One consequence <strong>of</strong> <strong>the</strong> slow growth <strong>of</strong> <strong>the</strong> network is thatUTOPIA has used a large portion <strong>of</strong> its bond proceeds to coverinterest expense and operating deficits. The balance <strong>of</strong> this chapterdescribes <strong>the</strong> reasons that more <strong>of</strong> UTOPIA’s investment capital hasnot been used for its intended purpose–to build <strong>the</strong> infrastructure.UTOPIA’s Infrastructure InvestmentIs UnderutilizedFor UTOPIA to reachbreakeven, plannerspredicted it must havea 30 percent take rate.As mentioned, UTOPIA’s original financial goals were not metpartly because <strong>of</strong> disruptions in <strong>the</strong> construction schedule and a loss <strong>of</strong>federal financing. UTOPIA also saw a large number <strong>of</strong> subscribersdrop <strong>the</strong> service. As a result, <strong>the</strong> agency’s average subscription rate hasdropped well below <strong>the</strong> critical 30 percent rate, <strong>the</strong> point at whichUTOPIA begins to cover its costs. Currently, Lindon is <strong>the</strong> only citywith a subscription rate that remains higher than 30 percent.UTOPIA’s Subscription Rate Needed to Cover Costs WasPredicted to Be 30 Percent. The subscription rate (<strong>of</strong>ten referred toas <strong>the</strong> “take rate”) is a common measure <strong>of</strong> <strong>the</strong> success <strong>of</strong> a fiber-opticnetwork. The take rate represents <strong>the</strong> percentage <strong>of</strong> addresses whereservice is available.A 2003 feasibility study predicted that UTOPIA was likely toachieve a 55 percent take rate within ten years. The analysis, preparedby an independent consulting firm, was based on <strong>the</strong> results <strong>of</strong> a localmarket survey and <strong>the</strong> experience <strong>of</strong> o<strong>the</strong>r municipal networks in o<strong>the</strong>rstates. The study also predicted that if <strong>the</strong> project reached a 30 percenttake rate, <strong>the</strong> network would begin to have a positive cash flow and beable to operate without additional financial support. In effect, <strong>the</strong> 30percent take rate was identified as <strong>the</strong> breakeven point beyond which<strong>the</strong> agency would operate as a self-sustaining enterprise.Only Lindon Has a Subscription Rate in Excess <strong>of</strong> 30 Percent.According to early feasibility assumptions, Lindon is <strong>the</strong> onlyUTOPIA member city with a sufficient number <strong>of</strong> subscribers tosupport <strong>the</strong> cost <strong>of</strong> <strong>the</strong> network. As <strong>of</strong> April 5, 2012, access to servicehad been provided to seven <strong>of</strong> <strong>the</strong> nine construction areas or“footprints” in Lindon. Of <strong>the</strong> 4,024 addresses where service isavailable, 1,357 subscribe to one or more UTOPIA services. Thatequals a subscription rate <strong>of</strong> 34 percent. The residential areas alonehad a subscription rate <strong>of</strong> 36 percent.- 14 -A <strong>Performance</strong> <strong>Audit</strong> <strong>of</strong> <strong>the</strong> <strong>Utah</strong> <strong>Telecommunication</strong> <strong>Open</strong> Infrastructure Agency (August 2012)
While Lindon is <strong>the</strong> only city that currently has a subscription ratehigher than 30 percent, at one time, Orem and Payson appear to havehad subscription rates higher than 30 percent. However, due to a loss<strong>of</strong> subscribers, <strong>the</strong> take rates in those cities have declined. For example,Orem has 3,553 addresses that have subscribed to services at one timeor ano<strong>the</strong>r. Of those, over one-third (1,275 addresses) have dropped<strong>the</strong> service.Lately, UTOPIA has focused a new marketing effort with some <strong>of</strong>its legacy neighborhoods where infrastructure has been installed but isunderutilized. Those efforts have yielded modest results. FromNovember 2010 to July 2012, through construction largely fundedthrough UIA, UTOPIA’s subscriber data shows it has gained 281additional subscribers in Orem. Even so, Orem’s take rate amongaddresses where service is available has dropped to 23 percent. As aresult, Orem, as well as Payson, no longer has a sufficient number <strong>of</strong>subscribers to generate <strong>the</strong> revenue UTOPIA needs to recover itsinvestment in those communities. Because service is not available tomany addresses, only 9 percent <strong>of</strong> all Orem and Payson residents andbusinesses subscribe to UTOPIA.As shown in Figure 2.2 (page 8), as recently as April 2012,UTOPIA <strong>of</strong>fered services to 58,100 addresses. That means <strong>the</strong>network service has been completed near <strong>the</strong> street address and isavailable for service. Of those available addresses, 9,340 subscribe to<strong>the</strong> service, for a system-wide take rate <strong>of</strong> 16 percent. However, <strong>the</strong>residential areas appear to have higher rates <strong>of</strong> acceptance than <strong>the</strong>business and multi-dwelling units. System-wide, <strong>the</strong> residential takerate is 21 percent. Therefore, even <strong>the</strong> residential sector is still wellbelow <strong>the</strong> critical 30 percent breakeven point needed to generate apositive cash flow.While some areas <strong>of</strong><strong>the</strong> network appearadequately utilized, <strong>the</strong>network on <strong>the</strong> wholeremains underutilized(16 percentsubscription rate).We are especially concerned about some footprints whereUTOPIA has made a large investment but has very few subscribers.For example, one highly underutilized footprint is located in WestValley City. UTOPIA has invested over $1 million to install cable,cabinets and conduit systems in an area that has only 27 subscribers.The investment in that section <strong>of</strong> West Valley is not capable <strong>of</strong>producing <strong>the</strong> revenue UTOPIA needs to cover its costs.Under UTOPIA’s new business model, which is financed throughUIA, <strong>the</strong> potential for return on investment is one <strong>of</strong> <strong>the</strong> most criticalOffice <strong>of</strong> <strong>the</strong> <strong>Utah</strong> Legislative <strong>Audit</strong>or General - 15 -
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