Santa Cruz’s brain drain of 20,000 residents commuting over the hill for better pay may soon be a trend of the past.
If all goes as planned in an unprecedented deal between Santa Cruz and local service provider Cruzio, gigabit fiber Internet—the gold standard for speed—will be available to all homes and businesses in the city by 2018.
The roughly $45 million project is the first of its kind in the outer Silicon Valley area, and promises to launch Santa Cruz to the forefront of the tech industry, says J. Guevara, the city’s economic development manager.
Similar projects such as Google Fiber have built high-speed networks in cities like Kansas City and Austin, but only in wealthy neighborhoods. Only a handful of small cities across the nation offer fiber connectivity to all.
“We’re solving our own market problems with a local company, through local government, to protect our community’s interests,” says Guevara. “This isn’t solely about technology. The Internet is access to the world and all the ideas and all the things to come that we can’t even foresee. With the so-called ‘Internet of Things,’ with self-driving cars, with how interdependent we’ve become in our daily lives, this is the groundwork and framework to make our lives more fulfilling and successful.”
For years, Internet speeds in Santa Cruz have lagged behind Silicon Valley’s, part of the reason so many professionals commute over the hill, Guevara says.
In June, Santa Cruz was ranked No. 447 out of 505 California cities for download speeds, according to Ookla, a network diagnostic company. The city also got a “D” grade for its Internet speeds from the Central Coast Broadband Consortium, an association working to bring high-speed networks to the region.

The Deal

According to the plan, which will be funded through a 30-year bond, every resident and business will have access to gigabit speeds for around $80 per month by 2018. That’s 1,000 Mbps (megabits per second)—fast enough to download an HD movie in three seconds—for roughly the same price as ordinary cable or DSL connections.
The contract between Cruzio and the city should be final early this year and groundbreaking is expected by fall. In 2017, neighborhoods will be brought online, starting with those showing the most interest in a cruzio.com online survey.  
Broadband Internet is becoming an essential utility like electricity and sewers, Guevara says, so involving local government in its construction makes sense.
Think of it like a highway system, he says. For competition to occur, each service company would have to lay its own pipes down every street, building a redundant system. Letting the government build one system and lease it to a private company is more efficient, he says.
In Santa Cruz’s case, the city has an exclusive agreement with Cruzio. In the plan unanimously approved by the city council on Dec. 8, the city will pay up to $52 million of construction costs to lay the cables in the ground, and Cruzio will cover the $2 million of electronics needed to light up the network.
The city will own the network, but Cruzio, based in downtown Santa Cruz, will administer it and provide customer and technical support. The private company has more than 25 years of experience doing so, and is a better fit for the job than the city, Guevara says.
The local private-public partnership model makes sense for broadband Internet, because governments are good at building utilities, but aren’t always the most entrepreneurial, he says.
“This is the people’s network,” Guevara says. “The people of Santa Cruz, through local government, will own the network, so all of the money which is typically leaving our local economy to pay Comcast and AT&T, wherever they are, that money will stay within the city.”
“It’s closing that economic loop by building our own infrastructure, because the private sector won’t do it,” he adds.

Shared Risks, Rewards

The city will cover its costs with a lease revenue bond, which does not use the general fund and would not compete with services such as schools and libraries.
Cruzio fiber customers will pay back the bond collectively through their rates—likely over 30 years, roughly $2.5 million a year. For the city to stay in the black, 7,500 customers, or 34 percent of Santa Cruz households, would need to sign up for the fiber network—a goal referred to as the “take rate.”
Cruzio already has 3,000 subscribers that have said they will join, says James Hackett, Cruzio’s director of business operations and development.
“A 34 percent take rate, or 7,500 subscribers, is a very doable target and similar networks offering the same types of speeds for the same types of prices have 60 to 70 percent take rates,” Hackett says. “Just to be clear, this will be gigabit speeds for right about the same price people are paying for DSL or cable—100 or more times faster for pretty much the same price.”
A market survey from October shows residents have strong interest, and 34 percent would purchase the plan for $85 per month.
If the revenue isn’t enough to pay back the city’s bond, then Cruzio is obligated to pay 80 percent of the shortfall. The city’s general fund would be put on the line, covering the remaining 20 percent.
In drafting the agreement, the city made sure that Cruzio had incentive to continue building its customer base, Guevara says, learning from the example of a failed private-public broadband project in Utah.
“It’s elegant,” Guevara says. “What we’re doing is we are both sharing the risks and the rewards.”
If Cruzio couldn’t meet its end of the deal, the city could take on another provider to operate the network, or take over the network itself. If the situation became dire, the city could sell the infrastructure.
But those scenarios are unlikely since all surveys show that the community supports the project, Guevara says.
“They all want this,” Guevara says. “They haven’t been able to get anything of this speed because there’s no competition in the market.”

Up to Speed

In September, after city council approved the Cruzio partnership, the Comcast subsidiary Xfinity announced it would up its download speeds in Santa Cruz from 29 to more than 105 Mbps—for free. For two years, the company had charged customers extra for the 105-plus Mbps service, but never delivered more than 29 Mbps.
The so-called upgrade required no new hardware or visits from technicians, suggesting that the company had the technology to provide higher speeds all along, but never did.
The private-public partnership presents a new solution, a way to circumvent the big players like Comcast and “cut the cord.”
The city is uniquely poised to bring gigabit fiber to the masses, a nearly unprecedented achievement.
Councilmember Don Lane says the city’s excellent credit record—uncommon in the state—allows it to fund a project of this scale. Having a local company of Cruzio’s caliber partner is also rare, he says.
“We’re bridging the digital divide,” Lane says. “If we make this kind of high-speed internet available to every household in the community at a reasonable price, which is what I think is going to happen, every student from every economic background is going to have access to this infrastructure. I think that’s so important moving forward to ensure that not just people that have a high income can have access to high-speed Internet.”