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FiberNet Advisory Board Agenda Packet 06-03-2015 SpecialAGENDA FIBERNET MONTICELLO ADVISORY BOARD SPECIAL MEETING Wednesday, June 3, 2015 — 7 a.m. Academy Room, Monticello Community Center Members: Brian Stumpf, Charlotte Gabler, Jon Morphew, Dennis Sullivan, Jacob Kramer Others: Jeff O'Neill, Dan Olsen, Rachel Leonard, Bryan Rabe 1. Call to Order 2. Recommendation regarding contract with Yondoo for video services 3. Recommendation regarding strategy for deploying enhanced ONTs 4. Monticello/Windom cooperative cost saving ventures update • Recommendation regarding agreement with Windom for purchasing bandwidth • Letter of intent to Windom regarding Metaswitch 5. Next Meeting — Tuesday, June 9th, 2015 6. Adjourn I. II. FiberNet Monticello and Potential Agreement with Yondoo FiberNet Monticello Video Currently video is an obstacle to FiberNet's financial independence because: a. It's expensive to provide b. It requires frequent upgrades to equipment c. It requires significant staff time for operations and maintenance d. The local market is competitive e. It is undergoing shifts as consumers weigh the benefits of opting out of traditional television options in favor of streaming options. Because of these factors, FiberNet is facing diminishing subscriber numbers and escalating costs. In recent years revenues have not been enough to cover the cost of providing the service to the Monticello community. Monthly Annually Total Revenue $56,341.39 $676,096.68 Total Costs $60,995.33 $731,943.96 Total Loss -$4,653.94 -$55,847.28 It is no longer feasible to continue operating at the status quo. FiberNet's budget cannot support the upgrades necessary to match the competition, but it would risk losing subscribers if video service were eliminated. However, there is a relatively recent, less -traditional model; a third party hosted provider called Yondoo that could offer FiberNet a way to retain video service for subscribers. Yondoo Video Services Yondoo is a subsidiary of CSI Digital, a current video vendor for FiberNet. The business model behind Yondoo has existed as various parts for many years, but they recently pulled everything together into a new hosted video model. In the hosted video option FiberNet connects to Yondoo's super-headend by an existing fiber feed. FiberNet continues to install, bill, and provide tech support for FiberNet video subscribers; however, Yondoo is responsible for the content, hardware, licensing, and software. This allows FiberNet to continue offering the service at a significantly reduced cost. Yondoo Equipment& Software Maintenance Programming Contracts III. Impact on FiberNet FiberNet Installations Billing Tech Support There are several essential outcomes of a Yondoo agreement that would positively impact FiberNet. a. Reduced Costs: By utilizing the Yondoo hosted model many current costs for video would be eliminated, most would be eliminated immediately. For example, instead of paying CSI Digital each month for software and support, trouble tickets, etc., FiberNet would be billed per Yondoo subscriber. This cost would be covered by the subscribers' monthly payments for video service. In addition to these costs, FiberNet would see a reduction in budgetary items like the energy bill. By using the Yondoo headend, FiberNet could remove equipment from the headend in Monticello which reduces energy consumption. There is also possibility for resale value of the sold equipment. MONTHLY NETWORK FEES Vendor Monthly Annually Notes Vubiquity $779.50 $9,354.00 PPV and VOD- out of service still in contract Vaultus $150.00 $1,800.00 Cross connect fees CSI Digital $2,700.00 $32,400.00 Fiber feed from Portland CSI Digital $2,500.00 $30,000.00 Software and Support CSI Digital $250.00 $3,000.00 Trouble Tickets (cost varies per month) Minerva $2,166.67 $26,000.00 Software and Support Total Network Costs 1 $8,546.17 1 $102,554.00 1 Eliminated under Yondoo MONTHLY PROGRAMMING FEES (Based on billing information from May 2015) (Costs vary depending on the number of subscribers) Vendor Monthly Annually Local Broadcast Channels $6,345.33 $76,143.96 NTTC $33,809.91 $405,718.92 NBCU $4,596.97 $55,163.64 Direct Pay Channels $6,194.07 $74,328.84 FOX Retail $87.50 $1,050.00 Premium Channels $554.00 $6,648.00 Bulk Premium $513.05 $6,156.60 Music Choice Digital Music $348.33 $4,179.96 Total Programming Costs $52,449.16 1 $629,389.92 Notes Majority of the channels Approximately 20 channels Includes Fox Sports Except Starz & Encore Hotels Eliminated under Yondoo b. Enhanced Video Service: The greatest obstacles to gaining and retaining video subscribers is the lack of features and aging equipment. However, these complaints are addressed by the features offered by Yondoo. IV. In addition, the pricing for Yondoo features and equipment matches current market rates. FiberNet's is several years old which makes the sale of certain services, such as HD, more difficult in a competitive market. SERVICE UPGRADES FiberNet Yondoo Notes Set -Top Boxes X X Updated version with Yondoo DVR X X Updated version with Yondoo Whole Home DVR X X HD X X TV Everywhere X Video on Demand X Pay Per View X Premium Channels X X c. Updated Pricing Model: One of the most significant legacies of the past is the existence of promotional