terrence p. mcgarty, lisbon february 13, 2003 broadband to the user: us market development and...
TRANSCRIPT
Terrence P. McGarty, Lisbon February 13, 2003
Broadband to the User:US Market Development and Options
Lisbon
February 13, 2003
Terrence P. McGarty, Lisbon February 13, 2003
Fiber Network Architecture
Terrence P. McGarty, Lisbon February 13, 2003
Fiber to the Home (FTTH)
“Home Run”
Separate fiber to each home from Head End or Central Office
Pros:• Ultimate performance• Highest flexibility• Minimal interoperability and upgradeability issues
Cons:• Extremely high cost• Incremental build-out expensive as well
“Active Star”
Fiber runs from Head End to remote hubs with switching equipment
Pros:• High performance• Diversity of services
Cons:• High equipment costs• Reliability issues: need for power at every remote• Aesthetics, real estate for remotes
Passive Optical Network (“PON”)
Single fiber runs from Head End to hubs with passive optical splitters
Pros:• Lowest life-cycle costs• Simplest design, minimal need for field electronics• Highest reliability
Cons:•Requires simultaneous upgrade of remotes and Head End• Shared resource: bottlenecks upstream, signal compatibility
Gigabit Ethernet (“GigE”)
Giga Bit Ethernet is a technology which uses “distributed” routers allowing direct 110 Base T or higher connections to the home.
Pros: • Simple Interface•High Data Rate
Cons:• Shared local connection•Increases complexity and management
Terrence P. McGarty, Lisbon February 13, 2003
Comparison of Internet Access
Residential
SOHO
SME
Large Enterprise
Dial-Up
DSL
Cable Modem
LMDS Fixed Wireless
Fiber to the Home
Data
500 Kbps
1 Mbps
5 Mbps
100 Mbps
56 Kbps
High Res. Video, Digital Services
Low Res. Video
Terrence P. McGarty, Lisbon February 13, 2003
Fiber Backbone
Ring 1
Ring 2 Ring 3
Ring N
HeadEnd
HeadEnd
HubHub SHSH
Terrence P. McGarty, Lisbon February 13, 2003
Technology and Cost Comparisons
Terrence P. McGarty, Lisbon February 13, 2003
Broadband Options
• FTTH – PON
• FTTH – Gigabit Ethernet
• HFC
• Wireless – LMDS, 802.11
• DSL
• Cable Modems
Terrence P. McGarty, Lisbon February 13, 2003
Technical Issues
Terrence P. McGarty, Lisbon February 13, 2003
Protocol LayersApplication The applications software, it is what the end user
sees and uses.
Presentation Provides for such things as security and security management.
Session Controls communications between applications, flow management, and creates sessions between applications at end user level.
Transport Ensures reliable end to end transport and flow control
Network Provides point to point and point to end point reliable links
Data Link Provides for reliable physical link transport; can be divided into LLC and MAC functions
Physical Provides physical connections and electrical connections, including modulation.
Terrence P. McGarty, Lisbon February 13, 2003
TCP/IP vs OSI
Application
Presentation
Session
Transport
Network
Data Link
Physical
Application
Transport: TCP
(host to host)
Internet: IP
Network Access
Physical
Terrence P. McGarty, Lisbon February 13, 2003
Network Convergence
ServiceServiceAdaptationAdaptation
L1L1
L2L2
F-T1F-T1 DS1 DS3DS1 DS3
SonetSonet
OC3 - OCnOC3 - OCn
Cam
pus
Cam
pus
802.N802.NFrameFrameRelayRelay
ATMATM
L3L3IPIP
PPPPPP
WA
NW
AN
IP
Terrence P. McGarty, Lisbon February 13, 2003
IPIP Header
0 31
160 bits per Header
20 O
ctet
s
Source Address
Destination Address
Version IHL Type of Service Total Length
Identification Flags Fragment Offset
Time to Live Protocol Header Checksum
Terrence P. McGarty, Lisbon February 13, 2003
TCP
Source Port Destination Port
TCP Header
Sequence Number
Acknowledgement Number
DataOffset Reserved URG etc Window
Check Sum Urgent Pointer
0 31
160 bits per Header
20 O
ctet
s
Terrence P. McGarty, Lisbon February 13, 2003
TCP and IP and ATM Headers
Data
ATM
IP
TCP
Terrence P. McGarty, Lisbon February 13, 2003
ATM
Information Fields
48 OctetsOr
384 bits
Flow Control VPI
VCI
Payload Type
Header Error Control
Terrence P. McGarty, Lisbon February 13, 2003
Ethernet MAC Frame 802.3
Preamble StartFrame
Destination Source Length Data Pad ErrorCheck
56 bits 8 bits 16 bits 16 bits
Terrence P. McGarty, Lisbon February 13, 2003
Architecture Elements
Terrence P. McGarty, Lisbon February 13, 2003
Ethernet Layer 2, 3 and ATMHomeHeadend Transport
ATM
TCP/IP
Layer 2
RouterIP Address
Layer 2 SwitchRouter
Router
Router
ATMSwitch
Layer 2ATM Switch
Terrence P. McGarty, Lisbon February 13, 2003
Fiber Rates ATM v GigE
ATMSwitch
Rates of OC 3, OC 48, OC 96, OC 192
PassiveOpticalSplitter
PassiveOpticalSplitter
PassiveOpticalSplitter
622 Mbps down155 Mbps Up
TDM DownTDMA Up
Max 10 MbpsShared
ATM
Terrence P. McGarty, Lisbon February 13, 2003Q.931 Q.931SS7
SETUP
IAM
IAMSETUP
CALPRO
ALERTACM
ACM
ALERT
CONNECT
ANMANM
CONNECT
DISC
RELREL
DISCREL
RLC
RLC
REL
RELCRELC
LETESS7
TRANSITEXCHANGE LE TE
Terrence P. McGarty, Lisbon February 13, 2003Q.931 Q.931SS7
SETUP
IAM
IAMSETUP
CALPRO
ALERTACM
ACM
ALERT
CONNECT
ANMANM
CONNECT
DISC
RELREL
DISCREL
RLC
RLC
REL
RELCRELC
LETESS7
TRANSITEXCHANGE LE TE
Terrence P. McGarty, Lisbon February 13, 2003
Q.931 Q.931SS7
SETUP
IAM
IAMSETUP
CALPRO
ALERTACM
ACM
ALERT
CONNECTANM
ANM
CONNECT
DISC
RELREL
DISCREL
RLCRLC
REL
RELCRELC
LETESS7
TRANSITEXCHANGE LE TE
Physical
Application
Presentation
Session
TCP
IP
LLC/MAC
Physical
IP
LLC/MAC
Physical
IP
LLC/MAC
Physical
Application
Presentation
