CETI posted a "financial plan outline" on Dec. 31, but it's another
slide show with the same old cliches. The education bureaucrats have boxcar
size 10-year numbers but no supporting explanation or analysis. It's an
academic propaganda exercise, not
a picture of a real business.
Get Ready, Billy, for
Part I: CETI Revenue:
$945 mm from CSU tech spending on PC's software, phones, support.
CETI's cost to provide: $724 mm. -- about a 30% markup.
The educrats say, of course that CSU will get better than market
rates, but their fragmentary contract (MSA v. 4_1, paragraph 12)
only says that CETI has to give CSU as good a deal as anyone else
gets *from CETI* -- not that Microsoft or GTE or Hughes has to
give such good deals. Idiots! Of course, most items and quantities
under this deal will be unique, so the price "guarantee" is very
hard to monitor in any event -- especially because CSU will have
a
strong interest in CETI's profitability.
For $221 million maybe we could build our *own* telecom system?
Second, CETI will sell $1.481 billion of "technology products and
services" to CSU constituencies (I think this means "faculty and
students"), affinity groups and the commercial market.
The cost is only $976 million, so about a 52% markup. (Dell Computer
runs on a 27% markup, but they don't have a captive market .) If
the kids
don't buy enough computers and cellular phones, then the faculty
aren't
going to get the shiny new computers CETI is supposed to buy every
three
years. (Actually, the CSU's puppet foundation buys them from CETI
with
its share of CETI profits -- MSA Para. 11(b)(1) -- although
we don't know
what that share is because the crucial operating agreement is still
only a
table of contents copied from a lawyer's form book.)
A new third element called "Network co-production" shows up in
this plan, kicking in $1.380 billion in revenue at a cost of
$1.035 billion.
A tiny footnote #3 to the revenue chart confesses
that this is telephone
revenue from "public-private use of infrastructure with excess
capacity available to corporate partners", and suddenly we realize
what GTE is getting out of the deal.
Watch closely, kids. It's part of your education:
CETI borrows $300 million, which is guaranteed by GTE (Microsoft and
the
others go along for the ride. Don't worry about running out of money,
because CSU's
nice Mr. Ernst built in a $60 million "buffer"
CETI then pays the $300 million back to GTE for wiring the CSU campuses
and for laying a SONET fibre optic cable backbone connecting the
Bay Area,
the Central Valley and LA. The cable has far more capacity than
CSU needs,
so GTE sells the excess capacity to commercial customers. As they
say,
"Revenue Generation created needs for increased bandwidth will be
met
through the flexibility of the network for growth and funded by
the revenue
generated." Inter-campus / 4CNet Rollout Plan, Draft
12/18/97
"Gee, Mr. Wizard. Does this mean that GTE gets
*paid* to build its
own California expansion project?"
Well, Billy, think how much money our *partnership* can save by
using "existing GTE facilities to supply CETI Network
connections", even if the campuses don't get the high speed
connections that were in the original designs. Remember what the
Infrastructure Buildout Plan says: "The bandwidth available to a
given campus will be determined by (in no particular order a)
educational requirements b) geography c) cost d) revenue
generation requirements e) facilities availability."
"But Mr. Wizard -- what about all those community
colleges on
C4Net?"
Billy, you really should do your homework. "'4CNET services will
remain intact with no direct improvements from the CETI program",
but the partners can generate revenue from televising "classes via
satellite to High Schools, Community Colleges, County Offices of
Education, Corporate Offices, Prisons, military installations and
other private and public institutions not otherwise connected to
4CNET." If California insists on spending money on prisons, the
university will just have to go where the money is. And no one
with any sense of political correctness can forget "Cultural
diversity (along with related revenue opportunities) through
national and international broadcast of CSUSat programs." It's so
much easier to go after "mass audiences" when one of your partners
(Hughes) actually *builds* the communications satellites you pay
for.
"But Mr. Wizard -- where does the *other* billion
dollars go?"
Please, Billy. Remember that your debits have to equal your
credits! It's actually $1,071,000,000.00 (and change.) $272
million goes for system operations (including some expenses that
don't use any real money, but you'll have to wait until you're
older before you learn about depreciation.) $250 million goes for
management, sales, and product development. (According to the
Fresno version of the December 5 partnership plan, they will spend
$4 million a year on new product development.)
"Mr. Wizard, that's only one percent of sales!
That's not much
money for a technology services company to
spend on R&D!"
Very good, Billy! But you're forgetting that they have the CSU and
its faculty and students as a captive market. This modest amount
will "keep the product line refreshed and contemporary." After
that, $264 million goes for interest and taxes, lumped together.
Table 16-1 of the original GTE plan showed about $210 million in
lease and interest payments on that $300 million, implying a $54
million tax load -- but Limited Liability Companies are normally
treated as *Partnerships* which don't pay tax -- the various
parners do.
"Does this mean that CSU will have to start paying
income taxes? Does it mean
that CSU will lose its tax exemption? Does
it mean that there will be a disqualifying
private use of facilities paid
for with tax exempt bonds, so as to void the exemption?"
I'm shocked, Billy. Where did you learn such vulgar language? No,
don't tell me. There's one lesson left. Can you use your Microsoft
(TM) Excel spreadsheet on your Hitachi (R) laptop to calculate the
"modest though fair rate of return on their investment"? (12/31/97
Partnership Financial Plan)
"I sure can. Boy, the kids in my class who can't
afford CETI
products are going to be in trouble now. Let's
see: they put in
$36 million (per the GTE plan) and they co-sign
for the $300
million loan -- Hey, Mr. Wizard -- if this
flops and they have to
pay on the guarantee can't they go after CETI
and CSU?"
Relax, Billy. I'm sure that the CSU negotiators know all about
guarantors' subrogation rights and have a plan to keep anything
bad from happening. Besides, Paragraph 16 of the fragmentary
master services agreement (Ver. 4.1) says that the puppet
foundation will provide a forum for discussion of any disputes
between CETI and the puppet foundation (after which they go
to
court.) Now stop stalling. What's a modest though fair rate of
return?
"Well, if they put in $36 million and don't have
to pay on the
guarantee, and if they get 51% of the $284
million in net income,
and if they have to wait 10 years before they
get any money back
at all ... why,
that's a 15% per year compounded return on
investment! And
GTE gets paid to build its own California SONET
backbone, and Microsoft locks up a generation
of California
software users .... Mr. Wizard, why do grownups
do things like
this?"
Time for bed, Billy. And if you're very good tomorrow and eat all
your vegetables, I'll tell you the story about Good King Munitz
and his Hidden Agenda.
And goodnight children, everywhere.
1/4/98 Robert Daniels, Professor of Accounting, SF State
University.
