Fact: Tacoma’s Click cable TV system loses money.
Fact: For the 20,000 or so customers in Click’s service area, cable rates for similar channel packages still undercut Comcast, the biggest cable company in the world.
Fact: Click’s customers pay less for digital receivers than Comcast. They pay less for HD cable boxes. They pay less for DVR boxes. They pay less for on-demand video services.
Question: Is Click worth it?
Answer: While acknowledging the shortfalls of the cable operation, the closest observers tend to say yes. They point to the smaller but increasingly profitable side of the business — municipal broadband Internet service.
“Absolutely! It is a most valuable asset,” said Mitchell Shook, CEO of Advanced Stream Broadband, a local Internet service provider, or ISP, that contracts with Click to provide cable and broadband Internet service.
“What Tacoma has here is pretty special,” said Brian Haynes, CEO of Rainier Connect, another local ISP that uses Click’s network.
“We’ve invested a lot of money in this asset,” said Mayor Marilyn Strickland. “Without Click we would have had substandard service and higher prices. We know we have an asset, but how do we want to make it keep working for the city of Tacoma?”
“I think it’s served its purpose very well in terms of being a competitor disciplining the market rate — that’s what we want to preserve,” said Bill Gaines, director of Tacoma Public Utilities, the overseer of Click.
The preservation part — the how — is the tricky bit. In theory, a path to long-term fiscal health is open, but political traps lurk for leaders of the utility and the city, as well as the private entities that ride Click’s fiber-optic pipes.
“What we’re trying to do,” Gaines said, “is find a new business model that preserves the benefits of Click, retains a competitive alternative here in this market both for cable TV and for Internet, but in a way that doesn’t continue to burden the electric power customers.
“We’re the stewards of a public investment here — a pretty significant investment in a public resource.”
TV NOT PART OF PLAN
Conceived in the 1990s, Click is the biggest byproduct of a municipal fiber network created for multiple purposes: efficient power maintenance and an alternative to a local cable monopoly that provided limited offerings and lousy service.
Steve Klein, former director of TPU and the father of Click, wasn’t interested in cable TV when he proposed a city-owned fiber-optic network. He saw the system as a tool to improve maintenance and efficiency across the power grid.
Getting into the content business — cable TV — wasn’t part of his original plan.
“We were in the wires business,” he said in recent interview. “The fiber was another wire. The content was not the business that I wanted Tacoma Power in.”
Klein, who now heads the Snohomish County Public Utility District, heard from city leaders and residents who saw an opportunity to build a cable TV system that would compete with TCI, then the local cable provider.
The company had resisted efforts to beef up its cable offerings, and residents were unhappy with the service. Efforts to draw competitors into the marketplace fell on deaf ears.
Klein’s instincts rebelled against the idea of a public cable TV system. If private interests wanted to ride Tacoma’s fiber, fine — but he didn’t want to get into content wars with cable giants.
Eventually, public sentiment and political pressure prevailed.
“I reluctantly went with it,” he said. “It was not part of the original philosophy. I knew in my mind that someday, fixed-content cable programming would go by the wayside. The technology was going to move to on-demand.”
Since then, Click’s road hasn’t always been smooth. Since its inception in 1998, the network has struggled to cover operating expenses and never quite covered its capital costs.
But on the operating side, Click broke even while standing as a source of civic pride: a competitive counterweight that offered consumers a choice.
Things have changed; online video options and cord-cutting customers have eaten into Click’s revenues.
Overall, the $200 million fiber-optic network that spawned the old label of “America’s #1 Wired City” is turning into a budget drag; the latest budget figures show it’s losing as much as $7 million a year, largely driven by capital costs, debt service and other expenses.
The biggest expense by far — $22.3 million — is programming costs, which have increased by about 7 percent per year for several and show no signs of slowing.
Within those rising costs, a big driver comes in the form of retransmission fees: the charges broadcast outlets levy for the right to their programming. For certain broadcast stations, the fees have nearly doubled.
Gaines has known that for a long time. Disputes over retransmission fees from Fisher Broadcasting, corporate parent of KOMO-TV, led to a programming blackout in early 2013 that lasted almost a month.
Click is in the midst of negotiating new contracts for programming, and fees are expected to rise again.
Some of Click’s fiscal woes are structural, he said: As a public entity, Click is bound by union contracts and personnel expenses that private outfits don’t face. Lacking Comcast’s massive market share, Click has a tougher time negotiating programming rates.
In the big-picture sense, the $353 million utility can easily absorb the cable expense overruns with minimal impact on electrical ratepayers — the subsidy amounts to slivers of fractions of pennies on the dollar — but it’s still bad business.
“Right now, this thing (Click) is being subsidized to a degree by the electric power customers because it’s not recovering all of its costs,” Gaines said. “That will get worse over time, and that’s really not fair. It’s not fair to the electric power customers — so we’re trying to get out of that box.”
IS HEALTH POSSIBLE?
An evolving consultant’s report, first commissioned in 2010 and revised several times since, mapped out the long-term prescription for fiscal health. Four years ago, Click’s rates were 40 percent lower than Comcast’s.