Session
TCP
IP
LLC/MAC
Telco Network
IP Network
Terrence P. McGarty, Lisbon February 13, 2003
Physical
Application
Presentation
Session
Transport
Network
Data link
Physical
Application
Presentation
Session
Transport
Network
Data link
Physical
Application
Presentation
Session
Transport
Network
Data link
Physical
Application
Presentation
Session
Transport
Network
Data link
Terrence P. McGarty, Lisbon February 13, 2003
Physical
Application
Presentation
Session
TCP
IP
LLC/MAC
Physical
IP
LLC/MAC
Physical
IP
LLC/MAC
Physical
Application
Presentation
Session
TCP
IP
LLC/MAC
Terrence P. McGarty, Lisbon February 13, 2003
Physical
Application
Presentation
Session
TCP
IP
LLC/MAC
Physical
IP
LLC/MAC
Physical
IP
LLC/MAC
Physical
Application
Presentation
Session
TCP
IP
LLC/MAC
Terrence P. McGarty, Lisbon February 13, 2003
Q.931Q.931SS7
SETUP
IAM
IAM
SETUP
CALPRO
ALERT
ACM
ACM
ALERT
CONNECT
ANM
ANM
CONNECT
DISC
REL
REL
DISC
REL
RLC
RLC
REL
RELC
RELC
LETE
SS7TRANSIT
EXCHANGE
LETE
Physical
ApplicationPresentation
SessionTCPIP
LLC/MACPhysical
IPLLC/MAC
Physical
IPLLC/MAC
Physical
ApplicationPresentation
SessionTCPIP
LLC/MAC
Telco Network
IP Network
Q.931Q.931SS7
SETUP
IAM
IAM
SETUP
CALPRO
ALERT
ACM
ACM
ALERT
CONNECT
ANM
ANM
CONNECT
DISC
REL
REL
DISC
REL
RLC
RLC
REL
RELC
RELC
LETE
SS7TRANSIT
EXCHANGE
LETE
Q.931Q.931SS7
SETUP
IAM
IAM
SETUP
CALPRO
ALERT
ACM
ACM
ALERT
CONNECT
ANM
ANM
CONNECT
DISC
REL
REL
DISC
REL
RLC
RLC
REL
RELC
RELC
LETE
SS7TRANSIT
EXCHANGE
LETE
Physical
ApplicationPresentation
SessionTCPIP
LLC/MACPhysical
IPLLC/MAC
Physical
IPLLC/MAC
Physical
ApplicationPresentation
SessionTCPIP
LLC/MAC
Q.931Q.931SS7
SETUP
IAM
IAM
SETUP
CALPRO
ALERT
ACM
ACM
ALERT
CONNECT
ANM
ANM
CONNECT
DISC
REL
REL
DISC
REL
RLC
RLC
REL
RELC
RELC
LETE
SS7TRANSIT
EXCHANGE
LETE
Telco Network
Terrence P. McGarty, Lisbon February 13, 2003
PON Passive Optical Networks
Terrence P. McGarty, Lisbon February 13, 2003
PON Options
• APON – ATM based PON
• EPON – Ethernet based PON
Terrence P. McGarty, Lisbon February 13, 2003
Flavors of PON: A / B / E / G / P
• Multiple ways of implementing PON
• APON - ATM PON
– first commercial product, used primarily for business applications
• BPON - Broadband PON
– expanded version of APON with added functionality to support robust video
services
• EPON - Ethernet PON
– PON using Ethernet for packet data - still evolving
• GPON - GigaPON
– evolving PON technology at gigabit rates
• Proprietary PON
– long term viability and support issues
• Alcatel uses BPON in 7340 FTTU
Terrence P. McGarty, Lisbon February 13, 2003
• 7340 H-ONT (Home Optical Network Terminal) - customer interfaces
• 7340 P-OLT (Packet Optical Line Terminal) - network interface for PONs
• 7340 V-OLT (Video Optical Line Terminal) - video distribution across PON
• 7340 AMS (Access Management System) - element management
7340 V-OLT
7340 P-OLT
7340H-ONT
Network Central Office or Fiber NID Home Network
Remote Terminal Distribution
7340 AMS
Voice
Data
Video
7340 FTTU System Elements
Terrence P. McGarty, Lisbon February 13, 2003
7340 BPON Technology
• Voice, data and video (bidirectonal) for 32 subscribers over a single fiber
• Coarse WDM supports three wavelengths — 1,490/1,310/1,550 nm
• 622/155 Mb/s packet rate via two wavelengths
• Dedicated wavelength for video — very high capacity (4 Gb/s Broadband Entertainment)
• 20 km (12.4 mi.) span
20 km (12.4 mi.)
1,550 nm
622 Mb/s1,490 nm
1,310 nm
Splitters
7340 V-OLT
7340 P-OLT
7340 AMS
Central Office or Remote Terminal
FiberDistributio
n
PassiveOutside Plant
155 Mb/s
TDMA Up in ATM
Frames, TDM down
in ATM Frames
TDMA Up in ATM
Frames, TDM down
in ATM Frames
Terrence P. McGarty, Lisbon February 13, 2003
FTTU System Key Points• Optical Network Terminator (ONT)
– Optimized for residential service
– Environmentally hardened
– Locally powered with battery backup
• Optical Line Terminator (OLT)
– Shares common components with the ASAM 7300
– Supports residential and business services
– Architected for modularity, scalability and cost
– Low initial capital investment
• Partnering with best-in-class vendors for other elements
• Element Management
• FSAN/ITU standards compliant; Alcatel active participant
7340 H-ONT
7340 P-OLT
Terrence P. McGarty, Lisbon February 13, 2003
FTTU Service View• Supports bundled services — voice, data, video
– up to four POTS systems with lifeline support– very high speed data (10/100Base-T or HPNA interfaces)– video (Analog, Standard Definition Digital & High
Definition)• Flexible bandwidth use
– more than 20 Mb/s available per subscriber on average– higher bursting rates possible– supports service level agreements (SLAs)– efficiently carries IP and MPEG payloads
• Supports service requirements of tomorrow– easily accommodates emerging services– ONT upgradeable via software for new services– ONTs planned for several niche applications — SOHO,
MDU, MSE, MTU
ONT
RJ11
CoaxRJ45
POTS
POTS
POTS
POTS
10/100baseT
CATV
HPNA
UPS
Terrence P. McGarty, Lisbon February 13, 2003
Satellite
Cable TV
Local TVBroadcast
BroadcastVideo
Tx 1550nm
Central Office Home
7340 AMS
PSTN
Video Optical
Transmitter
Vid
eo
RF
Mu
x
VoD Server
GR-303/TR-08Voice
Gateway
VideoStorage
7670 RSP /OmniswitchATM Switch
BAS
Class 5 Switch
UPS
Tx 1490/Rx 1310 nm
Tx 1550nm
7340V-OLT
7340 P-OLT
WDM
Alcatel 6620 FTTU
Fiber and components in outside plant
7340 H-ONT
Intranet/Internet
FTTH Network Solution:
IP Video Return
Terrence P. McGarty, Lisbon February 13, 2003
HPNA 2.0 or Ethernet 10/100 Base-T VoD
PUMP
VideoApplication
Server
Tx 1490 /Rx 1310 nm
Satellite
Cable TV
Local TVBroadcast
BroadcastVideo
Mo
du
lato
rs
Tx 1490 nm Rx 1310 nm Tx 1550 nm
Video Optical
TxVoD/
XCATV/DBS
Tx 1550nm
Tx 1550nm
V-OLT
WDM
IP or ATM network
1:32
CATVBroadcast
75 Ohm Coax
IP Return
BPON 1550nm CATV Solution
Terrence P. McGarty, Lisbon February 13, 2003
1-24 25-48 49-72 73-9696 Homes Passed
Primary Flexibility Point
36 fiber Cable ~15 km
1:8
OLT
24 fiberCable
Greenfield 100%Homes passed are
Connected
Over BuildConnect as you add
subscribers
FP2
24
FP12
2424
FP3FP4
2424
24
FP5FP6
FP7
2424
24
FP8FP9
FP10
24
FP11
24 1152 Total Homes Passed
24 fiber Cable ~ 1 to 5 km
F11:4
Final DropPoint
FTTU Outside Plant Example• Tiered splitting strategy
• Minimize cost
• Allow flexibility for future with fiber rich last 1/2 mile
Terrence P. McGarty, Lisbon February 13, 2003
APON CostsElement Fixed Variable Capacity
Router
Cisco 12000
$250,000
7670 ATM Switch
7340 P OLT
Optical Switch
317 Remote
7340 H ONT
Home Units
Terrence P. McGarty, Lisbon February 13, 2003
Gigabit Ethernet
Terrence P. McGarty, Lisbon February 13, 2003
System Elements
3700Headend
1601,000 BTCarriers
3700Headend
1601,000 BTCarriers
410 HubConcentrator16 1,000 BT
410 HubConcentrator16 1,000 BT
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
Cisco12000Router
Cisco12000Router
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
410 HubConcentrator16 1,000 BT
410 HubConcentrator16 1,000 BT
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
Terrence P. McGarty, Lisbon February 13, 2003
GigE Architecture
RouterRouter
TCP/IPFrom RouterOut: Layer 3
TCP/IPFrom RouterOut: Layer 3
HubHub
HubHub
RemoteRemote
RemoteRemote
RemoteRemote
HeadendHeadend
Ethernet100 GbpsLayer 2
Ethernet100 GbpsLayer 2
Layer 2Switch
Ethernet toBackbone Layer 2
Layer 2Switch
Ethernet toBackbone Layer 2
TCP/IPLayer 3, 4
Contains TCP and IP address
TCP/IPLayer 3, 4
Contains TCP and IP address
Layer 1, 21 Gbps
Backbone
Layer 1, 21 Gbps
Backbone
Terrence P. McGarty, Lisbon February 13, 2003
Fiber Backbone
Ring 1
Ring 2 Ring 3
Ring N
HeadEnd
HeadEnd
HubHub SHSH
Terrence P. McGarty, Lisbon February 13, 2003
GigE CostsElement Fixed Variable Capacity
3700 Headend $190,000 $12,000 160 1 Gbps BT connections
410 Concentrator $6,995 16 Gbps BT Connections, 10 km range
317 Remote $7,695 4 Gbps, 24 100 Mbps port pairs, 10 km range
36 Access Portal $1,165 10/100 Mbps (8), POTS (2)
Terrence P. McGarty, Lisbon February 13, 2003
Design Issues
3700Headend
1601,000 BTCarriers
3700Headend
1601,000 BTCarriers
410 HubConcentrator16 1,000 BT
410 HubConcentrator16 1,000 BT
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
Cisco12000Router
Cisco12000Router
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
410 HubConcentrator16 1,000 BT
410 HubConcentrator16 1,000 BT
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
317 HubRemotes
4 1,000 BT24 100 FX Pairs
If low load per HH, then can set 15 HH 317Per 410, and one 1 Gbps from 410
Back to 3700, with 1 Gbps on in and1 Gbps on out.
Terrence P. McGarty, Lisbon February 13, 2003
Capital Plant
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
Portal Capital $291,250 $582,500 $873,750 $1,165,000 $1,456,250 $1,747,500 $2,038,750 $2,330,000 $2,621,250 $2,912,500 $3,203,750 $3,495,000
Remote Capital $80,208 $160,417 $240,625 $320,833 $401,042 $481,250 $561,458 $641,667 $721,875 $802,083 $882,292 $962,500
Concentrator Capital $7,000 $14,000 $21,000 $28,000 $35,000 $42,000 $49,000 $56,000 $63,000 $70,000 $77,000 $84,000
HE Capital $247,081 $247,081 $247,081 $247,081 $247,081 $247,081 $247,081 $247,081 $247,081 $247,081 $247,081 $247,081
250 500 750 1,000 1,250 1,500 1,750 2,000 2,250 2,500 2,750 3,000
Terrence P. McGarty, Lisbon February 13, 2003
Per Sub CapitalNet Capital per Sub
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
Net Capital per Sub $1,752 $1,406 $1,290 $1,233 $1,198 $1,175 $1,159 $1,146 $1,137 $1,129 $1,123 $1,117
250 500 750 1,000 1,250 1,500 1,750 2,000 2,250 2,500 2,750 3,000
Terrence P. McGarty, Lisbon February 13, 2003
Cap per Sub LargeChart Title
$1,070
$1,080
$1,090
$1,100
$1,110
$1,120
$1,130
$1,140
$1,150
Net Capital per Sub $1,146 $1,117 $1,136 $1,121 $1,111 $1,103 $1,114 $1,108 $1,103 $1,099 $1,107 $1,103
2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000
Terrence P. McGarty, Lisbon February 13, 2003
Municipal Broadband
Terrence P. McGarty, Lisbon February 13, 2003
What is Municipal Broadband?
• Optical fiber network owned by municipality (Town / Utility)
• Fiber connectivity to homes and commercial properties: 100 Mbps service, Fiber to the Home (FTTH)
• Integration of school, fire, police, public safety, healthcare
• Open access network allowing any service provider/ISP
• Municipality provides “bit” backbone only; service provider owns end-users
Headend
Open InterfaceInternet, Cable, Telco
MunicipalBroadbandNetwork
Terrence P. McGarty, Lisbon February 13, 2003
Network and ServicesNetwork and Services ISP Integrator & CarrierISP Integrator & Carrier
Municipal/Town BroadbandMunicipal/Town Broadband
Value Added PackagerValue Added Packager
Added Serviceswould be Video, VPNs,
Voice Over IPand other advanced
services.
Added Serviceswould be Video, VPNs,
Voice Over IPand other advanced
services.
