HomeMy WebLinkAboutStaff Report 14582City of Palo Alto (ID # 14582)
Utilities Advisory Commission Staff Report
Meeting Date: 8/3/2022 Report Type: VII. NEW BUSINESS
City of Palo Alto Page 1
Title: Discussion of Preliminary Internet Survey Results and Financial
Business Models for Palo Alto Fiber
From: Director of Utilities
Lead Department: Utilities
This item is for discussion and no action is requested. Staff will present preliminary results and
findings of the internet survey and financial forecasts of three business models (insource,
hybrid, outsource) and financial plan. Staff seeks input from the Utilities Advisory Commission
(UAC) in preparation of the joint Council/UAC study session scheduled on September 19, 2022.
On June 23, 2022, the City launched the internet services market research survey and Palo Alto
Fiber deposit program. The internet survey seeks responses from Palo Alto residents and
businesses to learn more about their internet preferences and service needs. The data received
through the survey will give guidance to the City Council when they determine next steps for
the Palo Alto Fiber project and determining service details like pricing and speeds. The new
deposit program is a means to demonstrate the community’s strong support for seeing the Palo
Alto Fiber internet services project through to fruition. As with any City project, community
input is essential to ensuring the City Council knows where the community stands. By
submitting a $50 deposit for the Palo Alto Fiber project, residents and businesses are
demonstrating strong support for their neighborhood and district obtaining locally controlled
fiber internet services. As of July 13, 2022, the City has received 2,350 survey responses and
498 deposits. The survey will be available through the end of July to gain as much community
responses as possible. The City Council and Utilities Advisory Commission will host a joint study
session on September 19, 2022 to review the survey results and FTTP financial models.
The Business Case evaluates three City-operated ISP models. The City can provide ISP with (1)
100% in-house staffing; (2) hybrid of insource (i.e. 70%) and outsource (i.e. 30%) (3) outsource
all functions to multiple strategic vendors. Some broadband functions are core competencies
and can be easily managed by the City, while other functions are new and can be outsourced
where the City doesn’t have the expertise in-house. Subsequently, outsourced functions have
the potential to slowly be brought in-house through hiring and as City staff becomes more
comfortable with the day-to-day operations of the fiber network. Magellan has identified
specific advantages and disadvantages for each model which will be discussed at the meeting.
Staff: Dave YuanConsultant: John Honker
City of Palo Alto Page 2
• Insource
Pros: Total control; quality of service; institutional knowledge
Cons: Highest labor costs; higher learning curve
• Hybrid of Insource and Outsource
Pros: Flexible start-up and scalability
Cons: High labor costs; higher contract costs; contract risks
• Outsource
Pros: Lower labor costs; experienced vendors
Cons: Risk of lower service levels; no institutional knowledge; contract risks
Attachments:
• Attachment A: Presentation
Utilities Advisory Commission
Palo Alto Fiber Update –Preliminary Internet
Survey Results and Financial Business Models
August 3, 2022
Staff: Dave YuanConsultant: John Honker
PALO
ALTO
llill
- 2
AGENDA
•Project Update
•Preliminary Survey Update
•Business Models
•Insource
•Hybrid
•Outsource
•Preliminary Pro Forma Financials
•UAC Feedback for Joint Council Study Session
- 3
Project Update
Planning Area Focus
(Checkmark means complete)
Business Operations
Management
Customer Service
Billing & Finance
Sales & Marketing
Market Analysis & Competitive Assessment
Technology Change & Obsolescence
Network Operations
Tech Support
Engineering
Regulatory Review •State Agencies: CPUC
•Federal Agencies: FCC, USAC
•Compliance & Reporting Requirements
Governance/Operational Models Models Organizational Structure
Policies, Procurement, Rate Setting and Management Decision
Guidelines
Preliminary Pro Forma Financials
Capital Plan
Staffing Plan
Rate Sheets and Packages
Income Statement
Borrowing Schedules
Final Pro Forma Financials •Update Capital Plan Based on Final Engineering Design
•Update Take Rates and Income Statement Based on Survey Results
•Provide Final Set of Financials with Sensitivity Analysis
Fiber Engineering Design 90% Design Complete
•100% Final Construction Prints in Aug-Sept
- 4
PRELIMINARY SURVEY UPDATE
Total Surveys Emails 21,925
Surveys Complete 7/13 2,350
10.7% Response Rate
Surveys Complete 7/20 3,177
14.5% Response Rate
$50 Deposits Received 7/20 672
- 5
PRELIMINARY SURVEY UPDATE
Value Percent Count
$20 -$40 Per Month 7.9%222
$41 -$60 Per Month 28.0%790
$61 -$80 Per Month 28.3%797
$81 -$100 Per Month 19.3%544
$101 -$120 Per Month 8.7%246
More Than $120 7.8%221
Totals 2,820
How much do you pay each month for your internet services, not
including other services such as television or telephone?
