7. ccgreportdraft 100910

2010

Douglas A. Dawson

President

10/13/2010

TACOMA POWER CLICK! NETWORKDEVELOPMENT OF A 10-YEAR STRATEGIC BUSINESS PLANSPECIFICATION NO. PC10-0270F

DRAFT confidential Do not disclose outside of Click! Network

CCG Consulting LLC 10-Year Strategic Business Plan for Click!

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DRAFT confidential do not disclose outside of Click! Network

Table of Contents

Page

Executive Summary .......................................................................................................................3 Overview of the Project .................................................................................................................8 Revenues .......................................................................................................................................10 A. CATV Rates are Below Market ....................................................................................10 B. Retail Data .....................................................................................................................12 C. Lifeline Data ..................................................................................................................15 D. Sales to Business Customers ........................................................................................15 E. Adding Voice ................................................................................................................16 F. Adding Cellular ............................................................................................................18 Expenses ........................................................................................................................................20 A. Employee Costs.............................................................................................................20 B. Marketing ......................................................................................................................26 C. Internet Help Desk ........................................................................................................32 D. Union Issues ..................................................................................................................33 Operational Issues ........................................................................................................................36 A. Dealing with the ISPs ...................................................................................................36 B. Using Internal Construction Crews ..............................................................................39 C. Vehicle Tracking System .............................................................................................40 D. Wholesale Customers ...................................................................................................41 E. Dealing with Software ..................................................................................................42 F. Maintenance Contracts / Contractors............................................................................44 Network and Capital Budget ......................................................................................................46 A. Fiber Backbone Network .............................................................................................46 B. Bandwidth Management ..............................................................................................51 C. Capital Budget ..............................................................................................................59 Strategic Considerations .............................................................................................................61 A. Competition with the ISPs ...........................................................................................61 B. The Future of Cable TV ...............................................................................................67 C. End the Subsidies .........................................................................................................69 D. Smart Grid ....................................................................................................................70 E. Sell or Operate? ............................................................................................................70


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Business Plan ................................................................................................................................72 A. Business Model Spreadsheet Assumptions ..................................................................72 B. Business Plan Results ...................................................................................................77 C. Comparing Scenarios ...................................................................................................78 Next Steps .....................................................................................................................................82 Attachments ..................................................................................................................................83 I. Proposed Organizational Chart ......................................................................................83


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Executive Summary Click! (Company) hired CCG Consulting, LLC (CCG) to create a 10-year strategic plan. This report describes CCGs findings and recommendations. Following is a short description of the primary findings of the report. All of these topics are discussed in greater detail in the report following this executive summary. Findings Click! is not self sufficient today. Municipal ventures are considered successful if they can generate enough revenue to cover the cost of operations, the cost of debt and the capital costs needed to maintain the business. Click! has covered operating expenses in many years since 2004 but has never covered the cost of capital. A fully self-sufficient Click! would be able to cover expenses and annual capital. Real success for Click! would be to also generate excess cash above this breakeven. Revenue shortfall. The cable TV rates for Click! are roughly 40% below the rates in surrounding communities. This discount is too great since cable TV does not have a 40% profit margin. Staffing is too high. Click! has more employees than similar companies. Click! also spends more on labor than similar companies. Click! management has already recommended some staff cuts and this report suggests additional cuts that bring the Click! manpower in line with the rest of the industry. Click! didnt Stay Competitive when Comcast Introduced the Bundle. Click! was a growing Company until Comcast introduced a bundle of cable TV, data and telephone services. Since that time Click! has basically stagnated. Click! offers data products through partnerships with three ISPs, but this model is a failure in the marketplace. In order for Click! to thrive again Click! must offer the triple play services and add retail data and telephone products. Click! should also consider offering wireless cellular telephone services to gain an advantage over Comcast. Cable TV Alone is not a Viable Product Going into the Future. The margins on cable TV are going to decrease over time as programmers keep increasing costs. Further, I am seeing the dawn of an age where the younger generation is eschewing cable TV for web TV. If retail TV is the only retail product, the Company does not have a rosy future. The Company is Viable. If Click! can raise rates, cut manpower and introduce new services the Company will be viable and growing again during the ten year period that is the focus of this business plan. Since growing the Company is an achievable goal, liquidation should not be considered as a viable option at this time. Even if liquidation / sale should someday become a viable option, the value of the Company will be greatly increased by first making the Company more profitable.


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Recommendations Following are the specific recommendations that are the result of creating the 10-year strategic plan. The first five recommendations are the primary changes that are needed to make Click! successful over the upcoming ten year period. These changes are mandatory if Click! is to be successful. If the Company feels unable to make these suggested changes then the Company has to consider exiting the business. This report described a path for the Company to become profitable and thrive for the next ten years. Failure to make these changes would mean a permanent subsidy of Click! from Power. The changes listed after the first five are things to consider, but are not as important as the first four recommendations.

1. Click! Should Adopt the Aggressive Growth Plan. This report looked at a moderate and aggressive growth plan. The moderate growth plan adds retail Internet services. The aggressive plan also adds telephone and cellular service. I recommend the aggressive plan since it gives Click! the greatest opportunity to be profitable. With the aggressive plan the Company can thrive even if one of the product lines does not do as well as predicted by this report.

2. Raise Cable TV Rates to Market. Cable rates are currently about 40% lower than the rates in surrounding communities. Click! needs to set cable rates closer to market. I recommend setting a discount target such as setting rates at 15% to 20% below the rates in surrounding communities. Once that target rate has been set, Click! should then transition current rates to equal the target rates. This transition is going to take three or four years and will require double digit percentage increases.

Once Click! rates have reached the target discounts, Click! should raise rates each time that rates are increased in surrounding communities. This means that Click! rates will become market based and not cost based. This will mean a rate increase in Click! whenever there is a rate increase in Seattle. I further recommend that Click! work with the Board and Tacoma politicians to find a way to streamline the rate increase process. Currently the process of raising rates is time consuming, difficult and not always successful. In order for Click! to be successful rate increases need to be removed from politics. One idea to simplify the process would be to pass an ordinance that authorizes the Board to raise and maintain rates at some set discount below the rates in surrounding communities, without the need for political approval as long as rates are at or lower than the targeted market rate.

3. Reduce Manpower. Click! expenses are too high and this is almost entirely due to having

more employees than similar cable companies. Click! needs to reduce manpower to reduce expenses and to be more comparable to similar companies.


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Click! management has already suggested some manpower reduction in the 2010 and the 2011/2012 budgets. This report endorses those cuts and suggests additional cuts. This report suggests two reasons to cut manpower:

First, Click! has more departments / cost centers than similarly sized companies. Combining departments will eliminate some management positions, create efficiencies and expand the management span of control (meaning each supervisor will manage a greater number of employees).

There are several departments where Click! has more employees compared to similar companies. This report recommends eliminating positions that seem excessive by industry standards.

The consolidation of functions is going to pose some issues for union employees. However, I believe that the unions can see that such changes are in the long term best interest of the Company and the employees. A growing Company will add back more union employees than are being eliminated today and will also create a dynamic and profitable Company.