pricing on video subscriber accounts. It would very difficult to correct or update these promotional prices individually, but transitioning to Yondoo would update each bill and ensure that FiberNet is covering its costs. d. Economy of Scale FiberNet's current video system is reliant on a high number of subscribers to cover the network, equipment, and maintenance costs. The past five years have shown that without consistent, considerable reinvestment in the system, this number of subscribers is not plausible. Using Yondoo reduces FiberNet's individual reliance on the number of subscribers to make video profitable. FiberNet pays for the subscribers we have; Yondoo in turn takes the responsibility for high subscriber counts and spreads them out among several client networks. Yondoo Agreement The specific elements of the Yondoo agreement include: a. A minimum term of 3 years (necessary for programming rights which operate in 3 year cycles). With the 3 year term capital startup costs apply immediately. b. Option for a 5 year term. Under the 5 year term FiberNet has 2 options to waive capital startup costs: 1. FiberNet would have 18 months to achieve 1,000 video subscribers. If that number is met, the fees are waived. If not, the startup costs would be due. 2. FiberNet could opt to waive the monthly IRU payment ($3 per subscriber) until 1,000 video subscribers are achieved. At that point the IRU payment would be reinstated. c. Within the agreement FiberNet agrees to provide Yondoo with access to the network. In return, Yondoo would provide FiberNet with an IRU payment of $3.00 per subscriber. d. FiberNet will continue to bill customers directly for their video service. Yondoo will submit a monthly bill to FiberNet based on the number of subscribers and their video packages. e. FiberNet will continue to collect and distribute Cable PEG fees as established in the franchise agreement. V. Challenges The long-term effect of an agreement with Yondoo has the potential to have a significant positive impact on FiberNet subscribers and the budget. However, there are challenges that should be acknowledged. a. In order to cover the costs of its monthly payment to Yondoo, FiberNet must ensure customers are billed at Yondoo's prices. This means higher package prices and lower equipment costs; some subscriber bills will decrease and some will increase depending on the specific elements of the subscriber's bill. This also means most existing promotions and discounts will be eliminated in favor of Yondoo's pricing structure. It will be challenging to ensure all subscribers' bills have accurate Yondoo pricing, but it is the only way FiberNet will ensure revenue to cover its own costs to Yondoo. b. Due to the changes in customer bills, there is the potential for a short-term loss of video subscribers. Staff anticipates a recovery of subscriber rates over time due to the improved product offering, but there is no way to guarantee that. VI. Summary The Yondoo hosted video option allows FiberNet to significantly reduce the costs of providing video while enhancing the service offered to the Monticello community. The transition would be a challenge, and there would likely be an initial decline in video subscribers, but there is a strong likelihood the hosted option would make FiberNet stronger over the long-term. VII. FiberNet Advisory Board Options a. Recommend signing the Yondoo agreement for hosted video services with the terms as presented in the original document. FiberNet would need to reach 1,000 video subscribers within the first 18 months to have the set-up costs waived or would have to budget for those costs in the 2016 budget. b. Recommend signing the Yondoo agreement for hosted video services with the option to waive the monthly IRU payment to cover the start-up costs. Once FiberNet reaches 1,000 video subscribers then the monthly IRU payment would be reinstated. c. Recommend rejecting the agreement with Yondoo for hosted video services. Calix GigaCenters Currently, FiberNet requires several pieces of equipment to provide residential service: A. ONT B. Cyber Power C. Router (internet customers) As a cost-saving measure FiberNet re -uses equipment from disconnected subscribers at new properties; however, the current stock of ONTs is depleted and the older equipment is beginning to fail. FiberNet will need to purchase new ONTs in 2015. Staff has examined the options for purchasing new ONTs and recommends purchasing a new Calix product called a GigaCenter. FiberNet already uses Calix ONTs, but GigaCenters are less expensive, require fewer pieces of equipment, and provide an enhanced experience for subscribers. In addition, staff has prepared a long-term strategy for recovering the cost of the GigaCenters, something that has not previously been used for ONT purchases. Cost ONT $350.00 GigaCenter $320.00 Cyber Power $48.00 Router $90.00 Total $488.00 Total $320.00 GigaCenters cost less than traditional ONTs. Staff requests to use money budgeted for capital expenses in 2015 to pay for the GigaCenters. These funds would be used to purchase ONTs regardless of whether the new or old model of ONT is approved. Staff also recommends instituting two new subscriber fees. The first is a GigaCenter Gateway Fee which is similar to the current router rental fee and the second