- 6
PRELIMINARY SURVEY UPDATE
What company provides your internet service at home?
Value Percent Count
Comcast/Xfinity 67.2%1,916
AT&T 24.0%685
Sonic 5.3%152
Etheric 0.2%5
Unsure 0.4%10
Other -Write In 3.0%85
Totals 2,853
- 7
PRELIMINARY SURVEY UPDATE
Do you purchase other services with your home internet services?
Value Percent Count
Cable Television 28.8%795
Home telephone service 25.8%712
Other -Write In 7.8%214
None of the above, I only 54.7%1,510
subscribe to internet through
my provider
- 8
PRELIMINARY SURVEY UPDATE
If you use cable television at home, would you consider switching to an
internet streaming service like Netflix or Hulu over the next year?
Value Percent Count
Yes, I would cancel cable television and
use just internet streaming
17.2%446
I already subscribe to internet streaming
and don't have cable television
53.9%1,394
No, I would keep cable television and
add internet streaming
11.8%305
No, I would keep cable television, I'm
not interested in internet streaming
2.7%70
I'm not sure, I need more information
about internet streaming
14.4%372
Totals 2,587
- 9
PRELIMINARY SURVEY UPDATE
Please rate your overall satisfaction level with your home internet service.
Value Percent Count
Very dissatisfied 7.3%181
Somewhat dissatisfied 22.3%552
Neither satisfied nor dissatisfied 12.8%316
Somewhat satisfied 38.2%945
Very satisfied 19.4%480
Totals 2,474
-10
PRELIMINARY SURVEY UPDATE
If the City of Palo Alto were to offer high-speed internet services to your home, please select the top 3 reasons why you would switch from your current provider.
Item Overall Rank Rank Distribution Score Number of
Rankings
Lower price 1 4,255 1,827
Faster speed 2 3,957 1,798
Higher
reliability
3 3,450 1,779
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-11
COMPETITIVE ANALYSIS
Final survey results will provide inputs to competitive analysis
and threats, to be completed end of July; survey and deposits
will remain open for ongoing engagement.
•What speeds should be provided?
•What features are most important?
•What do competitors charge today/future?
•What should Palo Alto charge?
•How elastic is the market?
•What impact do pricing changes have on take rates?
•What is the expected take rate at the optimal price?
-12
STAFFING/VENDOR RESOURCES
Determine best mix of
existing resources, new
hires and strategic vendors
for Palo Alto Fiber
Existing
Resources
New
Hires
Strategic
Vendors
Finance &
Accounting
Sales &
Marketing
Tech
Support
General
Management
Operations
Management
Overnight
Customer Service
Billing Field
Services
Network
Design
Customer
Service
Customer
Service Construction
Legal Service Quality
Control
Construction
Management &
Inspections
-13
STAFFING ESTIMATES FOR BUSINESS MODELS
Comparison of FTEs required for Outsource, Hybrid, Insource Models
One approach is to outsource functions during the first several years, then bring inhouse.
Ramp down vendor contracts as insourcing occurs.