Basic services wouldbe basic ISP andvalued added ISP
based servicesto end user
Basic services wouldbe basic ISP andvalued added ISP
based servicesto end user
Concept of Municipal Broadband
Terrence P. McGarty, Lisbon February 13, 2003
Opportunity Size
• Have budgeted 15 municipalities under definitive contract in 2003; already have 8 with preliminary agreements
• Anticipated over 300 towns by end of year 6, regional and national• Revenue goes to $100 million, NOI peaks at 61%• CCF requirements are $5 million, primarily for build out of NOCs and
working capital, use of proceeds can be throttled by demand• Capital can be throttled on buildout
Year 2003 2004 2005 2006 2007 2008
Number Towns Serviced 15 54 125 196 262 316Revenue ($000) $1,208 $9,520 $26,163 $49,220 $71,464 $93,453Cost of Service ($000) $0 $168 $782 $1,802 $2,788 $3,460% Gross Margin 100% 98% 97% 96% 96% 96%Net Operating Expenses ($000) $3,267 $10,061 $19,184 $27,210 $30,887 $32,732Net Operating Income ($000) ($2,059) ($709) $6,197 $20,208 $37,790 $57,261NOI Margin % -171% -7% 24% 41% 53% 61%Capital Expenditures ($000) $200 $1,018 $2,123 $3,365 $2,975 $2,671Net Free Cash Flow ($000) ($2,389) ($2,624) $1,735 $12,147 $27,156 $44,449Cumulative Cash Flow ($000) ($2,389) ($5,014) ($3,278) $8,868 $36,024 $80,473
Terrence P. McGarty, Lisbon February 13, 2003
Incumbent network provider “Owns” all of the local customers
High borrowing cost of capital Unbundling of broadband poses business risk to existing services Significant cuts in budget Politically complex
Local CATV presence “Owns” the CATV customer
Very bad cash position Need to upgrade cable plants to support two-way broadband in outlying areas
Some broadband in larger cities and towns Some backbone infrastructure
Limited to no financial capability Serious negative cash flow
MunicipalNetwork
Capable of raising financing at low cost of capital Capable of local and targeted deployment No local regulatory problems
No network operational skills, but can be easily outsourced No infrastructure support capabilities, but can be easily outsourced
Current Options for Broadband
Strengths Weaknesses
Terrence P. McGarty, Lisbon February 13, 2003
Municipal Broadband: “Win Win Win” Scenario
TownTown
ConsumerConsumerISP
ServiceProvider
ISPService
Provider
1. Increased Revenue Source2. Possible 2:1 or more
coverage3. Improved Town Facilities4. Integrated Municipal
Services
1. Increased Revenue Source2. Possible 2:1 or more
coverage3. Improved Town Facilities4. Integrated Municipal
Services
1. Lower Cost of Services2. Improved Gross
Margins3. Added capabilities for
advanced services4. Better competitive
positioning
1. Lower Cost of Services2. Improved Gross
Margins3. Added capabilities for
advanced services4. Better competitive
positioning
1. Increased Service Offerings
2. Integrated Town Services3. Increased Property
Values4. Decreased Town Taxes
1. Increased Service Offerings
2. Integrated Town Services3. Increased Property
Values4. Decreased Town Taxes
Terrence P. McGarty, Lisbon February 13, 2003
Comparison of Internet Access
Residential
SOHO
SME
Large Enterprise
Dial-Up
Cable Modem
Fixed Wireless
DSL
Fiber to the Home
Data
500 Kbps
1 Mbps
5 Mbps
100 Mbps
56 Kbps
High Res. Video, Digital Services
Low Res. Video
Terrence P. McGarty, Lisbon February 13, 2003
Fiber-to-the-Home Services
Video Services: StandardAnd enhance video services
With HDTV digital TVentertainment
Telephone Services: AccessTo multiple telephone
services providers,offering choice
And cost savings
Broadband Internet Access: 100 Mbps or greater; A secure, ultra high speed network for family, municipal, medical, educational, public safety.
Terrence P. McGarty, Lisbon February 13, 2003
“Win Win Win” Scenario
TownTown
ConsumerConsumerISP
ServiceProvider
ISPService
Provider
1. Increased Revenue Source2. Possible 2:1 or more
coverage3. Improved Town Facilities4. Integrated Municipal
Services
1. Increased Revenue Source2. Possible 2:1 or more
coverage3. Improved Town Facilities4. Integrated Municipal
Services
1. Lower Cost of Services
2. Improved Gross Margins
3. Added capabilities for advanced services
4. Better competitive positioning
1. Lower Cost of Services
2. Improved Gross Margins
3. Added capabilities for advanced services
4. Better competitive positioning
1. Increased Service Offerings
2. Integrated Town Services
3. Increased Property Values
4. Decreased Town Taxes
1. Increased Service Offerings
2. Integrated Town Services
3. Increased Property Values
4. Decreased Town Taxes
Terrence P. McGarty, Lisbon February 13, 2003
Financing “Public Works” Project
• Treat municipal broadband project as Public Works; like building town roads or sewers
• Local municipality finances, builds, owns and operates broadband infrastructure
• Financing: municipal revenue bonds (tax-exempt)
• Feasibility test: “Revenues sufficient to cover debt service and direct expenses?”
• Could be partially underwritten by anchor tenants (local businesses and other institutions/coops)
Terrence P. McGarty, Lisbon February 13, 2003
Target Markets
Terrence P. McGarty, Lisbon February 13, 2003
Target Market
• Residential: Single cable modem type interconnection, broadband access plus telephony.
• SOHO/SME: Upscaled cable modem access and multiple telephony connections. LAN support.
• Commercial: Multi Employee locations with LAN capabilities and server access.
Terrence P. McGarty, Lisbon February 13, 2003
Targeted Town Characteristics
• Not in strict Dillon Rule states (MO, NV, TN, TX, VA)• Little or no broadband infrastructure
– Old cable / telecom systems– Outside of RBOC/cable immediate interest
• Proximity to long haul fiber• 10,000 or more homes, upper 25% income demographic, 250 ft per
front home• Existing municipal power/water/sewer systems• Wealthy demographics; rich bedroom communities• High Internet penetration rate (AOL, AT&T)• Town not dependent for goods and services on State (RBOC lobbying
factor)• Political support
Terrence P. McGarty, Lisbon February 13, 2003
Key Demographic Factors
High Density per Mile
Good Demographics/High Internet Usage
Increased Seasonal Usage
Commercial BasePublic Services and Public Safety Usage
Limited Rural Access
Terrence P. McGarty, Lisbon February 13, 2003
NewEngland Target Towns
Town State LOI Hot List Follow Up
Acton MA 7,500
Amherst NH 3,590
Biddeford ME 8,616
Brunswick ME 5,849
Concord NH 16,281
Derry NH 12,327
Durham NH 2,882
Goffstown NH 5,641
Hanover NH 2,832
Hudson NH 8,034
Johnston RI 11,197
Keene NH 8,955
Laconia NH 6,724
Lebanon NH 5,500
Lewiston ME 15,291
Londonderry NH 7,623
Merrimack NH 8,832
Middleborough MA
Milford NH 5,201
Newport RI 11,566
Peabody MA
Saco ME 6,773
Salem NH 10,402
Sanford ME 8,262
Scarborough ME 6,471
South Portland ME 10,042
Walpole MA 8,000
Warwick RI 35,517
Wayland MA 4,700
Wellesley MA 8,600
Westford MA 6,800
Weston MA
Westwood MA 5,200
Total 41,882 83,252 140,074
Terrence P. McGarty, Lisbon February 13, 2003
US Target Market
Region Total States
Target States
Total Towns
Target Towns
Target Town %
Total Households
Target Households
Target Household %
New England NE 4 4 176 68 38.6% 3,665,000 653,343 17.8%
East E 11 5 5,990 94 1.6% 23,706,000 610,817 2.6%
Midwest MW 10 9 15,258 726 4.8% 23,736,000 4,218,897 17.8%
West W 8 8 3,992 427 10.7% 16,196,000 3,363,951 20.8%
South S 16 12 13,086 498 3.8% 33,124,000 2,744,947 8.3%
Other O 2 0 298 0 0.0% 616,000 0 0.0%
Totals 51 38 38,800 1,813 4.7% 101,043,000 11,591,955 11.5%
Source: U.S. Census Bureau; Merton Market Analysis
Terrence P. McGarty, Lisbon February 13, 2003
US Coverage
Total Towns
1 Dot = 60
Town Penetration0.46
Target Town %
Terrence P. McGarty, Lisbon February 13, 2003
Broadband Markets
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
Dec-99 Jun-00 Dec-00 Jun-01 Dec-01
Num
ber
Hig
h-Sp
eed
Lin
es
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Per
cent
Cha
nge
Satellite or Fixed Wireless 7,816 3,649 26,906 73,476 75,341
Fiber 307,315 301,143 376,197 455,549 486,483
Coaxial Cable 877,465 1,469,130 2,193,609 3,329,976 4,394,778
Other Wireline 609,909 758,594 1,021,291 1,088,066 1,078,597
ADSL 185,950 326,816 675,366 998,883 1,369,143
Percent Change 43.8% 50.2% 38.5% 24.5%
Dec-99 Jun-00 Dec-00 Jun-01 Dec-01
Source: FCC Broadband Report, July 2002
Terrence P. McGarty, Lisbon February 13, 2003
Case Study: LaGrange, Georgia
Basis Statistics
• Pop. 26,000
• 11,000 Households
• Rural Troupe County
• Avg. Income $26,000
• City Budget: $65 mil.
