offered to customers in that cable operator’s individual regions. Most cable operators offer only one ISP to customers in a given system, although there has been a move recently within the industry to offer multiple ISPs to customers in a given cable system. For example, pursuant to its merger obligations with the Federal Trade Commission, AOL Time Warner has announced that, in addition to Road Runner, it will carry the AOL Internet service as well as unaffiliated ISPs Earthlink and Juno. In September 2001, AOL Time Warner started selling Earthlink high-speed access over its cable lines in Columbus, Ohio, and Syracuse, New York. AOL Time Warner plans to sell Earthlink high-speed service in numerous additional Time Warner markets by year-end. In addition, AT&T voluntarily conducted a technical and operational multiple-ISP trial in Boulder, Colorado, with plans for the commercial rollout of multiple-ISP service in several major cable markets by mid-2002.
Many MSOs have offered high-speed Internet access through Excite@Home, which filed for bankruptcy in September 2001. As a result, in December 2001, AT&T terminated its @Home service and switched its subscribers to its own
Confidential Page 17. 9/20/02 United Telesystems, Inc. network, while other MSOs will continue to provide @Home service until February 28, 2002, when they will have transitioned their subscribers to other services. Cox has traditionally offered high-speed Internet access service either under the brand Cox@Home, Road Runner, or Cox Express. However, following the bankruptcy of Excite@Home, Cox announced that it plans to migrate all of its current high-speed cable modem subscribers to Cox’s proprietary high speed network. In addition, Cox has begun a technical trial with AOL and EarthLink in its El Dorado, Arkansas, system. Comcast also announced that it plans to migrate its current Comcast@Home subscribers to its own high-speed network. Additionally, in November 2000, Comcast announced that it will offer Juno Express in a trial to take place in its Philadelphia area system. In March 2001, Earthlink announced that it also would participate in that trial.
As of year-end 2000, Cox had approximately 480,000 high-speed data subscribers, and 880,000 high-speed data subscribers as of the end 2001. Comcast had approximately 950,000 high-speed data subscribers by year-end 2001. AT&T had approximately 1.3 million broadband data subscribers by year-end 2001. Cablevision had 475,000 subscribers by year-end 2001. Charter had, by year-end 2001, 575,000 high-speed data subscribers. AOL Time Warner had 1.4 million subscribers to its own cable modem service by year-end 2001. Adelphia had 375,000 by year-end 2001.
A small portion of cable Internet access continues to be delivered through a television receiver rather than a personal computer. These services typically do not provide complete access to the Internet, but provide such basic applications as e- mail, Web browsing, and “hyperlinking” technology. Many of these services are now considered by industry analysts to be interactive television (“ITV”) services, instead of Internet access services. Nationwide providers of such service include WebTV, Worldgate, and America Online which provides AOLTV. Wink Communications offers a similar product marketed primarily as an interactive tool for the enhancement of multichannel video programming. Charter is planning to roll out an interactive television service called Digeo Broadband which will provide interactive television and limited Internet functionality including e-mail, chat, and news and travel information.
Circuit-switched telephony still is the only type of commercially-deployed cable telephony available, but trials continue for cable-delivered IP telephony. MSOs, such as Cox and AT&T, continue to deploy circuit-switched cable telephony, and others, such as Cablevision and Comcast, offer cable telephony where it has
Confidential Page 18. 9/20/02 United Telesystems, Inc. already been deployed. Several MSOs, including AT&T, AOLTW, Comcast, and Charter, are currently testing IP telephony, while Cox has plans for IP telephony trials in 2002. CableLabs is managing a project, called PacketCable, aimed at identifying, qualifying, and supporting products that support Internet over cable- based multimedia services such as IP telephony. In May 2000, CableLabs announced the release of the final feature set for PacketCable residential IP voice service. Following that, CableLabs released draft compliance test plans for PacketCable interface specifications. In May 2001, the Society for Cable Telecommunications Engineers (“SCTE”) and the European Telecom Standards Institute (“ETSI”) announced a set of new technical standards for offering IP telephony based on PacketCable technical standards established by CableLabs. In March 2001, leaders in the IP telephony market congregated for the World Telecom Policy Forum in Geneva, Switzerland to discuss the future regulatory environment in IP telephony.
As one of the first cable operators to offer a telephony product, Cox Communications has long been regarded as the leader in cable telephony deployment. As of 2001, Cox provided facilities-based cable telephony services to approximately 344,000 subscribers nationwide. Cox reports an average 14.5 percent penetration in areas where its local telephone service is available. Cox expects to start testing IP telephone service in 2002. AT&T provided telephone services to more than 848,000 customers, as of June 30, 2001. In addition to circuit-switched technology, AT&T has also been pursuing Internet voice applications for cable telephony. In March 2000, AT&T purchased a 32 percent equity investment in Net2Phone giving it a 39 percent voting stake. In January 2001, it announced that it would expand its trial of local Internet telephone service to the Rochester, New York, area from its initial test site in Portland, Maine. The service, called Line Runner, is being marketed to Road Runner customers as a second line service only.
As a result of its acquisition of Jones Intercable in March 2000, Comcast now has 15,000 cable telephony customers in the Washington, D.C., metropolitan area. Comcast also offers telephony service in Florida and Michigan. Although Comcast is not interested in deploying circuit-switched service of its own, it has chosen to maintain the service where it has already been deployed. Cablevision offers limited facilities-based residential circuit-switched telephony in New York through its commercial telephone business, Lightpath. As of 2001, Lightpath reported almost 12,500 cable telephony customers, representing 8.2 percent penetration of the 153,000 homes marketed. Charter Communications is not presently pursuing commercial deployment of circuit-switched cable telephony. However, since
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December 1999, Charter has been testing IP telephony in several field trials.
Over the last several years, cable operators have been upgrading their systems so that they can offer digital video, access to the Internet, and telephone services. Over the past year, the MSOs have proven that they can successfully deploy multiple services, although some services, such as telephony, have not been as profitable as once expected. However, MSOs have found value in all their advanced services as a way to reduce basic cable video churn. For example, Adelphia is proposing to offer video-on-demand as an adjunct service to premium service subscribers, perhaps as a means of retaining premium subscriptions. In addition, several analysts note that cable telephony is valuable as a tool to increase video penetration and lower customer loss, especially to DBS. While individually some advanced services are not considered particularly lucrative to the MSOs, these services appear to be valuable as a package.
Cable operators incurred expenses of approximately $8.9 billion for producing and acquiring programming in 2000. Approximately $6.4 billion of these expenses were license fees paid by the basic cable networks to obtain programming, and approximately $2.2 billion were license fees paid by premium cable services. Approximately $148 million of these expenses were for the production of original programming. Reported estimates indicate that these programming network expenses will total $9 billion by year-end 2001.
Data concerning cable industry revenue, cash flow, and stock prices indicate that the cable industry growth slowed significantly in 2001. Relative to major market indices, cable stocks, as represented by the Kagan MSO Index, performed below average in 2000 and in 2001. Annual cable industry revenue grew 3.7 percent in 2000 over 1999, reaching $38.1 billion. By the end of 2000, revenue per subscriber grew almost two percent to $561.38 per subscriber per year, or $46.78 per subscriber per month. Analysts estimate that 2001 year-end total revenue will reach nearly $44 billion, an estimated 15.4 percent increase over 2000, and that revenue per subscriber per year will reach approximately $637.33, or $53.11 per subscriber per month.
When cable system revenue is classified by source, home shopping revenue demonstrated the greatest percent increase in 2000. Commissions from home shopping increased nearly 30 percent in 2000, from $185 million in revenue in 1999 to $239 million in 2000. Advanced video services increased 3.7 percent in 2000 after having experienced 338 percent growth in 1999. Analysts expect advanced
Confidential Page 20. 9/20/02 United Telesystems, Inc. video services to grow nearly 175 percent in 2001 to reach just over $5.5 billion in revenues for the year. The PPV sector, typically volatile, demonstrated a 20 percent decline in revenues in 2000, but analysts expect PPV revenue to increase in 2001, growing an estimated 44 percent, to over $1 billion in annual revenue. Equipment and installation revenue declined over 13 percent in 2000, from $2.8 billion in annual revenue in 1999 to a little more than $2.4 billion in 2000. Industry analysts predict this revenue sector will increase slightly in 2001 to an estimated $2.5 billion. Annual revenue from local advertising increased from $2.7 billion in 1999 to $3.2 billion in 2000, a 20.7 percent increase, and analysts expect local advertising revenue to increase 13 percent over the next year to reach $3.7 billion in revenues by year- end 2001. Revenue from the basic service tier (“BST”) and from the cable programming service tier (“CPST”) combined grew from $23.1 billion in 1999 to $24.7 billion in 2000, a 6.9 percent increase, and analysts expect these revenues to increase to $26.1 billion by year-end 2001.
Cash flow is often used to assess the financial position of cable firms. Cash flow is generally expressed as “EBITDA” (earnings before interest, taxes, depreciation, and amortization). Industry-wide cash flow increased 6.5 percent between the end of 1999 and the end of 2000, from $15.6 billion to $16.6 billion. Cash flow will increase an estimated 10 percent, reaching $18.3 billion by year-end 2001. In 2000, the cable industry generated $244.64 in annual cash flow per subscriber, $10.76 higher per subscriber than the $233.88 per subscriber generated in 1999. In 2001, cash flow per subscriber per year increased by $20.17, reaching $264.81. The ratio of cash flow to revenue (“cash flow margin”) increased from 42.4 percent in 1999 to 43.6 percent in 2000 and decrease to 41.5 percent by year- end 2001.
After reaching its all-time high in January 2000, cable stock values, as represented by the Kagan MSO Stock Index, declined throughout 2000 and 2001. Unlike past years, when there were many precipitating events causing the sell-off of cable stocks, cable’s current downturn seems to be more in step with the overall trends of the economy. But despite currently depressed stock prices, analysts are optimistic about cable’s future as the cable companies have proven that they can successfully roll out new services with the synergistic effects of bundling. Even in the face of competition from DBS and other providers, analysts are encouraged by continued advanced service revenue growth.
Over the last several years, the number of acquisitions and exchanges between MSOs has declined, though there have been a number of mergers among large
Confidential Page 21. 9/20/02 United Telesystems, Inc. operators. The number of systems sold decreased between 1998 and 1999 from 119 to 92 systems. Between 1999 and 2000, the number of systems sold decreased from 92 to 47 systems, and between January and June 2001, there were 23 transactions. The total number of subscribers affected by system transactions and the average size of systems sold (measured by the number of subscribers per system) continues to vary greatly from year to year. Smaller cable operators, however, are often unable to take advantage of the efficiencies that come from clustering, and thus are more susceptible to financial difficulties. In the past year, small operators Galaxy Telecom, Inc., and Classic Communications faced such difficulties often seen among small MSOs. Some of the assets of these operators were sold to larger MSOs, further consolidating the industry.
While the number of subscribers affected by system transactions decreased between 1999 and 2000, from 18.3 million to 10.5 million, the average size of traded systems increased from approximately 199,000 subscribers per system sold in 1999 to approximately 223,000 subscribers per system sold in 2000. In 2001, the average number of subscribers per system transaction was approximately 176,000. The total dollar value of transactions decreased between 1999 and 2000 from $73 billion at year-end 1999 to $62.1 billion at the end of 2000. The total dollar value of transactions in 2001 was approximately $15 billion.
The cable industry typically has relied on combinations of private and public financing, with the distribution of these combinations varying greatly from year to year. These year-to-year fluctuations in financing sources appear to be based on the availability of acceptable financing rates through private investors or capital lending institutions, and the attractiveness of debt and equity offerings. During 2000, the cable industry acquired approximately $380 million in public equity offerings (i.e., sale of stock), $101 million in private equity (i.e., financing from individuals, private corporations, venture capital firms and investment banks), $2.8 billion in private debt (i.e., banks and other borrowings), and $4.2 billion in public debt (i.e., sale of public bonds).
C. Direct-to-Home (“DTH”) Satellite Service (DBS and HSD)
Video services are available from high power DBS satellites that transmit signals to small DBS dish antennas installed at subscribers’ premises, and from medium and low power satellites requiring larger satellite dish antennas. DBS currently has over 16 million subscribers, an increase of approximately 24 percent since 2000. Between 2000 and 2001, the number of HSD subscribers, measured as
Confidential Page 22. 9/20/02 United Telesystems, Inc. the number of HSD users that actually purchase programming packages, declined from 1.5 million to one million, a decrease of 32 percent. DirecTV and EchoStar are each among the ten largest providers of multichannel video programming service. In 2001, DBS represented a 18.2 percent share of the national MVPD market and HSD represented another 1.1 percent of that market.
