'Bridge to nowhere'? So far, a middle mile with revenue problem
Litigation. Revenue discrepancies. A relationship on the rocks.
But more than three years into running the network, Western and North Central Massachusetts' middle mile network operator is still struggling to break even.
The Massachusetts Broadband Institute estimated that revenue would be three times what it has been in recent years. Hopes for connections to homes and businesses have fallen short, and revenues for the network operator — Axia NGNetworks USA Inc. — have suffered accordingly.
What's more, Axia and the Massachusetts Technology Collaborative have been embroiled in litigation over finances since July 2014 — only months after the network launched that February.
While MBI warned potential operators that it might take time for the network to be profitable, Axia has been losing money on the network ever since it began operating it.
While attention has focused on delays in last-mile connections, the numbers show that the middle mile has problems of its own.
Axia NetMedia Corporation, of which Axia NG Networks USA is a wholly owned subsidiary, has experience bringing broadband to rural areas, including the Alberta SuperNet, a high-speed network connecting 429 communities in urban and rural Alberta, Canada.
Axia's deficits on the network total $1.5 million for the first three quarters of 2016 alone, according to the most recent financial data available.
MBI estimated potential annual network revenue for Axia at $9,060,217 — a baseline scenario provided in 2010 for modeling purposes.
Axia has never earned more than $2.1 million a year in network revenues, according to the financial data.
To date, Axia's losses on the network total at least $10.4 million. That includes a period when the network was not fully operational.
Amid these financial losses, observers, including one former Axia employee, are questioning the future utility of the middle mile.
"Most people sort of forget that there's a reason nobody has [previously] built fiber in Western Massachusetts," said Tim Scott, former vice president of Axia NGNetworks USA who helped select the middle mile as a project for Axia. "The economics don't work. It's a very difficult proposition for a private sector company."
Brian P. Voke, attorney for Axia, did not respond to questions from The Eagle related to Axia's operational situation.
The middle mile was a major investment by MBI, a division within the Massachusetts Technology Collaborative.
The middle mile promised to provide a highway for internet use at speeds previously only dreamed of in some Western and North-Central Massachusetts communities. It ultimately enabled 1,245 community institutions, including schools, libraries and public safety entities, to access fiber internet — considered state-of-the art for connectivity.
The project was funded through federal stimulus money and state matching funds — $45.4 million from the federal Broadband Technology Opportunities Program (BTOP) and $44.3 million in matching Commonwealth funds from MBI, the state Executive Office of Public Safety and Security, and the state's Information Technology Division.
MBI pitched the middle mile as a platform for residents and businesses to access broadband internet through connections that could be built off the network. MBI's June 2010 request for proposals seeking a network operator claimed the network would allow for competitively priced residential and business broadband internet service.
According to the RFP, eight potential providers indicated an interest in using the middle mile for those end-user connections that haven't materialized for most of Western Massachusetts.
"That was basically a bridge to nowhere — though the [community institutions] desperately needed it," said Christopher Mitchell, director of the Community Broadband Networks Initiative based in Minnesota and an expert on community broadband networks. "Dollar for dollar, it was not a wise investment at the time."
But Matthew Crocker, whose company, Crocker Communications, provides service to community institutions over the middle mile, sees success in the project.
"It's a great network. It's got great pricing," said Crocker, an owner of Crocker Communications. "It wins most businesses because it's better. I think a strong middle mile is going to be great for the Western Massachusetts economy."
Crocker Communications has provided service on the middle mile to community institutions since the beginning of the network. The company has connected other customers directly to the network, Crocker said.
Last July, Axia NGNetworks USA Inc. was sold to an Ohio-based company, Terry Fergus FSM Capital Management. A request for comment on The Eagle's findings sent to Axia's corporate communications department was redirected to FSM Capital Management.
"Other than to tell you that Axia NGNetworks USA Inc. is pursuing, through arbitration, a breach of contract action against [the Massachusetts Technology Collaborative] relative to the middle mile network, I do not believe it would be fair or ethical to comment on the ongoing litigation between the parties," said Voke, the Axia attorney, in an email.