All of the suggested reductions in staff (the current management planned cuts and the CCG recommended cuts) reduce the total manpower to 90 FTEs. Under an aggressive growth scenario the Company would hire as many as 58 new employees over ten years as customers grow, but employees are not added until customers are added.

4. Offer the Traditional Bundle of Services. Click! has stopped growing since Comcast

introduced the bundle of voice, video and data. The Click! combination of retail cable TV and wholesale data is not working and must be considered a market failure. I am recommending that Click! offers the same bundle of products as the competition, plus consider adding cellular service.

Click! needs to offer a retail data product directly to customers. I am recommending that Click! compete side by side with the three existing ISPs. The wholesale model where customers have to buy data somewhere other than Click! is the primary reason for the total stagnation of sales that has occurred since Comcast added the bundle. If Click! is unwilling to add voice and data, then it would be appropriate to think about selling or liquidating the Company. It is worth considering buying the customers from one or more of the ISPs as a way to jump start the new business line.

Voice would be added by reselling quality VoIP from some other provider. There is a lengthy discussion of the viability of offering voice in the report.

Click! can also add a cellular product that would resell one of the large carriers like Verizon or AT&T. This product would be labeled with the Click! brand. While resold cellular is less profitable than the other Click! products, it still adds valuable margin and also allows for more possibilities of bundling, particularly since Comcast and Qwest do not offer cellular service.


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5. Click! Needs to Change the Sales and Marketing Model. Click! spends more dollars per new sale than comparable companies. The current Click! marketing model is very staff intensive and relies mostly upon mailings. Click! needs to change the marketing effort to be more productive:

Click! needs to reduce some staff to free these dollars up to be used to generate customers. The Company cannot afford to spend any marketing dollars that are not directly generating significant sales. Some of the current marketing staff is not generating enough revenue to justify their positions.

Click! should maintain the current mail campaigns. These campaigns have been adding about 500 new sales each month. Unfortunately, natural churn at Click! is also about 500 customers per month, so the total number of customers has been stagnant for several years. The bottom line is that the current sales model accounts for 6,000 sales per year, making it a successful sales model.

Click! should also employ contractors to sell door to door. These need to be local positions that are paid solely by commissions. I am recommending a staff of 5 local salespeople, 3 to sell to residents and 2 to sell to businesses. If each if these salespeople can generate an average of $1,200 per week in new sales (a reasonable goal when the triple play products are available), then this sales effort will generate $1.8M per year in new revenues over and above what is gotten from the mail campaign.

Together this new sales effort should be much more effective than the current marketing model. The mail campaigns should generate more dollars of sales once Click! has more products to offer. The door-to-door campaign will generate new sales from customers who have not been responding to the mail campaigns.

6. Other suggested changes: a. Click! should consider offering a lifeline retail data product. One of the initial

goals of the network was to make Tacoma one of the most wired cities in the country. However, there are still many homes that cannot afford the retail Internet products available in the market. Click! can offer a $15 to $20 lifeline data product that will enable more homes to have decent access to the Internet. This product can generate small profits and is cost justified.

b. Click! needs to change the way it treats the wholesale ISPs. The current regime is that all three ISPs are treated identically, for all practical purposes. The Company and the employees are somewhat disdainful of the ISPs and this carries through to the working relationship between the ISPs and Click!. The Company needs to look at these ISPs as if they are large customers and treat them accordingly. This is going to mean negotiating separate deals with each ISPs as well as mandating change in the way that employees treat the ISPs. There is going to be a lot of tension created with the ISPs when Click! gets into the retail data business, and some of this tension can be lessened by starting fresh in the working relationship with the ISPs.


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c. Click! needs to pay more attention to the wholesale data business. The current model of selling to CLECs and other carriers has stagnated and there has been very little sales generated in this area for several years. Click! needs to make an effort to reinvigorate this market and I have suggested ways to refresh this effort.

d. Click! needs to sell more to businesses. One of the initial goals of Click! was to use this network to spur economic development and to bring benefits to the business community in the City. However, after a decade the network is still only connected to a very small percentage of the businesses in the City. There are also a number of business buildings and neighborhoods connected to the exiting Click! fiber network that are underutilized. Click! needs to use the direct sales effort described above to sell directly to more to businesses. Business sales will also be easier after Click! has a voice product.

e. Click! needs to use competitive external construction crews rather than using the high cost internal construction crews from Power employees (that were once Click! employees). The internal construction cost is several times higher than commercial costs that can be obtained by quality local contractors. The current high priced construction has held back growth of business customers. Both the ISPs and the wholesalers have brought potential sales to Click! that did not materialize after the cost of construction was determined. The original business plan at Click! envisioned eliminating this group once the network was completed. Power should eliminate this group unless they have use for them on the Power network.

f. Click! Needs to complete the transition to a digital network. CCG recommends that the conversion to digital be done with a digital overlay and not with the use of IP video. The conversion to digital will free up tremendous bandwidth on the network allowing for the addition of channels, a more robust video on demand product and much faster data speeds. The biggest cost of converting to digital will be the addition of more settop boxes.

g. Click! needs to negotiate with Ciena for the replacement / upgrade of the SONET network that was purchased two years ago from Nortel (and sold to Ciena). This network is not working as promised. Once upgraded to Ciena this Ethernet network can be used to replace the SONET network and the Cisco networks.

h. Click! needs to keep the network and products at a competitive level with Comcast and Qwest over the next ten years. This is going to mean increasing the amount of data speed to customers for the same price as they pay today. It will mean introducing new cable products such as 3D as it is offered by Comcast. The growth business plans generated by this project show that Click! ought to be able to generate extra cash over and above the cost of operations. This report does not suggest how such excess cash ought to be used. Certainly some of it ought to be used for keeping a competitive service offering. Cash can also be used to expand the network to new neighborhoods. Finally, cash can be returned to Power as repayment on the original cost of the network.


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i. Click! has been getting cash infusions every year from Power to pay for capital. In the current environment where both Power and the City have tight budgets it is probably time to consider the idea that Click! should get no more subsidies from Power. My analysis shows that even with an aggressive business plan that Click! will need a cash infusion in 2011 and possibly in 2012. Click! can end subsidies now in two possible ways. First, any future cash infusions from Power could be treated a loan with the expectation that Click! would repay Power. Click! could also get a line of bank financing to keep itself solvent. The aggressive business plan suggested by this report generates enough cash to support debt payments.


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Overview of the Project CCG Consulting, LLC was hired in response to a proposal submitted under RFP PC10-270F. The purpose of this RFP was to seek a consultant to develop a new 10-year strategic business plan for Tacoma Powers Click! Network. The RFP called for the consultant to assess potential product expansion opportunities, the feasibility and life cycles of the current services offered and the longevity and viability of the existing network to support electric distribution system communications. The RFP called for assessing Click! of the 10-years under four different scenarios:

Maintain: business as usual Moderate approach: support and grow the Click! products and the power

telecommunications system Aggressive approach: expansion of the Click! products and the power

telecommunications system to promote strong growth Retraction: exit strategy from current Click! products and moderate support for the

power telecommunications system This report looks at the first three of these scenarios. A separate report has been created to explore the issue of retraction and the valuation of the Company. The project undertook the following research steps in order to understand the Company:

1. Desk Review at CCG. The Company sent us a lot of basic information about Click! that included such things as organization charts, current budgets, recent historic financial reports, various monthly management reports, network diagrams, salaries, a list of products, prices and customers for each product, reports done by other consultants in the past few years, and other pertinent information.