In 1999, DirecTV merged with United States Satellite Broadcasting Co., Inc. (“USSB”) and acquired PrimeStar. There are now over ten million DBS subscribers (EchoStar, DirecTV, and PrimeStar’s subscribers being transitioned to DirecTV’s service), an increase of approximately 39% over the past eighteen months. The number of HSD subscribers, measured as the number of HSD users that actually purchase programming packages, has declined from 1.8 million to 1.5 million, which is likely due to subscribers switching to DBS. DirecTV and EchoStar are among the ten largest providers of multichannel video programming service. DBS represents a 15.4% share of the national MVPD market and HSD represented another 1.8% of that market.
On October 28, 2001, General Motors Corp. (“GM”) and its subsidiary Hughes Electronics (“Hughes”) together with EchoStar Communications Corporation (“EchoStar”) announced the signing of definitive agreements that provide for the spin-off of Hughes from GM and the merger of Hughes with EchoStar. The combined company would use the EchoStar name and adopt the DIRECTV brand for its services and related products. The merger would create the nation's second-largest pay television platform with more than 16.7 million subscribers, of which 1.8 million subscribers are National Rural Telecommunications Cooperative (NRTC) and affiliates, and 14.9 million subscribers are owned-and-operated by the combined company. Cable TV companies presently control more than 80 percent of the U.S. pay television market, while a combined EchoStar-Hughes would provide service to about 17 percent of the market.
The spin-off of Hughes from GM would result in current holders of Class H common stock receiving one share of new Hughes Class C common stock in exchange for each share of Class H stock held prior to the spin-off. The merger of Hughes and EchoStar would result in Hughes being the surviving entity and taking the name EchoStar Communications Corp. Holders of Class A EchoStar common stock prior to the merger would receive 1.3699 shares of the new EchoStar in exchange for each share of Class A EchoStar common stock held prior to the merger. Based on the closing price of EchoStar common stock of $25.26 on Oct.
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26, 2001, the transaction would provide a value of approximately $18.44 per GMH share, representing a 20-percent premium. As of Oct. 26, 2001, the implied market capitalization of Hughes was approximately $21.3 billion and the market capitalization of EchoStar was approximately $12.1 billion. The transaction is expected to require approximately $5.5 billion of total financing, which EchoStar expects to fund in the capital markets prior to closing. Completion of this financing has been backstopped by a bridge commitment of approximately $2.75 billion from Deutsche Bank, and a bridge commitment of approximately $2.75 billion from General Motors, the latter of which the parties plan to replace with a commitment from one or more other leading financial institutions in the near future. The GM bridge commitment is secured by a pledge of $2.75 billion of EchoStar stock held by a trust controlled by EchoStar Chairman and Chief Executive Officer Charles Ergen. The transaction is subject to a number of conditions, including approval by a majority of each class of GM shareholders -- GM $1-2/3 and GM Class H -- voting both separately as distinct classes, and also together as a single class. Approval of the majority of EchoStar's voting shares has already been given by written consent. The proposed transaction also is subject to regulatory clearance under the Hart- Scott-Rodino Act and approval by the Federal Communications Commission. The transaction is also contingent upon the receipt of a favorable ruling from the Internal Revenue Service that the separation of Hughes from GM will qualify as a tax-free spin-off for U.S. Federal Income Tax purposes. The transaction is currently expected to close in the second half of 2002.
D. Wireless Cable Systems
Currently, the wireless cable industry (“MMDS”) provides competition to the cable industry in limited areas. MMDS subscribership is at approximately 700,000 subscribers, falling from 821,000 between 1999 and 2001. With the advent of digital MMDS and the FCC’s authorization of two-way MMDS service, it appears that most MMDS spectrum eventually will be used to provide high-speed data services. Wireless cable represented an 8% share of the national MVPD market in 2001.
E. SMATV Systems
SMATV systems, also know as private cable operators, use some of the same technology as cable systems, but do not use public rights-of-way, and focus principally on serving subscribers living in multiple dwelling units (“MDUs”). As of
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2001, SMATV subscribership remained unchanged from last year at 1.5 million subscribers, representing approximately 1.7% share of the national MVPD subscribership, dropping from 1.8% in 2000.
F. Broadcast TV
Broadcast networks and stations are competitors to MVPDs in the advertising and program acquisition markets. Broadcast networks and stations also are suppliers of content for distribution by MVPDs. In addition, they supply video programming directly to those television households that are not MVPD subscribers and to television sets in MVPD households that are not connected to such service. In this regard, one study estimates that 81 million, or approximately 30 percent of the nation’s 267 million television sets, receive broadcast signals over-the-air. The broadcast industry has continued to grow in the number of operating stations (from 1,663 in 2000 to 1,678 in 2001) and in advertising revenues ($41 billion in 2000, a 12.2 percent increase over 1999). Audience levels, however, continue to decline. During the 2000-2001 television season, the seven television networks accounted for a 57 percent share of prime time viewing for all television households, compared to a 59 share a year earlier. Broadcast television stations continue to deploy digital television (“DTV”) service. Eighty-three percent of the more than 1,300 commercial television stations have been granted a DTV construction permit or license and 229 are currently on the air with DTV operation.
G. Local Exchange Carriers
The 1996 Act expanded opportunities for LECs to enter the market for the delivery of video programming. In recent years, the most aggressive LECs were reducing or terminating their efforts in the video marketplace. In 2001, ILECs have largely exited the video business, instead mainly reselling DBS service. While almost completely exiting the video programming business in 2001, BellSouth is reselling DBS service and, while at least one of the systems is currently for sale, continues to operate some overbuild cable systems in limited areas. A number of smaller LECs are offering, or preparing to offer, MVPD service over telephone lines. Some CLECs, most notably RCN, continue to pursue MVPD entry. Previously, Ameritech, now owned by SBC, was the most significant LEC provider of in-region cable service. In the past year, SBC sold these systems to WideOpenWest, which is considered a BSP and discussed below. Qwest Communications International (formerly US West) continues to offer video, high-speed Internet access, and telephone service over existing copper telephone lines using very high-speed digital
Confidential Page 25. 9/20/02 United Telesystems, Inc. subscriber line (“VDSL”) in Omaha and Phoenix. Reports indicate that 40 to 50 LECs, mostly small, also are using VDSL to offer a bundle of services, including video, over telephone lines.
H. Open Video Systems
In the 1996 Act, Congress established a new framework for the delivery of video programming called the open video system (“OVS”). Under these rules, a LEC or other entrant may provide video programming to subscribers, although the OVS operator must provide non-discriminatory access to unaffiliated programmers on a portion of its channel capacity. Several BSPs, including some that are CLECs, operate open video systems, hold OVS certifications, or hold local OVS franchises. RCN is by far the largest OVS operator in the country.
I. Internet Video
As of 2001, 58 percent of the U.S. population has Internet access at home with 50 million households owning personal computers. Real-time and downloadable video accessible over the Internet continues to become more widely available and the amount of content also is increasing. Despite the evidence of increased interest in Internet video deployment and use, the medium is still not seen as a direct competitor to traditional video service. Broadcast quality Internet video requires a high-speed broadband connection at speeds which most current broadband providers cannot guarantee. Investment and development of Internet video services is continuing, however, video offered over the Internet still remains less than broadcast quality.
J. Home Video Sales and Rentals
Sale and rental of home video, including videocassettes, DVDs, and laser discs, should be considered part of the video marketplace because they provide services similar to the premium and pay-per-view offering of MVPDs. About 90 percent of all U.S. households have at least one VCR. The number of homes with DVD players has grown rapidly since their introduction, with the number of homes with DVD players expected to reach 25 million by the end of 2001. The newest home video is the personal video recorder (“PVR”). One source reports that 500,000 PVRs have been sold since they were introduced two years ago. A PVR can pause, rewind, and perform slow motion and instant replay of a live program, thereby allowing a viewer to watch earlier portions of a program while later portions of the program are still being broadcast. A PVR is intended for use with a service that
Confidential Page 26. 9/20/02 United Telesystems, Inc. provides an onscreen programming guide service through a telephone connection. This technology can be used to create a personal menu and can learn to record based with a viewer’s television preferences.
K. Facility Based Competitive Broadband Service Providers (BSP’s)
1. Overview
Since 1995, competing franchises have been awarded covering over 369 communities in 34 states, with the potential to pass 18.5 million homes. However, not all of the franchises awarded are currently operational. After a franchise is awarded, it can take a significant amount of time for the franchisee to build, or gain access to, a network over which to provide video service. The importance of competitive broadband service providers that are overbuilding existing cable systems with state-of-the-art systems that offer a bundle of telecommunications services, including video, voice, and high-speed Internet access, continues to grow. BSPs are carefully selecting which communities to serve, based on factors such as favorable demographics and high population density. Their strategy is to increase per subscriber revenue and decrease churn. Yet, BSPs face considerable challenges inherent in entering markets with entrenched competitors. RCN is the largest BSP, serving approximately 443,000 subscribers in New York City, Washington, D.C., and surrounding suburbs, South San Francisco, Boston and its suburbs, Northern New Jersey, and suburbs of Philadelphia. WideOpenWest (“WOW”) recently became the second largest BSP with its acquisition of the former Ameritech cable systems, which serve about 300,000 subscribers. In addition, WOW is constructing systems in selected metropolitan Denver communities. The third largest BSP is Knology, which operates or is building systems in the Southeast, and currently serves 110,000 subscribers.
Other planned overbuilds include Intertech Private Cable, which will compete head-to-head with Adelphia in Kenmore, New York. It will offer ten more channels than Adelphia at a rate that is $5 less than Adelphia’s current rate. 21st Century has invested $250 million in fiber network in a portion of Chicago, where it offers cable television, Internet access, and telephone service. 21st Century plans to propose overbuilds in other portions of Chicago to compete head-to-head with AT&T. RCN passes 425,000 homes and serves 270,000 OVS and cable subscribers. RCN provides service to areas surrounding the City of Boston, the New York City metropolitan areas, and the surrounding areas of Washington, D.C. RCN extended its operations to San Francisco and Philadelphia. RCN offers Internet access, and
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Several electric and gas utilities continue to move forward with ventures involving multichannel video programming distribution. The electric utilities possess characteristics that could potentially help them become a significant competitive player in the video services market. Many already possess fiber-optic networks throughout the public rights-of-way in their service areas. Some of these characteristics, such as ownership of fiber optic networks and access to public rights- of-way, make them competitively significant. Some utilities offer telecommunications services on their own, while others partner with broadband service providers, such as Starpower, RCN’s joint venture with PEPCO. A number of utilities have announced, commenced, or moved forward with ventures involving multichannel video programming distribution. Starpower, a joint venture between RCN and PEPCO, has begun to offer video, telephone, and Internet services in the Washington, D.C. area. Seren, a wholly-owned subsidiary of Minneapolis-based Northern States Power, is currently offering cable and high-speed data access as a competitive operator in several Minnesota communities and plans to expand its service. It also appears that utilities, particularly municipal utilities, are willing to build advanced telecommunications networks to offer a full range of services where incumbent cable operators and telephone companies are not. Others, including several municipal utilities in Alabama, Arkansas, California, Florida, Georgia, Iowa, Kentucky, Missouri, Ohio, Oregon, Tennessee, Texas, and Virginia are currently or planning to provide broadband and telecommunications services to customers. Reports indicate that 357 municipalities currently offer communications services.
New municipal overbuild activity continues to grow. In Wadsworth, Ohio, the city’s system has 2,228 customers. The city of Lebanon, Ohio, began serving cable subscribers in 1999. Both of these Ohio systems are competing with the incumbent cable operator, Time Warner. In Georgia, the cities of Acworth, Cairo, Camilla, Elberton, Moultrie, Newnan, Tifton, and Thomasville have constructed and launched systems. The Scottsboro Electric Power Board has constructed a municipal system in Scottsboro, Alabama. In Tennessee, the cities of Fayetteville and Covington have launched systems and the city of Columbia is currently constructing a system. Other communities, such as Poplar Bluff, Missouri, Glasgow and Murray, Kentucky, Palo Alto, California, Hastings, Nebraska, and Spencer, Iowa, have also constructed community owned competitive broadband systems. The communities tend to build state-of-the-art, two-way systems that will provide a wide array of analog channels, digital channels, and high-speed Internet service. These entities compete with incumbent cable operators such as AT&T, Charter, and Mediacom. They plan to
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An indication that an overbuilt system may be in operation occurs when an incumbent provider asks the FCC to determine that effective competition exists within its service area. Such a determination exempts the cable operator from regulation of its rates. As of December 31 1999, the FCC had granted 63 petitions for determination of effective competition status on the basis of overbuild competition. A review of selected areas where incumbent cable operators face head- to-head effective competition is included herein. The case-by-case analysis shows that such competition often results in lower prices, additional channels at the same monthly rate, improved services, or additional non-video services. The FCC’s latest update of this information is late each year , with the last being the Seventh Annual Report on Competition in Video Markets.
