February 7, 2006
The year was 1995. Lance Pugh was standing in my office in the Old Ashland Armory, waving his arms and explaining vociferously that I needed to understand that because the City of Ashland had been farsighted enough to back a municipal fiber network, the Armory was going to be wired to the world wide web. Once this marvelous fiber was pulled into the building, I would be able to contact clients around the world. Lance envisioned the Armory becoming an online entertainment emporium, with live video feeds streaming out live shows from the Armory stage. Lance imaged something on the order of “Ashland City Limits.” Lance was right on with his prophecies, but a little ahead of his time, and what visionary isn’t? I still think he had a cool idea.
Will Work For Net Access
In 1999, I had an office in Medford, a dot-commer client in San Francisco, and a high-stakes lawsuit to service in San Jose. Using dial-up wasn’t cutting it. My client offered to do whatever it took to speed up my Internet connection. I ended up with a hybrid system called Perkinet that required a technician to install a satellite downlink into my building, while I still did my uploads by phone modem. Kooky system, but it worked until Internet CDS discontinued the service after about three months. Then I ended up buying Qwest DSL high-speed through a third-party vendor who would have committed seppuku if he’d had an ounce of decency about him. The service cost $400 per month, and was intermittently down for extended periods. But it was still better than dial up.
AFN, My Savior
In 2000, I moved my office back to Ashland, when I realized that both AFN and Charter Internet were available, and competing prices down brutally. I started with Charter because they won the race to my cul-de-sac, and stayed with them until a three-day outage brought my clients down around my ears. I switched to AFN and never had cause to look back, although the whole bit with dealing with a third-party ISP seemed bizarre. Why, I asked myself, would the City throw away its ownership of a fiber network by letting third-party ISPs do the easy work of signing up customers to a broadband network? But I didn’t think about it long. AFN service was great, cheaper than Charter, that charged me more for extra IP addresses. I even broke down and got cable TV during 2004, but I tired of big media in a big way after watching Kerry throw the vote to his fellow-Bonesman. TV, I decided, sucks. But you can take my Internet away when you pry my keyboard from my cold, dead hands.
It’s 2005, and I pay extra for a one-gigabit monthly upload capacity, so the Ashland Free Press and other publishers can put their works out on the Internet. Hosting websites from your own place is a cozy thing to do, not quite as romantic as a crackling fire, but often more remunerative. I went to Vegas earlier this year and met with a group of Internet entrepreneurs, people who run a lot of websites, and make some pretty good money. But they also pay big bandwidth bills, and were very impressed with the low price of bandwidth in Ashland. In fact, they asked if they could buy some.
Welcome to the Bandwidth Business
So what is bandwidth? Bandwidth, my dear fellow Ashlander is the business we are in. Bandwidth is the Internet medium of information transfer. Measured in “megabits per second,” it serves the same function as the wooden letters in Scrabble, without which you can’t spell anything. Every “bit” is a unit of information – one “yes” or one “no” – one pixel on or one pixel off on a video screen. You need lots of bits to make a letter, and many more bits to record a song, picture, or movie. Without bandwidth you can’t send any letters, numbers, pictures, or gambling wagers over the Internet. If you want to send a lot of information, you need a lot of bandwidth.
Where, you might ask, is this bandwidth manufactured? As best I can ascertain, it is manufactured in computers called “servers,” that crank it out of their processors, which are called engines for a very good reason. And yes, right here in Ashland, we have a lot of servers, adding to the total bandwidth in the Internet universe. We are producing and selling this marvelous material that can be hammered into anything you can see on a screen, hear through a speaker, and print on paper or even in three-dimensional materials.