is an early termination fee; both would offset the cost of purchasing the equipment. Equipment The GigaCenters are more efficient because they combine previously separate pieces of equipment into a single item. This is less expensive for FiberNet to provide and requires that customers have fewer pieces of equipment in their homes. Also, since GigaCenters are installed inside the homes, this equipment is not exposed to the weather conditions like traditional ONTs. This should help extend the life of the equipment. Features GigaCenters offer an enhanced experience for subscribers as well as benefits to FiberNet's staff and budget. For Residential Subscribers • Stronger wireless signal throughout the whole house • Capability for more devices at peak performance • Capability for higher symmetrical speeds (up to a gig on wireless) For FiberNet • Takes advantage of the new E7 platform • More efficient troubleshooting • Fewer truck rolls means money saved on tech support • Less wiring during installs means time and materials money saved • Potential to add features like wireless set-top boxes Deployment Based on the lower cost, need for less equipment, and enhanced customer experience, the FiberNet Advisory Board is asked to consider recommending the following GigaCenter deployment plan to the Monticello City Council. 1. Funds are allocated from the capital equipment portion of the FiberNet budget to purchase GigaCenters. 2. All new subscribers are installed with a GigaCenter (approximately 20-25 per month). a. All new subscribers have a GigaCenter Gateway fee of $15.99 on their account. This helps cover the cost of the equipment and also entitles the customer to free service calls on the FiberNet equipment. b. All new subscribers sign an installation form agreeing to pay an Early Termination Fee if they cancel service within 2 years. The cost of the ETF is 15.99 x number of months remaining in the 2 year term. This is just a fee- it is not a residential contract. 3. Existing subscribers would receive a GigaCenter if they request it. a. They could retain their current equipment with no change to their bills. b. If they opt for the GigaCenter for a better experience, they would agree to the same terms as new subscribers: the GigaCenter Gateway Fee and the Early Termination Fee. 4. Existing subscribers with ONTs that fail would have a choice. a. They could have their old ONT replaced with a used ONT for no additional cost. b. They could have a new GigaCenter installed with the same fees as a new subscriber. Based on this plan, money from the budget would be used for an initial capital expenditure on the new equipment. However, the cost of the GigaCenters would be recovered within 2 years with the gateway fee or through the early termination fee. After 2 years, the gateway fee becomes revenue. Please note, if the use of GigaCenters is successful, FiberNet will need to continue to purchase enough equipment to cover new installs. As with the current system, FiberNet would recycle any disconnected GigaCenters at new residences. However, staff and the advisory board will need to continue to monitor how the continued purchase of equipment impacts the 2015 budget and include the cost of GigaCenters in the 2016 budget. Use of this equipment will have a short-term effect on the budget since the funds to cover the initial costs are recovered over a 2 year period. XO Price/M = $7.00 Windom Price/M = $1.20 For Final Year of the XO Agreement: Additional Per Month: $1,600.00 Additional for the Year: $19,200.00 However, this includes significantly increased internet capacity to offset increased internet traffic with the expectation that costs will decrease significantly after the completion of the XO agreement in 2016. Vaultas History Nov 2014 Dec 2014 Jan 2015 Notes: The Vaultas invoice would also be reduced under the yondoo video Monthly Pmt. $4,749.00 $4,400.00 $4,400.00 option- it would be reduced by $150.00 per month. -$349.00 XO History Aug 2013 Dec 2013 Oct 2014 May 2015 Notes: The price for XO was reduced once during an agreement renegotiation and then reduced again Circuit 1 Pmt. $9,327.47 $4,991.26 $5,004.87 $5,230.12 when FiberNet began utilizing MICE in 2014. Incremental increases are due to increased Circuit 2 Pmt. $7,596.22 $1,819.44 $2,256.59 $1,918.42 bandwidth usage. Vendor Jun 2015 Jul 2015 Aug 2015 Sep 2015 Oct 2015 Nov 2015 Dec 2015 Jan 2016 Feb 2016 Mar 2016 Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 XO (Comb.) $7,148.00 $7,148.00 $7,148.00 $7,148.00 $7,148.00 $7,148.00 $7,148.00 $7,148.00 $7,148.00 $7,148.00 $7,148.00 $7,148.00 $7,148.00 $0.00 $0.00 (1 Gig) Vaultas $4,400.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Windom $0.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 (10 Gig) Total $11,548.00 $13,148.00 $13,148.00 $13,148.00 $13,148.00 $13,148.00 $13,148.00 $13,148.00 $13,148.00 $13,148.00 $13,148.00 $13,148.00 $13,148.00 $6,000.00 $6,000.00 $1,600.00 -$7,148.00 XO Price/M = $7.00 Windom Price/M = $1.20 For Final Year of the XO Agreement: Additional Per Month: $1,600.00 Additional for the Year: $19,200.00 However, this includes significantly increased internet capacity to offset increased internet traffic with the expectation that costs will decrease significantly after the completion of the XO agreement in 2016.