Telecom History
• In early 1990s, established (with ITC Holdings) a 4 mi. fiber network and multi-carrier PoP
• City provided local bandwidth and route diversity; ITC provided long-haul data carrier services
• Local fiber network is now 57 mi.; serves commercial customers
Local Broadband Project for Homes
• In 1998, Lagrange Dev. Authority partnered with Charter Communications to build 150 mi. hybrid fiber-coax cable network
• Financed with $9.2 million revenue bonds
• City, Authority financed, built and owned network
• Leased capacity to Charter for video services
• City currently providing broadband Internet, data, VPN and Voice over IP services; residential broadband + data priced at $40/month
• Connected all 21 schools and two large colleges in Troupe county for Internet, voice, video; attracted several new businesses to area
• 100% of households receiving cable TV; 70% signed up for cable Internet access (2001)
• Revenues grew from $67K in 1997 to $117K in 1998 to $571K in 1999 to over $1,000K in 2000.
Terrence P. McGarty, Lisbon February 13, 2003
Local Broadband NetworksAlabama: Lincoln, Opp, Foley, Scottsboro
Alaska: Angoon, Kake, Kiana, Kotlik
Arkansas: Conway, Lockesburg, Paragould
California: Anaheim, Alameda, Burbank, Los Angeles, Palo Alto, San Bruno, Santa Rosa
Colorado: Center, Copper Mountain, Longmont
Florida: Gainesville, Key West, Lakeland, Leesburg, Newberry, Ocala, Valparaiso
Georgia: LaGrange, Fairburn, Marietta, Newnan, Thomasville
Iowa: Akron, Algona, Alta, Bancroft, Cedar Falls, Coon Rapids, Danbury, Dayton, Denison, Grundy Center, Harlan, Hartley, Hawarden, Hull, Independence, Indianola,
Lake View, Laurens, Lenox, Manilla, Manning, Mount Pleasant, Muscatine, New London, Orange City, Primghar, Rock Rapids, Sac City, Sanborn, Sibley, Spencer,
Tipton, Wall Lake, Waterloo, Westwood
Kansas: Altamont, Baxter, Cawker, Columbus, Courtland
Kentucky: Bardstown, Barbourville, Bowling Green, Frankfort, Glasgow, Williamstown
Maryland: Easton
Massachusetts: Braintree, Chicopee, Holyoke, Shrewsbury, Westfield
Michigan: Clearwater, Coldwater, Crystal Falls, Hillsdale, Holland, Lowell, Negaunee, Norway, Wyandotte
Minnesota: Bagley, Coleraine, Elbow Lake, Fosston, Jackson, Marble, Westbrook, Windom
Missouri: Newburg, Springfield, Unionville
Nebraska: Lincoln
North Carolina: Morganton
New Hampshire: Keane
Ohio: Archbold, Butler County, Celina, Cuyahoga Falls, Hamilton, Lebanon, Niles, Wadsworth
Oregon: Cascade Locks, Eugene, Lexington, Lincoln County Public Utility District, Springfield
Pennsylvania: New Wilmington, Pitcairn
South Dakota: Beresford
Virginia: Blacksburg, Leesburg, Lynchburg
Washington: North Bonneville, Sumas, Tacoma
West Virginia: Phillipi
Wisconsin: Oconto Falls, Two Creeks
Wyoming: Lusk, Bailroil
Source: 1998, Muni-Telecom list server, Center for Civic Networking
Terrence P. McGarty, Lisbon February 13, 2003
Benefits of Municipal Broadband
• Ubiquitous Coverage – mission driven
• Lower buildout costs - Rights of way, RFP process
• Enhanced Services – digital media, interactive TV
• Economic Development – attracts new businesses
• Community Asset – property values and taxes
• Competition – forces high QoS from private providers
• Efficiency – leverage existing infrastructure (utilities, etc)
• Fewer Upgrades –open access, ample bandwidth
• Improved Government IT – integration, E-government
• Security – integrated communications infrastructure
Terrence P. McGarty, Lisbon February 13, 2003
Risks of Municipal Broadband
• Financing Risks – experience, credit rating, balance sheet
• Technology Risks – compatibility and interoperability
• Revenue Risks –customer demand, private sector interest
• Operating Risks – experience, regulatory, QoS
• Political Risks – project approval process, regulatory
• Regulatory Risk – ILEC, namely Verizon, litigation and delay tactics
Terrence P. McGarty, Lisbon February 13, 2003
Target Market – U.S.
