Cooperating Cooperatives: A Partnership of Common Interest Among Potential Competitors
Co-Mo Electric Cooperative provides electricity to nearly 33,000 meters in an area of Central Missouri bounded by the Missouri River in the north and the Lake of the Ozarks in the South. Callaway Electric Cooperative provides electric service to about 13,000 residential, agricultural, and commercial meters in rural Callaway and southern Montgomery Counties, adjacent to Co-Mo’s service area. Co-Mo and Callaway are members of and receive generation and transmission (G&T) services from Central Electric Power Cooperative, which is also the nexus for their mutual interest and broadband partnership.
Having watched each other grow over the years, the co-ops began a dialogue that led to a broadband partnership, which many might consider unusual for companies working in such close proximity. Seth Hart, lead relationship manager in CoBank’s Denver office spoke with Sean Friend, director of finance of Co-Mo and Tom Howard, CEO of Callaway, to understand how the partnership developed and what the two very similar businesses bring to the table.
How did this project/partnership get its start?
Sean Friend: Over the years, we had been talking with many of our neighboring co-ops about fiber given the success of Co-Mo’s project. Callaway expressed interest in moving away from an existing partnership it had. As these discussions progressed, we looked for more opportunities to leverage Co-Mo’s existing infrastructure to assist Callaway.
Tom Howard: The project began as a means to increase growth for our cooperative. Callaway had watched Co-Mo’s success in providing broadband to its membership and local communities. Meanwhile, Callaway had experienced stagnant growth and sales since 2007. In looking for ways to spur growth, we determined that lack of high speed broadband in our service area and the local communities was actually hindering growth. Co-Mo had made substantial investment in assets we could share and help them to cost justify, as well as allow us to proceed with the project at a lower cost.
How did Co-Mo and Callaway meet and decide to work together?
SF: Co-Mo and Callaway are both members of Central Electric Power Cooperative, which is our joint G&T provider. Co-Mo and Callaway have a long history together, so each of us was able to see what the other was pursuing in the broadband and fiber arena.
TH: Co-ops working with Central Electric have a long history of shared services and “Cooperation among Cooperatives.” Co-Mo Connect, which is Co-Mo’s broadband brand, began a few years prior to Callabyte Technology, which is Callaway’s broadband subsidiary. We watched Co-Mo Connect grow into a successful company and Callaway had a desire to follow Co-Mo’s business model via Callabyte.
Now, Callabyte is leveraging some of Co-Mo Connect’s assets – headend equipment, 24/7 help desk, etc. – via a fiber connection between our organizations leased from Central Electric. The strategy was to follow a successful business model and lower both Co-Mo Connect’s costs and Callabyte’s cost.
Our success with Co-Mo is built on trust. We are two separate entities with common goals and expectations: reliable service, a quality product and a fair price.
What do each of you bring to the partnership?
SF: Co-Mo brings the central office, TV headend and technical expertise. Callaway provides growth opportunities in and around their service area that Co-Mo would not be able to pursue without the partnership. When you own the data center and the TV headend, you have a lot of capital invested, which turns into a fixed cost base that must be supported. By partnering with Callaway, we can spread these fixed costs over a larger subscriber base, which makes both cooperatives’ product offerings more affordable.
TH: Co-Mo brings us a quality business model, back end equipment and 24/7 support. Callabyte adds capital investment and infrastructure to reach its members, as well as additional customers in our local communities.
What services are provided by Co-Mo for Callaway?
SF: We provide TV, central office and tier 2 technical support.
TH: Co-Mo provides wholesale product and technical support for Callabyte’s subscribers. They also handle all network, transport, and core negotiating and support, along with access equipment configuration, software and upgrades, and core network monitoring.
What do you each get in return? How are revenues shared?
SF: By partnering with Callaway, we can spread some of our fixed cost over more subscribers. We are also able to support a larger workforce than we would be able to do on our own. This enables us to provide better service and coverage, which benefits both the members of Co-Mo and Callaway. TV revenues are shared under a split-profit model. The other services are under a separate contract, which has a fixed and a variable pricing component.