Year 6 In-House Staffing Estimates
Total FTE Outsource Hybrid Insource
Assistant Director 1.00 1.00 1.00
Engineering & Operations Manager 1.00 1.00 1.00
Sales & Marketing Manager 1.00 1.00 1.00
Account Manager 1.00 1.00 1.00
Revenue & Accounting Manager 1.00 1.00 1.00
NOC Technicians - 2.00 4.00
Customer Service Rep - 2.00 3.00
Installation & Service Tech - 2.00 3.00
Network Engineer - 1.00 3.00
Customer Service Supervisor - 1.00 2.00
Maintenance & Repair Tech - 1.00 2.00
Billing Tech - 1.00 1.00
Network Designer - 1.00 1.00
Field Services Manager - 1.00 1.00
Total FTE 5.00 17.00 25.00
-14
SUMMARY OF STAFFING MODELS
Palo Alto Staffing Costs 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Total
Insourced $1.93M $3.96M $4.92M $5.22M $5.35M $5.86M $6.01M $6.16M $6.31M $6.47M $52.18M
Hybrid $1.93M $3.34M $3.73M $3.82M $3.92M $4.02M $4.12M $4.22M $4.33M $4.43M $37.86M
Fully Outsourced $0.77M $1.26M $1.29M $1.32M $1.35M $1.39M $1.42M $1.46M $1.49M $1.53M $13.26M
Palo Alto FTEs
Insourced 7 19 23 24 25 25 25 25 25 25 25
Hybrid 7 15 17 17 17 17 17 17 17 17 17
Fully Outsourced 3 5 5 5 5 5 5 5 5 5 5
Vendor Costs
Insourced $0.00M $0.02M $0.09M $0.23M $0.32M $0.37M $0.37M $0.37M $0.38M $0.38M $2.51M
Hybrid $0.00M $0.09M $0.43M $1.13M $1.60M $1.83M $1.85M $1.86M $1.88M $1.89M $12.55M
Fully Outsourced $0.00M $0.18M $0.87M $2.26M $3.19M $3.66M $3.69M $3.72M $3.75M $3.78M $25.11M
Total Costs
Insourced $1.93M $3.97M $5.01M $5.44M $5.67M $6.23M $6.38M $6.53M $6.69M $6.85M $54.70M
Hybrid $1.93M $3.43M $4.16M $4.95M $5.52M $5.85M $5.96M $6.08M $6.20M $6.32M $50.41M
Fully Outsourced $0.77M $1.44M $2.15M $3.58M $4.54M $5.05M $5.11M $5.18M $5.24M $5.31M $38.37M
-15
KEY TAKEAWAYS
•Consider the balance of quality/value versus
risk/control
•Selection and retention of staff/vendor
•Risk mitigation may require multiple options
•Vendor management is critical
•Flexibility to adapt to changing market conditions
•Speed to market and scalability vital for success
-16
FINANCIAL PLAN
Will change
based on take
rates, final
design and rates
Costs Original Estimates 2021 Late 2021 Current Estimates
Fiber Backbone $22.28M $25.62M
Fiber To The Home $85.97M $98.87M
Cost Savings if Built Together -$4.48M -$8.73M
Working Capital Set Aside $12.50M $12.50M
Total Costs $116.27M $128.26M
Funding Original Estimates 2021 Current Estimates
Existing Fiber Fund $32.50M $32.50M
Contribution from Electric to Fiber
Backbone $10.00M $10.00M
Total Available Funding $42.50M $42.50M
Total New Funding Required $73.77M $85.76M
-17
SAMPLE PRICING BANDS
Service Package Estimated Monthly Rate
Internet Platinum - 10 Gbps TBD
Internet Platinum - 2 Gbps $95 - $150
Internet Gold - 1 Gbps $80 - $95
Internet Standard - 600 Mbps $60 - $80
Internet Basic - 200 Mbps $40 - $60
Premier Internet - 1 Gbps
(Includes Dedicated Packages)
Premium Internet - 500 Mbps $300 - $500
Select Internet - 250 Mbps $200 - 250
Standard Internet - 100 Mbps $100 - $150
Basic Internet - 50 Mbps $60 - $80
*Estimates based on market pricing as of 6/1/2022
Residential
Commercial
$500 - $1000
-18
FINANCIAL PLAN - INSOURCE
Will change
based on take
rates, final
design and rates
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Homes & Businesses With
Access 7,499 15,036 22,611 30,223 30,374 30,526 30,679 30,832 30,986 31,141
Customers
- 481 2,410 6,278 8,870 10,172 10,254 10,336 10,419 10,502
Take Rate 0% 3% 11% 21% 29% 33% 33% 34% 34% 34%
Revenues $1.70M $2.01M $3.49M $7.11M $11.32M $14.10M $15.35M $15.83M $16.33M $16.85M
Cost of Providing Services $0.43M $2.90M $3.90M $4.30M $4.49M $5.04M $5.15M $5.27M $5.39M $5.52M
Gross Profit $1.27M -$0.87M -$0.33M $3.03M $7.16M $9.46M $10.62M $11.00M $11.39M $11.79M
