Cover Story

Market Share

by Nathan Stubbs

Wednesday, November 24, 2010

Inside LUS Fiber's new marketing push and why it's crucial to the business' long-term success. By Nathan Stubbs

[Editor's Note: This is part two of a two-part series on LUS Fiber - where it stands and where it's headed.]

LUS Director Terry Huval's voice comes up over images of a picturesque family at home. "Our Lafayette Utilities System," he says.

The focus then switches to the family: "For over 100 years, they've served families like mine," a teenage girl says. "They keep our lights on, make sure we have pure drinking water and that our waste water is clean... and I really like that."

Wednesday, November 24, 2010

Inside LUS Fiber's new marketing push and why it's crucial to the business' long-term success. By Nathan Stubbs

[Editor's Note: This is part two of a two-part series on LUS Fiber - where it stands and where it's headed.]

LUS Director Terry Huval's voice comes up over images of a picturesque family at home. "Our Lafayette Utilities System," he says.

The focus then switches to the family: "For over 100 years, they've served families like mine," a teenage girl says. "They keep our lights on, make sure we have pure drinking water and that our waste water is clean... and I really like that."

Blithely working on a computer, she adds: "Now they have the coolest and fastest Internet, great for homework - and fun." As the family is shown to be happily enjoying all of LUS' services, they conclude: "Lafayette Utilities System. You might say they're family."

The 30-second TV spot was written and produced by The Munson Group (Baton Rouge political and media consultant Bob Munson has been a close adviser to City-Parish President Joey Durel). Scheduled to begin running early next year, it's LUS' latest attempt to spread the word that its fiber telecommunications business is up and running, and to kindle a sense of pride in the public ownership of both LUS and LUS Fiber. Since first entering the market in February of last year, one of the biggest challenges facing LUS Fiber has been its need to create a brand, one that captures its lofty ideals of making telecommunications more affordable, bridging the digital divide and spurring technological innovation. This year - the first year LUS Fiber will be offering phone, Internet and cable service to everyone in the city - making a good public introduction will be crucial to the business' long-term success.

It won't be easy. Central to the challenge is the fact that LUS Fiber's chief competitor, Cox Communications, has an advertising budget and marketing staff that dwarfs that of LUS. For this fiscal year, which began in November, LUS Fiber's advertising budget totals $500,000, not including salaries for LUS' two marketing staff members. With a tight budget, LUS' Huval acknowledges that the business will have to get creative in its campaign. Last weekend, LUS Fiber hosted Community Fest, a free downtown concert and festival billed as "a celebration of our community, our technology and our culture." LUS Fiber has also expanded its sign-up-a-friend campaign, whereby any LUS customer can earn up to a $50 credit off his bill for every referral.

"Based on everything I've seen," Huval says, "and how much money's been thrown at advertising and marketing by the competition, we cannot compete with that volume of dollars. And so we're going to do the things that are necessary to try to make customers aware that we're around, but we also think it's going to be a lot more of a neighbor-to-neighbor, community kind of groundswell helping us achieve all of our objectives."

That neighbor-to-neighbor marketing tactic took a hit recently when Cox Communications threatened to sue LUS over its yard sign campaign, a campaign Cox argued was in violation of the city's own sign ordinance. A Cox attorney pointed to a clause in the city's extensive sign law that prohibits residents from putting out nonpolitical commercial yard signage (LUS' signs read "I'm proud of my LUS Fiber" with a number to call to hook up service).

LUS Director Terry Huval will appear in a TV
commercial that combines advertising for both
LUS utlities and LUS Fiber.

LUS Fiber has faced some criticism for perceived failure to fully engage Cox and exploit the technological prowess of its fiber-to-the-premise network. It's come from some of LUS' most ardent supporters. Doug Menefee, chief information officer for regional medical staffing firm The Schumacher Group, ran a pro LUS Fiber blog supporting the project in the run-up to the city election on the issue in 2005. Menefee now has a new blog, The Dyslexic CIO. In a post titled, "Acadiana's tech community has some work to do," Menefee questions some of the early governing logic at LUS Fiber, including why the business has not partnered with Internet companies like Google or Yahoo to offer more in the way of email and website solutions. LUS Fiber developed its own email hosting; it does not offer website hosting.

