April 29, 2006

Council to mull AFN options

Joe Franell pushes to get out of cable TV biz

By Vickie Aldous
Ashland Daily Tidings

Ashland Information Technology Director Joe Franell is recommending that the Ashland Fiber Network get out of the money-losing cable television business altogether.

He also is asking the Ashland City Council to allow AFN to become an Internet Service Provider, or ISP, so that it could sell its Internet service directly to customers.

ISPs such as Project A, Open Door Networks and JEFFNet currently retail AFN's wholesale Internet product. The ISPs would continue that relationship with AFN, but AFN would join their ranks as a retailer.

The Ashland City Council will discuss options for AFN's future with Franell in a study session at 5:15 p.m. on Monday in the Ashland Civic Center Council Chambers, 1175 E. Main St. Study sessions are open to the public, but opportunities for input are at the discretion of the council. The council also will discuss clean-up efforts along the railroad tracks north of A Street.

During the council's regular meeting that begins at 7 p.m. on Tuesday in the council chambers, councilors are scheduled to make a decision about AFN's future.

They also will be asked later that night to consider methods for making payments on AFN's $15.5 million debt.

In a memo to the council, Franell said AFN's cable television service loses about $61,000 each month.

Raising television prices, cutting back on expensive channels and taking other measures still would not close the gap, according to Franell.

“Even with all of the changes listed above, the CATV product still will lose between $600,000 and $700,000 per year,” he wrote in the memo.

In contrast, AFN's Internet service earns a positive margin of about $44,000 each month, he said.

Earlier this year, the council had directed city staff to explore an “open carrier” model for AFN in which AFN's infrastructure would be opened up to allow businesses to pay the city to provide telecommunications services.

That aspect of the plan could still work and could generate money for AFN if, for example, a company wanted to offer telephone service via Internet, Franell said.

But councilors also wanted to provide network and local television channels and basic Internet service to all households and charge a mandatory fee of about $10 a month. That practice could expose the city to accusations of predatory pricing or creating barriers for competitors to enter the market, city staff learned after consulting with telecommunications attorney Jim Baller of The Baller Herbst Law Group in Washington, D.C.

The information prompted Franell to develop other options for the council to consider.

If AFN gets out of the cable television business, rates charged by AFN's competitor could rise 15 percent to 26 percent based on market research, Franell said in the memo to the council. AFN and Charter's 6,500 cable subscribers are saving about $433,704 to $665,014 each year because of dampened prices, compared to AFN's annual television losses of $600,000 to $700,000, he said.

“This means even if all Ashland CATV subscribers are realizing the maximum benefit of 26 percent savings on their cable bill, the resulting losses make it at best a ‘wash‚ financially’,” Franell wrote. “Since keeping CATV will result in additional rate increases, it is unlikely that citizens will realize enough of a savings to offset the losses.”

In an interview, Franell said AFN could shut down its television service immediately.

But if the council does decide to cut the service, he would recommend a gradual transition plan so that cable television customers could find alternative providers.

AFN could even partner with a business, such as a satellite company, that could provide television, he said.

Dropping the television service has the potential to cause a loss of AFN Internet service customers if a competitor, such as Charter, offered a cut-rate Internet and television package to former AFN television customers shopping for a new television provider.

When asked about that risk, Franell said he has had conversations with Charter's Southern Oregon general manager, Mike O'Herron, and believes O'Herron wants to act in a professional, fair manner.

“I don't think there will be any underhanded, wild effort,” Franell said.

As for the ISPs that retail AFN's Internet service, he said the city may have to look at increasing the wholesale Internet price, which could narrow the ISP's profit margins. The ISPs charge an average of almost $10 a month over the wholesale rate and provide services such as computer virus protection.

Franell also is presenting a number of other options for the council's consideration that include:

• AFN eliminates cable television service and become the only Internet retailer. AFN could earn $300,000 to $400,000 more each year, but it also could lose about 25 percent of its Internet customers who might turn to Charter or DSL offerings from the former ISPs during the transition. Becoming the sole ISP would have a “small to catastrophic” impact on the ISP businesses, according to the memo.

• Operations continue as they are, but AFN takes previously mentioned steps to reduce some of the financial losses from the television service.

• AFN keeps the television service and becomes the only Internet retailer.

• The city accepts the Jefferson Public Radio Foundation's offer to take over AFN, or spins AFN off as a separate non-profit organization.

To view Franell's full memo and attachments with financial analyses, visit the city's Web site at www.ashland.or.us. Click on “Council Business” in the left column and then click on the agenda packet for the May 1 study session.

Franell said he is open to questions and input and can be reached at franellj@ashland.or.us.

Staff writer Vickie Aldous can be reached at 479-8199 or vlaldous@yahoo.com.