Voke did not respond before publication to questions concerning the purchase price of Axia NGNetworks USA or if Axia's financial problems were a factor in the sale of the subsidiary.
DEAL WITH MBI
The middle mile made financial sense to Axia, at least in the beginning.
Axia's research indicated that operating the network would be financially feasible, Scott said. Axia had the capital to cover operational costs of the infrastructure.
The project also meshed well with Axia's philosophy, he said.
"It wasn't just about stimulus dollars," Scott said. "I think that the MTC and the MBI became the strongest fit by some distance."
Most other projects awarded federal stimulus funding required the private provider to invest in the project, unlike the middle mile. That meant Axia had no capital outlay in the beginning, he said.
As the operator, Axia sells wholesale bandwidth services — pure connectivity for data transfer from point A to point B — to retail internet service providers. Retail providers sell internet bandwidth that runs over the middle mile. The network acts as a highway to carry that connectivity. The customer pays the retail provider for services like internet, voice, and data, and the provider in turns pays Axia.
Axia must perform certain duties in exchange for collecting that revenue. Axia is responsible for monitoring, supporting, operating and maintaining all aspects of the network. All costs associated with operating the network are Axia's responsibility.
Axia's revenue is subject to sharing with MTC if it exceeds $3 million annually.
So far, it hasn't.
Axia's revenues on the network totaled $5.6 million between 2013 and Sept. 30, 2016, according to the financial data. Expenses in the same time period totaled $16.1 million.
The infrastructure of the network was built as envisioned, and Axia did its due diligence in selecting the project, Scott said.
"It was moving in the right direction," he said.
But problems outside of Axia's control, like delayed construction of the middle mile, amplified revenue difficulties, Scott said. The network was completed over a year later than planned, he said. Costs for the operator begin when the project does, not when the network becomes operational and revenues begin to come in, he said.
"The infrastructure is not complete, so you're not really collecting any revenue," he said. "The issue is when things slip. Costs don't slip."
Axia's total revenue for 2013 — before the network was completed — totaled $488,000.
Axia pays an annual oversight fee to MTC that increases every year and starts at $160,000, according to the parties' contract. Axia's contract with MTC runs for 10 years — but MTC or Axia can terminate the agreement if Axia becomes insolvent or unable to pay its debts.
The middle mile had only been in operation for about five months when conflict between Axia and MTC culminated in a lawsuit brought by MTC in Suffolk County Superior Court in July 2014.
The lawsuit claims that Axia was withholding fees and payments to and on behalf of MTC in violation of the parties' contract to gain leverage over MTC during a dispute involving several unspecified issues. Although Axia was ordered to refrain from withholding fees and payments in August 2014, the suit remains open.
Connections to the middle mile don't necessarily yield revenue for Axia. Any community institution can choose to take service, creating revenue for Axia — or not.
"Even if you bring fiber to a thousand sites, that doesn't mean you have a thousand customers," Scott said. "In Axia's case, winning the customer is winning the customer through a third-party retailer, which makes it even harder."
Axia is required to directly provide wholesale bandwidth services at a discount to 559 state community anchor institutions, according to the RFP. Some 1,245 institutions ultimately were connected to the network, including state and non-state community anchor institutions.
State and public safety community institutions purchase services over the middle mile directly from Axia if they so choose. MBI's 2010 RFP notes in multiple places that connected institutions are not required to purchase services on the network.
Retail internet service providers — including the operator — have to win customers, the RFP states.
The RFP identifies potential annual recurring revenue for Axia from the directly connected state community institutions at about $1 million. The RFP defines "Day One" revenues for Axia as the expected revenue from 559 state community institutions.
But that information was a model, not a promise.
"No [community institutions] were 'scheduled' to purchase network capability from the network operator," said MBI spokesman Brian Noyes. "There was no guarantee as to what they would purchase."
Axia reported to MBI at the end of 2016 that over 550 community institutions out of the 1,245 connected were purchasing some level of service, according to Noyes. This represents about 44 percent of the total connected institutions.