Bandwidth – great stuff. This marvelous medium of communication has deflated the record industry’s monopoly, created a new medium of self-expression, empowered young, old and everyone in-between, created innumerable jobs, and given us the means to reduce gas-guzzling hive activities like “showing up for work,” “going to the video store,” and “dropping off that paper to sign.” It probably also launched the Abu Ghraib expose, helped Michael Moore end-run the media blackout of Fahrenheit 911, and got Mike Brown fired. Using this fantastic high-speed network, we can also reduce our long-distance phone bills drastically, and talk to people around the world for pennies, using flat-fee Voice-Over Internet Protocol services like Vonage. People say information wants to be free, and I believe that, but without bandwidth, it’s going nowhere.
The bandwidth in Ashland is very good bandwidth, because it doesn’t run through nasty old copper wires left over from the bad old telephone days, like Qwest DSL and other nasty services. Ashland bandwidth races at the speed of light through 35 miles of buried optical fiber that doesn’t rust, doesn’t wear out, and allows fast, smooth transmission of data. This is an excellent product, and one that can be sold to people from all over the world, through a market that is accessible entirely over the Internet. Ashland could become a home for a goodly number of server farms, which is nice, clean industry that pays good salaries to technicians. We may not have a monopoly, but we have a very nice market in which to compete, and many of us think of AFN Internet access as a way of life. While reselling Internet access through a network of private ISPs is cumbersome and fragments our competitive strategy against Charter, it also provides a substantial number of local jobs that pump money right back into the community. We cannot forget the good jobs held by many Ashland public servants, union members, in the Ashland Information Technology, Telecommunications, and Computer Services Divisions, with a payroll totaling $1,830,000, many of whom would presumably have to find a new employer if AFN wasn’t a City enterprise anymore, and who must spend some of that money at Ashland eateries. Heck, if you fire all those people, who’ll be left to pay the meals tax?
How’d It Get So Expensive?
AFN is like a bunion – you don’t know how it got that big, and it hurts. Parkinson’s Law states: “Work expands to fill the time available for its completion.” G. Northcote Parkinson coined the aphorism when he was trying to figure out why the devil the number of Admiralty officials in Her Majesty’s Royal Navy ballooned 78% while the total number of ships under command fell by 67%. Nettlesome as this problem seemed, Parkinson got to the bottom of it. He observed that, regardless how trivial the task, “the thing done swells in importance and complexity in direct ratio with the time to be spent.” That leisure breeds self-importance is well-known, but Parkinson had the groundbreaking insight that “work swelling” results from bureaucratic infighting:
“Picture a civil servant, called A, who finds himself overworked. For this real or imagined overwork there are, broadly speaking, three possible remedies. He may resign; he may ask to halve the work with a colleague called B; he may demand the assistance of two subordinates, to be called C and D. There is probably no instance in history, however, of A choosing any but the third alternative. By resignation, he would lose his pension rights. By having B appointed, on his own level in the hierarchy, he would merely bring in a rival for promotion to W’s vacancy when W (at long last) retires. So A would rather have C and D, junior men, below him. They will add to his consequence, and by dividing the work into two categories, as between C and D, he will have the merit of being the only man who comprehends them both.“
Thus officials vie to multiply their subordinates and outmaneuver rivals, seeking to control bigger budgets, boss more employees, enjoy more prestige, and exercise more power. How does Parkinson’s Law figure into this story? No one in the City wanted another Department Head, least of all a “AFN Cable & Internet Department Head,” who would have a big budget, lots of subordinates, and according to the financial predictions, a cash cow to manage. Such a person would be an unbearable rival within City government, so it just did not occur to anyone that, however unpalatable, AFN needed someone to lead it.
Sun Tzu said that before going into battle, a general must ask:
“Which government has the right philosophy?
Which commander has the skill?
Which season and place has the advantage?
Which method of command works?
Which group of forces has the strength?
Which officers and men have the training?
Which rewards and punishments make sense?
This tells when you will win and when you will lose.
Some commanders perform this analysis.
If you use these commanders, you will win.
Some commanders ignore this analysis.
If you use these commanders, you will lose.
Get rid of them.”