• Initial region of focus is New England: strength of relationships, familiarity, vicinity and demographic factors
Region Total States Target States Total Towns Target Towns Target Town % Total Households Target HouseholdsTarget Household
%
New England NE 4 4 204 95 46.6% 3,665,000 957,218 26.1%East E 11 5 5,990 94 1.6% 23,706,000 610,817 2.6%Midwest MW 10 9 15,258 726 4.8% 23,736,000 4,218,897 17.8%West W 8 8 3,992 427 10.7% 16,196,000 3,363,951 20.8%South S 16 12 13,086 498 3.8% 33,124,000 2,744,947 8.3%Other O 2 0 298 0 0.0% 616,000 0 0.0%
Totals 51 38 38,828 1,840 4.7% 101,043,000 11,895,830 11.8%
Source: U.S. Census 2000; Merton Market Analysis
Terrence P. McGarty, Lisbon February 13, 2003
•Not in strict Dillon Rule states (MO, NV, TN, TX, VA)•Little or no broadband infrastructure
–Old cable / telecom systems–Outside of RBOC/cable immediate interest
•Medium to high population density•Critical size of population and number households•Wealthy demographics•High Internet penetration rate (AOL, MSN, etc)•Political, regulatory support
•Not in strict Dillon Rule states (MO, NV, TN, TX, VA)•Little or no broadband infrastructure
–Old cable / telecom systems–Outside of RBOC/cable immediate interest
•Medium to high population density•Critical size of population and number households•Wealthy demographics•High Internet penetration rate (AOL, MSN, etc)•Political, regulatory support
Target Coverage
Total Towns
1 Dot = 60
Town Penetration0.46
Target Town %
Terrence P. McGarty, Lisbon February 13, 2003
Market Penetration 2003-2008
0
50
100
150
200
250
300
350
Num
ber
To
wn
s
-
5
10
15
20
25
30
35
40
45
50
Num
ber
Re
gio
ns
Number Towns Serviced 2 5 8 15 22 31 40 54 69 88 106 125 143 162 180 196 212 229 245 262 277 291 306 316
Number Regions 1 1 1 2 2 3 3 4 4 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16 Q17 Q18 Q19 Q20 Q21 Q22 Q23 Q24
Terrence P. McGarty, Lisbon February 13, 2003
Competition
• Merton is s service integrator: not in highly competitive business of construction, optical technology or consulting
• Focused on niche market with high demand: public sector
• Targeted towns below radar of RBOCs and Cable for fiber broadband; private sector weakened financially
• Only one other known service integrator providing similar functions: DynamicCity out of Provo, UT
Terrence P. McGarty, Lisbon February 13, 2003
Competitive Factors
• Operational, technical and financial experience
• Operations support capability
• Credibility in industry and in Washington
• Regulatory successes
• Established track record as a team for years
• Minimal risk strategy to municipal broadband
• Bankable team
Terrence P. McGarty, Lisbon February 13, 2003
Risks
Risk Explanation Mitigation
Market Risk Towns not prepared to take on MBN projects
Market is large and there is known demand
Timeline / Sales Cycle Risk Time to revenues on any given project is high
Diversity of town portfolio; Co-Op approach reduces lead time
Regulatory / Political Risk State or Federal regulation, or ILEC supportive laws might prohibit MBN
Below radar of ILECs; Merton lobbying both Federal and state legislators
Vendor Risk Long-term viability of vendors
Careful selection of vendors; due-diligence
Town Financing Risk Towns may not be able to raise required capital
Track record of infrastructure projects funded by municipal bonds
Terrence P. McGarty, Lisbon February 13, 2003
MBN Details
Terrence P. McGarty, Lisbon February 13, 2003
Fiber to the Home (FTTH)
Head EndSwitch, and Data
BroadbandFacility
Head EndSwitch, and Data
BroadbandFacility
TownLocalHub
TownLocalHub
TownLocalHub
TownLocalHub
SubHub
SubHub
SubHub
SubHub
SubHub
SubHub
SubHub
SubHub
OpticalSplitters / Ethernet Switches
OpticalSplitters / Ethernet Switches
OpticalSplitters / Ethernet Switches
OpticalSplitters / Ethernet Switches
Terrence P. McGarty, Lisbon February 13, 2003
Capital Costs Estimates
Capital Cost Assumption Result
• Fiber Installation, New Trenching: $50,000 per mile
• Fiber Installation, Existing Conduits/ Aerial: $20,000 per mile
10%-90% split between new trenching and existing conduits/aerial
$23,000 per mile
Fiber Cost: $150 per mile per strand 48 strands on backbone
2 strands per home drop
$7,800 per mile
Optical equipment and buried installations: $7,000 per mile
Gigabit Ethernet Network architecture
$7,000 per mile
FTTH drop and home electronics: $900 per home
• Home has 100 foot frontage, or 60 homes per mile
• 30% penetration of homes, or 18 homes per mile serviced
$16,200 per mile
TOTAL $54,000 per mile
TOTAL per Home 18 homes per mile serviced $3,000 per Home
Terrence P. McGarty, Lisbon February 13, 2003
Town Revenue Model
Town Owned and Operated
BroadbandNetwork
Town Owned and Operated
BroadbandNetwork
ISPISP
Customers(Residential, SOHO/SME, Commercial
)
Customers(Residential, SOHO/SME, Commercial
)
CATV / LECCATV / LEC
Network Access Fees
Network Access Fees
Service Fees
Service Fees
Installation / Access Fees
Terrence P. McGarty, Lisbon February 13, 2003
Revenue Sources: “Starting Point”
AOL50%
Other ISP 20%
No Internet Access30%
Sample Internet Statistics
Two Lines60%
One Line40%
Number Telephone Lines (% of HH with AOL)
Number Households (HH) 10,000
Number HH with AOL 5,000
Number HH with Second Line 3,000
Effective Conversion Rate 30%
Second Line Fee / Month $25
Revenue to Town (Annual) $900,000
Municipal Broadband Network
Terrence P. McGarty, Lisbon February 13, 2003
“Back of the Envelope”
HeadEnd
HeadEnd
HubHub SHSH
3,000 HH$25.00 per month12 months/year
=$900,000Per year
3,000 HH$3,000 per HH=$9,000,000
For plant
Payback Ratio
000,900$
000,000,9$ = 10 years
Bond Interest Coverage = 185% (after Operating Expenses)
Terrence P. McGarty, Lisbon February 13, 2003
Beyond Starting Point
• Starting Point is one “if” scenario: Only homes with second telephone lines moved to Municipal Broadband Network
• Higher home penetration likely
• Commercial / public utility provide incremental revenues
• All other revenues are costless:
– Higher fee for 100 Mbps services
– Value added services: video, telephone, HD TV
Terrence P. McGarty, Lisbon February 13, 2003
Financing “Public Works” Project
• Treat municipal broadband project as Public Works; mission driven, not profit driven
• Local municipality finances, builds, owns and operates broadband infrastructure
• Financing: municipal bonds (tax-exempt/taxable)
• Feasibility test: “Revenues sufficient to cover debt service and direct expenses?”