Private broadband service providers are now developing competitive systems in the following service areas:
Augusta, GA – Knology Montgomery, AL – Knology Boston, MA – RCN Nashville, TN – Knology Boulder, CO – Seren New York – RCN Over 100 additional franchises - Charleston, SC – Knology WideOpenWest Chicago, IL – WideOpenWest Panama City, FL – Knology Clayton, CA – Seren Philadelphia, PA – RCN Cleveland, OH – WideOpenWest Pleasant Hill, CA – Seren Columbus, OH – WideOpenWest Portland, OR – RCN Columbus, GA – Knology San Francisco, CA - Seren Contra Costa County, CA – Seren Seattle, WA – RCN Danville, CA – Seren St. Cloud, MN. – Seren Denver, CO - Quest/Seren Tampa, FL – GTE Detroit, MI – WideOpenWest Thousand Oaks, CA - GTE Huntsville, AL – Knology Troy, AL - Harold Freeman Jefferson County, CO - WideOpenWest Waco, TX – ClearSource Knoxville, TN – Knology Walnut Creek, CA - Seren Los Angeles, CA – RCN Washington, DC – RCN
2. Incumbent Responses to Facility Based Competition
Following, is a description of a number of cases where the incumbent cable
Confidential Page 29. 9/20/02 United Telesystems, Inc. operator faced competition from a new entrant. UTI reports information gathered through comments filed in this proceeding, petitions filled with the Commission for a determination of effective competition, trade press reports, articles, and other publicly available sources.
Between July 2000 and June 2001, the Bureau granted 16 petitions for effective competition, representing 240 communities, based on competitive entry from LECs or their affiliates, DBS, and municipal operators. These communities represent approximately two percent of all cable subscribers. The differences between competition and general market responses based on technological advances, improved marketing, and new service opportunities are not always easy to distinguish. However, in communities where head-to-head competition is present, the incumbent cable operator has generally responded to competitive entry in a variety of ways, such as by lowering prices, providing additional channels at the same monthly rate, improving customer service, adding new services, or by challenging the legality of the entrant’s activities.
For example, in Boston, Massachusetts, in response to RCN’s entry, the incumbent cable operator in Boston, Cablevision of Boston (“Cablevision”), “moderated” its regional rate increase in the Boston area and agreed to improve its commitment to public and educational channels. RCN, a wholly owned subsidiary of RCN Telecom Services Inc., initially entered the Boston area market in 1996 as an OVS operator. It was granted a 15-year cable franchise by the City of Boston on July 27, 1999. By September 1999, RCN served a total of 11,000 subscribers in the Boston metropolitan area, including 5,000 subscribers in the City of Boston. By comparison Cablevision serves about 140,000 subscribers in Boston.
Because of its entry to the Boston area, the City of Boston was able to negotiate a franchise renewal with Cablevision that imposed obligations on the incumbent more favorable to the public than would otherwise have been possible. The franchise agreement requires Cablevision to upgrade its system capacity within three years to offer more channels, as well as local telephone and high-speed Internet access. Initially Cablevision took steps to prevent RCN from going forward by filing a lawsuit against RCN and the city. Cablevision created a barrier to entry by refusing RCN access to inside wiring in MDUs in the Boston area.
Lower monthly rates and added or improved services were also found in a number of other communities where the incumbent cable operator faced new entrants. For example, in Duluth, Georgia, the incumbent Rifkin & Associates,
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Inc./Cable Equities of Colorado, Ltd. (“Rifkin”) faced aggressive advertising aimed at its subscribers, accompanied by extensive press coverage in the local media, from new entrant BellSouth Interactive Media Services, Inc. (“BIMS”). In response to aggressive competition from BIMS, Rifkin upgraded its system and added 19 new channels -- nine new expanded basic channels, a low priced, three-channel new product tier, and seven PPV channels.
Similarly, in Somerville, Massachusetts, upon RCN’s entry, Time Warner, the incumbent, announced a rate freeze for only that area where it faced competition. In suburban Philadelphia, as a result of RCN’s entry, Comcast, the incumbent, began to offer “rate locks” and service improvements in the towns where it faced competition. In the Washington, D.C., area, as a result of entry by Starpower, an RCN affiliate, Comcast, the incumbent cable operator, reduced a previously proposed rate increase. In Fairfax County, a suburb of Washington, D.C., the incumbent Cox announced an upgrade of its plant in response to direct competition from RCN.
In some situations questions have been raised regarding the techniques used by incumbent service providers to forestall competition. In Scottsboro, Alabama, the Scottsboro Electric Power Board (“Scottsboro”) began construction of a new, municipally owned cable television system in Scottsboro because of widespread dissatisfaction with Falcon Cablevision (“Falcon”), the incumbent cable operator. In late 1999, Charter Communications (“Charter”) acquired Falcon’s operation in Scottsboro. After acquiring the system, Charter upgraded the system, is now able to provide cable modem service and digital programming at competitive rates, and began to engage in a course of conduct that is designed to terminate Scottsboro’s efforts to compete in the market and, moreover, to signal other would-be competitors that attempts to enter other Charter markets would lead to similar predatory practices.
Since beginning in April 2000, Charter offered a special rate of $19.95 per month for one year. It then allowed some customers to continue subscribing at that rate for a second year. In May 2000, Charter added one month of free service to the $19.95 rate. Charter’s special rates are available only to Scottsboro’s customers and are not available to all potential subscribers in Scottsboro. Charter normally charges $24.95 per month for its expanded basic service, which includes 200 channels comprised of 16 premium movie channels, 45 digital music channels, 16 educational channels, and 14 PPV channels. A digital receiver with remote and Charter’s on- screen guide are also included. Furthermore, Charter offers a $200 “bounty” to switch from Scottsboro to Charter, and an additional $200 if subscribers take its
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Internet service. In addition, Charter established a system under which it retired subscribers’ old debts. Scottsboro states that Charter’s special offerings have induced about 36 percent of Scottsboro’s customers to switch to Charter.
Charter has engaged in similar behavior against Knology’s systems in West Point, Georgia, and Montgomery, Alabama. Knology has provided cable service in West Point since 1998. In 1999, Charter purchased the incumbent cable system from Marcus Cable. After Knology entered the market, several rounds of lowering prices occurred until both providers were charging about $20 for expanded basic service. Charter did not offer the same discounted rates in nearby communities. According to Knology, in nearby communities, Charter’s prices ranged to more than $35 per month for expanded basic, more than the national average of $32.25. In addition, earlier this year, Charter began offering a “bounty” of $200 and free installation to any consumers that switched from Knology to Charter. Due to customers taking advantage of this offer, the effective cost of cable service was reduced to less than $4 per month. In Montgomery, Knology purchased an existing competitive system in 1997. When Charter acquired the incumbent cable system in 2001 from AT&T Broadband, it immediately lowered the price of its digital tier and offered consumers $300 to switch from Knology to Charter. According to Knology, Charter recently began to offer a “digital complete basic” service for less than $23 per month, which includes all analog expanded basic services, 50 channels available only on the digital tier, and 50 channels of digital music. In addition, Charter will forgive old debts to Charter or the system’s previous owner. Charter’s discounts and giveaways have reduced its prices below costs, even if only programming costs are considered. Charter is taking a significant loss on each new customer it takes from its competitors, but it may be able to recoup its losses once it has driven its competitors out of the market.
In communities where cable operators have faced competition for a substantial period of time, the initial competitive response generally gives way to a more mature form of competition that benefits both subscribers and operators. In Omaha, Nebraska, where Cox and Qwest have been competing for the past six years, both offer a bundle of video, telephony, and high-speed Internet access services to entice new customers and retain old ones. For example, Qwest’s phone customers pay $28.95 per month for 59 channels of basic cable service and $39.95 per month for cable modem service. For its part, Cox charges $33.95 per month for its 70 channel basic cable service and its cable modem service is $5.00 lower than Qwest’s charge for cable modem service. As result of this competition, cable penetration in the area has increased and “churn” has stabilized.
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As the cases presented above suggest, subscribers usually benefit from “head- to-head” competition. In communities where “head-to-head” competition has been sustained for a long period of time, customers generally receive lower monthly rates and better service, while operators generally enjoy higher penetration rates and lower churn rates. In some cases, particularly where a new entrant may appear vulnerable for financial or other reasons, the initial response of a large incumbent MSO to competition may be motivated by anticompetitive animus rather than legitimate business concerns. Because of the difficulty and cost of pursuing antitrust remedies, it may be that the target of anticompetitive conduct is without practical remedy.
The Scottsboro and Knology examples highlight the difficulties of new entrants that, for whatever reason, are capable of competing only within a confined geographic region. The vast resources of a large MSO may simply prove too much if brought to bear in a targeted fashion against a single system entrant. Moreover, the signal such targeting may send to others who would compete in the MVPD market, and particularly to the financial markets to which a new entrant may well be dependent for resources. It is not clear that the FCC has specific statutory authority to address these kinds of problems directly. There has been some suggestion that our authority to prohibit anticompetitive acts or unfair practices under section 628 of the Act would reach targeted and predatory competitive responses. Alternatively, it the FCC may be required to seek additional authority from Congress in order to combat such practices, which tend to limit competition and discourage new entry.
3. Additional Competitive Market Case Studies
A number of cases have been examined where an incumbent cable operator faced “head-to-head” competition from one of a variety of new entrants including municipalities, LECs, public utilities, and DBS operators. In communities where head-to-head competition is present, the incumbent cable operator has responded to competitive entry in a variety of ways, such as by lowering prices, providing additional channels at the same monthly rate, improving customer service, or adding new services including high speed Internet and telephone services.
Following, are descriptions of the initial response of both incumbents and new entrants in several local franchise areas where the incumbent cable operator is facing competition from a new entrant. The samples of competitive responses discussed below include localities in which an incumbent cable operator was found by the FCC to face effective competition from a new entrant, as well as communities for which a
Confidential Page 33. 9/20/02 United Telesystems, Inc. petition for effective competition has been filed and is pending before the FCC. These case studies examine situations in which an incumbent is faced with effective competition from a single new entrant, and do not necessarily reflect potential competitive responses if an area was to have more than one effective competitor.
a. Royal Oak, Huntington Woods, and Clawson, Michigan
Ameritech New Media (“Ameritech”), a subsidiary of an LEC, was awarded a cable franchise in June 1997 by the City of Royal Oaks, Michigan. In July 1997, Ameritech was granted cable franchises by the Cities of Huntington Woods and Clawson, Michigan. Ameritech began offering video services to Royal Oaks in December 1997, to Clawson in March 1998, and to Huntington Woods in April 1998.
TCI Cablevision of Oakland County, Michigan, is the incumbent cable operator in all three communities. According to TCI, Ameritech has reached penetration levels of 44%, 32% and 40.5% in Royal Oaks, Huntington Woods, and Clawson, respectively. TCI’s penetration rates are 51.8% in Royal Oaks, 66.1% in Huntington Woods, and 52.9% in Clawson.
As of 1998, Ameritech charged $9.95 per month for its basic tier which included primarily local broadcast channels. Its “Americast” expanded basic tier had 60 channels and was priced at $29.95 per month. To promote its Americast services, Ameritech offered a variety of promotional packages to its new subscribers, including free cable service for two months, $120 worth of grocery coupons, a free premium movie channel, and free installation.
In June 1997, prior to Ameritech’s entry into the Royal Oaks, Huntington, and Clawson areas, TCI had added new channels to its “cable plus” package and raised monthly rates by 13%. When Ameritech was granted its franchises, TCI reduced its monthly rates for the cable plus package from $32.20 per month to $28.95 per month, a 10% reduction, and moved the Disney Channel from a premium service to a basic service tier (Ameritech also offered the Disney Channel as a basic service). In addition, TCI offered its subscribers in the Royal Oaks area discount coupons worth $10. TCI offered a free converter box and remotes in Royal Oaks and Clawson. TCI also offered “money back guarantees” on premium programming in all three communities.