"LUS seems to be afraid of the private sector for partnership opportunities," Menefee tells The Independent Weekly, "because we don't see any partnerships out there with them." He envisions other data and video partnerships with wireless companies or video providers like Netflix or Hulu that could further enhance LUS Fiber's offerings to customers. "I think the big thing is we need to be driving innovation, and just providing TV and phone is not where it's at," says Menefee, who still counts himself as an LUS Fiber promoter. "So I think the ability for LUS to partner with either other telecom providers or partner with content providers and deliver really innovative broadband solutions from a data perspective, I believe that is going to be what sets us apart from other communities."

Jaci Russo is another early advocate for LUS Fiber. The senior brand strategist and co-owner of Lafayette ad firm The Russo Group has seen most of the advertising LUS Fiber has done to date, including the script for the new commercial. She says LUS has been wise to hold back its ad campaign until it had most of the early issues worked out with its system. "When it comes to branding, we always tell clients to get your house in order before you invite the public over to visit. So if they had done any sort of major advertising push before the system was ready for the visitors, it would have been disastrous. I think though, we're now at the critical juncture where there has to be major messaging in place. The message has to be right, and there has to be enough touch points to where all consumers who are targeted will see it. Looking at the messaging that I've seen from LUS Fiber so far, it seems to be still done as though by a utility company and not by a 21st century, technologically advanced entity."

In regards to its new TV spot, while combining ads for LUS and LUS Fiber may allow the two entities to split the budget, Russo suggests it also runs the risk of muddling the message. "You don't want fiber to sound like a utility," she says. "A utility is something that you only notice when it's not working. For most people, waste water is not sexy. Fiber to the home is. And so you almost do a disservice to fiber to the home by wrapping it around all of these run of the mill ordinary utility topics.

"Lafayette is special," she continues, "and fiber to the home is special and this isn't something that every city is doing and it should be shouted from the rooftops that this great thing is being created in our own little neck of the woods. The citizens of this town own that utility, own the fiber. And so they need to be given a message that will really connect with them and unite them in their pride - pride of ownership and of what Lafayette has accomplished that other cities haven't even tried. That message hasn't come through yet."

A Critical Year

With looming deadlines for when LUS will have to begin meeting large debt service payments, Huval acknowledges the importance of ramping up business in 2011. "This is going to be a critical year for us," he says. Each year, LUS Fiber must make payments on the $110 million loan it took out to start the business. The bonds were structured so that LUS Fiber only had to pay interest on the loans in its first three years (2008, 2009 and 2010). The bond issue also included $15 million in capitalized interest, meaning that $15 million of the loan amount was automatically budgeted to cover the business' interest payments in its first three years. This year's interest payment was for $5.5 million.

Next year, LUS Fiber will have to make a principal and interest payment on its debt - totaling $8.6 million. That payment will have to be covered entirely by operating revenue. In the event it cannot, LUS Fiber is allowed to take out a loan from LUS to cover payments, since the bonds were backed by the assets of the utility. "We will do all we can not to have to exercise that," Huval says.

Huval insists that the utility system has thus far not loaned any money to LUS Fiber other than what has been transferred in imputed taxes. A condition of the state Fair Competition Act that regulated LUS' entry into the telecommunications business, LUS Fiber is required by state law to pay imputed taxes equal to that of private telecom companies. LUS Fiber is paying that money to the utilities system, which in turn has loaned some of it back to LUS Fiber as funds may be needed to cover expenses. These loans are all regulated and approved by the state Public Service Commission, and LUS Fiber must pay the utility system back for the loans with a fair market interest rate. Another requirement of the Fair Competition Act is that LUS Fiber also pay back a startup "loan" of approximately $14 million from LUS. This was the computed amount the utility spent on assets LUS Fiber inherited - specifically $11.4 million for the fiber network backbone built by LUS that predates LUS Fiber and another $3 million in preparatory costs for the LUS Fiber business that preceded the bond issue.

To this point, LUS Fiber's revenue has fallen behind initial projections. Huval attributes much of the slow start to early setbacks the business faced during its rollout (see last week's cover story, "Waiting to Connect"). In July of this year, LUS Fiber revised its annual revenue projection for 2010 from $23 million to $11 million, along with a corresponding cut in operating expenses from $19 million to $12 million. LUS Fiber made similar mid-year budget adjustments in 2009. It has also slashed all nonessential budgeted items, including $500,000 it had slated for developing a wireless network.

LUS Fiber abandoned its yard sign campaign after
Cox Communications threatened to sue the city for
violating its own sign ordinance.

