A presentation regarding the Municipal Broadband Feasibility and Business Model Options

KEY STUDY FINDINGS

• The full capital cost is estimated at ~$194 million, incorporating a 30% contingency and inflation over a 5-year construction period, assuming a 40% take-rate. • A City contribution of ~$150 million is required to establish a sustainable FTTP business from scratch, applying reasonable assumptions under a “base case”. This contribution is the investment the City would need to make for which there would likely be no return.

The remaining capex can be supported from net revenues after operating costs. • Entering into a partnership with one or more entities to lease fiber and run the business would reduce the City’s risks and potentially reduce costs. A partner could potentially leverage existing operations and assets, achieving economies of scale. 2 FTTP in Cambridge will likely require a City contribution to be financially feasible

CAPITAL COST SUMMARY

3

Cost Component

Costs* Project management & engineering $18.4M Utility pole make-ready $4.8M Distribution network construction (aerial & underground, labor & materials) $63.3M MDU fiber laterals and indoor cabling $27.4M Core network electronics $8.8M Total fixed cost $122.6M Fixed cost per passing $2,345 Distribution electronics cost $5.6M Customer activation cost (includes drops & CPE) $20.6M Total cost (without contingency) $148.9M Total cost per customer $7,117 Contingency (30%) $44.7M Total cost (with contingency) $194M Total cost per drop (with contingency) $9,252 *Assumes drops are built to 40% of passings

BASE CASE: CAPITAL CONSTRUCTION AND RENEWAL COSTS

4 Initial construction is over five years; figures assume 40% take-rate

CAPITAL EXPENDITURE & CAPITAL RENEWAL

$30M $40M $50M $60M $70M

Outside plant

Core network equipment Drops CPE & distribution electronics

OPERATING EXPENSES SUMMARY

Labor O&M

• Fiber technicians • Customer service representatives • Integrity Manager • GIS analysts • IT Specialists • Account representatives 5 Cost categories considered to create full retail operations from scratch

Parametric non-labor O&M

• Underground fiber locates and repairs • Fiber maintenance and relocations • Core network electronics maintenance • CPE maintenance • Education and training • Customer billing • Bad debt allowance • Commodity internet capacity • Pole attachment lease fees

Other non-labor O&M

• Insurance • Utilities • Office expenses • Legal expenses • Marketing

BASE CASE: OPERATIONS AND MAINTENANCE EXPENSES

6 Annual operating expenses rise over time with inflation and labor rates

OPERATIONS & MAINTENANCE

$5M $15M $25M

Labor O&M

Parametric non-labor O&M

Other non-labor O&M

BASE CASE: PROJECTED REVENUES AT 40% TAKE-RATE

7 Assumes average of $70/mo., rising 3% per year ($30/mo. for low-income residents) REVENUE $5M $15M $25M $30M $35M $40M

Subscription revenue

Connection fee revenue

FINANCIAL MODEL

• Capital expenses: Outside plant, network equipment, drops, CPE, buildout schedule, etc. • Pricing: Target pricing based on market, mix of full paying vs. low-income • Take-rate / adoption curve: Steady state take-rate, take-rate ramp up, churn • Operating expenditures: – Labor costs – Non-labor parametric operating costs (e.g., $x per pole times n poles) – Other non-labor operating costs (e.g., $x per month for insurance) • Inflation adjustment (capex, opex, revenue) • Capital grant funding: City subsidy to reduce initial capital expenses • Financing conditions: Interest rate, expected return on equity, debt-to-equity ratio, term, etc.

8 A custom financial model was developed to understand the project’s business case and key sensitivities with the following key inputs:

FINANCIAL FEASIBILITY ANALYSIS

• The financial feasibility analysis does not include assumptions around how the citywide FTTP network is funded or financed, but assesses whether the project requires external funding for it to be financially feasible based on the fundamentals of the operational cash flows (revenue, capex, and opex) • The financial model calculates the internal rate of return of the project (project IRR) using the operational cash flows over the construction period and 25 years of operations • To evaluate financial feasibility, the analysis determines what combination of take-rates and public funding, if any, would be necessary to achieve a sufficient project IRR (assumed to be 10%), given certain assumptions about average revenue per user (ARPU) • The report includes sensitivity analysis on the baseline feasibility assessment for the following key variables: Capex, opex, ARPU, and project term 9 The baseline feasibility analysis examines the overall attractiveness of the project from a commercial perspective

FINANCIAL FEASIBILITY ANALYSIS OUTPUTS

10 Our baseline financial feasibility analysis shows that a ~$150 million upfront contribution combined with a 40% take rate would achieve a project IRR of ~10%. The sensitivity analysis shows how changes in pricing and capex amounts affect the required upfront capital contribution.

Scenario / sensitivity

Baseline analysis (30% capex contingency) Baseline analysis with $10 lower pricing $206M* $185M Baseline analysis with $10 higher pricing $152M $91M Baseline analysis with 20% capex contingency $130M Baseline analysis with 40% capex contingency $199M*

PARTNERSHIP OPTIONS

11 Partnership could offer significant advantages while the City could meet key goals

What City could gain…

…what City could give up… …what City could retain • De-risking business model through market validation • Operational and marketing expertise in a highly competitive and fast- changing business • Potential private capital investment to reduce upfront costs • Upside revenue potential • Control over day-to-day business operations and market rate setting • Fiber service to all City premises • City long-term ownership of fiber infrastructure • Affordable options and pricing control for low-income households • Key policy goals around data privacy and net neutrality

INTEREST IN A PARTNERSHIP IS LIKELY STRONG

• Given the attractive Cambridge market, a number of ISPs and infrastructure companies would likely look at a City RFP seriously • P3 investors are very comfortable with City owning the asset and the P3 investor having a long-term commercialization opportunity • Some ISPs also might be willing to lease City fiber, but others would want fiber ownership • Some ISPs require a larger footprint (now or in near future) than Cambridge, but they would explore this themselves 12 A range of companies may be interested in partnering with the City 13

Passive Infrastructure

Active Infrastructure

Service Provision

Building and maintaining dark fiber network Setting up and operating active electronics on network

Delivering broadband

services to subscribers

PARTNERSHIPS: ELEMENTS OF THE BROADBAND NETWORK

Business models are distinguished largely by defining the role of parties at each scope element of the network 14 Model #

Passive Infrastructure

Active Infrastructure

Service Provision

1 Muni ISP (Broadband department or outsourced) 2 ISP (one or multiple) 3