A new Heartland Institute study claims that the city of Lafayette, La., is greatly underestimating the marketing and content acquisition costs it will face in building and operating services over a fiber-to-the-home network. The study is based on public data obtained from Bristol, Va., on the operation of its FTTH network, said analyst Steven Titch, author of the study, “Municipal Broadband: Optimistic Plan, Disappointing Reality.”

The report comes as Lafayette residents face a July 16 vote on whether the Lafayette Utility Systems should build its proposed $125 million FTTH network.

“As set forth, Lafayette is going to run into a problem three or four years down the road where they may not have the cash flow to keep building,” Titch said in a phone interview. “Then they may have to do what Bristol has done and set a $44.95 minimum for anyone who wants a fiber connection.”

Jim Baller of The Baller Herbst Law Group, which represents municipalities seeking to build their own broadband networks, dismissed the new study as “full of mistakes and misinterpretations of fact,” and said there would be a thorough response to its claims coming.

LUS has faced strong opposition from incumbent network operators BellSouth and Cox Communications, who have been lobbying hard against the proposal. The two incumbents have come under fire for some of their tactics, including highly negative polling.

In his report, Titch uses operational data released by the Bristol Virginia Utilities OptiNet FTTP network to make the point that LUS is seriously underestimating its costs.

The key issue, he said, is that, unlike other utility networks such as power or gas, an FTTP network has ongoing marketing expenses in order to continue to add customers and retain the existing customer base.

“It’s dangerous to say you can decrease marketing costs,” he said. “At the very least, they stay the same. This is a competitive market and to compete, you have to constantly be trying to build mind share among residents, to get new customers and to hold on to what you have. And that applies whether you are Comcast, or BellSouth or OptiNet or any municipality.”

According to Titch, who says he obtained his information directly from BVU, that network is still losing money annually despite revenues of $4.7 million in 2004, up from $754,000 in 2003.

“OptiNet’s shortfalls are a function of its escalating operating expenses, which increased 67 percent to $6.5 million from $3.9 million in 2003,” he wrote in the report. “Operating costs in 2003 represented a 148 percent increase over 2002. OptiNet’s costs stem from its need to compete in the broadband market. The chief contributors to OptiNet’s deficit are the cost of promotion and marketing, the cost of programming, and the cost of borrowing.”

Under the LUS plan, marketing costs are projected to decline as the customer base grows--Titch maintains that’s not realistic. BVU OptiNet has now implemented a requirement for potential customers to agree to purchase $44.95 in services--voice, data and video--in order to get a fiber optic connection built to their residence.

“What happens to the universal service and low-cost promises in that situation?” Titch queried. “These companies hit a point where they have to ask if they should be focused on universal service or [average revenue per user], and they will have to do ARPU.”

A request for comment by BVU officials was not answered.

The Heartland Institute has been disparaged by pro-municipal broadband forces as a mouthpiece for the telecom incumbents. Titch said, however, that less than five percent of the organization’s funding comes from telecom companies.