Barrett Breeding: In the electric cooperative world, a member’s a member and they’re going to stay a member. In the broadband world, customers choose to use you, and you have to keep them, and you have to grow with them.
You really have to get into the data, getting the information behind those members and know how to serve them. Or, in competitive areas, they will switch. They’ll switch for convenience, and they’ll switch for money, and they’ll switch for just the quality of service.
There’s a lot more to think about. You really have to be a lot more intentional in the broadband world. It really is a completely different culture you need — management all the way down through those customer-facing employees.
Teri Viswanath: That’s Barrett Breeding, he is the chief financial officer for Ozarks Electric Cooperative, and he’s talking about the transformation needed to stay competitive in the broadband marketplace.
Hello, I’m Teri Viswanath the energy economist at CoBank and on today’s program, we meet up with two electric cooperatives that are going to share their strategies on how to transform a start-up broadband initiative into a sustainable and thriving business. As always, I’m joined by my co-host and colleague, Tamra Reynolds, a managing director here at CoBank. Hi Tamra.
Tamra Reynolds: Hey Teri. We are going to start off this conversation by visiting with Barrett and Steven Bandy, the chief technology officer at Ozarks Electric Cooperative and general manager of OzarksGo. We are then going to continue this conversation with Zach Morgan, the chief financial officer with United Electric Cooperative in Savannah, Missouri.
Just a little background on Ozarks Electric: This co-op serves electricity to about 90,000 homes, farms and businesses in northwest Arkansas and northeast Oklahoma. They also serve about 45,000 broadband customers, having only started constructions back in 2017. Also important to note that Ozarks is witnessing pretty impressive growth of roughly 2 ½ to 3 % each year.
Our conversation begins with Steve’s assessment on how that growth and competition for those consumers changes the game for Ozarks.
Steven Bandy: I can tell you just day one starting this project, driving your truck through an area subdivision out in the rural areas. You’d be getting sign ups and people asking. Now that you’re getting more into growth areas, where people may not be as familiar with you as a cooperative or what you’re doing. It changes a lot of things in how you have to compete in a lot of these areas are high compete areas, we’ve had to change our tactics. To how do you market to that? How do you make sure you get a return on that investment and what does that look like?
Making sure that your price marks are right. Incentives are in the right place you’re dealing with a competition that has different incentives and things that they can offer to the customer. So, I think with our analytics being able to really drill down into that to let us know, “this can work, we can do this.”
Viswanath: Tamra, Steven is Ozark’s chief technology officer, so we can probably assume that he’s hard-wired toward data analytics. But, in response to your question their product offering, he provided a straight-forward narrative on how their ability to stay on top of the customer data has enabled the agility to pivot within the marketplace.
Bandy: You’re seeing customers starting to use more data - doing more in the home - more devices coming into the home and you also can use that data to look and see if they’re getting dissatisfied. Their issues may not be how it’s being served, but it may be the limits on how much they’re getting.
We’re able to dig into that and be able to make offerings and see those that that may need to increase the speed and not doing that just to try to drive a dollar, but to drive an experience.
We’ve added an additional tier in our speeds for internet, we’ve added a mid-tier in there over 500. We’ve also added a 2500 over the gig and we’re seeing take rates in that. What was traditionally taking the lower end service, we’re starting to see them taking the upper end services and fitting more into the lifestyle what they want.
Reynolds: The sort of “marketplace pivot” that Steven talks about has a direct impact on the infrastructure that needs to be in place to serve that demand. But system builds come with a hefty price tag, as rising supply-chain costs and delays effect the business line. Barrett responds to Steve’s comments about the balance sheet impact.
Bandy: We’ve had to upsize our core systems, just the ring around our system.
That allows you to be able to push your data across and allow for better redundancies in in outage control, making sure that you got growth areas that are being able to be served.
But we’re also we look at that and we also measure, you know, really on the on the bandwidth needs we start getting to be about 50% capacity and we start looking at getting new links, new services, upsizing, making sure that we’re well ahead that, because, if you wait too long, by the time you get the equipment, you’re at an 80%, 85% and you’re probably behind.
We monitor that in our monthly reports, we look at it daily, hourly and you know we have put the processes into place, to make sure that that customer experience doesn’t change.
Breeding: Just to add to Steve, from his side, he’s looking at network performance and making sure we are able to serve the customers’ needs well in advance of that need. On my side, this is where you really have to plan years in advance. It is not inexpensive to upgrade equipment, especially when you’re growing. You really have to coordinate between your operations and finance and know where you’re going, not just this year, but several years in advance.
On the electric side, what the impact on your rates is going to be long term and plan for it and manage your financial metrics. And then on the broadband side, it really is more about return on those assets and profitability and when do you break even when you start making profit on that because it’s one thing to spend money providing the best service you can to electric members. The minute you move outside of your territory, you need to be very intentional about providing a return to your broadband business.
