A Heartland Institute study challenging the financial viability of municipal broadband networks is rife with “mistakes, misinterpretations, unsupported and insupportable claims, irrelevancies, innuendos, key omissions and obvious untruths,” according to Jim Baller of The Baller Herbst Law Group, the attorney for both of the municipal networks profiled in the study.

The study claimed that the city of Lafayette, La., is greatly underestimating the marketing and content acquisition costs it will face in building and operating a fiber-to-the-home network and based its conclusions on public data obtained from Bristol, Va., on the operation of its OptiNet FTTH network. The study was published June 20, about one month ahead of the July 16 city vote on the LUS FTTH plan.

The chief problem with the Heartland study, said Baller, is in author Steven Titch’s interpretation of the Bristol data, notably his discussion of the financial losses the system has run in its first three years. Instead of using EBITDA (earnings before interest, taxes, depreciation and amortization) numbers, as is usually done in the communications industry, he said, Titch uses the losses Bristol has reported that include depreciation of its capital assets.

“A positive EBITDA means that a company is generating enough revenue to cover the daily operating expenses of running the business,” Baller said. “That is particularly important here because a substantial portion of the ‘loss’ shown [in the Heartland report] is attributable to non-cash depreciation.”

Based on EBITDA numbers, the Bristol FTTH network is actually projected to run ahead of plan this year at $2.06 million, and has been on or ahead of target in all but one of its four years of operation.

“It’s absolutely typical for a capital-intensive project like this one to run at a loss in the early years,” Baller said. “It’s what you would expect. The Bristol network is actually exceeding expectations.”

The attorney also objected to Titch’s characterization that OptiNet’s costs are growing exponentially, especially for marketing and content creation.

“True, as Heartland observes, OptiNet’s operating expenses increased 148% from 2002 to 2003, and 67% from 2003 to 2004,” Baller said. “But Heartland fails to tie those increases to the revenue increases that OptiNet’s expense-generating activities caused. Those revenue increases were 84% from 2002 to 2003 and 517% from 2003 to 2004. When viewed in a more useful light, from 2002 to 2004, OptiNet’s revenues increased by 1035% while its expenses only increased by 314%--a very impressive performance.”

In addition, he said, costs for all marketing and promotions, programming and interest are less than 29% of all expenses in 2004. That makes Heartland’s claim that these four items are “chief contributors to OptiNet’s deficit” simply untrue, he said.

In a telephone interview, Titch conceded LUS’s point that operating losses are to be expected in the early stages of a capital-intensive project like Bristol’s OptiNet. “But where [OptiNet is] trending is worthy of concern because their marketing and programming acquisition costs are climbing,” he said.

With regard to LUS’s point that OptiNet’s EBITDA numbers are a more accurate gauge of its performance than the Heartland Institute presented, Titch said, “You can hide a lot with EBITDA. EBITDA’s a good measure of how well you’re doing, but there’s still this debt at the back end, and that affects the net worth of the operation.”

OptiNet is much more of a success story than Heartland portrays, Baller said. The service has captured 57% of the local residential cable market, 56% of the local residential voice market and 34% of the high-speed data market. On the business side, OptiNet has 18% of business telephone service in the Bristol market, as well as 7% of business cable TV and 15% of business high-speed data.

The LUS project stands to do at least as well, Baller maintains, because the Lafayette area is larger and more financially prosperous than Bristol, Va., which lies in an area hit hard by declines in tobacco farming, coal mining and textile manufacturing. In the initial LUS survey, 70% of Lafayette households said they would sign up for service if the prices were lower than those of incumbent phone and cable competitors.

In general, Titch’s claims that municipal broadband projects tend to underestimate the ongoing cost of marketing is off the mark, Baller maintained. In OptiNet’s case, the company had signed up 50% of local households on a walk-in basis before the network was built, he said. Utility companies building FTTH networks have brand names that are already established in the community and don’t need the kind of marketing effort that a new player would, Baller added.

Content acquisition is a major expense for any system operator, but LUS has built a 4% annual increase in programming costs into its plan, based on the average 4% increase in costs reported by the National Cable TV Cooperative, which acquires programming for a multitude of smaller system operators.

Baller and others who favor municipal broadband networks believe the Heartland Institute is heavily biased against them because it receives funding from incumbent telephone companies.

Titch denied LUS’s charge that the Heartland Institute is a biased “tool” for incumbent service providers BellSouth and Cox, which have both vigorously opposed LUS's plan, but the institute does not disclose the names of the companies that fund its work. As for the inaccuracies LUS claims in the Heartland report, Titch said he stands by the report.