20101117-cover-0101Wednesday, November 17, 2010

Why LUS Fiber faces its most critical year yet — a behind-the-scenes look at the business’ early setbacks. By Nathan Stubbs

[Editor’s Note: This is part one in a two-part series on LUS Fiber — where it stands and where it’s headed.]

In early October, Lafayette Utilities System Director Terry Huval went to his boss’ office to deliver some bad news. After roughly 20 months in operation, LUS’ fiber-to-the-home telecommunications business was going to have to raise rates for its cable TV services, in some cases by as much as 15 percent. Huval felt he had little choice. The business had staved off raising prices as long as it could, but programming costs — the cost of carrying each channel on its cable system — were scheduled to rise again in 2011. On top of that, the Federal Communications Commission had yet to respond to a complaint LUS Fiber had filed over the National Cable Television Cooperative rejecting its membership application. (LUS alleges in the complaint that its chief competitor, Cox Communications, which now sits on the board of the NCTC, has blocked its membership to the organization, which most small cable providers go through to obtain better leverage in negotiating and buying from cable programmers.)

City-Parish President Joey Durel knew the situation. And the former Durel’s Pet Shop Inc owner also understood the retail business.

“It wasn’t that big a deal to me,” Durel recalls. “What I used to hear in retail is, ‘Why would you complain about this going up when you don’t say anything about the price of red beans going up?’ The point is, it’s an industry issue. Our competitor also raised rates not too long ago. As a retailer, you absorb price increases as long as you can. You try not to pass them off [to customers], but there’s a point where when your suppliers are going up on you that at some point you’ve got to pass it on.”

The news was nonetheless disheartening. Having to raise rates just before completing the citywide buildout of its fiber-to-the-home network, and offering the service to every business and residence in the city, is hardly the way LUS Fiber wanted to punctuate its prolonged rollout. “I knew it was going to be painful,” Huval says. “I knew customers weren’t going to like it. Customers were going to say, ‘Well, you’re doing exactly what Cox used to do.’”

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LUS Director Terry Huval acknowledges LUS Fiber has struggled to meet early expectations.

Fearing the worst, Huval decided to announce the rate increases by sending a letter to every LUS customer. In that letter, dated Oct. 15, Huval begins by thanking customers for being “a loyal supporter of LUS Fiber, the only communications system actually owned by you and every citizen in Lafayette,” before citing rising programming costs and denied NCTC membership as reasons for the rate hike. “A large number of smaller cable providers are saving money by purchasing their programming through this cooperative and we have not been provided any reason why LUS Fiber is being treated differently from those other providers. We have filed a formal complaint with the Federal Communications Commission seeking to address this issue. My commitment to you is that LUS Fiber will continue to provide world-class video, Internet and phone services and that we will always work to keep our prices for our services as competitive as possible.”


The letter concludes by urging any customer with a question to email Huval or call him directly on his office phone.
It was the kind of local, personal touch LUS Fiber had always promised to deliver, and, so far, it appears to have largely curbed any damage from the rate hike. “I had far less than 1 percent of our customers call,” Huval says. “I addressed every one. Talked to every one of them, and at this point I don’t think we’ve lost a customer yet [over the rate increase].”

Huval recently sat down with The Independent Weekly for candid conversations about the tough decisions and challenges the LUS Fiber business has faced since its launch in February 2009. While acknowledging some major setbacks, and potential changes in the overall business plan, Huval remains upbeat and optimistic about LUS Fiber’s future.

“We’ve had to deal with some things we wish we wouldn’t have had to deal with,” he says. “But we’re going to get there. It’s just not the path I initially laid out.”

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LUS Fiber technician Josh Freed installs an optical network terminal box at a new customer's home.

EARLY SETBACKS
As it worked toward its stated launch date of January 2009, LUS Fiber faced an early dilemma. The NCTC — the organization it had planned to join in order to secure all of its cable program provider agreements — had placed a moratorium on new members, leaving LUS Fiber on its own in securing those contracts. As one can imagine, calls from a small municipal utility in Lafayette, La., were hardly a priority for the top executives of a national network like ESPN. Often, the calls weren’t returned at all. Doug Dawson, LUS’ national telecom guru and consultant who wrote LUS Fiber’s original feasibility study, stepped in to help where he could. Using his contacts, Dawson helped facilitate a number of contracts, but heading into January 2009, holdouts remained.

Huval recalls that going into January, LUS Fiber was looking at having to launch its business with several notable exceptions to its cable lineup.

“We were prepared to go ahead while still trying to put channels on our system,” he says. “If we didn’t have them on initially, we felt that the process was moving forward. We were now in sufficient dialogue with the programmers to where it was just down to last negotiations. The contracts, while we may not have had authorization to carry their channel yet, we could see we were getting awfully close. In fact some providers actually let us begin placing their channels on our system even before we had the contract signed, because they knew that we were pretty close to that point and we were trying to get our system started.”