Viswanath: We talked about the importance of data-driven decision making in this rapidly developing data marketplace. But the question in my mind was, how has Ozark’s journey evolved?
Reynolds: For a start-up operation, there are preconceived ideas about the broadband business that frankly might not prove out. Once the network is up and running or as the enterprise hits certain major milestones — like encountering competition, moving into different markets and responding to evolving consumer demands — analytical needs grow. We asked Steve and Barrett about this, and here’s what they had to say.
Bandy: That’s a that’s a good question. I mean, looking back at day one, it was we had X number of passings and we needed to hit this percentage, and these people signed up and you were hitting your financial goals.
I think today that is completely switched down to this is the RPU off of that the that that growth. Today, it’s dealing with attrition. What services have you taken? What’s the best blend of those services to offer to your customer? What’s the incentive programs that you can offer to compete against your outside competition? How do you engage your employee to make sure that they’re selling those types of services?
We have a predictor in place that can tell you if someone’s disconnecting, why they are disconnecting. We’re working on trying to be able to put that into the phone system to where when a customer were to call in, we might have an idea of why they may be calling us. They may be calling saying hey, their service is lagging because of this. They have this number of devices connected, this is the problem they’re having. And we’ve tested that, and it it’s come back on our initial tests on where we run it back that it’s got 96% accuracy.
So it’s about how are we going to help you as a customer. And I think that’s the mindset that we have more as a cooperative. It’s more about making sure you have that best service that you expect to pay for. And I think we get a lot of that, you know from early day one. Hey, we have a passing. You signed up great. We’re glad to have you. Now we’re to the, “How do we keep you engaged?”
We were recently recognized across the state in the Arkansas Business Journal as as one of the top providers. I think that is a great testament to what we’ve done when you’re just in one little area of the state and the state has recognized you as one of the top Internet providers in the state. I think that goes a lot back to the employees on how we really do want to make a difference in their lives and provide that better service for them, for the value that they’re paying for.
Breeding: When you first start building, you’ve made the decision to build, right? Now you have to look at retaining all the customers you acquired initially, but then also how do you acquire more customers? How do you continue to add to that subscriber count?
When a service terminates like Steve said, we know if they’ve left as an electric customer as well. And they’re moving, you know, to a completely different area of the state or country, so there’s no reason to worry about that customer. Most broadband companies just know they’ve left. We know which ones are still here and we can look at why we’ve lost those customers and why we retain others. And then also as people move in, we’re usually the first place they call because we’re an electric utility. You set up your electric so as utilities first and then your internet. So we can get the data and know who’s taking services when they move into the territory electrically and make sure we are doing what we can to get capture those customers.
Huge amount of data you can look at it in a million different ways. And what Steve’s team has really done well is getting all that data and making it consumable. So, a lot of automation, a lot of dashboards so that we can actually look at the data and figure out what we need to do. And, unless you have the data, unless you can really consume that data quickly and efficiently, you’re not going to be able to make those decisions at all.
Viswanath: Our next conversation is with Zach Morgan, the CFO with United Electric Cooperative out of Missouri. This co-op has about the same number of fiber services customers that Ozark has but has been at it for more than a decade. What’s more they have about four times the number of fiber services customers as they do electric members. But, let me have Zach share United’s story.
Zach Morgan: Back in 2011, before myself and our CEO got here, we received a 75%/25% grant loan from the USDA or RUS, a BIP loan, and what that was that was meant for us to build out a section of our electric territory with fiber optics.
We’ve built out about 1,300 miles of line in our service territory, and it went pretty well. It took us about two years to build out. And then about a year before I got here, there was a city or a municipal about half an hour east of us where our G&T is actually located, and they asked if we would provide fiber services to their community down in Missouri. They were a municipally owned electric system, so the make-ready for putting fiber optic cable there was next to nothing. We were able to go to overhead, and our take rates were pretty high, and that project was wildly successful. We really saw an opportunity here to help subsidize our electric rate because we had all these communities that didn’t have internet service or very low internet service, and so we felt that there was a path here to subsidize our electric rate by running this as a for-profit entity. That’s what we’ve done. Today, we’re going to hit 40,000 subscribers in 2025, and we’re still at about 10,000 electric meters, so we have about four times as many fiber customers as we do electric meters. About 4,000 of those are electric members, but the overwhelming majority are outside of our service territory.
We did a rate raise at the beginning of ‘16 and we were able to subsidize for so long. We finally did our first electric rate increase in July of 2024, so we were able to really bring back a lot of goodwill to our membership.
Viswanath: I’d like to hear that journey as you think about defining success, defining performance metrics for this for-profit business, and how that’s evolved.