So much the worse if you have no commander at all. You can’t even get rid of them. But we have only ourselves to blame. We funded AFN in a feel-good mood, and it took off like a colt that saw the barn door open. Since then, we haven’t had a chance of catching up. We started off on the wrong foot. Without a top manager, AFN was nobody’s baby, and everybody’s excuse. No one’s professional fate was personally bound up in getting AFN built within a specified time frame, so Parkinson’s Law ate up all the slack that the City allowed.
Time is the enemy of profit. Incomplete systems don’t operate, and an inoperable system cannot generate a profit. Every day a project drags on, the more likely it will not be completed or will fall short of expectations, the day when you start earning any money from operations is set farther off. The failure to complete on-time was the first operational failure of AFN, and it was no due to the fact that no strict schedule for completion was adopted or adhered to. Instead, the job was done in the usual public-contracting style, by union City employees and private contractors receiving prevailing wage.
Of course, no one was clamoring for prompt completion of AFN. By contrast, in an effective private organization, when construction fell behind, the AFN sales chief might remind the Construction Director and AFN top brass, that “delayed deployment” means “delayed sales” means “delayed revenue” means smaller bonuses for all of them. Delay in deployment is daily death for the sales chief, who lives from sales, who hopes to send his children to medical school with the proceeds of sales.
Salespeople read Sun Tzu because selling to consumers is a war, a fiercely competitive enterprise that should never be engaged in by amateurs. War is managed by successful commanders. Selling is managed by sales chiefs. Commanders are supposed to produce victories, and sales teams are supposed to produce cash. What do you do with commanders who fail to produce victories? “Get rid of them.” The same thing happens to sales chiefs who don’t produce bucks. They get into something different, and the business finds someone who can sell. This job of actually getting the money is indeed a very difficult one, that is fairly analogized to fighting a war. But from what I can tell from researching the City’s website and news resources, AFN had no Sales Director. So no high-level AFN employee ever actually faced the nitty-gritty business of getting Internet and cable users to choose AFN over Charter. Instead, City employees went about the business of providing services and charging fees for them, the only model with which they are familiar. Unfortunately, Charter had a sales director.
Nobody’s job at the City of Ashland was on the line when advertiser revenues fell markedly below projections. Worst of all, no one fought for a marketing budget, which is analogous to failing to give your soldiers any weapons. No one was worried they’d lose face if Charter stole our customers using predatory pricing (underselling your competitor even though you lose money in the short run). Even though AFN pays $460,000 per year for ”Central Services,“ usually described as ”legal and accounting,“ AFN never got a formal legal opinion about whether the City could sue or otherwise challenge Charter’s discriminatory pricing policy, under which it delivers Internet access and cable services at lower prices in Ashland than in Medford. Nope, we just sat there while Charter ate our lunch, even though their service is inferior. And most definitely no one’s job was imperiled by the City’s failure to roll out Internet telephone service, thus kissing off a half-million of forecast revenue in a single inaction.
So how has AFN been run at all? AFN has been run by remote control from Lee Tuneberg’s office, with nods from Alan DeBoer and City Administrator Gino Grimaldi, who signed off on all the debt that we’re now carrying.
So why is the project everybody’s favorite whipping boy? Everyone wants to blame the debt, but I want to talk about AFN’s unexploited value first, because frankly, the debt is not killing us, we have no way of getting rid of it but to pay it off, and all the negative talk is just driving down the price of the asset in question. If we are going to sell, we should not be broadcasting our despair about the financial imbroglio we have gotten ourselves into. A recent interpretation of Sun Tzu for salespeople says, “If you are struggling, you must seem calm.” We are struggling, and we must seem calm. We are sitting at the big stakes table, here. The vultures are circling, and we are what’s for dinner. We need to kick a little.