2. Competitive Research. I looked at the prices charged by Click! as well as the prices charged by other providers in the market, and in nearby markets.

3. Interview Stakeholders. I visited Click! and interviewed all supervisors and some employees. I also interviewed several Board members and talked to upper management of the Company. I also interviewed all three wholesale ISPs, of which one is also a wholesale provider for Click!

4. Fact Finding at the Company. While at Click! I also met with various employees to get follow-up details on topics identified during the desk top review of the Company.

5. Understand the Network. Derrel Duplechin of CCG visited the Company and met with the technical staff in order to understand the full capabilities of the existing network. He has continued to talk to Click! staff since that visit.

6. Understand Vendor Relationships. I looked at most major contracts and/or invoices for external services.

7. Understand the Financial Structure. I looked in depth at the historic financial reports and the current and future budgets.


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Once all of the basic facts were gathered, I identified the potential issues at Click!. The basic analysis was done using a financial framework whenever possible. This means as I identified issues and possible solutions that I tried to determine the financial impact of each solution. Some of our analysis was done by comparing metrics and methodologies used at Click! to other mid-sized communications companies. I looked at companies between 10,000 and 100,000 customers that included a mix of commercial and municipal businesses. In all cases I used clients of CCG and the underlying data from each of these companies is known by CCG but protected in each case by a confidentiality agreement. However, I have gotten the permission of all of these clients to use their data for the purposes of calculating metrics and comparing to other companies as long as I do not disclose their actual information without their express permission. There are not many companies in this mid-sized range and I believe the sample I used is representative of the industry. Business Plan Models I then undertook the creation of three business plan models as directed by the RFP a status quo model, a moderate growth model and an aggressive growth model. The details of each of these models are described in more detail in this report. Each model began by using the actual 2011 / 2012 budget for capital, expenses and revenues. I then made adjustments to each model as appropriate. For example, the status quo model was only adjusted to reflect a few changes that were already contemplated by management, such as lowering manpower a few more bodies than was included in the 2011 / 2012 budget. The moderate and aggressive growth plans include adjustments that reflect the recommendations made by CCG. For example, if I recommended cutting or adding personnel, this would be reflected in these models.


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Revenues This section looks at ways to grow revenues. Additional ideas for revenue growth are addressed in the Operational section of the report under the discussion of Sales and Marketing. A. Cable TV Rates are Below Market.

When Click! entered the cable TV market the original rates looked to be roughly 15% below Comcast rates. In the years since that time Click! has only raised rates a few times while Comcast in surrounding markets has continued to raise rates. Click! raised rates twice in the last year but cable rates are still roughly 40% lower than Comcast rates in other communities like Seattle. The problem with having rates so far below surrounding communities is that the margin on cable service is not high enough to support a 40% discount. In the years since Click! entered the cable business there has been tremendous increases in the cost of programming, and rate increases by Comcast in other surrounding communities. Further, Click! gains no market advantage from having rates this far below surrounding communities. Comcast has basically matched Click! rates at whatever level they have been set, and so Comcast rates in Tacoma today are close to Click! rates. Anytime that Click! raises rates, Comcast quickly matches. I would expect that if Click! moves rates higher than Comcast is going to instantly match the increases. It is my recommendation for Click! to establish a goal to have cable rates that are no more than 15% to 20% below market rates as measured by the rates in nearby communities. In order to get to that market rate Click! is going to need to raise rates every time that Comcast raises rates in nearby communities. Click! also needs to have a series of rate increases that will close the current gap between a 40% discount and the market goal of a 15% or 20% discount. The very low cable TV rates is the number one reason why Click! has been underperforming financially. Click! should have raised cable TV rates every year since inception and instead has only raised rates a few times. Following is the history of the rate increases since the inception of Click! 2002 - 8.5% average increase 2005 - 5% average increase 2008 - 9.11% average increase 2009 - 9.65% average increase 2010 - 8.37% average increase The Company should have had at least a small increase each year since inception in 1998. The Company also had only one increase between 2002 and 2007. Not raising rates has lead to a


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cable revenues being nearly $3M lower than where the rates would today be if Click! had maintained the 20% discount compared to surrounding communities. Having lower rates than surrounding communities is certainly a valid goal for Click! and is one of the reasons that Click! was founded. However, to have rates that are 40% below market rates is simply bad business and is the number one reason why Power has had to subsidize the cable system. It may be somewhat difficult politically to talk about double digit rate increases for three or four years, but even after such increases Tacoma is still going to have cable rates that are 20% lower than in surrounding communities. This needs to be explained to citizens and can be painted in a positive light. Citizens are not going to benefit by Click! being subsidized in hard economic times, and while customers want rates that are low as possible, they also want Click! to succeed in the long run. Every cable customer in Tacoma benefits from having lower rates since Comcast matches whatever rates Click! offers. Raising rates in any municipal system is always a challenge since rate increases must be approved by politicians. The process of raising rates appears to be time consuming in Tacoma. If Click! adopts this recommendation there are going to be rate increases every year, or at as long as Comcast keeps raising rates. There is some consensus in the industry that rate increases should be slowing down in the future, but only time will tell. The consensus is that the large cable companies will eventually price themselves out of the market with annual 7% rate increases. The politicians in the City must be educated on this issue so that they automatically expect and will approve cable rate increases every year. In all cities it is normal for local politician to reject or delay rate increases for political gain. However, if Click! is to become and remain profitable, then cable rate increases need to be an annual and planned event. One idea that might simplify the rate process and that can take politics out of it is to consider a resolution that establishes the goal that Click! should have cable TV rates that are 15% or 20% below surrounding communities. Such a resolution could empower Click! to raise rates as needed, without City Council approval, to get to and maintain the 15% or 20% discount. Many of my other municipal clients have found ways to remove politics from the rate setting process. Some cities give the power to raise rates to the Utility Board, meaning that rate increases do not need City Council approval. Bristol Virginia recently went even further and moved the utility to become a new political entity that is not under the direct control of the City Council. It can be difficult to operate a commercial business when rate increases are controlled by politicians instead of by the managers of the Company. Click! needs to have significant rate increases to get cable TV rates to up to market, but also will probably need continuous annual rate increases after that to keep rates at market. Failure to keep rates as high as they need to be will make it hard for Click! to ever succeed and be self-sufficient as a business.


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B. Click! Needs to Offer Retail Data

Click! needs to enter the retail data business and compete with the ISPs. The existing business model has failed and Click! is not using the existing network to the fullest advantage of the Company or to the community. Consider the following:

1. When Click! was established, one of the most important goals stated was to make Tacoma one of the most wired communities in the country. The competition provided by Click! did help the City to move forward with this goal in the early years. The Click! network was used to provide high-speed data services to government and to a few larger businesses. The competition with Comcast and Qwest helped to spur the adoption of high-speed services in homes and small businesses.

2. For various political reasons Click! adopted a business plan to offer data services only through local Internet Service Providers (ISPs). The political discussion centered around the idea that the Click! network ought to spur small local businesses instead of compete with them.