TCI petitioned the FCC for a determination of effective competition in the
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Royal Oaks, Huntington Woods, and Clawson areas. The Cable Services FCC granted the petition on February 5, 1999. The FCC found that Ameritech had overbuilt TCI’s systems in each of the affected communities and was competing for subscribers with TCI in those areas. Also, Ameritech’s extensive marketing efforts and press coverage of its construction ensure that potential subscribers were aware of the availability of Ameritech’s service. The FCC also noted that as a result of competition in the above communities, cable rates were lower, new channels were added, and equipment was provided free of charge.
b. West Point, Georgia
On June 1, 1998, ITC Globe, Inc., d/b/a/ Knology (“Knology”), began providing its cable service in the City of West Point, Georgia. Knology is affiliated with the incumbent LEC, Interstate/Valley Telephone Company. Its 750 MHz system is capable of providing video and high- speed Internet services.
Initially, Knology offered a 17 channel basic service package for $8.75 per month, and a 59 channel extended basic package for $25.95 per month. Its extended basic package included a number of channels that were unavailable on the incumbent cable operator’s channel line up. Knology later reduced its extended basic rate to $19.95 per month and added six additional channels. It also offered free installation and a “30-day money back guarantee” to its subscribers.
Knology also discounted its “bundled” Internet and cable services. Specifically, Knology charged $29.95 per month to its cable customers for its “Olobahn” high-speed Internet access service, but charged its non-cable subscribers $49.95 per month for the same service. Knology’s subscribers could also opt for a consolidated bill for cable, telephone, and Internet services.
Marcus (now Charter Communications, Inc.), the incumbent cable operator in West Point, responded to Knology’s entry in a variety of ways. According to Marcus, it recently: (a) upgraded its 350 MHz system to a 750 MHz system; (b) added six new programming services to its expanded basic package and reduced the price for that package; (c) implemented an overall price reduction of up to 48% for its basic, extended basic, and premium packages; (d) ceased charging customers for its wire maintenance protection plan; and (e) implemented various marketing and advertising plans detailing its rates and service changes. As of August, 1998, 205 of Marcus’ subscribers had switched to Knology. Marcus reported that Knology had a subscriber base of 214 compared to its own subscriber base of 1,200.
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Marcus petitioned the FCC for a determination of effective competition in West Point. The FCC granted the petition on January 26, 1999. The FCC found that Knology had overbuilt Marcus’ system, and that potential subscribers were aware of the availability of Knology’s service. Also, potential subscribers were able to receive Knology’s service for little or no additional investment and without encountering regulatory and technical difficulties. The FCC also noted that cable rates were lower and additional services were being provided as a result of competition in West Point.
c. Somerville, Massachusetts
On December 16, 1997, the City of Somerville awarded a cable franchise to RCN-BecoCom, L.L.C. (“RCN”). Previously, RCN, a telecommunications company, was certified by the FCC to be an OVS operator in Somerville. RCN has been providing video and other services to Somerville residents since October 1997.
Prior to providing cable services in Somerville, RCN launched a $2.25 million advertising campaign that offered telephone, Internet, and cable services at a lower “bundled” rate than anywhere else in the country. In response to RCN’s advertising campaign and impending entry, Time Warner launched its own advertising campaign, offering its subscribers a free subscription to TV Guide, an additional channel, and lower rates for its universal remote control.
RCN offered a standard service consisting of 75 channels for $24.95 per month. Its standard service included channels such as the Disney Channel, The History Channel, and the Discovery Channel. The monthly charge for RCN’s standard service was further discounted to $19.97 per month for subscribers who also bought local telephone service from RCN. RCN also offered unlimited high- speed Internet access for an additional $19.95 per month. The monthly charge for Internet access was discounted to $17.95 if subscribers also subscribed to RCN’s cable or telephone services. Time Warner charged $26.48 for its 56 channel “standard”` service. RCN offered free standard installation whereas Time Warner charged $30.64 for installation.
In November 1997, Time Warner announced a 10% price increase for its standard cable services in 82 Massachusetts communities, but did not increase rates in Somerville. In 1998, Time Warner reduced monthly charges for its basic and standard services in Somerville by $0.19 and $0.09 per month, respectively. As of
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1998, Time Warner was charging $26.20 for its 56 channel standard service. Time Warner’s standard service had 19 fewer channels than RCN’s. Moreover, unlike RCN, Time Warner’s standard service did not include Disney Channel, Discovery Channel and The History Channel. Time Warner charged $9.50 a month for the Disney channel and $.75 a month for the Discovery and The History channels.
After entry by RCN, Time Warner reduced rates for certain premium services. For example, prior to RCN’s entry, Time Warner was charging $12.55 for three channels of HBO. As of 1998, Time Warner reduced its rate for the three channel HBO package to $11.50, an 8% reduction. RCN charged $11.95 for two channels of HBO. At the same time, Time Warner offered its subscribers more flexibility in selecting programming packages by allowing them to buy premium services without having to subscribe to its standard service. In early 1999, Time Warner announced that it would freeze its rates in Somerville during 1999.
According to one report, as of March 1999, between 2,000 to 2,500 of the approximately 19,000 Time Warner subscribers in Somerville switched to RCN. A number of RCN’s subscribers purchase “bundled” services, including Internet access and telephone service. Currently, Time Warner does not offer Internet or telephone service in Somerville. However, Time Warner is planning to swap its Somerville system with MediaOne, and the latter is expected to provide Somerville with Internet and telephone service in addition to cable services.
Time Warner filed a petition requesting a finding of effective competition in the City of Somerville. The petition was granted on February 5, 1999, recognizing that potential subscribers were reasonably aware of the availability of RCN’s services, and that subscribers in wired areas were able to receive RCN’s cable service for only a minimal additional investment and without encountering regulatory or technical obstacles.
d. Various Communities, Vermont
In May 1999, Adelphia Cable Communications (“Adelphia”) filed petitions challenging the certification of the Vermont Public Service Board to regulate Adelphia’s basic cable service and equipment rates in ten franchise areas. In the petitions, Adelphia argued that its cable systems faced effective competition because DBS providers offered comparable programming to at least 50% of households in the franchise areas, and the subscriber base of competing MVPDs exceeded 15% of households. In September 1999, the FCC granted Adelphia’s petitions. DBS service is presumed to be technically available to all subscribers due to
Confidential Page 37. 9/20/02 United Telesystems, Inc. its nationwide satellite footprint, and is presumed to be actually available if households in a franchise area are made reasonably aware that the service is available. Adelphia provided evidence of advertisements in local media about the availability of DBS service in each of the affected franchise areas.
According to local newspaper advertisements, DirecTV offered three months of “Total Choice” programming free to new subscribers. This programming package consisted of 85 channels including the Disney Channel, Lifetime, ESPN, and A&E Channel. Also, DBS dealers offered free professional installation or a free “do it yourself” installation kit.
Adelphia, in the affected Vermont localities, offered between 7 and 15 channels on its basic service tier. Adelphia’s “CableValue” tier, on average, had 24 channels, including CNN, A&E, Nickelodeon, ESPN and the New England Sports Channel. The Disney Channel was offered as a premium service in its systems.
In nine of the ten affected franchise areas, DBS penetration rates ranged from 16% to 63%. In three of the ten affected franchise areas, the penetration rate for Adelphia ranged from 38% to 41%. In one of the affected franchise areas, Adelphia’s share of residential MVPD market was only 11%, smaller than DBS penetration in that area. In Vermont as a whole, Adelphia is the dominant cable operator, serving 70% of all households in the state.
Unlike the cases described above, direct evidence of a reduction in monthly charges or change in services offered by the incumbent cable operator is unavailable. Although Adelphia upgraded a majority of its systems in Vermont, it is not clear whether the affected franchises were part of that upgrade nor whether the upgrade was undertaken as a competitive response or was previously scheduled.
e. Lebanon, Ohio
In August 1997, the Lebanon Bureau of Telecommunication Services (“LBTS”) was awarded a cable franchise by the city of Lebanon. LBTS is a part of the Lebanon Department of Service – Division of Electricity. LBTS has been providing cable services to Lebanon residents since February 1999. LBTS charges $5.99 per month for basic cable service and provides 27 channels on this tier. For its combined basic and deluxe cable service, LBTS charges $20.98 and provides 61 channels. In addition to cable service, LBTS is also planning to provide dial up Internet access at $19.99 per month and cable Internet service at $39.99 per month.
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As of February 1999, LBTS’ cable system passed 70% of the households in the City of Lebanon and the remaining 30% were to be wired shortly.
Time Warner is the incumbent cable operator in Lebanon. Prior to LBTS’ entry, Time Warner provided service to nearly 3,000 of approximately 7,300 potential subscribers. Upon LBTS’ entry, in March 1999, Time Warner started to offer significant discounts to retain its subscribers and to win back subscribers who switched to LBTS. Time Warner offered a special rate of $45 per month for a service that included all of Time Warner’s “standard” services plus several premium channels and two set-top boxes. Prior to LBTS’ entry, Time Warner charged $57.10 a month for a similar package.
By one account, as of July 1999, LBTS had 800 subscribers. A significant majority of LBTS’ subscribers are former Time Warner subscribers. In 1999, Time Warner reduced its 23 channel limited basic tier rate from $7.74 per month to $5.99 per month, a reduction of about 23%. Also, Time Warner reduced its 67 channel extended basic tier rate from $28.17 per month to $20.98 per month, a 25% reduction. In July 1999, Time Warner further reduced its extended basic rate to $14.99 a month. Moreover, Time Warner authorized its marketing representatives to offer promotional discounts that included free movie channels to subscribers who were planning to switch to LBTS.
Time Warner also announced that its Lebanon system would be one of the first Time Warner systems to offer a digital package that would include channels such as the Golf Channel and the Disney Channel. Time Warner also plans to offer high speed cable modem service to its Lebanon subscribers for $39.95 per month. LBTS, in turn, was considering reducing its previously announced monthly rate of $39.99 for high-speed Internet service.
f. Preliminary Findings
The case studies suggest that subscribers have benefited from “head-to-head” competition. Generally, in the communities studied, subscribers: (a) paid lower monthly charges for services and equipment; (b) have received additional program offerings; (c) have access to alternative sources of telecommunications and Internet services; (d) have received new digital services; and (e) may expect better customer service from the incumbent cable operator. The Vermont case study also suggests an absence of competitive response by the incumbent when faced with “non-wireline” head-to-head competition such as from DBS. The Vermont case is the first instance
Confidential Page 39. 9/20/02 United Telesystems, Inc. where the FCC granted an incumbent cable operator’s petition for a determination of effective competition due to the presence of competition from DBS.
It appears that the incumbent operators in the localities described above have made greater use of “price” rather than “non-price” competitive responses. With the exception of the case in Vermont, the incumbents in the above examples have reduced their rates for basic or standard and premium services. In the Michigan communities studied, the incumbent cable operator also reduced equipment charges.
The cases described above also indicate that the new entrants in West Point and Somerville sought to attract subscribers by providing “bundled” cable and high speed Internet access services at a discounted price. To counter these service offerings, the incumbent operator in West Point responded by significantly upgrading its system.
The benefits of competition do not appear to accrue to subscribers in areas adjoining those communities where head-to-head competition is present. For example, reduced prices and additional services enjoyed by subscribers in Somerville and Lebanon were not available to subscribers in nearby areas. Ameritech notes that subscribers in communities adjacent to competitive communities pay more for similar services than subscribers in competitive communities. For example, in Independence, Ohio, Cablevision charges a total package price of $50.69 for a channel line-up nearly identical to that offered in nearby Brooklyn, Ohio, for $30.90 where it competes with Ameritech. Similarly, in Auburn, Michigan, AT&T charges $45.98 for a package identical to that offered in nearby Rochester, Michigan, for $39.40 where it faces competition from Ameritech.
IV. BROADBAND NETWORK CAPABILITIES
A. Overview
A Broadband Network can provide residential and commercial customers with video programming services, high speed data and Internet access, and telephone services. Designed utilizing a flexible architecture, the network will be capable of evolving as technological advancements prove their economic feasibility through customer acceptance of new products and services.