LUS also managed to secure other channels it was missing through an aggregator service — the same type used by hotels to secure select cable channels. The final negotiations pushed LUS back five days past its original deadline, but on Feb. 5, 2009, it began taking orders from its first customers. In securing all the programming contracts, another problem arose. Because LUS lacked the buying power of a large regional cable company or national coop, it was often at the mercy of programmers when it came to negotiating terms. Many programmers, whose fees are based on subscriber numbers, insisted that if LUS wanted their flagship channel on its expanded basic tier — the tier with the highest number of subscribers — it had to carry all their less-popular secondary channels on that tier as well. That’s why you’ll find the full package of five ESPN channels on LUS’ expanded basic channel lineup (by comparison, Cox has only ESPN and ESPN2 on its expanded basic tier). LUS originally planned to have just over 70 channels on its expanded basic tier. It ended up having to carry 83. And because LUS had already pledged to offer rates at 20 percent less than the competition, and gone before the city council with more specific price points, it had already locked itself in on how much it could charge for each cable tier. While a good deal for consumers, this sliced further into an already wafer thin profit margin for LUS’ cable service. “We ended up in a situation where we had a tier that was priced for 70 channels,” Huval says, “that we had already advertised the price, and now we were carrying 83 channels.”

The early difficulties with programmers were compounded by the next beast to rear it ugly head: the set-top boxes.

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Consultant Doug Dawson wrote LUS' original feasibility study and continues to advise on business decisions.

Prior to the launch, LUS Fiber had been beta testing its system in select homes to work out any bugs prior to going public. Repeatedly, there were glitches that came up with LUS’ set-top box for digital cable subscribers. The Motorola-made box was provided by LUS Fiber’s equipment provider, Alcatel Lucent. LUS selected Alcatel from the six companies that responded to its request for proposals for an equipment provider contract worth approximately $30 million. Based in France, Alcatel has touted its involvement in more than 65 fiber to the home, business and premise projects around the world.

Early reviews on the set-top box weren’t great, but LUS Fiber thought it could work through all of the issues. In most cases, LUS, working with Alcatel, found ways to fix most problem with upgrades to the middleware, the industry term for the software in the set-top box, or simple wiring corrections. But as LUS rolled out its public launch, fundamental problems with the boxes became more apparent. The box’s built-in Internet browser was slow and clunky and didn’t support many Web sites. Its DVR function was even more problematic. Often times, shows wouldn’t record or would freeze or pixelate during playback. In one instance, a family reported that their LUS Fiber had done the exact opposite of its pledge — to deliver a 21st century “future proof” product; the family’s DVR had somehow turned back the clock on their TV to the 1950s, replaying only in black and white a recorded program.

“We were forced to deal with all of these individual little issues — gremlins I call them,” Huval says. True to Huval’s moniker, the gremlins proved hard to eradicate. “In general, we got probably 90, 95 percent of them fixed,” Huval says. “That last 5, 10 percent, it wasn’t the system, and in some cases we were learning that the manufacturer just couldn’t get it fixed.”

Finally, the LUS director had enough. He remembers scheduling a conference call with his executive staff, executives at Alcatel and Durel. At the time Huval was attending an American Public Power Association conference in Salt Lake City. “It was around that June-July time frame,” he says. “It was a very terse phone call. It was not the calm Terry Huval that many people see. I was very concerned, very upset that we were still dealing with these issues at that particular point. Generally, the explanation [from Alcatel] for the issues that needed to be dealt with were it would take a couple of weeks to get that done. And a couple of weeks, a couple of weeks and a couple of weeks and the next thing you know I’m in June and in July after having launched in February and still don’t have some of these fixes.”

With negative word of mouth about the problems threatening to affect business, LUS opted to lay off the accelerator with its service rollout. “We weren’t trying to make a big market penetration immediately because we wanted to fix that issue,” Huval says. “I think had we not had the video problems that we would probably have about 30 to 40 percent more customers today, maybe more.” (The rollout recently hit another delay when LUS discovered contractors were not laying fiber wire in the appropriate right of way. The citywide buildout is still a few weeks away from completion.)

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LUS Fiber technicians Lance Morgan and Josh Freed (on ladder) run an overhead fiber line to a home.

It wasn’t until November of last year that LUS Fiber was able to sort through its options with Alcatel and reach a decision on a changeover of its middleware. That changeover, from the old Media Manager system to Microsoft’s Media Room, didn’t begin implementation until June of this year. In late June, LUS Fiber opted to change all of its subscribers over to the new set-top box system, a process it completed in late September. Alcatel supplied the initial order of new set-top boxes in the deal; LUS Fiber then began taking the old set-top boxes and converting them to the new middleware for further use. While LUS Fiber had planned for TV software upgrades in its long-term budget, the process resulted in the business incurring several hundred thousand dollars in expenses, mainly in the form of labor costs, sooner than it would have liked.