However, this idea, while having some merit, failed in execution because the local ISPs were not ready and able at that time to take full advantage of the opportunity to serve thousands of customers citywide. Ideally, with the chosen business plan, Click! would have provided a loop (a physical connection to each customer) and would have let the ISPs provide everything else. That would be the idea wholesale arrangement. However, the ISPs who entered into arrangements with Click! did not have the capability or funding needed to compete in the marketplace.

Click! helped the ISPs to succeed by providing many of the services that the ISPs should

have ideally done themselves. For example, Click! purchases the connection to the Internet for each ISP. Click! owns and operates many of the routers that perform functions that should be done by the ISPs. For instance, Click! assigns IP addresses.

The ISPs thus are now engaged with Click! in a hybrid business where Click! still

performs many of the functions that should be performed by the ISPs. The ISPs basically sell the service, bill customers and provide email service, and Click! does everything else.

3. The wholesale model with the ISPs is broken and has failed. This is most easily measured

by the fact that there has been almost no increase in data customers on the network over the last three years. The ISPs have stopped growing. During that three year time period the nationwide penetration rate (and one would also assume in Tacoma) for high-speed


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data customers has grown from 45% of all households to 65% of all households. During those three years retail data providers nationwide have seen nearly a 50% increase in customers while there has been barely any growth in data customers on the Click! network. All of the growth in data customers in the last three years has gone to Comcast and Qwest. The Click! network has basically stopped adding data customers.

4. The current wholesale policy means that customers need to coordinate being home for

multiple visits to accommodate Click! and the ISPs. Comcast offers a one-stop shop bundle where their technician can connect cable TV, telephone and data services on one visit. However, a Click! customer needs to have two or three visits to accomplish the same bundle of products (since 2 of the 3 ISPs do not offer voice). The multiple product bundle and the consequent inconvenience for the customer is yet one more reason why Comcast has been flourishing while Click! has been stagnating.

5. There are a number of reasons why data customers on the Click! network have stopped

growing:

a. Comcast adopted a new model of sales where they bundle services. Bundling means that Comcast now offers packages of cable TV, data and telephone service to customers. Customers like the idea of one-stop shopping and like the idea of getting just one bill for all of these utility services.

b. Click! does not have bundling. Click! offers retail cable TV services. Click! does not offer telephone service or data services. Instead, when a potential new customer inquires about Click! products there is an extremely clumsy and totally ineffective policy where Click! informs customers that they have three choices for data services and provides the phone numbers of the ISPs. Customers looking for a one-stop provider stop considering Click! at this point.

Only one of the ISPs on the Click! network offer voice services, so customers have limited ability to use the Click! network and get the triple play of services.

The lack of bundling has crippled Click! This is the primary reason why Click! has stopped growing for cable customers and is by far the primary reason why there has been no growth in data customers on the network. Customers are not willing to wade through calling and making a choice between three small data providers. When faced with the lack of bundling, customers are choosing to go to Comcast for the bundle.

c. Click! and the ISPs also have a very cumbersome process for installing a customer. Click! will first install the cable service and then the ISPs visit to install data services. This means two visits for an installation. Customers know that


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Comcast can install everything on one visit, and many are not willing to suffer through multiple visits to get the services they want.

Click! has been working on this issue with the ISPs and is close to testing having one truck roll for both services.

d. Comcast has increased data speeds. Comcast is currently upgrading to Docsis 3.0.

This is a protocol that allows them to provide significantly faster data services. Click! has this same upgrade planned for next year, but has not determined how to use this to any advantage with the ISPs.

e. Data services have become a commodity. In the early days of providing data

services it was an art form to deliver reliable data products to customers. However, a decade later the processes needed to provide data services are well known and the service has become a commodity. Any technically savvy Company can bring data services to customers, and in fact, Click! already performs most of the services needed to be a retail provider.

When considering all of these factors it is obvious that the current ISP model has failed. Customers want bundling. Customers want one bill for multiple services. Customers want one technician at their home who can take care of everything at the time of installation or when they need later service. The only solution I can see to grow customers on the network again is for Click! to get into the retail data business. If Click! has a combined cable TV and data product they can compete on an equal basis with Comcast again. The Comcast bundle crippled Click! and the Click! / ISP combination turned out to be a very poor competitive choice. I would note that below I also discuss the voice business, which would enable Click! to offer the triple play. The biggest question is how Click! ought to get into the data business. There are two options worth considering. These options are discussed in more detail in the section of the report on Strategic Considerations.

a. Purchase the customers of one of more of the ISPs. This would require an outlay of cash, but would also provide an instant retail revenue stream. One would expect the profits from the customers would reimburse the purchase price within a few years.

b. Compete alongside the ISPs. The ISPs have largely failed. As a group they have had no significant growth in three years. The Click! network is massively underutilized. There currently is enough capacity built into the network to serve twice as many customers as are on the network. There has been basically no growth in cable or data customers for


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three years due to the success of the Comcast bundle. One would expect Qwest to have a renewed effort in the market after they effectuate the merger with CenturyLink.1

It is my opinion that Click! needs to get into the retail data business or else consider getting out of the retail business altogether. Currently the Company is crippled by the lack of having a bundle and any future success plans that I discuss in this paper assume the Company has the ability to add new customers. I strongly believe that without the ability to offer retail data services that Click! will eventually begin to lose cable customers and the Company will not be able to support itself. If Click! competes directly against the ISPs there is certainly a chance that one or more of the ISPs will fail. The three ISPs are still small, undercapitalized companies. They have been propped up by Click! for many years and have only succeeded due to Click! performing many of their functions for them. However, since the advent of the Comcast bundle, it is obvious that the current wholesale model at Click! is a market failure and cannot be sustained if management wants to the Company to become self-sufficient. Certainly there are a number of issues to resolve for Click! to get into the retail data business. The network needs to be upgraded to DOCSIS 3.0. The Company also has to decide the manner of the competition, and this is discussed in more detail in the section of the report for Strategic Considerations. C. Click! Should Offer Lifeline Data Product One of Click!s initial goals at formation was to make Tacoma one of the most wired cities in the country. However, as the business was formed and the decision was made to sell data through ISPs on a wholesale basis, any idea of offering a lifeline, low cost bandwidth product got lost. A very low cost data service does not fit well with the wholesale business plan since there is not enough margin with a low cost product to split between Click! and the ISPs. However, should Click! decide to get into the retail data business, as recommended by this report, then the Company should also consider offering a lifeline product. A lifeline data product would be one available to homes for a low monthly price, say $15 to $20 per month, and would provide a lower amount of bandwidth than the full-price product. For example, a lifeline product might offer 1.5 Mbps download. There are still many households in the City that do not have broadband or who cannot afford a $40 broadband product, and this kind of lifeline offering can help to get more homes connected to the Internet. I recommend that Click! only sells a lifeline product to a home that also takes a cable TV or voice product.