Broadband service providers in many markets are in the process of upgrading their primarily one-way networks to high-capacity two-way interactive
Confidential Page 40. 9/20/02 United Telesystems, Inc. communications networks. The incumbent service providers in Geneva have generally not elected to upgrade their infrastructures to the level set forth in this Feasibility Study, therefore the City has a unique opportunity to gain market share through the establishment of a new Broadband Network offering enhanced service capabilities to residential and commercial consumers. Incumbent broadband service providers face significant technical problems associated with upgrading facilities for providing advanced services over cable HFC networks. Return path transmission interference often results from noise generated at the connection points between the trunk-distribution line connection and the distribution line-drop connections. Data transmissions in upgraded systems are vulnerable to signal ingress which causes interference and degradation caused by degraded elements of the Broadband Network such as fittings and service drops.
Broadband Networks are also one of the primary networks which utilities will utilize as they automate processes and provide a variety of new products and services to existing and new customers. The Broadband Network would provide the City with a high-speed customer communications network framework to potentially provide real-time automatic meter reading, market-based pricing, outage reporting, both load control and customer choice control, and other customer and company communications services. In addition, the interactive Broadband Network of the future could support new energy services such as the City’s video channel that could be the interface for a large number of the city’s utility customers. On this video channel, the City would be able to market services to their customers, allow customers access to current and historical billing information, and provide a means for customers to pay their bills via electronic funds transfer.
The utilization of fiber-optic technology increases the Broadband Network’s capacity and reduces noise, providing cleaner transmission paths that are necessary for provisioning such services as high-speed Internet access, telephony and other new services which require two-way interactivity. The use of an “HFC” architecture will enable the City to deliver applications at very high data rates. This Feasibility Study is based upon the assumption that the City will construct and operate a Broadband Network capable of providing more than 100 analog video channels, hundreds of digital video channels, as well as provide capacity for Internet access, telephony and other services. With respect to Internet access, the Broadband Network will be capable of carrying data up to several 100 times faster than transmission using dial-up modems over ordinary telephone lines, and 100 times faster than ISDN (integrated services digital network) telephone lines. Because the Broadband Network will be a shared medium, these speeds vary
Confidential Page 41. 9/20/02 United Telesystems, Inc. depending on the number of actual subscribers using the Internet connection at the same time.
Cable operators are continuing with the deployment of advanced technologies including digital video, Internet access, and telephony services over their cable systems. As indicated earlier, upgrades to their system infrastructure are being made so that operators can provide quality and reliable new services. Operators also may be choosing to make upgrades to increase system capacity prior to commencing digital transmission or two-way services. Additionally, cable systems previously providing only one-way (“downstream”) analog service to the customer may require upgrading to eliminate poor electronic connections and other sources of interference prior to providing two-way (“upstream” and “downstream”) data services. Two-way infrastructure is necessary for services such as two-way cable modems where data is transmitted entirely over cable and the provision of telephone services over cable wiring.
B. Broadband Network Architecture Overview
Beginning in the early 1990’s, Broadband Network architectures have transformed from closed systems that feature one-way delivery of analog television signals to two-way, interactive broadband systems, comprised of a hybrid of traditional coaxial and modern fiber optic technologies (“hybrid fiber- coaxial” or “HFC”). The HFC architecture was the first cost effective architecture deployed capable of delivering high quality video programming, interactive services, high- speed data and Internet access, telephony, and other revenue generating applications. Broadband networks are evolving from one-way video entertainment networks of 300-550 MHz bandwidth to full service, two-way, all optic FTTH/FTTB networks. The evolution from one-way to two-way technology has been occurring for several years and is escalating as broadband providers seek to enter advanced communications businesses.
In years past, networks deployed by cable television operators were constructed to provide only traditional video programming services that required only one-way transmission of signals. Until recently, the traditional one-way cable television system provided approximately 50 channels of analog video. The network was a full coaxial system designed with a centralized “headend” and lines called “trunks” leading from the headend to trunk amplifiers and line extenders placed in residential neighborhoods. The headend is the technological center of the system, where many programming operations and functions are processed, such as
Confidential Page 42. 9/20/02 United Telesystems, Inc. the reception of satellite delivered programming and broadcast signals. It includes facilities for descrambling incoming signals from satellite and broadcast programming networks, assigning them channel numbers, and processing them for retransmission over cable lines. The headend also contains electronic equipment for inserting advertising at the local level, encrypting signals for security purposes, and playing or producing public access/local origination programming. A traditional coaxial cable system included many amplifiers to boost the signal along the way to subscribers’ homes. A coaxial wire called a “drop” line then carried the service from the distribution line to the customer’s television set.
The HFC architecture replaces the previous coaxial trunk with a fiber-optic “trunk.” The fiber terminates at optical nodes, where the signal is then carried over an upgraded high bandwidth coaxial cable to the customer premises. HFC networks require fewer amplifiers and offer improved reliability, increased capacity, and clearer signal transmission, all of which facilitate two-way transmission. The FTTH/FTTB architecture is now replacing the HFC architecture, which eliminates all network RF amplifiers and electronics.
The Feasibility Study assumes the deployment of an advanced Broadband Network utilizing an FTTH/FTTB architecture as the basic transmission media. Since its introduction and implementation in recent years, FTTH/FTTB is quickly become the architecture of choice for many new entrants into the broadband services market seeking to develop a network for multiple service offerings that is future proof in network design. Fiber optics technology provides the system operator with a high degree of reliability, scalability, flexibility and extended bandwidth.
In addition to flexibly serving customers with high bandwidth communications capability, FTTH/FTTB’s hierarchical nature allows simple hubbing and interconnection via fiber transport. The architecture also provides a platform for the introduction of new services as they are developed. The FTTH/FTTB optical transmission network can consist of several different transmission sub-networks: the optical transmission network from the headend/central office to the Primary Hub; the optical transmission network from the Primary Hub to the Secondary Hub; the optical transmission network from the Secondary Hub and/or Secondary Ring and the optical transmission network to the customer premise device. The optical transmission network consists of the optical transmitter, the optical distribution network, the fiber optic cable and the fiber optic receiver. Using premium grade optical transmitters will optimize the design, which minimizes the cost in the transmitter section. From each transmitter, an optical loss
Confidential Page 43. 9/20/02 United Telesystems, Inc. budget will be estimated to link the headend/central office with the customer premise. By linking the Broadband Network headend and distribution hubs, Geneva would be positioned to better allocate resources over a broader customer base to achieve maximum program delivery efficiency through proper headend utilization while providing a high level of redundancy and reliability.
UTI has recommended a technologically advanced Broadband Network architecture to be deployed based upon: (1) equipment availability, (2) capability, (3) flexibility (4) potential service offerings, and (5) capital costs.
C. Digital Video Services
Digital signal transmission, as compared to the analog signal transmission historically used in cable systems, can provide superior video picture quality and increased channel capacity through compression techniques. Subscriber reception of digital video signals requires a set-top device to decompress and decode incoming signals and to translate the digital signals into the analog signals used by current television sets. Digital video technology is a computerized method of defining, transmitting and storing information that makes up a television signal. Digital video technology will allow the City greatly increase channel offerings through the use of compression, which converts one analog channel into 8 to 12 digital channels. The digitally compressed signal is up-linked to a satellite, which sends the signal back down to the Broadband Network's headend to be distributed, via optical fiber and coaxial cable, to customer's home. A digital-capable set-top box in the customer's home converts the digital signal back into an analog format so that it can be viewed on a normal television screen.
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D. Interactive Services
Broadband Networks will have the capacity to deliver various interactive television services. Interactive television can be divided into three general service categories: enhanced television; Internet over the television; and video-on-demand. These new services enable the customer to interact over the television set, generally by using a conventional remote television control or a computer keyboard, to either buy a product or service or request information on a product or service. Enhanced television includes such services as ancillary programming information, interactive advertising and impulse sales and purchases. Companies delivering enhanced television services include TV Guide Interactive, Wink Communications and Source Media. TV Guide Interactive provides the most basic enhanced television service, a navigator that permits customers to customize television program listings, set reminders and parental controls and order pay-per- view events. Wink offers viewers the opportunity to interact with the television during programs or commercials by way of flashing icons, leading them to program-related information, such as news, sports and weather, or the ability to purchase merchandise, or request product samples, coupons or catalogues. Source Media allows viewers to receive local programming and information services using a local guide and navigator with an Internet style experience. Companies providing Internet access over the television include WebTV and WorldGate Communications. Internet access and e-mail are delivered using a set-top box with the customer using a wireless keyboard. WebTV customers buy the set-top device at retail outlets and are able to view enhanced web images on the television screen. WorldGate Communications allows a viewer watching a commercial or program on the television to link directly to a related web page and requires no purchase by the customer of the set-top box. WorldGate Communications uses the set-top boxes now being deployed by the cable industry. Companies providing video-on-demand, such as DIVA Systems Corporation and Intertainer Inc., use servers at the headend facility of a cable system to provide hundreds of movies or special events on demand with video cassette recorder functionality, or the ability to fast forward, pause and rewind a program at will. Using a remote control, customers order programming through their set-top box. The ordering process signals the server, enabling the hardware and software residing at the headend facility to react to the order request.
E. Internet and High-Speed Data Services
Broadband Networks enable data to be transmitted up to 100 times faster
Confidential Page 45. 9/20/02 United Telesystems, Inc. than traditional telephone modem technologies. This high-speed capability allows cable modem customers to download large files from the Internet in a fraction of the time required when using the traditional telephone modem. It also allows much quicker response times when surfing the Internet, providing a richer experience for the customer. In addition, the two-way communications capability of the cable Internet connection eliminates the need for a telephone line. The cable Internet connection is always on, and does not require the customer to dial into the Internet service provider nor to “log on,” and await authorization.
To ensure inter-operable, non-proprietary cable modems are made available for purchase or lease by customers on a retail basis. General software operating standards, known as data over cable service interface specifications (“DOCSIS”), have been established. As of the year 2000, fourteen industry vendors, including equipment manufacturers such as 3Com, Cisco, General Instrument, Phillips Electronics, Samsung, Scientific-Atlanta, Sony, Thomson and Toshiba, received official DOCSIS certification from Cable Television Laboratories, Inc. As a result, standardized cable modems are currently available for purchase through various distribution channels, including retail outlets, personal computer manufacturers, and directly through the cable operator. Such availability will allow customers to use these modems in different systems similar to the traditional telephone modem, and should accelerate the deployment of high-speed Internet access over cable networks.
Speed, ease of installation and availability of cable modems should serve to increase the use and impact of the Internet. Furthermore, a Broadband Network, combined with data over cable service interface specifications, is currently the best vehicle to deliver all Internet protocol services, including Internet access, broadband content, streaming media and Internet protocol telephony to customers both on the computer and to the television via a digital set-top box, even though other high-speed alternatives are being developed. The Business Plan anticipates that the City will provide connectivity and e-mail hosting. The Business Plan does not anticipate that the City will provide Internet content.
Cable systems and cable modems offer speeds up to 27 megabits-per-second (“Mbps”) as compared with telephone company xDSL technologies that allow consumers to surf the Internet at speeds between 1.5 Mbps and 52 Mbps, though most users experience between only 3 to 10 Mbps for cable and between 1.5 and 7.1 for ADSL, the most widely used form of xDSL. Telephone companies, however, are able to offer customers the ability to access the Internet, while simultaneously talking
Confidential Page 46. 9/20/02 United Telesystems, Inc. on the same telephone line. Additionally, telephone companies, in association with xDSL technologies, utilize “dedicated lines” that run from the telephone company customer’s home to the central office, and can nearly guarantee certain speeds of data transmission. Cable networks use shared network infrastructure to the central office, thus the rate of speed can depend on the number of subscribers using the shared bandwidth at any given point in time. Consumers also can purchase traditional “low-speed” data access for the personal computer, which uses a traditional telephone modem and traditional telephone lines to transmit data, and which yields significantly slower data exchange rates.
As an example, Table 1 compares the transfer rate for downloading a 10 Megabyte file. A 10 Megabyte file is approximately the equivalent of a 10 to 20 minute movie clip. HFC architecture can transmit both upstream and downstream packets of information. The City thus will be positioned to operate as “pipeline” or “conduit” services, or become a full-service provider combining both Internet access and other value-added services.