“There’s still some issues we’re working out with [Alcatel Lucent] because of this situation,” Huval says, “and they’re owning up to their responsibilities here, and that’s going to assist us as we move forward. There’s more support they can provide to us, some things that they can do to help us move forward and help us keep our system in good working order and offer more services down the road.”

“We did everything we could do,” Huval continues, “to move as quickly as we could on our end to get that [set-top box] transition taken care of, and it’s a relief that we finally got to that point. But those two things back to back, the programming issues and having to deal with the premature replacement of our middleware, took a lot of planning, took a lot of thought, a lot of agonizing on how we were going to do that at a very critical stage of the game. We had some people work some tremendous hours, seven days a week, constantly trying to get this resolved. And I think because of it we’re a much stronger, much more knowledgeable group.”

COX TAKES ADVANTAGE
LUS Fiber’s chief rival, Cox Communications, has often managed to be one step ahead of the game. Perhaps the prime example is the ongoing saga with the NCTC. Shortly after Lafayette sold the bonds for the LUS Fiber project in June 2007, the NCTC sent notice it would be instituting a moratorium on new members at the end of the year. Because of a requirement that companies must be within six months of providing service in order to join, LUS knew it would have to wait out the moratorium to join.

Despite early indications it would only last a year, the moratorium wasn’t lifted until early 2009. As LUS was awaiting word on its application, it learned that Cox had managed to join the coop. The NCTC — an organization traditionally made up of smaller cable operators — allowed both Cox and another corporate telecom giant, Charter Communications, into the fold while LUS and other small companies were kept waiting. The addition of Cox and Charter more than doubled the NCTC’s collective subscriber base and, as a result, its buying power from about 13 million to more than 27 million subscribers. Cox also quickly won a seat on the NCTC’s board of directors.

“Cox was apparently able to join and didn’t run into the delays that we encountered,” Huval says. Last year, Lafayette and two other municipalities seeking to join the NCTC, Wilson, N.C., and Chattanooga, Tenn., notified the NCTC that they were preparing to file a joint complaint with the Federal Communications Commission to force the coop to let them in. The Kansas-based NCTC responded by filing suit against Lafayette, Wilson and Chattanooga in Kansas federal court to prevent them from pursuing the FCC complaint. Shortly afterward, the NCTC dropped its suit against Wilson and Chattanooga and opened the door for the two cities to join the co-op, contingent upon them dropping the issue with the FCC. LUS was notified, without explanation, that its application for membership had been denied.

Representatives from the NCTC did not return a phone message or email from The Independent requesting comment for this story.

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LUS Fiber intentionally slowed its rollout while addressing technical issues.

Lafayette city-parish government had to obtain legal representation in Kansas City to fight the NCTC’s suit. In June, it filed a motion to have the case dismissed, arguing that the NCTC was attempting “to drag a Louisiana municipal public utility into court on the plaintiff’s home turf in an effort to avoid being held accountable for its conduct before the Federal Communications Commission.”

LUS moved forward with its FCC complaint, which it filed in June. “NCTC’s discrimination against LUS cannot be explained on legal or factual grounds,” it states. “In fact, the only significant distinction between LUS and Chattanooga/Wilson is that LUS’s major rival, Cox Communications, is NCTC’s largest member as well as a prominent member of NCTC’s Board of Directors, whereas Chattanooga’s and Wilson’s major competitors, Comcast and Time Warner, respectively, are not members of NCTC.”

“Chattanooga and Lafayette are an awfully lot alike,” says consultant Doug Dawson, who works for both. “On paper, you could swap these two and barely be able to tell the difference.” Lafayette and Chattanooga both used their city-owned utility providers to expand into the telecommunications business. While Dawson is prevented by contract from revealing exactly how much Chattanooga or other clients saved by joining the NCTC, LUS Fiber’s FCC complaint says that the business’ own estimates are that its programming costs would drop approximately 20 percent. Cox Communications has denied any effort to influence the cooperative’s decisions on Lafayette’s membership. LUS Fiber has also maintained that there is no other viable alternative coop to the NCTC.

In the four-year time frame between LUS riding a wave of support to an election victory and the time it began offering services (multiple lawsuits against LUS contributed to this delay), Cox has also busily worked to enhance its local services and image, branding itself as “your home in the digital age” and becoming a ubiquitous sponsor of community events. It also went from offering 15 high definition channels to 80. Meanwhile, LUS’ early momentum waned. Huval recognizes that success now hinges on LUS Fiber’s ability to forge a solid reputation with its subscribers. “For us to succeed,” he says, “it’s going to be from neighbor by neighbor support of what we do. It’s going to be because we have a good reputation. That’s why we won the election.”

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