Gross Margin 75%-43% -10%43% 63% 67% 69% 69% 70% 70%
Sales, General &
Administrative Expenses $1.05M $2.47M $2.61M $2.77M $2.94M $3.01M $3.09M $3.17M $3.25M $3.33M
Depreciation & Amortization $1.27M $2.24M $3.25M $4.44M $4.69M $4.81M $4.99M $5.26M $5.27M $5.27M
Net Income -$1.05M -$6.70M -$8.24M -$7.15M -$4.45M -$2.45M -$1.55M -$1.45M -$1.06M -$0.66M
Cash Balance in Fund $32.72M $27.92M $22.30M $18.64M $17.55M $18.48M $18.60M $17.67M $20.07M $22.80M
-19
FINANCIAL PLAN -OUTSOURCE
Will change
based on take
rates, final
design and rates
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Homes & Businesses With
Access 7,500 15,036 22,611 30,223 30,374 30,526 30,679 30,832 30,986 31,141
Customers
- 481 2,410 6,278 8,870 10,172 10,254 10,336 10,419 10,502
Take Rate 0% 3% 11% 21% 29% 33% 33% 34% 34% 34%
Revenues $1.70M $2.03M $3.57M $7.33M $11.66M $14.50M $15.77M $16.27M $16.78M $17.31M
Cost of Providing Services $0.00M $0.77M $1.81M $3.91M $5.31M $6.04M $6.10M $6.15M $6.21M $6.26M
Gross Profit $1.70M $1.26M $1.76M $3.42M $6.34M $8.46M $9.67M $10.12M $10.58M $11.05M
Gross Margin 0% 62% 49% 47% 54% 58% 61% 62% 63% 64%
Sales, General &
Administrative Expenses $0.90M $2.15M $2.28M $2.43M $2.59M $2.66M $2.73M $2.80M $2.87M $2.95M
Depreciation & Amortization $1.27M $2.24M $3.25M $4.44M $4.69M $4.81M $4.99M $5.26M $5.27M $5.27M
Net Income -$0.47M -$3.98M -$5.30M -$5.67M -$3.92M -$1.93M -$0.89M -$0.72M -$0.28M $0.19M
Cash Balance in Fund $18.30M $31.15M $28.32M $25.93M $21.78M $21.36M $21.96M $21.57M $24.60M $28.02M
-20
FINANCIAL PLAN -COMPARISON
Will change
based on take
rates, final
design and rates
Comparison of Outsource vs Insource
Net Income 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Outsource -$0.47M -$3.98M -$5.30M -$5.67M -$3.92M -$1.93M -$0.89M -$0.72M -$0.28M $0.19M
Insource -$1.05M -$6.70M -$8.24M -$7.15M -$4.45M -$2.45M -$1.55M -$1.45M -$1.06M -$0.66M
Cash Balance in Fund 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Outsource $18.30M $31.15M $28.32M $25.93M $21.78M $21.36M $21.96M $21.57M $24.60M $28.02M
Insource $32.72M $27.92M $22.30M $18.64M $17.55M $18.48M $18.60M $17.67M $20.07M $22.80M
-21
SENSITIVITY ANALYSIS –TAKE RATES
Will change
based on take
rates, final
design and rates
$17,500,000
Contribution
from Fiber Fund in 2023
$15,000,000 Contribution from Fiber Fund
in 2024
Cash declines in the first years of operations, as
expenses are
higher than
revenues
Cash grows with
revenues as take rate increases,more customers
connected
Impact of take
rate on cash felt
in later years of
the project.
CURRENT
BUSINESS CASE
$0
-22% Break-Even
-30%
-32%
-40%
-50%
Sensitivity Analysis -Balance of Fund at Different Take Rates Over 10 Years
-22% Break-Even -30% -32% -40% -50%
Take Rate 2023 2024 2025 2026 2027 2028 2029 2030 2031
22% $18.30 $30.94 $27.60 $24.06 $18.20 $15.48 $12.41 $8.22 $7.31
30% $18.30 $30.95 $27.73 $24.58 $19.48 $17.83 $16.53 $14.19 $15.22
32% $18.30 $30.95 $27.75 $24.82 $19.94 $18.79 $18.65 $17.54 $19.83
40% $18.30 $30.96 $28.00 $26.18 $21.72 $22.38 $22.85 $22.36 $25.32
50% $18.30 $30.96 $28.04 $26.03 $21 .13 $21 .75 $24.79 $26.98 $32.72
2032 2033
$6.67 $6.30
$16.59 $18.32
$22.52 $25.63
$28.70 $32.53
$39.02 $45.88
-22
FINANCIAL TAKE AWAYS
Will change
based on take
rates, final
design and rates
•City’s existing fiber fund provides significant value
•Insource, outsource and hybrid models all viable
•Cushion of cash in case issues occur
•Lowers long-term debt service in perpetuity
•More flexibility in pricing and costs
•Without it, feasibility would be more challenging
•Other considerations
•Cash balance/reserves
•Price increases, inflation
•Debt repayment schedule
-23
UAC Feedback
Q&A