TABLE 1: Transfer Rate For A 10-Megabyte File
Modem Speed/ Type Transfer Time
14.4-Kbps* Telephone 1.5 hours 28.8-Kbps Telephone 46 minutes 56-Kbps Telephone Modem 24 minutes 128-Kbps ISDN Modem 10 minutes 1.54-Mbps T-1 Connection 52 seconds 4-Mbps Cable Modem 20 seconds 10-Mbps Cable Modem 8 seconds *kbps (kilobits per second) & Mbps (Megabits per second) Source: http://www.cablemodems.com/whatis.html
F. Telephone Service
During the last several years, the cable industry has been developing the capability to provide telephony services. Broadband telephony requires sizeable and expensive upgrades and presents a number of technical obstacles. Over the past two years, cable operators have begun developing Internet Protocol Telephony (“IP
Confidential Page 47. 9/20/02 United Telesystems, Inc. telephony”) as a potential alternative to switched cable telephony. An IP telephony voice call starts out similar to a cable telephony voice call in that both begin with special equipment that connects a household’s twisted pair infrastructure and cable infrastructure to one another. The difference between the technologies is that cable telephony eventually turns the call over to traditional “circuit switched” processing, while IP telephony eventually turns the call over to the network of the Internet for Internet Protocol processing. IP telephony treats voice telephone calls like data is treated on the Internet; that is, digitized pieces of data are divided into discrete packets and are transported over the Internet following the path of least resistance. As a result calls made using IP telephony technology may encounter choppiness and delays (“latency”). Today, many features, such as call waiting, are not part of the package of IP Telephony, but will be available to residential customers within the next one to two years. The Internet itself is not designed to provide circuit switched connections, such as those now used by switched telephone networks. Although there are significant technological difficulties that need to be worked out with IP telephony, many broadband service providers are considering this approach to replace current cable telephony technology. AT&T, is currently the leading proponent of IP telephony. The cable industry’s approach to eliminate latency in IP telephony is to eventually build a backbone network that is separate from the general public Internet backbone. IP telephony is currently being commercially offered on a small scale by providers such as AT&T, Sprint, Qwest Communications, NetWorks Telephony Corporation, Vocal Tec, and numerous small IP Telephony Service Providers (“IPTPs”), but for the most part remains in the development and trial stage. Recent developments will likely accelerate the pace of development of the voice telephony business for the cable industry.
The City’s Broadband Business Plan anticipates the construction of a Broadband Network with excess fiber optic capacity, thereby affording to the City the flexibility to pursue new data and telecommunications opportunities such as:
1. Providing wide-area networks, which extends a local area network outside of one building to other local area networks in other buildings and possibly in other cities;
2. Providing point-to-point data services, which is a secure circuit that directly connects two points;
3. Offering virtual private networks, which use a shared data network to transport private data reliably and securely; and
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4. Leasing dark fiber capacity to enable carriers to penetrate markets and bypass incumbent providers.
G. Multi-Service Offerings
As discussed above, numerous broadband service providers are offering customers, in many of their service areas, more than standard video services. Multi- service offerings and bundling services for sale seem to enhance subscription to alternative services offered by cable companies. Digital audio and digital, high- resolution video, as well as telephony and Internet access through cable modems are becoming high demand services that cable has the bandwidth capability to offer, depending on the capacity of the particular system. Indications are that customers value receiving these services through “one-stop-shopping.” For example, many large MSOs have found that bundling increases penetration of video and of new services. Bundling of services increases consumer awareness, interest, and ultimately penetration of services while saving on administrative and marketing costs. Many competitive broadband service providers such as McLeodUSA, RCN, and Knology started by offering video programming as part of bundled services. Many of these firms depend on their ability to offer multiple bundled services in discounted packages as a way to attract customers.
V. INVENTORY OF EXISTING ASSETS
The City must secure land and facilities to accommodate expanding into the provision of broadband services. The City should attempt to locate the headend electronic facility and satellite receiver earth station adjacent to customer service and technical support offices in Geneva. The off-air tower and satellite receiving earth station should be located at a site adjacent to the City broadband services office/headend facility and interconnected with that facility.
Certain steps should be taken to organize a professional management team to handle the daily operations of the business. This would include a Technical Manager, Technicians, and Customer Service Representatives. It is likely that, with proper training, some existing personnel in customer service or the City’s utility department may be cross-trained to provide support for the Broadband Network operation.
If the City elects to pursue the broadband initiative, an outside firm should be retained to manage the initial planning, financing, design, construction and
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VI. BROADBAND SERVICE PROVIDERS AND SERVICES
A. The City of Geneva Video Services
1. The City’s Broadband Network
As proposed, the City Broadband Network Initiative calls for the construction and activation of approximately 113.24 plant miles of broadband infrastructure passing an estimated 9,999 serviceable residential and commercial potential customers passed in and around Geneva, Illinois area with the ultimate objective of providing as close to universal service as economically feasible.
2. Rates and Video Services
The following rates are assuming that the City develops its system on a stand-alone basis:
The Feasibility Study assumes that the City will provide a Limited Basic Video Services Tier of eighteen (18) channels for $10.95 per month and the Expanded Basic Video Services Tier of fifty-seven (57) channels for $23.00 per month. There is also an additional Line Maintenance Plan for $1.95 per month. This brings the total cost for Standard Basic service $35.90 per month, excluding franchise fees and taxes.
The City will also provide a Digital Basic Tier that includes 35 video channels and 45 audio channels for $10.95 per month and a Premiere Basic Tier that includes 110 video channels and 45 audio channels for $46.85 per month.
It is also expected that the City will provide HBO, HBO Plus, and HBO Family for $11.95 per month and an HBO Digital Group (6 channels) for $11.95 per month. The Showtime Group (5 channels) will be offered for $10.95 per month, the Cinemax Group (4 channels) for $9.95 per month, the Movie Channel Group (3 channels), and the Starz Group (6 channels) will be offered for $8.95 per month. The Encore Group will be offered for $5.95 per month. In addition, there will be a Showtime Digital Combo (Showtime, TMC, FLIX, and Sundance) offered for $12.95 per month and an HBO Digital Group plus a Cinemax Digital Group offered for $19.50 per month.
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The following rates are assuming that the Tri-Cities enter into an arrangement with each other:
The Feasibility Study assumes that the Tri-Cities will provide a Limited Basic Video Services Tier of eighteen (18) channels for $10.95 per month and the Expanded Basic Video Services Tier of fifty-seven (57) channels for $22.00 per month. There is also an additional Line Maintenance Plan for $1.95 per month. This brings the total cost for Standard Basic service $34.90 per month, excluding franchise fees and taxes.
The Tri-Cities will also provide a Digital Basic Tier that includes 35 video channels and 45 audio channels for $10.50 per month and a Premiere Basic Tier that includes 110 video channels and 45 audio channels for $45.40 per month.
It is also expected that the Tri-Cities will provide HBO, HBO Plus, and HBO Family for $11.95 per month and an HBO Digital Group (6 channels) for $11.95 per month. The Showtime group (5 channels) will be offered for $10.95 per month, the Cinemax group (4 channels) for $9.95 per month, the Movie Channel group (3 channels), and the Starz group (6 channels) will be offered for $8.95 per month. The Encore group will be offered for $5.95 per month. In addition, there will be a Showtime Digital Combo (Showtime, TMC, FLIX, and Sundance) offered for $12.95 per month and an HBO Digital Group plus a Cinemax Digital Group offered for $19.50 per month.
For more information on services and rates, please see the Feasibilty Study section of business plan.
B. Incumbent Cable Television Service Provider – AT&T
1. Office Review
The AT&T office is located at 1101 East Roosevelt Road, Wheaton, Illinois. Although the office appeared to have four CSR stations, it was only staffed with one customer service representative (“CSR”) who was positioned at the front counter.
2. Rate and programming Information
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While rates vary slightly by franchise or service area, in Geneva, AT&T is providing a Basic Service Tier of thirty one (31) channels for $15.79 per month, an Expanded Basic Service Tier of fifty-five (55) channels for $19.69 per month. This equals a total of eighty six channels (86) for the Full Basic Service for $35.48 per month, excluding franchise fees and taxes. In addition, AT&T offers HBO, Showtime, The Movie Channel, and Cinemax for $12.99, and Starz! & Encore combined for $10.99 per month (only available when purchased with a digital subscription).
AT&T also provides five (5) Digital Service Packages that include the following: Digital Starter (requires subscription to expanded) for $6.99 per month, Digital Basic for $12.00 per month, Digital Bronze Package for $44.99 per month, Digital Silver Package for $52.99 per month, Digital Gold Package for $62.99 per month, and Digital Platinum Package for $76.99 per month.
3. Technical Review
AT&T’s Geneva system is currently operating at 550 MHz. The AT&T system includes a fiber backbone to reduce amplifier cascade and to improve end- of-line signal performance. Scientific-Atlanta amplifiers are used in the system. Most of the coaxial cable is jacketed and the trunk lines are ¾ inch with distribution lines being ½ inch coaxial cable. Overall, the cable plant is in decent condition.
VII. RATES IN COMPETITIVE BROADBAND MARKETS
The average monthly rate charged by cable television operators facing effective competition was $27.15 and $28.71 as of July 1, 1997 and 1998, respectively, ($0.55 and $0.57 on a per channel basis). For those not facing effective competition, the average monthly rate was $28.56 and $30.53, respectively, during the same time period ($0.64 and $0.65 on a per channel basis). This represents a differential of 5.2% and 6.3%, respectively, in average monthly rates between the competitive and the noncompetitive. Further, the average monthly rates charged by systems facing head-to-head competition was 14% less than the average monthly rate charged by noncompetitive systems.
Average monthly rates charged by competitive operators rose by 6.8% during the 12 months ending July 1, 1997 and 5.8% during the 12 months ending July 1, 1998. Per channel rates decreased by 5.2% in 1997 and increased by 3.6%
Confidential Page 52. 9/20/02 United Telesystems, Inc. as of July 1, 1998. During the same time periods, the average monthly rates charged by noncompetitive operators rose by 8.9% and 6.9%, respectively. Per channel rates of noncompetitive operators rose by 3.2% and 1.6%, respectively. As a result, average monthly rates and per channel rates as well as the rate of increase in rates is greater for the noncompetitive group than for the competitive group. However, the pace of those increases slowed in 1998.
The Consumer Price Index (“CPI”) published by the FCC of Labor Statistics (“BLS”) is another valuable source of information on cable industry prices. For the same time periods, the cable services segment of the CPI (“Cable CPI”) grew by 7.5% and by 6.7% respectively. The Cable CPI, however, includes the prices charged for premium services such as a la carte and pay-per-view channels as well as installation charges, which are not included in the calculation of average monthly rates set forth in this section. The overall CPI, which is also published by the BLS, grew by 2.2% and 1.7%, respectively, during the years ending 1997 and 1998.
Both competitive and noncompetitive operators attribute most of their rate increases to increases in programming costs, inflation, channel additions and system upgrades. Both groups also attribute significant portions of their rate increases to increases in non-defined “other” expenses. Both competitive and noncompetitive operators have continued to increase the number of channels provided to their subscribers which means that the quantity of service received by subscribers has changed over time. By 1999, almost 50% of cable operators surveyed had increased their systems’ capacity to 550 MHz or more. This typically has resulted in additional channels of service and may result in improved signal reliability. The competitive group reported a 1.5% increase and the noncompetitive group a 4.6% increase, in the average number of channels provided for the 12 months ending 1998. This brought the competitive group to an average of 54 channels and the noncompetitive group to an average of 50.1 channels as of 1998. Per channel rates increased for both groups, but by a rate of increase that was lower than the increase in unadjusted average monthly rates. For the competitive group, per channel rates increased by 3.6% (from $0.55 to $0.57) and for the noncompetitive group by 1.6% (from $0.64 to $0.65) during the year ending 1998.
Operators in the competitive and noncompetitive groups report that they offered 41 and 38 satellite channels, respectively, as of 1998, and that about 75% of those channels for both groups are devoted to general entertainment programming with the remaining 25% distributed among children’s, news, and
Confidential Page 53. 9/20/02 United Telesystems, Inc. sports programming. Rates per satellite channel increased by 0.1% for the competitive group and declined by 2.2% for the noncompetitive group for the year ending 1998.
A 1998 survey requesting information on the provision of digital services found that of 444 responses to a question on the availability of digital tiers, 128 operators (or 29%) offered that service. Of 709 responses to a question about Internet access, 137 operators (or 19%) reported that they offered Internet access service, and of the 678 responses to a question about telephony service, 25 operators (or 4%) report that they offered telephony service as of 1998.
VIII. OPERATING PLAN
The headend and offices facilities should be located in an easily accessible location near the center of the proposed Geneva service area. Utilizing existing land and office facilities could potentially reduce initial capital costs. Cross- training existing employees to handle broadband services-type duties could also save operating costs.