• Could be partially underwritten by anchor tenants (local businesses and other institutions/coops)
Terrence P. McGarty, Lisbon February 13, 2003
Bond Coverage Example
EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Bond Interest Bond Principal EBITDA
Terrence P. McGarty, Lisbon February 13, 2003
Key FactorsYear 1 2 3 4 5 6
Total Large Users (Large Users ) 200 200 200 200 200 200 Total Medium Users (Medium Users) 2,000 2,000 2,000 2,000 2,000 2,000 Total Small Users (Small Users ) 8,000 8,040 8,080 8,121 8,161 8,202
Total Users 10,200 10,240 10,280 10,321 10,361 10,402
Penetration EOY Large Users # # 20.00% 30.00% 33.00% 36.30% 39.93% 43.92%Penetration EOY Medium Users # # 20.00% 25.00% 30.00% 33.60% 37.63% 42.15%Penetration EOY Small Users # # 15.00% 20.00% 25.00% 30.00% 33.60% 37.63%
EOY Large Users 40 60 66 73 80 88EOY Medium Users 400 500 600 672 753 843EOY Small Users 1,200 1,608 2,020 2,436 2,742 3,087
Total EOY Users 1,640 2,168 2,686 3,181 3,575 4,017
Avg Number End-Users Large Users 140 350 441 485 534 587Avg Number End-Users Medium Users 600 1,350 1,650 1,908 2,137 2,393Avg Number End-Users Small Users 600 1,404 1,814 2,228 2,589 2,914
Total Avg Number End-Users 1,340 3,104 3,905 4,621 5,260 5,895Avg Penetration End-Users 8.70% 20.10% 25.23% 29.77% 33.80% 37.78%
Internet/Network Access
Installation Charge Large User $500 $500 $500 $500 $500 $500Installation Charge Medium User $250 $250 $250 $250 $250 $250Installation Charge Small User $100 $100 $100 $100 $100 $100
Avg Fee/ Month/ End-User Large Users $60.00 $60.00 $60.00 $60.00 $60.00 $60.00Avg Fee/ Month/ End-User Medium Users $40.00 $40.00 $40.00 $40.00 $40.00 $40.00Avg Fee/ Month/ End-User Small Users $25.00 $25.00 $25.00 $25.00 $25.00 $25.00
Terrence P. McGarty, Lisbon February 13, 2003
User Growth
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
Avg Number End-Users Large Users 140 350 441 485 534 587 646 710 781 859 945 1,040 1,105 1,120 1,120 1,120 1,120 1,120 1,120 1,120
Avg Number End-Users Medium Users 600 1,350 1,650 1,908 2,137 2,393 2,681 3,002 3,363 3,766 4,218 4,478 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500
Avg Number End-Users Small Users 600 1,404 1,814 2,228 2,589 2,914 3,280 3,692 4,156 4,678 5,266 5,927 6,324 6,386 6,418 6,450 6,482 6,515 6,547 6,580
Avg Penetration End-Users 8.7% 20.1% 25.2% 29.8% 33.8% 37.8% 42.2% 47.2% 52.8% 59.0% 66.0% 72.2% 75.1% 75.3% 75.3% 75.3% 75.3% 75.3% 75.3% 75.3%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Terrence P. McGarty, Lisbon February 13, 2003
Revenue
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
($00
0)
Netw ork/Internet Access $809 $1,397 $1,723 $1,996 $2,241 $2,507 $2,804 $3,137 $3,510 $3,927 $4,393 $4,757 $4,864 $4,885 $4,895 $4,905 $4,914 $4,924 $4,934 $4,944
Video $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Telephony $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Terrence P. McGarty, Lisbon February 13, 2003
OPEX
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
($00
0)
Network Operations Center (NOC) $50 $117 $147 $174 $198 $222 $249 $279 $313 $350 $393 $431 $449 $452 $453 $455 $456 $457 $458 $460
Maintenance - Electronics $94 $123 $150 $176 $196 $226 $253 $284 $318 $356 $399 $438 $443 $446 $448 $449 $451 $453 $454 $456
Maintenance - Backbone Network $25 $25 $25 $25 $25 $25 $25 $25 $25 $25 $25 $25 $25 $25 $25 $25 $25 $25 $25 $25
Lease Expenses $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Administration $47 $80 $99 $115 $129 $144 $161 $180 $202 $226 $253 $274 $280 $281 $281 $282 $283 $283 $284 $284
IEC Operations $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Network Operations $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Billing & Collections $60 $60 $60 $60 $60 $60 $60 $60 $60 $60 $60 $60 $60 $60 $60 $60 $60 $60 $60 $60
Customer Service $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Sales & Marketing $8 $14 $17 $20 $22 $25 $28 $31 $35 $39 $44 $48 $49 $49 $49 $49 $49 $49 $49 $49
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Terrence P. McGarty, Lisbon February 13, 2003
CAPEX
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
($00
0)
Fiber Installation Capital $12,429 $12,429 $12,429 $12,429 $12,429 $12,429 $12,429 $12,429 $12,429 $12,429 $12,429 $12,429 $12,429 $12,429 $12,429 $12,429 $12,429 $12,429 $12,429 $12,429
GigE Equipment Capital $2,357 $3,066 $3,741 $4,393 $4,911 $5,660 $6,325 $7,091 $7,947 $8,908 $9,977 $10,960 $11,084 $11,149 $11,195 $11,233 $11,272 $11,318 $11,358 $11,404
Netw ork Capital $124 $124 $124 $124 $124 $124 $124 $124 $124 $124 $124 $124 $124 $124 $124 $124 $124 $124 $124 $124
Other Capital $150 $150 $150 $150 $150 $150 $150 $150 $150 $150 $150 $150 $150 $150 $150 $150 $150 $150 $150 $150
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Terrence P. McGarty, Lisbon February 13, 2003
CAPEX per Sub
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
Fiber Installation Capital $4,638 $3,523 $2,902 $2,506 $2,236 $1,995 $1,780 $1,588 $1,417 $1,264 $1,127 $1,047 $1,037 $1,034 $1,031 $1,028 $1,026 $1,023 $1,020 $1,017
GigE Equipment Capital $879 $869 $874 $886 $883 $908 $906 $906 $906 $906 $905 $924 $924 $927 $929 $929 $930 $931 $932 $933
Netw ork Capital $46 $35 $29 $25 $22 $20 $18 $16 $14 $13 $11 $10 $10 $10 $10 $10 $10 $10 $10 $10
Other Capital $56 $43 $35 $30 $27 $24 $21 $19 $17 $15 $14 $13 $13 $12 $12 $12 $12 $12 $12 $12
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Terrence P. McGarty, Lisbon February 13, 2003
Financing Options
Terrence P. McGarty, Lisbon February 13, 2003
Municipal Project
• Town invokes State Constitutional Authority to initiate public works project
• Local municipality finances, builds, owns and operates broadband infrastructure
• Feasibility test: “Revenues sufficient to cover debt service and direct expenses?”