1 CenturyLink is currently a wholesale partner of Click! but this may end when they become the incumbent provider.


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While a lifeline data product has a low price, it is still profitable for Click! since a lifeline customer cannot use very much bandwidth. A $20 lifeline product, when added to an existing cable TV product might still add $10 per month of margin. D. Click! Needs to Sell More to Business Customers The original business plan stressed economic development as a premise for building Click!, and yet the network still touches only a small percentage of businesses in the community. The vast majority of sales on the network have been to residential customers. Click! does sell some wholesale services to carriers, who then serve some larger businesses. But overall, one can say that Click! has been a failure when measured by the amount of competitiveness it has brought to the business community. Click! does a good job of bringing bandwidth to the government, which is one of the largest customers in town, but Click! has not brought these same advantages to the rest of the business community. This is due in large part to politics. When Click! began the elected officials instructed Click! to use a wholesale business model rather than sell directly to the very lucrative business market. Unfortunately, the number of sales and connections made by Click! wholesalers are far lower than the potential for the network. For whatever reason, the wholesale broadband providers are not growing the business. In fact, broadband circuit counts for businesses continue to decline. For this reason, Click! needs to enter into the retail aspect of the broadband business as well as the ISP business.

Click! needs to make retail data sales to businesses a priority. This is a community that will benefit from greater competition. Businesses in the community pay a higher price for data services than do residential customers. Click! can bring savings to business while still adding customers with higher profit margins than their typical residential customer. There are a few steps that Click! must take to be more effective in selling to businesses.:

1. Click! needs to take more advantage of the buildings where there is already fiber. In many cases Click! has fiber to multi-tenant buildings where the Click! wholesaler has only sold to one or two businesses. There is almost no incremental cost in adding other businesses in these same buildings to the network. Click! obviously needs to be in the retail data business to effectuate these kind of sales, and if Click! enters the retail business, selling into existing wired buildings should be the first priority.

2. Click! must consider selling voice services. While there is a general decline in households with a landline phone, almost no businesses are getting rid of telephones. Small and medium businesses expect to be able to buy a bundle of data and telephone products from one provider, so if Click! is to have any success in this market you must add voice services.


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3. Click! needs a more direct sales model, which will be discussed in more detail in the

discussion of marketing and sales. The only way to sell to businesses is with live salespeople who visit the businesses. Traditional marketing through mailings is ineffectual in the business market.

E. Click! Needs to Add Voice (Telephone)

I know that the Company is leery about getting into the voice business. One of the key reservations expressed to me by staff is the fear of regulation. There is also a general feeling that voice is a declining product as more and more homes abandon voice for cell phones or VoIP products like Vonage. Let me address these two issues and then talk more about the reasons why Click! should add voice to the product mix:

1. Fear of Regulation. CCG has helped a number of cable companies get into the voice businesses. The fear of regulation has always been cited by cable companies as a reason to not sell voice. However, the regulations required to provide voice are not as scary as is feared, and in fact can be totally avoided in many cases.

Most states require a Company to become certified as a carrier if they are to bill customers for voice services under their own brand name. In most states a competitive telephone Company is referred to as a CLEC. A Company must obtain a certificate from the state in order to become a CLEC. This process generally looks at three things management capability, technical capability and financial capability. Click! and the City of Tacoma would pass these three tests easily. CCG has obtained certification for hundreds of companies in every state and we know that this would be a rubber stamp process for a company like Click!. After certification there are additional regulations concerning the sale of voice services. For example, there are some regulations concerning customer privacy, regulations concerning the process of discontinuing service for a customer who does not pay the bill and similar regulations. However, no state sets rates for CLECs and a competitive Company can charge any rate they wish to customers. It is possible for a Company like Click! to avoid regulations altogether. For example, if Click! were to buy wholesale telephone services from an existing CLEC in the state, then Click! would not need to be certified or regulated and could instead use the certification of the CLEC (as long as I would mention the CLECs name somewhere on the bill).

2. Voice is a Declining Product. The percentage of homes with a voice line is declining, and

to some extent voice has become a commodity. However, today there are still over 80% of homes with a landline telephone. Industry experts see this declining at about 5% in


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total market share per year. What this means is that there is still a significant number of customers in the market who purchase landline phones. Further, almost all businesses still have landline phones. The reports of the death of voice have been exaggerated. There are two primary reasons why households are dropping landline phones. First, many people are going to cell phones and feel they no longer need a landline phone. Second, some homes with telephone service are switching to Voice over IP (VoIP) rather than traditional telephone services. These two reasons for dropping phones are currently contributing to an overall market penetration drop of about 5% per year. Market experts believe there is always going to be a market for voice services. Voice offers a better quality call than cell phones. People who work out of their homes usually carry a voice line in addition to a cell phone line. Landline phones also provide better 911 services with the off-hook signal of the phone directly linked to the address. Cell phone service can generally provide 911 addresses only within a few blocks of the caller location. Businesses are expected to want voice lines for many years or decades to come. If Click! was to get into the voice business next year you would expect 75% of your existing or new customers to still have a voice line. While this percentage will drop over time, experts think that the market will bottom out at 30% to 40% of households. Voice is the most profitable of the triple play services and if Click! can get a 30% market share from existing customers this is still a very profitable business. Finally, I believe that having a voice product is almost mandatory if Click! wants to sell to more small and medium businesses. Businesses want a bundle of services and want one provider for voice and data. Further, businesses care more about quality than price. Businesses lose money when their voice lines dont work and they want to be on a reliable network. Sine network reliability is one of Clicks strengths, you should have a good story to tell to businesses.

I am recommending that Click! begin selling voice by purchasing wholesale voice from an existing CLEC in the state. Such a product will have some margin (I am estimating a monthly margin of $7 per customer). At some point in the future after Click! gets several thousand customers you will find that it will be far more profitable to offer voice directly. The margin per customer when offered directly is around $19 per customer per month. At the time of conversion Click! would need to buy a voice switch, get certified as a CLEC and get interconnected to the telephone network. However, that is a decision that can be deferred until such time that Click! first gets the customers. F. Click! Should Consider Reselling Cellular Service


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Click! should consider getting into the cell phone business. Today there are several resell opportunities with cell phone service. The most lucrative and easiest arrangement is to resell Verizon wireless. Verizon has made arrangements with several wholesale providers that allow them to sign up additional resellers like Click!. This opportunity is strictly a resale opportunity and does not require any capital expenditure from Click!. The only capital outlay required is to buy an inventory of cellular handsets, a rather modest investment. Under the Verizon resale terms Click! would be able to sell cellular service under your own branded name. Under a resale arrangement Click! would keep a percentage of the revenue billed, so there is recurring monthly revenue. Some other resale arrangements provide only a fee for signing a new customer. Click! would be able to offer all of the same packages offered today by Verizon and could also craft some new (but not radically different) packagers for customers. The typical reseller offers a very modest discount from Verizon rates, maybe a few percent, and relies upon their relationship with customers to make sales. One of my observations of the Company is that the customers you have seem to really like you and are loyal, and I think this provides an excellent opportunity for resale. One of the advantages of selling cellular service is that it gives you an advantage over Comcast and Qwest. Today neither of those companies have cellular service as part of their package or products. Neither of them is even seeking a wireless product as far as I can tell (these things are pretty well known in the industry). There are a few drawbacks to the Verizon resale plan. The primary issue is that Verizon will not let a reseller offer a new handset until Verizon has had it on the market for a year. This is to give the Verizon retail stores a jump start. What this restriction means is that Click! would not be selling to that segment of the cell phone users who expect to always have the latest and best handset. It is estimated that this represents about 20% of the cell phone market and most customers only consider getting a new handset when their plan expires or when they lose or break a handset. There are several things that make this attractive for Click!. First, Verizon coverage is very good in the City, meaning you would have a quality product. Second, since the City is a Verizon customer, Click! ought to be able to serve the City phones and keep the profits in house. This effectively lowers the cost of cell service for the whole City since the profits would go to Click!