Morgan: One of the things that we’re always looking at is obviously customer counts. That’s where everything starts. That just leads you to your revenue. We looked at the different packages that customers were taking. We have five different package types now, but we’ll just go with the four that we’ve had for a long time. We had a lower tier, two packages, 250 in BPS and then 500 and then 750 and then a gig.
One of the things that we noticed was your programming charge for each customer that signs up, it’s the same. You’re going to get charged $3 whether they take the lowest package or $3 whether they take the highest package. Then at that point, if you’re saying, if you’re telling me that, okay, if this customer takes the highest package, pays the highest price for this package but their programming costs that we have to burden on ourselves don’t increase, why are we marketing the lower packages as much?
That’s what we call gross profit or gross margin. What’s your revenue minus your cost of revenue? Same thing on the electric side. It’s your electric sales minus your cost of power, right? On the fiber side, it’s your fiber sales minus your cost of programming. Data specifically has a very high gross margin. We offer voice and TV, too. If you can make, let’s say, for example, we charge $100 for a gig package. If we’re getting charged $3 per customer on our programming, that’s $97 of gross profit for that customer. If we sell a package that’s $40, then that’s $37 of gross profit. We’re leaving $30 off the table there, which, times one in and of itself, $30 doesn’t move the needle. But when you’re talking 30,000, 40,000 customers, you’re talking a huge substantial difference. This is true recurring revenue. That’s why we have, I don’t know, a three-legged stool. Essentially, we do customer accounts, we do RPU and we do monthly recurring revenue to track all those things.
Viswanath: RPU, just for our listeners, revenue per unit.
Morgan: Yes, that’s right.
Reynolds: That’s great, Zach. I love the perspective that you’re evaluating multiple data points and saying, “How are we performing? What does this look like over time? How does that inform where we want to go as we continue to evaluate where we build out and what we are offering our subscribers?” I think, one of the things that’s relatively unique about what you’ve done, and Teri picked up on this, is the out-of-territory aspect. I think that requires a lot more planning and due diligence before you embark on some of those new markets.
Morgan: An example of that, Tamra, would be like when we were looking at St. Joe, they were able to pull some just amazing demographic information like age, average age of the household, average mean income of the household. Then they started breaking it down by polygon, because we’ve been doing this for almost 10 years now. We’ve got some consumer behavior out there. We can start seeing, hey, this is what success looks like when you’re dealing with these consumers now. St. Joe was a town of 70,000 that was wildly larger than any other market that we had done. That consumer behavior was wildly different than anything we’d ever expected.
We just looked at the ACSI information. We just look at the average age of the use of the person that took the survey. We look at the occupation, the college education, how many kids are in the household, things like that, and that’s great. All’s that tells me the satisfaction of the age demographic and the occupation, stuff like that.
Now I start adding packages into the ACSI information and now what I can see is I can see that 40, 50-year-old demographic that we just talked about usually takes the highest package. Boom, go, let’s go. Not everything’s like-for-like though either. Competition may have different competitors and different markets and things like that.
Maybe in our northern market, we may need a 35% take rate in that first year, because based off our ACSI information, we see that they take lower packages because they’re coming from providers that don’t offer as good of a service as we offer. They’re actually satisfied with a lower package because they’re coming from a lesser-than provider. Whereas maybe in our southern markets, they’re used to that gig, two gig service, self-install service. The take rate isn’t going to be as high, but the take rate in that market doesn’t have to be 35%. It may have to be 25% or it may have to be 30% because we can assume that these customers, or these potential customers, are going to take these higher packages. We’re going to need less signups to actually hit our payback period. That’s just some of the ways that we’ve evaluated things.
Viswanath: I’m going to break it down a little slowly because you’ve provided just a wealth of information. Want to make sure our listeners have this. You mentioned ACSI, the American Customer Satisfaction Index. That’s really going to understand the revenue potential of that particular new market. The other you mentioned, with your GIS group, happens to be polygon. That is the topography of service or the cost of delivering service into that area.
Morgan: Yes, that’s right. We’re using pretty much existing data from existing customers, matching it out up with demographic information in new markets, seeing where things match up. If there’s a match there, we’re going after it. We used to not operate like that. I’m sure a lot of other co-ops, like we’re talking about, it was just build, build, build, build. With all the grant programs coming on, there’s a lot more competition. You have to be a lot more precise and a lot more accurate and a lot more methodical with your projects.
Viswanath: There’s a sweet spot on the packages that you’re offering. You offered, for example, the trifecta. We’ve got data, television and voice, the three that are common and standard. In some cases have to be offered up, but you’re also refining in terms of what the best payback or packages for payback.
