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Santa Cruz #FIBER #LOVE becomes serious city business

By Steve Blum
Tellus Venture Associates
Special to Santa Cruz Tech Beat

December 10, 2015 — Santa Cruz, CA

It’s a love fest, several Santa Cruz city council members declared on Wednesday afternoon, as they unanimously approved…

  1. moving ahead with negotiating a fiber to the home partnership with Cruzio, a local independent Internet service provider, and
  2. pursue lease revenue bonds to pay the lions share of the tab. That city-financed portion – Layer 1 in Internet lingo – could go as high as $50 million. The core network – the fiber in the ground – is pegged at about $35 million. Another $7 million is earmarked to pay for customer connections and there’s an allowance for start up, bond financing and other costs.

Cruzio will have responsibility for buying and installing the electronics – Layer 2 – except for the terminals installed on subscriber homes and businesses, and for Layer 3, the Internet bandwidth. The city’s bonds will be paid back by revenue from the system. Final terms haven’t been set, but the model currently under discussion has Cruzio paying $6 per month for every premise passed and another $30 for every subscriber.

The market research done by the city indicates that an eventual take rate of 34% will pay back the investment over time. That’s about 7,500 subscribers, including the approximately 3,000 that Cruzio will transfer from its current service to the FTTH system. Plan B is for Cruzio to pay 80% of any financing shortfall, with the city picking up the remaining 20%.

Santa Cruz mayor Don Lane was clearly on board with the love fest, but he also added a dose of reality before the vote…

My enthusiasm for this is very high, but I think it’s so important that we recognise the magnitude of the commitment we’re making. I think it’s a really worthwhile commitment and it’s really well vetted. Everything is right about it. But it is something new, we’re taking a little bit of risk here, and I just think we should go into this with our eyes wide open about that, so we’re not saying to the community ‘oh, this is just dreamy and perfect’. It’s a serious investment, it makes sense and it’s a business deal. That’s what we have and I think it’s a good one.

That investment is expected to boost Santa Cruz’s economy, economic development director Bonnie Lipscomb said as she briefed council members on the project. High tech companies are moving into Santa Cruz, local residents want to telecommute rather than slug it out over highway 17 to Silicon Valley every day, and investors are looking at the community in a different light. Lipscomb said that investors from as far away as China have heard about the fiber project, and expressed interest because of it. It’s not just that fiber will be available to some – as it already is in downtown Santa Cruz – but that it’ll be available to all. That’s because it’s a city-led project, Lipscomb explained…

Another important element is to talk about is ubiquitous coverage across the city. That’s one of the unique aspects of this being a city network and this being a utility that’s owned by the city, a municipal government. We’re able to actually take this fiber network across every parcel in Santa Cruz. If this were Comcast, if this were another Internet service provider, the challenges are, particularly in a for profit business, is that you go where people are willing to pay for the service. One of the things that we’re really enabling is to level the playing field, so that everyone has access to this fiber network.

Next steps are for the City and Cruzio to agree on detailed deal terms, and arrange for the bond financing. That’s a process that’s likely to take months rather than weeks but, it is hoped, not very many months.

Documents from the 8 December 2015 council meeting:

City of Santa Cruz fiber project staff report, 2 December 2015
CTC market analysis, November 2015
CTC financial forecast addendum (with current deal terms), November 2015
CTC financial forecast, July 2015
Market survey prepared by Cruzio, November 2015

Documents from the 23 June 2015 council meeting:

City of Santa Cruz fiber project staff report, 17 June 2015
Cruzio FTTH proposal to the City of Santa Cruz, 23 June 2015
CTC costs estimates for a Santa Cruz FTTH system, May 2015

Tellus Venture Associates is assisting the City of Santa Cruz with its FTTH project. I’m not a disinterested observer. Take it for what it’s worth.

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