Nowadays everyone wants to know: should we dump AFN, or what? When you talk about selling something that is valuable, that works, that is already built, and that is buried under your house, you should have a good reason for doing it. The fact that it cost too much to build it, and it’s costing you to keep it, doesn’t necessarily mean you should haul off and get rid of it. You need to do an economic analysis, and that analysis really doesn’t have anything to do with how much money you have into the project. This economic principle is expressed as “forget sunk costs.”
What are “sunk costs?” Sunk costs are money that you’re not going to get back no matter what you do. My only economics professor, Armen Alchian, explained it by saying: “Imagine you had a million dollars, and you invested nine-hundred thousand of them in a stock that went belly-up and you lost it all. The way that you lost the nine-hundred-thousand should have nothing to do with how you apply the remaining hundred-thousand, except that perhaps you should not throw good money after bad.” In fact, people have a tendency to fixate on a loss, and it destroys their ability to evaluate how to dispose of the remaining asset.
As the owners of AFN, the citizens of Ashland find themselves in a similar situation. We have invested far more than we were told it would cost to build the fiber network. In 1999, it was estimated to cost $6 Million, and we are told it has cost $15.5 Million. To explain this Pentagon-sized overrun, City employees disclosed to the AFN Options Committee that, among other blunders, construction went way over budget because the City Attorney failed to inform the City that it would have to pay prevailing wages to contractors working on the project. The ballooning expense was not disclosed to the public. Rather, in July 2002, based on a memo from Lee Tuneberg, the City’s top bean-counter, then-Mayor Alan DeBoer authorized “internal borrowing” from the Water Fund and the Wastewater fund to keep AFN going through 2003. Tuneberg sent a copy of his memo to DeBoer to Gino Grimaldi, City Administrator, but didn’t even send a copy to Dick Wanderscheid, the City head of Electric, who has pretended to be the head of AFN since 2001, reading scripts preparedy by the accounting office. Wanderscheid has mainly been useful in hiding AFN's financial problems during his tenure, since he developed the habit of issuing AFN Quarterly Reports that describe only rosy conditions, then dropping a financial bomb (like a $2 Million deficit in AFN funding) shortly after each new budget is passed. Thanks to Dick's idea of how to fund things (secretly, after the fact, and when it's too late to say no), AFN has earned the reputation of being a boondoggle. Now it has to live that reputation down, and somehow get its neck out of the noose that John Gaffey and his band of fiscal vigilantes had slipped 'round its neck.
The ”sale of AFN" that many believe will get the City out of debt will not. The Daily Tidings ran a financial analysis in its December 3rd edition clearly showed that selling AFN for $5 Million and throwing away its operating revenues would increase yearly AFN payoff expense from $755,000 to $985,000 per year – from three-quarters of a million, to a million. The damage to local business from a sale could be substantial. We have a goodly number of businesses built on AFN Internet access, first among them the ISPs, whose fortunes, and those of their owners and employees, are based on the continuance of the existing order. We have a public resource that is still in our hands, over which we can yet exert control. Cooler heads want a fix before the vote – a sale, a lateral, a spinoff, a face-saving, time-saving fix that will prevent the issue going to a vote – what the powerful think of as a roll of the dice. But we are the voters. We paid for, and will continue to pay for this thing. We need to look at all the facts and make up our minds with a cool head.
The Options Committee has recommended that the City get rid of AFN, because it could never learn how to run it, but this sidesteps the politically untenable truth – the City has allowed Lee Tuneberg to call the tune that AFN has been required to play, and that tune is heavy on accounting expense. The “Central Services” expense of $460,000 per year keeps AFN underwater. The Options Committee report recommends spinoff because the members believe that, if a separate nonprofit were buying these same services, they would pay less than $100,000 per year. One might ask, then, if AFN has to be rescued from City government so they won’t be overcharged for accounting and legal work, what kind of a City government are we running, and where are the savings going to come from that will prevent us running up more debt? The answers to this question is simple. We are running a very expensive City government. And getting rid of AFN won’t fix that.