A communications tower, earth stations and headend facility will be required to be erected on the chosen headend site. The area of the headend facility housing electronics should be a secure and climate controlled area of at least 2,000 sq. ft. Office space will also be required to accommodate management, technical support, computer operations, sales, engineering, and customer service. Prior to commencing with system construction, qualified candidates will need to be interviewed with the position of technical manager filled to develop the broadband system. To the greatest extent possible, the local labor force should be utilized as a resource to hire employees for entry-level positions such as customer service, sales and installations.
Established suppliers of broadband products to the industry should be relied upon for system materials and labor. Price should not be the only factor taken into consideration in determining the best products to utilize in constructing the network. Companies like Scientific-Atlanta, General Instruments, Nortel, Lucent, Power & Telephone, ADC, and ANTEC have a long history of providing good products and service to the telecommunications industry. Proper procedures should be used to evaluate vendors and contractors for the construction of the network.
IX. FINANCIAL PLAN
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To ensure that the financial plan included as part of the Feasibility Study remains conservative in all respects, the financial projections (the “Projections”) contained herein are based upon the assumption that the system will be operated without reliance upon any existing “City” infrastructure. The Projections incorporate assumptions based upon more specifically: (a) service pricing, packaging and experience in similar markets; (b) experience with similar technologies and system architectures; (c) hands-on experience in constructing and operating similar systems; (d) equipment pricing and availability recently negotiated and experienced with vendors; and (e) agreements recently negotiated with associated service providers.
Further, the Projections utilize a proprietary three hundred fifty (“350”) page model which has been developed over the past fifteen (15) years. The model has been utilized to assess and finance numerous projects similar to the one being pursued by the City. The financial projections and other statements made in the Feasibility Study are forward-looking statements which are based upon significant assumptions and subjective judgments believed to be reasonable as of the date of the Feasibility Study. The financial projections assume that the City will be able to reach an average video services market penetration level sufficient to cover operating expenses within 24 months from the date financing is closed.
X. OTHER CONSIDERATIONS
If managed properly, the operation of the Broadband Network should complement the operations of the City’s core utility businesses. The Broadband Network’s potential to provide enhanced telecommunications services and utilization for certain utility and municipal based services such as utility management, distance learning and traffic control will provide direct benefits to existing operations.
Overall, the operation of the Broadband Network will also bring the benefits of competition to the Geneva market. The construction of a competitive broadband telecommunications infrastructure is likely to enhance the economic development of the Geneva area while serving to strengthen relationships with existing commercial and residential customers. Technically advanced telecommunications networks are fast becoming as vital to a community’s economic development and growth as other forms of infrastructure such as land, buildings, roads and utilities.
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XI. LEGAL CONSIDERATIONS
The Telecommunications Act of 1996 is the first overhaul of Federal telecommunications law in the U.S. in almost 62 years. The goal of this new law is to open up all telecommunications markets to competition and to let anyone enter any communications business in any market against each other. The FCC has been given the task of further defining and implementing this new law. They are seeking to implement plans to open up local phone markets, increase competition in long distance, and further competition in all areas of telecommunications, including video programming and data services. A more exhaustive review of the effects of The Cable Television Consumer Protection and Competition Act of 1992, The Satellite Home Viewer Improvement Act ("SHVIA"), and The Telecommunications Act of 1996 can be found in the “Legal Review” section of this Broadband Business Plan
XII. RISK ASSESSMENT
The profitability of this venture is highly dependent upon achieving enough market-share to support the capital investment in the infrastructure. The financial projections included herein as part of this Feasibility Study include numerous assumptions, such as achieving certain service penetration levels for the broadband services set forth at suggested rates. If penetration levels are substantially lower than the projected percentages, then additional cash reserves will be necessary to cover operating losses and debt financing.
As in other industries, technical obsolescence will always remain a concern in the telecommunications industry. Deploying the Broadband Network utilizing the most advanced technology feasibly available will help ensure that the Broadband Network will have a viable life span long enough to recover the capital investment. The equipment and architecture of the Broadband Network recommended in this Feasibility Study utilize the most advanced proven telecommunications technology available. The life span of the fiber and coaxial cables are in excess of 20 years. As new network enhancements are developed, it is likely that the Broadband Network will require upgrading to keep pace with changes in technology and to take advantage of new business opportunity.
Historically, cable television companies have often elected to aggressively oppose municipal entities seeking to provide video, data, or telecommunications services in direct competition with private enterprise. Incumbent service providers
Confidential Page 56. 9/20/02 United Telesystems, Inc. frequently seek to delay or prevent competition through legal and/or legislative actions. It is likely that incumbent service providers may also elect to upgrade systems and adjust service rates in an attempt to decrease the effects of competition. Should the City elect to proceed, these factors should be taken into consideration and should be anticipated.
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APPENDIX A
TABLE A-1
Cable Television Industry Growth (in millions)
Television Basic Cable Year End Households Homes Passed Subscribers ("TH") ("HP") ("Subs") HHs HHs U.S. % % % Passed by Subscribin Penetration Total Change Total Change Total Change Cable g (Subs/HP) (HP/TH) (Subs/TH) 1993 94.0 1.0% 90.6 1.0% 57.2 3.6% 96.4% 60.9% 63.1%
1994 94.9 1.0% 91.6 1.1% 59.7 4.4% 96.5% 62.9% 65.2%
1995 95.9 1.1% 92.7 1.2% 62.1 4.0% 96.7% 64.8% 67.0%
1996 97.0 1.1% 93.7 1.1% 63.5 2.3% 96.6% 65.5% 67.8%
1997 98.0 1.0% 94.6 1.0% 64.9 2.2% 96.5% 66.2% 68.6%
1998 99.0 1.0% 95.6 1.1% 66.1 1.8% 96.6% 66.8% 69.1%
1999 100.0 1.0% 96.6 1.0% 67.3 1.8% 96.6% 67.3% 69.7%
2000 106.4 6.4% 103.2 6.8% 68.5 1.8% 97.0% 64.4% 66.4%
June 01(e) 107.1 0.7% 104.0 0.8% 69.0 0.7% 97.1% 64.4% 66.3%
(e) June data is based on year-end estimate by Paul Kagan Associates.
Sources: 1993 to 1997: U.S. Television Households: Paul Kagan Assocs., Inc., Basic Cable Network Economics (1983-2007), Cable Program Investor, Mar. 13, 1998, at 2; Homes Passed and Basic Cable Subscribers: Paul Kagan Assocs., Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, Apr. 14, 1998, at 3.
1998 and 1999: U.S. Television Households, Homes Passed, and Basic Cable Subscribers: Paul Kagan Assocs., Inc., Paul Kagan’s 10-Year Cable TV Industry Projections (1998-2009), The Cable TV Financial Databook 1999, Aug. 1999, at 10.
2000 and 2001: U.S. Television Households, Homes Passed, and Basic Cable Subscribers: Paul Kagan Assocs., Inc., Paul Kagan’s 10-Year Cable TV Industry Projections (2000-2011), The Broadband Cable Financial Databook 2001, July 2001, at 10.
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TABLE A-2 Premium Cable Services: 1993 - June 2001 (in millions)
Premium Cable Service Subscribers1 Premium Units2 Year End Year End Total % Change Year End Total % Change 1993 26.4 6.9% 47.0 1.1% 1994 28.1 6.4% 47.4 0.9% 1995 29.8 6.0% 51.6 8.9% 1996 31.0 4.0% 54.6 5.8% 1997 31.5 1.6% 56.0 2.6% 1998 35.3 12.1% 57.9 3.4% 1999 35.5 0.6% 53.0 -8.5%3 2000 36.8 3.7% 55.6 4.9% June 2001 (e) 37.2 1.0% 56.4 1.4%
(e) June data are based on year-end estimate by Paul Kagan Associates.
1 Premium Cable Services Subscribers refers to the total number of homes subscribing to one or more premium services. Each home is counted once, regardless of the number of premium services to which it subscribes.
2 Premium Units refers to the total number of premium subscriptions. Each subscription is counted separately, thus may exceed the number of premium subscribers.
3 The decrease in the number of premium units is due to the migration of certain pay services to other tier categories. As such, the number of units sold by those services are no longer counted here.
Sources: 1993 to 1997: Paul Kagan Assocs., Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, Apr. 14, 1998, at 3.
1998 to 1999: Paul Kagan Assocs., Inc., Paul Kagan’s 10-Year Cable TV Industry Projections (1998- 2009), The Cable TV Financial Databook 1999, Aug. 1999, at 10.
2000 to 2001: Paul Kagan Assocs., Inc., Paul Kagan’s 10-Year Cable TV Industry Projections (2000- 2011), The Broadband Cable Financial Databook 2001, July 2001, at 10.
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TABLE A-3 Growth By Network Type: 1999 - June 2001
1999 98-99 2000 99-00
Network Type Number of Percent of Percent Number of Percent of Percent Networks Networks Change Networks Networks Change Basic/No-Chg 147 68.7% 5.8% 130 56.2% -11.6%
Premium 43 20.1% 138.9% 40 17.3% -7.0%
Pay Per View 9 4.2% -10.0% 11 4.8% 22.2%
Digital - - - 39 16.9% -
Other* 15 7.0% 114.3% 11 4.8% -26.7%
Total 214 100% 23.0% 231 100% 7.9%
* “Other” includes cable networks that fall under more than one service category. For example, the Disney Channel is part of the basic tier in some systems, but is sold as a premium service on other systems.
Sources: 1999: NCTA, National Cable Video Networks By Type of Service: 1980 - 1999, Cable Television Developments 1999/2000, at 6.
2000: NCTA, National Cable Video Networks By Type of Service: 1980 - 2000, Cable Television Developments 2001, at 8.
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TABLE A-4 Cable Industry Revenue and Cash Flow: 1997 – 2001
1997 1998 1999 2000 2001 % % % Estimated % Total Total Change Total Change Total Change Year End Change Total Avg Basic Subscribers (mil) 64.2 65.4 1.9% 66.7 2.0% 67.9 1.8% 69.0 1.6% Revenue Segments (mil.) Basic Service and CPST Tiers $20,008 $21,830 9.1% $23,135 6.0% $24,729 6.9% $26,142 5.7% Pay Tiers $4,952 $5,084 2.7% $4,989 -1.9% $4,648 -6.8% $4,777 2.8% Local Advertising $1,925 $1,850 -3.9% $2,685 45.1% $3,240 20.7% $3,661 13.0% Pay-Per-View $823 $627 -23.8% $954 52.2% $760 -20.3% $1,096 44.2% Home Shopping $152 $187 23.0% $185 -1.1% $239 29.2% $260 8.8% Advanced Services (Ana./Dig.)1 $208 $452 117.3% $1,978 337.6% $2,051 3.7% $5,562 171.2% Equipment and Install $2,320 $2,631 13.4% $2,824 7.3% $2,451 -13.2% $2,478 1.1% Total Revenue (mil.) $30,388 $32,661 7.5% $36,750 12.5% $38,118 3.7% $43,976 15.4% Revenue Per Subscriber $473.33 $499.40 5.5% $550.97 10.3% $561.38 1.9% $637.33 13.5% Operating Cash Flow (mil.)2 $13,369 $14,602 9.2% $15,600 6.8% $16,611 6.5% $18,272 10.0% Cash Flow per Subscriber $208.24 $225.87 8.5% $233.88 3.5% $244.64 4.6% $264.81 8.2% Cash Flow/Total Revenue 44.0% 45.2% 2.7% 42.4% -6.2% 43.6% 2.8% 41.5% -4.8%
1 Includes advanced analog, digital video, high-speed data, cable telephony, interactive services, and games.
2 Cash flow and its proxies (e.g., EBITDA) are often used to value the operations of a communications firm without regard to the firm's capital structure. Cash flow from operations is the net result of cash inflows from operations (revenue) and cash outflows from operations (expenses), thus ignoring non-cash charges to net income such as depreciation and amortization. Cash flow from operations indicates a firm's ability to meet its net finance and investment obligations.
Sources: 1997: Average Number of Basic Subscribers: Paul Kagan Assocs., Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, Apr. 14, 1998, at 3; Revenue Segments: Paul Kagan Assocs., Inc., Paul Kagan's 10-YearProjections, Cable TV Investor, May 20, 1997, at 9; Paul Kagan Assocs., Inc., Total Cable TV Advertising Revenue (1980-2007), Cable TV Financial Databook, Aug. 1998, at 15; Operating Cash Flow: Paul Kagan Assocs., Inc., Estimated Capital Flows In Cable TV, Cable TV Finance, May 31, 1998, at 1.