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I have provided a wireless business plan for the aggressive growth scenario that sells to roughly 1,000 new customers a year. This business plans provide a revenue stream that grows from nothing to $1.8M in new gross margin by year 10. There are additional expenses after the gross margin. First is the cost of marketing and selling the service and I have added this to the marketing analysis. Second, adding cell customers means adding some additional customer service reps. Finally, adding cell phone service means a new module for the billing system. Most cell phone plans have a basic price but also bill customers on a unit basis when they exceed the base usage. If Click! also gets into the landline voice business then it would already have this additional billing capability. I would not want to see Click! make cellular sales a priority. The margins on resold cellular service are not as good as the margins on any of your other products. However, Click! has a significant existing customer base and sells to a number of new customers every month, so a sales plan that markets to these bases while selling other products should attract a decent amount of cellular customers over time. Click! will also gain the advantage of making some profit from cell service sold to the City and/or the utility. The model assumes a sale of 700 phones to City accounts in addition to the sale to end users.


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Expenses A. Employee Cost I compared some basic metrics about the number of employees and payroll costs for Click! to a number of other commercial and municipal communications businesses. I only looked at businesses that have between 10,000 and 100,000 customers. The two metrics I considered are:

Number of employees per 1,000 customers Percentage of labor/benefits to total costs (less programming)

What I found in looking at other companies is that all of my other clients have between 3.1 and 3.5 employees per 1,000 customers. And, most of these other companies offer the triple play, which would make one think that they require more employees than Click!. Click! is not exactly comparable to these other companies since you are in the retail cable TV business and the wholesale data business. However, since you do a lot of the functions for the ISPs, it is reasonable to think of Click! almost as if you were in the double play business. The base budget used for 2010 / 2011 started with 113 employees. Before my analysis was completed the group has been cut for budgetary purposes to 103 employees. The cuts made are ones that Click! was already considering before my analysis. Depending on how you count Click! customers (ranges from 26,000 to 28,000 in counting cable customers or homes with active drops) you get a range of employees per 1,000 customers that varies between 3.7 and 4.0, both higher than any of my other clients. Even comparing to the highest ratio I found elsewhere at 3.5, this means Click! has an excess of 5 to 12 employees compared to similar companies. Click! has even more extra employees compared to companies that run really lean with a 3.1 ratio. This is further compounded in that the employees shown in the Click! budget does not represent everybody who works for Click!. For example, there are accountants and human resource people working elsewhere in the utility that are not included in this total. For some of the comparable companies, those backoffice employees are included in the ratios I am comparing to. However, those backoffice employees are included in Click! expenses through the over $1 million in each budget period in assessments and allocations by TPU and the general government. Further, the Click! head count is actually higher than I have calculated when you consider the contractors that are brought in as installers from time to time. However, this is where it gets fuzzy in making comparisons to other companies, because some of these companies also use occasional contractors (although some do not). Regardless of considering adjustments to the Click! ratio to account for backoffice employees or contractors, Click! has more employees per 1,000 customers than any other comparable Company for which I had data.


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The second metric I looked at is total labor costs compared to total expenses (not including programming). At Click! I calculated this ratio using both 2010 expenses through June and also using the full 2010 budget. In both cases Click! spends about 67% of non-programming expenses on labor and benefits. All of my other clients of similar size have a ratio between 42% and 46%. There are several reasons why the Click! labor ratio is so much higher than my other clients. First is the fact of having the extra employees compared to these other clients. Second is the level of benefits. Click! certainly has a higher benefit cost per employee than any of my commercial clients. However, the Click! benefits are similar to the benefits paid by other municipal clients. Finally, Click! has higher salaries for similar positions than my other clients. For the companies I compared to, only one other Company has union employees. All of the other companies except one operate in markets of smaller cities than Tacoma and consequently have salaries that are somewhat lower due to regional labor rates. All of these factors contribute to the Click! ratio being higher, although having more employees is still the primary reason for the difference between Click! and the other companies. After considering both metrics it is clear that Click! has more employees and a higher labor cost than my other clients of similar size. Next I compared the Click! organizational chart to that of my other employees to see where you differ from them. I found the following:

1. Span of Control. Click! has an extra layer of management compared to all of the other comparable clients. In these other companies the working departments report directly to the general manager. In Click! there are three managers today who report to the general manager and then other departments report to these three managers.

2. Number of Cost Centers. Click! has far more cost centers than any other of my clients. I dont know the genesis of the number of departments, but it almost look like numerous cost centers were created in order to give each of the three sectional managers a number of direct department heads reporting to them. None of my clients have exactly identical structures, but if I take a composite snapshot of how other companies are structured and apply it to Click! I would end up recommending a structure than has far fewer cost centers. I have prepared a new suggested organizational chart as part of this project. It is attached as Addendum 1 of this report. I will describe the final recommended structure below. The proposed structure consolidates several groups in the Company. For example, I am recommending moving all technicians in trucks into one department. This would combine


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the existing Network Operations group and the Service Installation group. I am also recommending combining the Network Service Center and the Dispatch groups.

3. The Proposed Organizational Chart. Following is a description of the Organizational Chart as shown in Addendum 1.

a. Reduces to Two Group Managers. Today the organization has three main managers reporting to the General Manager. Two of the existing mangers supervise technical employees. The organization splits up similar functions between the two technical managers. For example, There is a group that works on the outside network in trucks working for each manager.

The proposed organizational chart reduces from three managers to two. One manager becomes responsible for all technicians and the other manager is basically responsible for everything else (backoffice).

b. Consolidates Technicians in Trucks. Today there are two departments in the

Company that work on the outside plant network from trucks, the Network Operations group and the Service Installation group. The Network Operations group basically tests the network and consists of ten technicians and a supervisor. None of my other clients has this testing function as a separate department and in other companies testing is done by the same technicians who install customers and who do trouble calls. One of the main issues with installation technicians is keeping them from getting too bored with the job. Allowing installers to take breaks from customer work to do testing is a great way to give them a break from the routine. In all of my other clients this function is combined and performed by the installation technicians. There are a number of benefits of combining the two groups:

Eliminates a group supervisor and puts all technicians in trucks into one

group. Provides a change of pace for technicians since they can be moved

between installation, repair and testing functions to keep work fresher. It should lower the need for outside contractors. In very busy weeks

everybody can do installations or repairs and thus not require outside help. The work flow for install technicians changes from week to week, so having a larger group provides more flexibility to get things done during busy periods. The converse is also true in that a large number of technicians could be assigned to testing during a slow week.