Another important projection has changed. In its feasibility study, LUS Fiber calculated it would need market penetration of 23 percent to break even with the business and meet all of its debt obligations. A 23 percent "take rate," as it's referred to, amounts to signing up a little more than 14,000 of approximately 62,000 total potential customers in the city of Lafayette (approximately 51,000 of whom are residential).

However, with LUS Fiber's higher than anticipated expenses for programming, Huval acknowledges the all-important take rate number has gone up. "Looking at where we stand now, moving forward, I would say that 30 percent is where we ultimately need to be," Huval says. This means LUS Fiber's customer target is now about 18,600. Based on the business' monthly financial statements, an estimated sign-up rate and information from sources knowledgeable of the business, The Independent estimates that LUS Fiber currently has approximately 9,500 customers.

LUS Fiber is just starting to break even from an operations standpoint, according to its most recent monthly financial reports for August and September of this year. Monthly revenues vary due to staggered collections from LUS Fiber's wholesale business, but have recently been hovering around $1 million a month. In August, LUS Fiber posted a net operating revenue profit (before depreciation and amortization) of $140,474; for September, it had a net operating revenue loss of $302,294. "We're at a point now where there's some months where we're making more money than it's costing us to operate the system," Huval says, "and some months where we're falling a little short of that. But overall, we're seeing a trend where we're getting to the point where our net operating revenue is positive. That's a very positive sign for a business that's been in place for 21 months, especially with the delays we've gone through."

Creating Competition

Despite some of his criticisms, Menefee says the LUS Fiber project has clearly benefitted Lafayette. "The value that it's brought to this community from a business perspective is amazing," he says. "At Schumacher Group we have both LUS and Cox providing us fiber optic services. I can't get that at any of my other office locations across the country." He estimates he pays about 30 percent less for dedicated broadband lines in Lafayette than elsewhere because of the competitive marketplace here.

Lafayette Consolidated Government's Traffic and Transportation Department recently experienced the advantage of having multiple telecommunications providers. In February, Transportation Director Tony Tramel got a letter from Cox regarding his department's contract with the telecommunications provider for its Internet Protocol traffic control system, which allows the city to coordinate its traffic signal timing plans. The contract was set to expire in June, and Cox's letter stated that the price for renewal was going up 46 times its current rate, from $6,000 a year to $281,232 a year. Tramel then contacted LUS Fiber and was able to negotiate a deal to get more than 10 times the bandwidth Cox offered for a lower price. Cox then countered with another offer that was still higher than LUS' price of just over $125,000 a year. "LUS really stepped up to the plate," Tramel says.

LUS won a similar competitive proposal process with the Lafayette Parish School System. LUS provides 1 gigabyte service to all the parish's high schools, 2 gig service to LPSS central office and 100 meg service to all other schools. LUS Fiber has also made important inroads into the business community with proud clients that include, The Schumacher Group, Dr. Stephen Abshire, Lafayette General Medical Center, Fugro Chance, PHI, Stuller Settings, Jefferson Towers, TMC Foods and Louisiana Physicians' Corporation. (In the interest of full disclosure, The Independent is also a subscriber to LUS Fiber.) "Starting with our first day of selling LUS Fiber services," Huval stresses, "we have always taken more customers away from Cox than they did from us - without exception."

Both Huval and consultant Doug Dawson say the competitive environment LUS Fiber has brought to high speed telecommunications shows it is delivering on its initial pledge. It also means the business may be well positioned for the future. Dawson explains that last quarter, for the first time in history, the overall number of U.S. cable subscribers dropped. "Today you have to have [cable], that's how you get customers," he says. "That's not necessarily always going to be true. You're going to see an awful lot of households with just an Internet connection."

"That's the reason this was started," he continues. "This was not started for the cable business. This was started to bring high speed Internet to Lafayette for economic development and to save people money."

"We're very confident we're going to be successful," adds Huval. "We had a slow pace on the front end but now we're at a point where we have the system built up citywide so that we can be more effective at attracting new customers."

Huval says LUS is already preparing to add new features to its cable system, including TV caller ID and weather and news updates, as well as remote DVR programming. He preaches patience to those anxious to see more from the business, promising other "head turning" applications farther down the road, once the business becomes more established.

"We're in this thing for the long haul," he stresses. "This is a long race, not a short race. We've been at this now for 21 months, and there's a lot of things that we've learned and a lot of things that we've improved upon. This is just the beginning."