1998: Average Number of Basic Subscribers and Revenue Segments: Paul Kagan Assocs., Inc., Paul Kagan’s 10-Year Cable TV Industry Projections (1998-2009), The Cable TV Financial Databook 1999, Aug. 1999, at 10-11; Operating Cash Flow: Paul Kagan Assocs., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook 1999, Aug. 1999, at 149.
1999: Average Number of Basic Subscribers and Revenue Segments: Paul Kagan Assocs., Inc., Paul Kagan’s 10-Year Cable TV Industry Projections (1999-2010), The Cable TV Financial Databook 2000, Aug. 2000, at 10; Operating Cash Flow: Paul Kagan Assocs., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook 2000, Aug. 2000, at 150.
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2000 and 2001: Average Number of Basic Subscribers and Revenue Segments: Paul Kagan Assocs., Inc., Paul Kagan’s 10-Year Cable TV Industry Projections (2000-2011), The Broadband Cable Financial Databook 2001, July 2001, at 10; Operating Cash Flow: Paul Kagan Assocs., Inc., Estimated Capital Flows in Cable TV, The Broadband Cable Financial Databook 2001, July 2001, at 138.
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TABLE A-5 System Transactions: 1998 - June 2001
1998 1999 98-99 2000 99-00 Jan-June % Change % Change 2001 Number of Systems Sold 119 92 -22.7% 47 48.9% 23 Total Number of Subscribers 22,466,200 18,288,706 -18.6% 10,494,290 -42.6% 4,040,046 System Size Average 188,792 198,790 5.3% 223,283 12.3% 175,654 Number of Homes Passed 36,397,730 28,345,972 -22.1% 17,393,388 -38.6% 6,789,548 No. of Homes Passed Avg 305,863 308,108 0.73% 370,072 20.1% 295,197 Total Dollar Value (mil.) $64,601 $73,070 13.1% $62,154 -14.9% $14,772 Dollar Value (mil.) Average $542.9 $794.2 46.3% $1,322.4 66.5% $64.0 Dollar Val. Per Subscriber $2,875 $3,995 39.0% $5,923 48.3% $3,656 Dollar Val. Per Home Passed $1,775 $2,578 45.2% $3,573 38.6% $2,176 Cash Flow Multiple 13.1x 16.7x 27.5% 19.6x 17.4% 14.4x
Sources: 1998: Paul Kagan Assocs., Inc., Cable System Sale Summary (through December annually), Cable TV Investor, Jan. 29, 2000, at 7.
1999 to 2000: Paul Kagan Assocs., Inc., Cable System Sale Summary (Annually through December), Cable TV Investor, Feb. 5, 2001, at 12.
2001: Paul Kagan Assocs., Inc., Cable System Sale Summary (Annually through June), Cable TV Investor, Aug. 29, 2001, at 9.
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TABLE A-6 Acquisition of Capital: 1993 - June 2001 ($ in million)
Year Private Debt Public Debt 2 Private Equity Public Equity Total Sum % of Sum % of Sum % of Sum % of Capital Raised Total 1 Raised Total Raised Total Raised Total Raised 3 1993 $(3,584) -186.4% $5,280 274.6% $62 3.2% $165 8.6% $1,923
1994 $ 4,803 87.0% $155 2.8% $100 1.8% $461 8.4% $5,519
1995 $(714) -8.5% $4,495 53.6% $1,191 14.2% $3,419 40.7% $8,391
1996 $1,287 23.4% $2,355 42.7% $49 0.9% $1,818 33.0% $5,509
1997 $103 1.2% $6,252 73.3% $1,942 22.8% $230 2.7% $8,527
1998 $194 2.3% $6,174 72.7% $200 2.4% $1,927 22.7% $8,495
1999 $(320) -1.1% $16,115 55.9% $5,385 18.7% $7,648 26.5% $28,828
2000 $2,766 36.7% $4,288 56.9% $101 1.3% $380 5.0% $7,535
June 2001 $8,585 44.3% $8,156 42.1% $94 0.5% $2,540 13.1% $19,375
Total: 1993- $13,120 $53,270 $9,124 $18,588 $94,102 June 2001 Avg Raised Per $1,544 $6,267 $1073 $2,187 $11,071 Year
1 Column entitled "% of Total" represents the percent of total capital raised from financing sources for that given year.
2 Public Debt is expressed in terms of net new public debt.
3 Total Capital Raised equals private debt plus public debt plus private equity plus public equity.
Sources: 1993: Paul Kagan Assocs., Inc., Estimated Capital Flows in Cable TV, Cable TV Finance, May 31, 1998, at 1.
1994: Paul Kagan Assocs., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook 1999, Aug. 1999, at 149.
1995 to 1999: Paul Kagan Assocs., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook 2000, Aug. 2000, at 150.
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2000: Paul Kagan Assocs., Inc., Estimated Capital Flows in Cable TV, The Broadband Cable Financial Databook 2001, July 2001, at 138.
2001: Paul Kagan Assocs., Inc., June Cable Financing Snapshot, Cable TV Finance, July 31, 2001, at 10.
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APPENDIX B
TABLE B-1 Assessment of Competing Technologies(i)
Technology Used June 97 June 98 June 99 June 00 June 01
(1) TV Households 97,000,000 98,000,000 99,400,000 100,801,720 102,184,810 Percent Change 0.00% 1.03% 1.43% 1.41% 1.37%
(2) MVPD Households(ii) 73,646,970 76,634,200 80,882,411 84,423,717 88,310,074 Percent Change 1.76% 4.06% 5.54% 4.38% 4.60% Percent of TV Households 75.92% 78.20% 81.37% 83.75% 86.42%
(3) Cable Subscribers 64,150,000 65,400,000 66,690,000 67,700,000 68,980,000 Percent Change 1.02% 1.95% 1.97% 1.51% 1.89% Percent of MVPD Total 87.10% 85.34% 82.45% 80.19% 78.11%
(4) MMDS Subscribers 1,100,000 1,000,000 821,000 700,000 700,000 Percent Change -6.78% -9.09% -17.90% -14.74% 0.0% Percent of MVPD Total 1.49% 1.30% 1.02% 0.83% 0.79%
(5) SMATV Subscribers 1,162,500 940,000 1,450,000 1,500,000 1,500,000 Percent Change 3.24% -19.14% 54.26% 3.45% 0.0% Percent of MVPD Total 1.58% 1.23% 1.79% 1.78% 1.70%
(6) HSD Subscribers 2,184,470 2,028,200 1,783,411 1,476,717 1,000,074 Percent Change -4.10% -7.15% -12.07% -17.20% -32.28% Percent of MVPD Total 2.97% 2.65% 2.20% 1.75% 1.13%
(7) DBS Subscribers 5,047,000 7,200,000 10,078,000 12,987,000 16,070,000 Percent Change 17.78% 42.66% 39.97% 28.86% 23.74% Percent of MVPD Total 6.85% 9.40% 12.46% 15.38% 18.20%
(8) OVS Subscribers(iii) 3,000 66,000 60,000 60,000 60,000 Percent Change 36.99% 2100.00% -9.09% 0.0% 0.0% Percent of MVPD Total 0.00% 0.09% 0.07% 0.07% 0.07%
Notes: (i) Some numbers have been rounded. (ii) The total number of MVPD households is likely to be somewhat less than the given figure since some households subscribe to the services of more than one MVPD. See 1994 Report, 9 FCC Rcd at 7480. However, the number of households subscribing to more than one MVPD is expected to be low. Hence the given total can be seen as a reasonable estimate of the number of MVPD households. (iii) The decline in OVS subscribers since 1998 reflects the conversion of portions of some OVS systems to franchised cable systems over the last three years.
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Sources:
(1) Television households: 1997 from Nielsen Media Research as cited in TV Column, Washington Post, Aug. 26, 1997, at E4; 1998 from Nielsen Media Research as cited in Broadcasting & Cable, June 29, 1998, at 70; 1999 from Nielsen Media Research as cited in Broadcasting & Cable, June 28, 1999, at 26; and 2000 and 2001 from Nielsen Media Research.
(2) Total MVPD households: The sum of the total number of subscribers listed under each of the categories of the various technologies. See note (ii) above.
(3) Cable subscribers: 1997 from Paul Kagan Assocs., Inc., Paul Kagan’s 10-Year Cable TV Industry Projections, Cable TV Investor, May 20, 1997, at 9; 1998 from Paul Kagan Assocs., Inc., Paul Kagan’s 10-Year Cable TV Industry Projections, Cable TV Investor, Aug. 10, 1998, at 4; 1999 from Paul Kagan Assocs., Inc., Cable Industry 10-YearProjections, Cable TV Investor, June 25, 1999, at 6; 2000 from Paul Kagan Assocs., Inc., Cable Industry 10-YearProjections, Cable TV Investor, June 19, 2000, at 6; and 2001 from Paul Kagan Assocs., Kagan’s 10-Year Cable TV Industry Projections, Broadband Cable Financial Databook 2001, July 2001, at 10.
(4) MMDS subscribers: 1997 from WCA Comments for the 1997 Report at 8. The 1998 and 1999 subscribers estimated by the FCC; 2000 subscribers from NCTA Comments for the 2000 Report at 9; and 2001 subscribers from NCTA comments at 7.
(5) SMATV subscribers: 1997 subscribers were estimated by the FCC based on data from Paul Kagan Assocs., Inc., Private Cable Growth, Private Cable Investor, July 1997, at 3; 1998 subscribers from NCTA 1998 Comments at 6; 1999 subscribers from NCTA Comments for the 2000 Report at 5; and 2001 subscribers from NCTA Comments at 9.
(6) HSD subscribers: 1997 from DTH Subscribers, SkyREPORT, Nov. 1999, at 10; 1998-2000 from SkyReport.com at http://www.skyreport.com/dth_us.htm; and 2001 from SBCA Comments, Table 1 at 4.
(7) DBS subscribers: 1997 from DTH Subscribers, SkyREPORT, November 1997, at 10; 1998 from Minal Damani and Jennifer E. Sharpe, U.S. DBS Marketplace: 1998, The Strategis Group, July, 1998 at 6; 1999-2000 from SkyReport.com at http://www.skyreport.com/dth_us.htm; and 2001 from SBCA Comments, Table 1 at 4.
(8) OVS subscribers: OVS subscriber count for 1997 through 2001 estimated by the FCC.
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TABLE B-2 Number and Subscriber Size of Major Cable System Clusters (Cumulative Figures)
Range of Clustered 1997 1998 1999 2000 Subscribers Clusters Subscribers Clusters Subscribers Clusters Subscribers Clusters Subscribers (thousands) (millions) (millions) (millions) (millions) 100-199 49 6.7 33 4.6 41 5.4 26 3.6
200-299 33 8.2 25 6.3 16 4 13 3.2
300-399 11 3.8 20 6.7 20 6.8 22 7.4
400-499 8 3.7 7 3.2 9 3.9 13 5.9
>500 16 11.9 21 19.6 28 23.8 34 34.3
Total 117 34.3 106 40.4 114 43.9 108 54.4
Sources:
1997 to 1999: Paul Kagan Assocs., Inc., Major Cable TV Systems/Clusters, The Cable TV Financial Databook 1997, July 1997, at 39-41; Paul Kagan Assocs., Inc., Major Cable TV Systems/Clusters, The Cable TV Financial Databook 1998, July 1998, at 42-44; Paul Kagan Assocs., Inc., Major Cable TV Systems/Clusters, The Cable TV Financial Databook 1999, July 1999, at 46-48.
2000: Paul Kagan Assocs., Major Cable TV Systems/Clusters, Broadband Cable Financial Databook 2001, July 2001, at 36.
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TABLE B-3 2001 Concentration in the National Market for Purchase of Video Programming(1)
Rank Company Percent of Subscribers(2)
1 AT&T 16.44
2 Time Warner 14.35
3 DirecTV 11.32
4 Comcast 9.53
Top 4 51.64
5 Charter 7.35
6 Cox 6.98
7 EchoStar 6.87
8 Adelphia 6.51
Top 8 79.35
9 Cablevision 3.40
10 Insight 1.54
Top 10 84.29
Top 25 89.70
Top 50 91.38
HHI 905(3)
Notes:
MSO subscriber totals as of June 2001, and reported in Top Cable System Operators as of June 2001, Kagan World Media, Cable TV Investor, August 29, 2001, at 12-13. There is no double counting of subscribers. If a cable operator is partially owned by more than one MSO, its subscribers are assigned to the largest MSO. Subscribers for DirecTV and EchoStar are based on SkyReport.com at http://www.skyreport.com/dth_us.htm.
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