The consultant’s report called for double-digit rate increases while acknowledging the pitfalls.
“Forty percent below market is bad business and is the number one reason why Power has had to subsidize the cable system,” the report stated. “It may be somewhat difficult politically to talk about double-digit rate increases for four years, but even after such increases, Tacoma is still going to have cable rates that are lower than in surrounding communities.”
The words written in 2010 were dead right. Four years and six rate increases later, the rates for Click customers are still lower than Comcast overall. When Click raised its rates, Comcast followed suit, lowballing in Tacoma while increasing monthly rates for surrounding customers in Pierce County who have no alternative.
The current breakdown for a basic 88-channel package looks like this:
• Click, $52.99.
• Comcast (Tacoma), $52.99.
• Comcast (Pierce County), $69.49.
“Comcast raises its rates all the time and there’s not a front-page headline about it,” said Chris Gleason, TPU spokeswoman.
SELLING RETAIL INTERNET SERVICE
The consultant’s report included another recommendation: It suggested Click and TPU needed to start selling retail Internet service.
Currently, Click sells broadband access at wholesale rates to businesses and public agencies, including Tacoma schools. For retail Internet — connections to individual homes — Click contracts with three local ISPs that serve about 21,451 customers. Click gets a 60 percent cut of the Internet revenues.
The pure math is plain. As cable revenue drops and customers shift to online and other services, Internet service is where the money is. Click’s wholesale Internet revenue is a small part of the operation ($3 million), but it generates a 40 percent profit.
For retail Internet services provided through ISPs, the profits are even greater: $6.8 million in costs compared with $11.4 million in revenue, and a profit margin that approaches 60 percent.
“It’s the future for the industry,” Gaines said.
That was what the consultant’s report recommended in 2010. The fundamental idea hasn’t changed in the past four years in multiple revisions of Click’s strategic plan.
“I am recommending that Click compete side by side with the ISPs,” the report said, and added a stinger. If Click didn’t want to move into retail Internet, “then it would be appropriate to think about selling or liquidating the company.”
On paper, the idea is simple. Then there’s political reality. When Gaines and other Click leaders introduced the retail Internet idea in 2012, they sparked an explosive political debate that hasn’t ended.
If the utility wants to sell retail Internet, the public utility board and the City Council must give their blessing. Those leaders, mindful of vocal protests from the local ISPs, haven’t been willing to take that step — and the leaders of the ISPs don’t want them to.
One ISP representative, Chuck Prater of Net-Venture, framed the idea in stark terms in 2012.
“What you’ll end up doing is putting us out of business,” he said.
Haynes, CEO of Rainier Connect; and Shook, CEO of Advanced Stream, echoed those concerns in 2012, as did Laura Fox, a TPU board member at the time. She still thinks it’s a bad idea for Click to compete directly with local ISPs.
“It’s just not the right thing to do,” she said. She also believes that Click should find a way to cut its losses and make a graceful exit from the cable business.
Jake Fey, former city councilman, now a state representative, recalls that the utility board and City Council members agreed it would better for Click and the ISP owners to work together than compete head to head. He’s still inclined to think Click entering into direct competition might not be the best approach.
“I don’t know that that alone would address the issue,” he said.
In 2014, the ISP owners hold the same views. The CEOs, Haynes and Shook, have worked with Click over the past two years to add Internet customers and beef up the utility’s bottom line. There’s no need for Click to compete directly, according to Haynes.
“We’ve grown the broadband side of the house,” he said. “We’ve proven that we can grow the network as long as we can have a working relationship (with Click). There is tremendous opportunity on this network for growth. It’s not the doom and gloom story.”
Shook said the same thing, noting that the ISPs and Click have worked together to build a long-term relationship that will pay dividends.
“Click will soon be profitable,” he said. “And without any of the risks or costs associated with having Click enter into the retail phone and Internet business.”
SELL THE WHOLE OPERATION?
Still, those rosy projections shy away from the elephant in the room: a cable operation that continues to drive losses.
Another option looms: Could Click and its fiber-optic network be sold to a private entity?
Gaines sees little hope on that front. In 2013, Provo, Utah, sold its $39 million fiber-optic network to Google for $1, in exchange for the promise of new high-speed Internet access for its customers.
“You don’t want to do that,” he said.
He’s reluctant to put hard numbers and details on the table; he prefers to have that conversation in the first quarter of next year, when the fiscal picture will be clearer, but he sees at least two options.
“We could do what we proposed two years ago, move into retail space and compete head to head,” he said. “The ISPs don’t like that, and it doesn’t solve the structural problems — but you could do that.”
Another option, less clear, would hand off the cable TV aspect to a private provider while maintaining ownership of the fiber network.
“That would achieve what the consultant is suggesting, but it also gets over some of the other structural impediments,” Gaines said.
He’s not settled on either approach, and he alludes to other options — but he says the time isn’t ripe for concrete proposals.
“We don’t really have a recommendation yet,” he said. “I would prefer to have that public debate when there’s a recommendation or an actionable item on the table.”
When will that be?