Today the job descriptions and pay scales for these two departments is not the same. Over time these two functions need to be merged so that there is only one


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type of technicians who performs all of the functions needed in this group. I cannot find any other Company of your size who has specific testing technicians. For the reasons stated, the Company will be far better off to have one larger department of technicians that perform all of the outside plant and customer related functions.

c. Consolidates Network Service Assurance Group (NSA) and Dispatch. When comparing to similarly sized companies I could find no Company with a standalone dispatch group. This function is found in most companies consolidated with the NSA function or with customer service.

These two groups were combined in the past at Click! and were separated into two distinct groups at one point. The recommendation is to move these two groups back into one group. There are several advantages of such a consolidation:

The workflows are such that in both groups there are busy and slow times of each day. By cross training all of the employees in a combined group to do both functions, the group will become more efficient. I have not suggested cutting back the number of employees in the combined group, but I believe that after the group was combined and sufficiently cross trained that there will be an economy that would probably allow for the reduction of the combined group by one or two bodies. This reduction would take six months to a year to materialize.

With the groups combined there would be coverage for both functions when at least one person is working.

One of the recommendations in this report is for Click! to get into the retail data business. Most companies who offer retail data also use this combined group to act as second tier customer support for data customers. This technical support is referred to as help desk support in most companies. Today, the customer service reps at Click! take the first tier calls and talk customers through the most typical problems with data (such as checking to make sure the modem is plugged in). Today, if the customer service rep is unable to solve a customers problem they then refer them to second tier help desk support, which happens to be at each ISP. If Click! is in the retail data business then you will need a help desk group to talk to customers. This group would be the natural place to put such a function, and you gain even more efficiencies by having three functions in the same group. For example, if the NSA is manned 24/7 then there is also late night coverage for help desk support at the same time. It may be that it will be more efficient to outsource help desk customer


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support, but if it is done in house, this would be the natural group to perform the function.

d. Consolidates Business Systems and Administrative Support. Combining them will

result in the collapse of a cost center and operational efficiency. In the organizational chart I have the combined group reporting directly to the General Manager, since the manager is the recipient of much of the research out of that group. This group ought to easily be able to absorb the supervision of this group, who basically help all groups with paperwork and related functions.

e. Consolidates the Engineers and the Interactive Services Group. This is another move that creates several benefits:

Eliminates a supervisor and one of the engineers becomes the department head.

Eliminates another cost center making budgeting easier. These two groups work hand-in-hand every day and there is no functional

reason to have these as separate groups. My other clients call such a combined group by many different names, but almost every one of them has only one group that includes all of the inside technical staff. Having the engineers in charge of this group makes it easier to get coherent and consistent technical decisions since all technical staff are in one department.

4. Number of Employees in Some Departments. Along with reviewing the best

organizational structure I compared the number of employees in each group and found that there are several departments at Click! that have more employees than similar groups at other similar companies. Specifically this includes:

a. Network Operations. This group seems to have an extraordinarily high number of technicians to do the testing function. As mentioned earlier, I do not know of another Company of this size who has a separate testing group. However, all of my other clients track testing time by the use of different accounts for testing versus installation or repair work. One can look at the ledgers of these companies and see the relative time spent on each of these functions. In looking at my other clients who keep this information in the ledger I cannot see any of them who spend more than three man years each year on testing, meaning three full time equivalent bodies doing this function. Many of these clients have networks bigger than the Click! network.

However, many of the networks for these other companies have more fiber than Click!, and some of the other networks are all fiber. There is definitely more testing needed for an HFC network as compared to a fiber network, and perhaps even a little more testing when compared to a copper network. Because Click! has


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an HFC network I am going to assume that you require more than companies that are all fiber.

But it is still unimaginable to me that testing of the network requires ten technicians and I believe that this group needs to be drastically reduced. I am recommending that you keep four FTE equivalents for the testing function and move that many employees into the Service Installation Group. I would also note that the Network Operations group charges half of their time to Power today, so reducing manpower is going to lower the charge to Power as well as to Click! The allocation of the testing function between the two entities should be reexamined as you make this change. Power generally benefits from the fiber network and does not get much benefit from the HFC network. Certainly Power gains some benefits from the HFC network due to the use of the smart meters installed in 18,000 homes and businesses. But Click! gains far more benefit from the HFC network testing than Power and it is hard to justify charging half of HFC testing to Power.

b. Interactive Services. The Interactive Services group takes care of all of the electronics and related systems and functions in the Company. They maintain the cable TV headend, the SONET network, the Ethernet network, the HFC network, data routers, and the Internet backbone connection.

This group has far more technicians than are employed by any of my other similar clients. There appears to be several reasons why there are so many technicians. First, there are three to four employees who primarily work on the cable TV headend. In all of my other clients there is generally just one technician primarily in charge of the headend, with a few other technicians cross-trained to assist during emergencies or during vacations and other times off.

Most of the other technicians at Click! are assigned primary responsibilities for other systems. For example, there are technicians who work on SONET or on Ethernet. The jobs in this department today are very much placed into silos, meaning that each technician has a specific responsibility for a particular system or network. In all of my other clients, inside technicians are generalists. Technicians are expected to learn about and pitch in on any system that needs help. Click! is not a large enough Company to justify technicians with specific responsibilities. I have only seen that kind of specialization at the very large cable and telephone companies.

The primary function of the inside technicians is to fix problems as they arise and to make sure things are running well. Generally technicians are not the ones to design or choose new technologies to replace systems, a function generally given


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to engineers. In most companies there are just enough inside technicians to put out fires as they arise. Most companies rely on vendor support to fix really hard problems and use their technicians to keep things operating smoothly and to fix minor problems and to replace equipment when needed. Technicians at most companies know a little bit about every system. Certainly each technician can be expected to be the primary go-to person for one or two systems, but this is different than having technicians dedicate full time to specific systems.

Many of my other clients do not have auto-provisioning like is done at Click!. Auto-provisioning is a software system that allows a service to be automatically activated when a customer service rep takes an order for a service. At Click!, when a customer adds HBO, as an example, it is activated by software as the order is being taken. In a Company without auto-provisioning, technicians are involved in activating new services as well as performing the maintenance and repair functions. This means that some of the companies I am comparing to have technicians that perform functions that are not needed at Click!. This would make one believe that Click! might even need fewer technicians than similar companies.

I am recommending that the number of inside technicians is cut by four people. The remaining technicians need to begin immediate cross training so that all of the technicians know something about each system. There are several ways to do this. One typical way to structure this department is to have a primary technician assigned to each system who is supposed to know the system well and a back-up technician to assist as needed or to act as the primary when they are absent from the Company. Other companies have the technicians act as a group and have them work as a team to solve problems as they arise. I am thinking that the first alternative probably is going to suit Click! better since there are already primary specialists for each system. However, as the bodies are cut back, every remaining technician is going to need to quickly get up to speed on the various systems since everybody remaining will have more responsibilities than today.

B. Marketing The marketing budget is higher than what one would expect in a Company this size. In the telecom industry (and in many related industries) there is a fairly routine metric used for determining the right size of a marketing budget.