Even though not all the community institutions initially connected to the network are purchasing service, the middle mile was still a wise investment, said Noyes.
"All of the [community institutions] are connected to the 21st century fiber-optic network, and even if they do not take service at this time, it allows them the option to connect when demand rises in the future," Noyes said in an email. "For this reason, we believe this infrastructure is a valuable asset to the region and will continue to be for decades to come."
One of the institutions purchasing internet service, the Stockbridge Library Association, has seen improvement in connectivity since switching from DSL to internet over the middle mile.
"As a library, [internet is] one of the most important services that we provide," said Katie O'Neil, director of the Stockbridge Library Association. "I feel like we got more complaints before."
The library's prior DSL internet would experience slowdowns frequently, often in the mid-afternoon. Since switching to middle mile-based internet service, O'Neil said she doesn't notice those problems much anymore.
Unlike the Stockbridge Library Association, some institutions connected to the middle mile already had access to broadband internet. This aligns with the purpose of the federal funding, said Noyes. That money focused on broadband projects that offered new — or substantially upgraded — service to community institutions.
Some institutions are also purchasing lower-priced services than originally listed in MBI's 2010 RFP.
The RFP lists the "expected product" for 180 libraries as Ethernet-1000 (one gigabyte), with average pricing of $1,200 a month.
Assuming all 180 libraries are connected to the middle mile and could purchase Ethernet-1000 service, that would generate $2.5 million in annual revenue for Axia, according to data from the RFP.
But none of the 149 libraries within the CW/Mars system — which include places like the Berkshire Athenaeum and most every library elsewhere in the Berkshires and Western Massachusetts — is paying for that level of Ethernet-1000 service from the middle mile, according to Tim Spindler, executive director of CW/Mars. Instead, libraries opt for less expensive internet service with far less bandwidth.
Mitchell of the Community Broadband Networks Initiative said $1,200 a month is a high price for Ethernet-1000 service.
"That's one of the most expensive prices I've heard quoted to me in the last year," he said.
Crocker, of Crocker Communications, disagrees.
"That $1,200 is an amazing price for a gigabyte of connectivity in Western Massachusetts," he said.
The middle mile could turn into a break-even — or even profitable — venture for Axia if more providers would utilize the network for end-user connections to homes and businesses.
Axia could achieve break-even status around January 2018. That was the time frame given by an MTC employee at a July 2016 meeting of MBI's board of directors, according to meeting minutes.
One recent policy shift by MBI would appear to lessen Axia's potential to secure customers.
Towns seeking financial and planning support from MBI in the form of construction grants are obligated to build off and utilize the middle mile to bring broadband internet to homes and businesses, unless MBI and the town agree an alternate solution is warranted, according to Last Mile FAQs on MBI's website.
Charter Communications utilized the middle mile network in its last-mile build-out to homes in Hinsdale, Lanesborough and West Stockbridge, said Peter Larkin, the special adviser to the state Secretary of Housing and Economic Development who's leading planning and strategy for the Baker Administration's Last Mile Broadband Project.
But MBI's revised Last Mile Program Policy approved on Sept. 29, 2016, provides more flexibility for providers of end-user connections that do not need to utilize the middle mile network, according to minutes from a meeting of MBI's board of directors that same day.
DOES IT WORK?
For some, the middle mile provides a smooth, well-operated base for further connections to broadband internet.
"The people that complain about the price of the middle mile don't understand how the network works," said Crocker. "It's been a great network since Day One."
But Crocker's view isn't universal.
It can be difficult to get Axia to do things correctly when it comes to setting up new circuits for customers, said Doug Norton, president of
AccessPlus Communications, another middle mile retail provider.
"It's a little tough trying to get them to do it right the first time," he said. "[I] don't get the impression that they're overly invested. At the end of the day, [it's] a state network run by a company ... that doesn't have much interest."
The Eagle asked the attorney for Axia to respond to that view, but he did not provide an answer before publication.
Reach staff writer Patricia LeBoeuf at 413-496-6247 or @BE_pleboeuf.
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