Morgan: Yes, and I’ll give you an example, Teri, with St. Joseph, just talk about TV a little bit. If you are offering TV, you can get hit with price increases all over the place. That programming increase is real. If you’re not keeping up with those increases, all of a sudden, TV becomes a loss leader, and it just becomes a loser. It starts eating into your gross profit or your broadband margins at that point in time.
That was something that we discovered a little bit in the spring of last year of, okay, we need to increase these TV rates. What we also found out, it was a perfect timing thing, especially in our St. Joe market. Our biggest competitor there, they dropped Bally Sports. In the Kansas City market, that is the only channel that you can watch the St. Louis Cardinals and the Kansas City Royals on. Most years, Kansas City Royals, it’s not something you think about, but they were in the playoff race this year. We assumed a certain take rate for TV and many, many more people took TV than what we ever anticipated or budgeted for.
The programming for it’s not cheap, but we’ve used that as an angle and we use that data from that to see, “Hey, we’re keeping TV because it actually is a competitive advantage in this very large market that we serve.”
Reynolds: Ozarks talked about the need to really understand attrition rates, so we asked Zach about this and how to enable recurring revenue. Here’s what he had to say.
Morgan: We’ve spent some time with some telco companies outside of the cooperative space to really get a good idea of how this thing actually works from their world. I’ll just tell you it’s always a race to the bottom.
We have a provider here in town. Like I said, we have gig for 100. They’re offering it for 35 right now. That’s going to be good for a year. There’s absolutely no way they’re making money on it, but it’s not fiber, it’s copper, but that’s still how they market it. When I see these competitors offering three, four, five gigs, it’s nothing more than a marketing ploy.
One of the things that we do weekly is we do a connect and disconnect report, Teri. And they actually provide the reasons for why they disconnected. There are about five or six categories there that we’ve nailed down that we say are competitive for competitive reasons, one of the things that I’m actually looking at is for the people that leave for competitive reasons, what percentage are coming back on?
For the percentage that are coming back on, what’s the frequency of that? If they’re coming back on within six months, what that tells me is the price didn’t matter, the service was literally so bad that they came back on. If they’re coming back on in a year, what that tells me is that the price increased, and they’re coming back to us. We’re digging into this right now, because I don’t want marketing and sales, customer service playing pricing games without us having a full understanding of the consumer behavior.
Viswanath: So how do we retain these customers? Is there a way to make this product “sticky?”
Morgan: Even the stickiness, Teri, when you talk about it, the additional services, like really in the St. Joe market, we feel the TV is sticky. The thing about TV is it’s not just the cost of programming, it’s the cost of your staff’s time too. TV issues take up an overwhelming amount of their time, and that’s an additional cost, too. When we talk about these sticky services, especially the commercial accounts, we’re also going after the phone system too, because, you get the data and that’s one thing, then you get the phone system in with voiceover IP as well, that makes it that much harder for that customer to get off you, because not only do they have to change their data, they have to change their entire phone system.
On the residential side, we know for a fact, that our customer service is the thing that differentiates us. It’s the thing that you don’t want to run your fiber operation like a cooperative, because it’s a for-profit entity, but it does have to have that cooperative feel to it in order to differentiate yourself.
Really, the customer service is a huge component. That’s the thing that we focus on the most. I don’t just mean the customer service reps.
I also mean when the techs are going to the house or when we’re doing construction in the field, how we’re taking care of customers. We want to treat them like members, maybe not to the extent that we treat our members because we treat our members very well, but it has to have that feel to it as well. That is one thing that also really makes it sticky for us.
Reynolds: Much of the conversation we had with our guests was focused on the benefits of data-driven analytics in the more competitive fiber market but the conversation with Zach became incredibly interesting when we talked about the risks of not being laser-focused on profitability. That is, taking on too much debt without having a clear understanding of the revenue potential attached to market growth expectations.
Morgan: Anybody that reads the Wall Street Journal, just look at AT&T’s fiber bill. It is astronomical. They’ve got shareholders right now that are worried about their debt load. AT&T’s debt load. If the biggest telephone player is getting questions from its shareholders about its debt load, imagine what some of the other smaller players are doing. You have to be very smart.
For me, how do we stay nimble? It’s some of the analytics that we talked about. You’re in a for-profit environment, if you’re going to get a payback, nobody’s just going to let you have it for free. Somebody’s going to step on your toes.
Viswanath: Ok, Zach, I’m convinced. The business of providing internet and data access requires a data-driven approach to remain profitable.
Reynolds: I hope all of you have enjoyed this conversation and will join us next month when we sit down with E3 principal consultant Kush Patel when he talks about their organization’s research that rigorously quantifies the grid and customer impacts of continued data center growth in Virginia, which is the world’s leading data center market.
Viswanath: Please join us then, and goodbye for now.