• Public works project: mission driven, not profit driven
• Partially underwritten by anchor tenants (local businesses)
Terrence P. McGarty, Lisbon February 13, 2003
Alternative Approach
• Use optimal combination of alternatives to achieve highest quality, lowest lead-time, most cost-effective establishment of local broadband infrastructure and services
• Example
– Town finances 80% of network installation; sells 20% shares to interested parties (co-ops, businesses)
– Town issues municipal bonds to finance project
– Town builds, owns and operates network; sells unbundled network access to ISPs and IAPs
– ISPs, IAPs provide voice, data and video services
Terrence P. McGarty, Lisbon February 13, 2003
Financing Options – Municipal Bonds
• Revenue Bonds– Tax-exempt municipal debt secured by revenues from projects
• General Obligation Bonds– Tax-exempt municipal debt secured by tax assessments and project
earnings– Voter approval required
• Assessment Bonds– Municipal debt secured by special tax assessments on property
forming collateral on bonds• Mello-Roos Bonds
– Municipal debt secured by tailored special tax assessments on assets forming collateral on bonds; greater flexibility
• Certificates of Participation (COPs)– Revenue COPs or Lease COPs (secured by district’s general fund)– No votes, property assessment required; greatest flexibility
Terrence P. McGarty, Lisbon February 13, 2003
Financials
Terrence P. McGarty, Lisbon February 13, 2003
Market Growth
-
50
100
150
200
250
300
350
400
450
Num
ber
Tow
ns
-
5
10
15
20
25
30
35
40
45
50
Num
ber
Reg
ions
Total Number Towns 3 7 10 19 28 39 50 68 86 110 133 156 179 203 224 245 265 286 307 327 346 364 383 395
Number Regions 1 1 1 2 2 3 3 4 4 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16 Q17 Q18 Q19 Q20 Q21 Q22 Q23 Q24
Terrence P. McGarty, Lisbon February 13, 2003
Revenue
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
($00
0)
Feasibility Studies $150 $489 $1,038 $1,220 $1,293 $1,205
Sales & Marketing $0 $15 $468 $3,078 $11,907 $24,655
Financial Advisory $793 $3,740 $8,306 $10,954 $9,885 $9,328
Installation Management $264 $5,180 $14,471 $25,862 $26,249 $24,185
Operations Support $0 $96 $1,881 $8,107 $22,131 $34,080
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Terrence P. McGarty, Lisbon February 13, 2003
Cash Flow
($10,000)
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
Cumulative Cash Flow ($2,389) ($5,014) ($3,278) $8,868 $36,024 $80,473
Net Free Cash Flow ($2,389) ($2,624) $1,735 $12,147 $27,156 $44,449
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Terrence P. McGarty, Lisbon February 13, 2003
Head Count
0
20
40
60
80
100
120
140
160
180
200
Installation Management 0 0 0 3 7 10 17 23 32 34 43 51 65 70 75 75 75 75 75 75 75 75 75 75
Operations (NOC) Support 0 0 0 0 0 0 16 16 16 16 16 32 32 32 32 48 48 48 48 48 48 48 48 48
Executives 5 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8 9 9 9 9 10 10 10 10
Business Development 1 1 2 4 4 6 6 8 12 15 15 15 15 15 15 15 15 15 15 15 15 15 15 15
Sales & Marketing 2 4 4 6 6 8 8 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10
Engineering and Operations 1 2 2 4 6 9 9 12 12 15 15 15 15 15 15 15 15 15 15 15 15 15 15 15
Accounting & Finance 0 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6 6 6
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16 Q17 Q18 Q19 Q20 Q21 Q22 Q23 Q24
Terrence P. McGarty, Lisbon February 13, 2003
Competitive Analysis
• Some 50 municipal fiber installations in the U.S. and about 200 municipal broadband projects overall
– Technology and operations is commodity
– Financing, politics and regulatory issues are key barriers
• Most existing projects financed by internal cash of municipalities, cumbersome bank loans and some bonds
• Initial financing + full service support (political, legal, finance, technology, operations) is unique concept and key to successful implementation (Merton)
Terrence P. McGarty, Lisbon February 13, 2003
Key Business Projections
Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Number Tow ns Serviced 15 54 125 196 262 316Revenue $1,208 $9,520 $26,163 $49,220 $71,464 $93,453Cost of Service $0 $168 $782 $1,802 $2,788 $3,460% Gross Margin 100% 98% 97% 96% 96% 96%Net Operating Expenses $3,267 $10,061 $19,184 $27,210 $30,887 $32,732Net Operating Income ($2,059) ($709) $6,197 $20,208 $37,790 $57,261NOI Margin % -171% -7% 24% 41% 53% 61%Capital Expenditures $200 $1,018 $2,123 $3,365 $2,975 $2,671Net Free Cash Flow ($2,389) ($2,624) $1,735 $12,147 $27,156 $44,449Cumulative Cash Flow ($2,389) ($5,014) ($3,278) $8,868 $36,024 $80,473
Terrence P. McGarty, Lisbon February 13, 2003
Fund Sources and UsesYear Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
SourcesBeginning Cash $0 ($2,389) ($5,014) ($3,278) $8,868 $36,024Net Operating Income ($2,059) ($709) $6,197 $20,208 $37,790 $57,261Total Sources ($2,059) ($3,098) $1,183 $16,930 $46,658 $93,285
UsesCapital Expenditures $200 $1,018 $2,123 $3,365 $2,975 $2,671Interest $0 $0 $0 $0 $0 $0Taxes $0 $3 $864 $2,880 $5,412 $8,248Change in Working Capital - Cash $130 $895 $1,474 $1,816 $2,247 $1,894Total Uses $330 $1,916 $4,462 $8,062 $10,634 $12,812
Ending Cash ($2,389) ($5,014) ($3,278) $8,868 $36,024 $80,473
Net Free Cash Flow ($2,389) ($2,624) $1,735 $12,147 $27,156 $44,449Cumulative Cash Flow ($2,389) ($5,014) ($3,278) $8,868 $36,024 $80,473
Net Revenue ($2,259) ($1,729) $3,210 $13,963 $29,403 $46,342Cumulative Net Revenue ($2,259) ($3,988) ($779) $13,184 $42,587 $88,929
NPV $38,861CoM 40%Terminal Value 286,305$ EBITDA Multiple 5IRR 119%
Terrence P. McGarty, Lisbon February 13, 2003
Pro Forma Income StatementYear Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Revenue $1,208 $9,520 $26,163 $49,220 $71,464 $93,453
Feasibility Studies $150 $489 $1,038 $1,220 $1,293 $1,205
Sales & Marketing $0 $15 $468 $3,078 $11,907 $24,655
Financial Advisory $793 $3,740 $8,306 $10,954 $9,885 $9,328
Installation Management $264 $5,180 $14,471 $25,862 $26,249 $24,185
Operations Support $0 $96 $1,881 $8,107 $22,131 $34,080
Cost of Service $0 $168 $782 $1,802 $2,788 $3,460
Gross Margin $1,208 $9,352 $25,381 $47,418 $68,676 $89,993% Gross Margin 100% 98% 97% 96% 96% 96%
Net Operating Expenses $3,267 $10,061 $19,184 $27,210 $30,887 $32,732
Feasibility Study $70 $185 $330 $333 $308 $256
Installation Management $88 $1,724 $4,802 $8,554 $9,038 $9,038
Operations Support $0 $924 $2,310 $4,158 $5,544 $5,544
P ersonnel and G&A $3,109 $7,227 $11,743 $14,165 $15,997 $17,894
EBITDA ($2,059) ($709) $6,197 $20,208 $37,790 $57,261EBITDA Margin % -171% -7% 24% 41% 53% 61%
Leases $0 $0 $0 $0 $0 $0
Net Operating Income ($2,059) ($709) $6,197 $20,208 $37,790 $57,261NOI Margin % -171% -7% 24% 41% 53% 61%
Terrence P. McGarty, Lisbon February 13, 2003
PCNCF Sensitivity
($20,000)
($18,000)
($16,000)
($14,000)
($12,000)
($10,000)
($8,000)
($6,000)
($4,000)
($2,000)
$0
0.70% 0.80% 0.90% 1.00% 1.10% 1.20%
Financial Advisory Fee %
Pea
k C
um
ula
tive
Neg
ativ
e C
ash
Flo
w
1.00% 1.50% 2.00% 2.50% 3.00% 3.50%