TH: Both Co-Mo Connect and Callabyte are stand-alone companies and each has a separate customer base. There are cost savings due to the synergies of the two organizations. However, the only revenue shared is through a shared base fee and subscriber fee for video and VoIP.
The strategy was to follow a successful business model and lower both Co-Mo Connect’s costs and Callabyte’s cost.
I assume you have contracts in place with each other. How long do they extend and are there any early termination provisions?
SF: Each service has a different contract.
TH: We have a service level agreement that is reviewed annually. We also have a facilities lease agreement, which is in place for a five-year term, with 30 days written notice for early termination.
Are there any unanticipated benefits?
SF: Every time you partner with someone you learn a little bit more about your business and the potential benefits and challenges common to the telecommunications industry. Working with a partner and seeing the challenges that they face helps Co-Mo to become a better company. It is exciting to see our employees continue to work through complex issues every time we are faced with new challenges. This allows us to grow as a company.
TH: Having been in the retail propane business, Callaway recognized many of the challenges and benefits of being in a competitive retail business – a different type of workforce, communicating with the members/customers in a competitive environment, etc. An unanticipated benefit for us was the positive reception we received from our members and the local business community by offering high-speed broadband. Our members realize it takes time and requires investment, and they appreciate our efforts.
CoBank’s interest and support in our project has also been important. Success is built on relationships. Callabyte has established a great relationship with its customer base, with Co-Mo Connect and CoBank.
Are you competitors in any aspect of the business?
SF: On the retail side we are not currently competitors, but there will be potential for us to be retail competitors in the future.
What makes this broadband partnership work? Is it the location, competitive environment, demographics?
SF: The fact that we had a good relationship with each other from the start has made a world of difference. The existing fiber network in the state of Missouri made it easier to lease fibers for the transport between us and Callaway, as well. Combine those factors with the close proximity of our co-ops and exploring a partnership just made sense.
TH: Our success with Co-Mo is built on trust. We are two separate entities with common goals and expectations: reliable service, a quality product and a fair price. We communicate this to our customers, and most importantly, between Co-Mo and Callaway. Our proximity to one another helps make this possible.
What has been the biggest challenge in working with one another?
SF: As with any partnership, managing expectations, clear communication and execution of the agreement are always challenging. Both parties must work together for a common goal. This is challenging to do within your own organization, but it gets more challenging when you bring two organizations together.
TH: While there is trust, we are two separate entities, so communication at times or simply understanding the difference in our subscriber demographics has been a small challenge.
Is this a unique partnership or has it been replicated elsewhere? Will it be replicated elsewhere?
SF: This concept has been replicated many times. Each partnership that we enter has a little different concept, but the core services and products are the same. We will always continue to look for ways to provide value to our membership and our partners.
Sean Friend is the director of finance for Co-Mo Electric Cooperative, and the vice president of finance for Co-Mo Connect. He began his cooperative career at Intercounty Electric in Licking, Missouri, in July of 2008. During his tenure at Intercounty, he held responsibilities in accounting, finance, tax, IT, HR and customer service. Mr. Friend is a graduate of College of the Ozarks with a bachelor of science degree in accounting. He received his MBA at Columbia College. He also a licensed Certified Public Accountant in the state of Missouri.
Tom Howard is the CEO/general manager of Callaway Electric Cooperative, the local electric cooperative which serves rural Callaway and southern Montgomery counties in Missouri. He is a part of several boards for organizations within the Rural Electric Cooperative family and local community, one of which is Associated Electric Cooperative. Mr. Howard is also President of Callabyte Technology, L.L.C. Mr. Howard attended the University of Missouri-Columbia and received a bachelor’s degree in Agriculture Mechanization and Agricultural Economics.
This interview was originally published in Broadband Partnerships: A Key to High-Speed Success for Rural Electric Co-Ops.