Generally, there are two parts of a marketing budget the cost of obtaining new customers and the cost of retaining existing customers. There is a metric for each of these two components. Most companies target a budget for selling to new customers at 12% to 15% of the revenues to be obtained. Said another way, most companies are willing to spend a little more than a month of customer revenue in order to get a new customer. This metric is used by cable companies,


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wireless companies and telephone companies throughout the industry. The second metric is for setting a budget for customer retention and most companies in the industry target between % and 1% of the existing revenues for retention.

There are several business plans that were created as part of this project and that are described in more detail in the Business Plan section of the report. The business plans vary from a Status Quo business plan that essentially keeps the Company operating in the same manner as the last few years, up to an Aggressive growth business plan. I applied the high end of the above metrics to the various business plans, meaning I applied 15% of the new revenues and 1% of existing revenues. Applying this metric produces a range of suggested marketing budgets between $960k and $1.2M per year for 2011 for the various plans. In the growth models the marketing target grows each year as revenues grow and in the aggressive version the budget is $2.1M by the tenth year of the plan.

The amount of marketing dollars suggested by these metrics is significantly lower than the existing marketing budget. When I analyzed the account and identified those items that are strictly sales and marketing oriented I show the current planned expenditures for 2011 for sales and marketing to be over $2M.

I have to also consider the fact that the Company has not grown for several years. Even with this large budget the overall number of customers has been static for several years. This is not to say that the marketing effort has been totally ineffective. Click! has routinely been adding about 500 new cable customers per month for several years, which also just happens to be about the same number of customers that disconnect each month. One can say that Click! is spending $2M a year for results that have stopped it from shrinking, but that have no allowed it to grow.

The challenge is how to reduce the marketing budget and still get better results than today. To answer that question I first looked at how other comparable companies are doing sales and marketing. Generally, these other companies have anywhere from two to four direct marketing employees. In every case, everybody in the marketing group in these other companies is hands on and there are no supervisors. Each person in these marketing groups is directly responsible for driving some measurable portion of revenue.

By contrast to these other companies, Click! has too many employees in the marketing group. Click! has ten employees between the Marketing and the WCS group along with a group supervisor and a department head that also do some marketing work. Obviously the first place to consider trimming the marketing budget is in people.

It is important that every dollar spent on marketing, be it salaries or something else, generate new sales. Any expenditure that does not directly result in significant revenues is an expense that cannot be justified or afforded.


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Following are some ideas that can help bring marketing dollars in line with the industry metrics and still produce the growth that is needed for Click! to succeed:

1. Some Functions in this Group are not Really Marketing. There are a few people and

functions in this department that are not really related to marketing. For example, one person is the primary liaison to the ISPs, and this function is probably more directly attributable to customer service. I would recommend moving this person to the Customer Sales and Service group.

Another function done by this group is to take care of MDUs. This is a function that is somewhat marketing, somewhat customer service and somewhat related to negotiating contracts. My understanding is that there are two people who perform all of the functions related to MDUs and I recommend that this be reduced to one person who does everything related to MDUs.

I would also note that I think the Company can do better in sales to MDUs. I know that Comcast has contracts with MDUs in the city that make it hard for Click! to get access to many complexes, but recent FCC rulings give Click! the right to challenge some unsavory Comcast practices. While there are still ways for Comcast to negotiate an exclusive contract, many of the tricks they used in the past are no longer valid. I think it would be appropriate to have specific goals for the MDU person to gain access to more MDUs each year. If this area is not growing it is hard to justify a person to do the function. Marketing dollars could best be spent elsewhere.

The WCS group is related to wholesale customers and ISP business. This function is more customer service than sales related. The suggested organizational chart moves this group out of marketing and makes it a separate group.

2. Reduce Employees. As mentioned, the marketing group is much larger than groups I see

in similar companies. Most of them have two to three marketing employees who then direct the marketing and sales campaigns. It is vital that every person in this department be responsible for some effort that directly drives new sales of products. Companies of you size cannot afford to spend much effort on brand marketing, but instead must drive sales.

My recommendation is that you keep three marketing coordinators and an MDU salesperson, for a total department of four people. The three coordinators must be responsible to completely drive the mail campaign and the direct sales campaign (discussed below). I would recommend that the MDU employee be given directions to step up sales to MDUs compared to past performance and to also give them responsibility for the affinity campaign (discussed below).


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3. Revamp the Marketing Campaign Based upon Offering the Triple Play. If Click! adds the voice, retail data and cellular products suggested by this report, then the marketing effort, mostly done by mailings, can be reinvigorated to sell these additional services. Currently the Company has a significant embedded customer base and one would expect decent sales of the new products into this base.

The Company has been selling 500 new customers per month using the mail campaigns and the customer service reps need to be trained to sell the full suite of products when customers call to get connected.

I have one recommendation for the existing sales campaign. They do make an attempt to track campaigns by the use of campaign codes and linked telephone numbers, but nobody had statistics that showed the effectiveness of any specific campaign. The marketing staff today was unable to tell me about the success of each of its mail campaigns. It is vital that the Company find some way to track the success of each campaign so that you can know what does and does not work. There are various techniques that can help to track mail campaigns. For example, many campaigns assign a code number to each mailing and ask customers to give them the code numbers when they call.

4. Direct Sales. Most cable companies in markets as large as Tacoma use direct door-to-door sales teams. It was reported to me that Comcast has door-to-door sales people in Tacoma.

I know Click! tried door-to-door sales in the past, but did it using employees, and reported to me that the effort was unsuccessful. In my experience, the only sales model that works is one where the sales people are compensated with commissions based upon sales success. This model does not work anywhere using employees, if those employees get a basic salary and benefits even if they do not sell. If sales people can get a base pay for not selling, then they will often take the easy way out and collect the base pay for doing nothing.

Sales people are some of the most difficult people you will ever work with. Almost nobody likes doing door-to-door sales. It is hard work and mostly a salesperson will hear No all day long. It is difficult to find people who will work through the pain of the job and stay motivated enough to succeed.

The sales model that seems to work is to use contractors instead of employees. The pay for the contractors will be based only upon successful sales. For example, a common compensation in the telecom industry is to pay a salesperson a commission that is equal to the amount of the monthly recurring revenue that is sold. Some companies give some very limited benefits to contract sales people. For example, if a salesperson has been meeting quota, you might pay them for two weeks of vacation per year. But as


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contractors, it is typical that the sales people pay their own payroll taxes and health insurance.

One thing that needs to be introduced in this sales model is a method for tracking sales. It is typical that commissions are not paid until customers are actually connected to the network. This means that you need to find a way to flag sales that are made by a sales person and then gather this data in order to calculate the amount and the timing of commission payments. Generally this is done manually for a few months when this process starts, but over time every Company finds a way to automate the calculation of commissions.

Another important issue with a sales team is that the sales people should be directed where to sell. Most companies require sales people to keep logs of some sort, and often give them a Blackberry or some similar tool. The goal is to not only get sales from the salesperson, but to also gather market data. Sales people should make an entry after every door they knock on that will tell you what they encountered. Over time, this sort of data gives you a much more detailed picture of the market than anything you have today. In sales, knowledge is everything. For example, if a household says that they are currently in the middle of a two year contract with Comcast, then you can make certain that somebody knocks on that door again before that contract expires. You also will gather good information on each ho

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