Burlington Telecom disaster

In April, 2008, Burlington Telecom looked like a case study of a successful municipal fiber network. Burlington Telecom has subsequently become a financial and political disaster.  It may soon become an operational disaster as well.

Some developments:

  1. Since 2009, and perhaps beginning earlier, Burlington Telecom (BT) has encountered acute financial difficulties.  A Blue Ribbon Committee reported that BT overpaid for its network and is not viable with its debt load of $51 million, including a $33 million financing agreement with CitiCapital.
  2. The Burlington City Council apparently illegally transferred $17 million to BT to help it cover its operating costs.  The City Council also requested that the Public Service Board relax the rules governing BT paying back loans from the city.  The FBI is now investigating the issues.
  3. In Feb. 2010, a group of telecom professionals calling itself Reboot BT formed to seek to re-organize and stabilize BT.  Reboot BT included Tim Nulty, who helped to found BT and served as its General Manager until he resigned in Oct. 2007.  Reboot BT’s proposals apparently did not move forward.
  4. On Nov. 24, 2010, CitiCapital moved to repossess BT’s operating equipment because BT failed to meet required payments.  This action threatens to disrupt services to BT’s customers.  BT’s customers include the Burlington police, the Burlington fire department, and other city departments.
  5. A group of telecom professionals, largely overlapping with the membership of Reboot BT, responded to this crisis by seeking to open negotiations to purchase BT.[1] The group did not put forward a specific purchase price.
  6. Burlington City government has lost millions invested in BT thus far.  Michel Guite, the owner of Vermont Telecom (Vtel), estimated BT’s value about $15 million in conjunction with his offer to participate in restructuring BT (as reported in the Burlington Free Press, Nov. 26, 2010).  Haik Bedrosian, a close observer of Burlington politics, noted, “Now it seems the City is probably going to eat a loss of between 30 and 50 million dollars on the Burlington Telecom experiment, not counting increased interest costs from lower credit ratings. Sad.”

A key recommendation of the Blue Ribbon Committee on Burlington Telecom:

the overall strategic plan of Burlington Telecom must shift from engineering and technology based to one based on sales, marketing, and customer service in order to be successful in the future. Organizational structure should be refined to meet the needs of such a strategic plan.[2]

Municipal organizations that provide and maintain municipal roads, water, sewage, and in some jurisdictions, electricity, focus on engineering and implementing well-established technology.  Municipal organizations don’t have a good track record in sales, marketing, and customer service in fast-changing retail sectors.

One of BT’s major assets was community recognition and community good-will.  That asset allowed BT to avoid the high level of customer acquisition expenses that other communications companies incur.  For example, Verizon spent $98 million on advertising for Fios in measured advertising media in 2008.  Verizon’s advertising expenditure per Fios customer acquired has been estimated at $200.[3]  Whatever organizational form BT adopts, it is likely to face much higher customer acquisition costs than it had in the past.

The Blue Ribbon Committee’s recommendation that BT’s organizational structure “should be refined” seems to point away from an organization that provides a municipal communication network in a way like municipalities provide municipal roads.[4]

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Notes:

[1]  Letter from Andrew Montroll et. al. to Bob Kiss, Mayor, City of Burlington, and Bill Keogh, President, Burlington City Council, Nov. 24, 2010.

[2] Blue Ribbon Committee (BRC) on Burlington Telecom, p. 4.  Reboot BT (the G-9) “fully agrees with the BRC’s analysis and with its recommendations.”  See Reboot BT FAQ.

[3] “Is Verizon’s $23 billion bet with Fios paying off?” Advertising Age, May 18, 2009.

[4] Reboot BT declared, “Ownership of BT by the City is not necessarily a bad thing. Management of BT by City Hall is.”  It proposed that BT be restructured as an “independent locally owned non-profit that remains true to the original goals of BT.” The group that recently proposed to purchase BT declared that it sought to keep BT a “community focused entity.”

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