Two ultra-small startups duel to sell ultrafast broadband to Lawrence

On June 1, Dustin Brown opened his third business in Lawrence.

Already an established wedding photographer and software consultant who operated out of a studio just north of the Kansas River, he started Prime Edits with a simple concept. Subscribers would upload raw photos, and Brown would edit the images and beam them back.

The business plan was complicated by Brown’s slow Internet connection. Like most people in Lawrence, Brown was a WideOpenWest customer. The company — usually referred to as WOW — was the college town’s dominant cable and Internet provider.

A typical photo package coming Brown’s way might total 80 gigabytes. Downloading files of that bulk took awhile, and getting them back to clients ate up even more time.

“It was taking half a day to upload a wedding,” Brown tells The Pitch. Given that his business model hinged on editing 10 weddings a day, this was a problem. “The math on it just kind of freaked us out.”

Brown hoped to secure a fiber-optic connection from WOW and pay a business rate. The company’s offer to Prime Edits: a budget-busting $1,200 a month.

He considered loading photos onto a drive and hiring a courier to make daily trips to Kansas City’s Startup Village, which enjoys a connection to Google’s gigabit fiber. But a friend suggested an alternative: Connect with Wicked Broadband, a startup trying to cement a place in Lawrence’s fiber scene.

Wicked Broadband’s history in Lawrence goes back nine years and includes previous corporate names. It’s run largely by a Lawrence native named Josh Montgomery, who wired Brown’s building with a fiber line that ran about 100 times faster than his cable connection allowed (an advantage that Google subscribers in Kansas City had realized for more than a year).

“Honestly, it went from my editors saying I’m going to leave for the day and hoping it [the upload] wouldn’t break in the night to not hearing about it anymore,” Brown says.

Montgomery says he wants to put gigabit fiber in every home and business in Lawrence through an open-access network — meaning that anyone, not just Wicked Broadband, could lease fiber from Montgomery’s infrastructure and offer Internet service or use it for something else, such as video security.

It’s a pioneering idea but one that carries some risk to Lawrence taxpayers: Montgomery has asked the city to guarantee a $300,000 loan. He has been waiting more than a year for the Lawrence City Commission to give him an answer. Part of why he’s still waiting is Mike Bosch.

Bosch struck all the right chords October 7 when selling his own fiber-optic business plan to the Lawrence City Commission. Before a packed meeting chamber, he deftly played the earnest small-town startup seeking the city’s approval to do business.

“I love raising my family in a small town in Baldwin City,” Bosch told Lawrence’s five-member commission. He explained how his company, RG Fiber, could bring high-speed Internet to Lawrence without asking much in return. All he wanted was access to the city’s rights of way, to lease just a few of the unused fiber-optic strands that the city had buried years ago, and perhaps some land at VenturePark for future office space. He didn’t want any of the city’s money, he said.

He also used the moment to take a shot at Wicked Broadband for requesting a loan guarantee.

“I want to be very clear in making the statement that we’re asking you not to fund our competitor, Wicked Fiber,” Bosch said. “We simply think that it’s not fair for us to do the hard work to attract the investment to build the business plan, to be vetted by the community of investors and entrepreneurial organizations, and then go in and compete with a competitor who is supported and funded by the city.”

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Bosch used Wicked Broadband’s reported 2012 franchise fees to extrapolate that the company had made no more than $200,000 that year. “They simply don’t have the capability,” Bosch told the commission.

But Bosch hasn’t yet demonstrated his own acumen. The Dallas native started Reflective Group in 2011 as a software company, then began RG Fiber as a Reflective subsidiary, with the goal of stringing fiber-optic cable to Baldwin City and Lawrence. Bosch said at a later Lawrence City Commission meeting that he has never built a fiber network; his main investor, Rex Schick, owns a company in Olathe called K&W Underground, which buries fiber-optic cable. RG Fiber has no paying customers yet and is not a functioning Internet service provider.

Bosch’s previous business projects include shipping-industry startups that failed. Other abandoned ventures have left behind frustrated and jilted business partners.

Just as Google first plugged ultrafast fiber into Startup Village, tiny Cortez, Colorado, had laid its fiber-optic network.

The Rocky Mountain town of about 8,000 people installed the first phase of its fiber network in 2011. The small city, which built the network, decided it wouldn’t sell Internet service to customers; instead, it invited Internet service providers to lease part of the network and then sell service directly to customers.

Such an arrangement is called an open-access or a common-carrier network. The idea is to bury one fiber network and then charge usage fees to whatever entities contract with the owner; those entities then charge their own retail clients. Seven ISPs now operate in Cortez, competing to sell high-speed Internet to that city’s residents and businesses.

Common-carrier networks are rare in the United States, due in part to resistance from major telecom companies such as AT&T, which can afford to lobby governments against open access. And so far, the results with open-access networks are mixed. The Cortez network seems to hold promise, but Utah’s UTOPIA network has chronically underperformed. A similar network in Burlington, Vermont, has also struggled financially.

In Lawrence, Bosch says he has no interest in pursuing an open-access network. He would prefer to fight it out with AT&T and WOW. Montgomery, however, favors open access. He believes that his model would bring more competition — meaning more business — to Lawrence.

Unlike RG Fiber, Wicked Broadband has customers and is a functioning Internet service provider. Montgomery counts among his subscribers 26 of the University of Kansas’ 29 fraternity and sorority houses.

Montgomery, a short, sturdy redhead who frequently wears an FBI hoodie, enjoyed a little fame in 2005 as the creator of a novelty device called the Fox Blocker. Wired to a television, the device could keep its user from stumbling across the Rupert Murdoch-owned conservative cable network. The ABC TV series Boston Legal referred to Montgomery’s innovation with an episode in which a high school principal attaches the Fox Blocker to all the televisions in his building to keep the channel’s “hate speech” out of classrooms.

Montgomery first proposed installing a fiber-optic network in Lawrence in 2008, when his company was called Lawrence Freenet. His idea then was to wire the city and offer discounted or free service to low-income residents. Lawrence leaders weren’t interested.

Montgomery has a prickly relationship with key staffers at Lawrence City Hall, including City Manager Dave Corliss, whom Montgomery chewed out during a public meeting in January 2006. Today, he says that encounter — when Montgomery’s company was receiving an award from the city — was a product of his being a rash 27-year-old. Montgomery says he and Corliss have patched things up some, though he believes that city leaders are stacking the deck against his latest proposal.

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Montgomery began a January 29 e-mail to Corliss and other Lawrence staffers, discussing proposed legislation in Kansas that would forbid the lease of municipal-owned fiber, “I know the three of you don’t like us much and that you’ve come out against our project, but right now we are the only game in town.”

It helps to have friends at City Hall when you’re requesting taxpayer assistance for your project. Montgomery’s request involves the city’s guaranteeing a $300,000 private loan to get his pilot broadband project to about 300 residences. The city wouldn’t put down cash or a direct subsidy to secure the loan; it would instead be on the hook for up to $300,000 only if Wicked Broadband failed and couldn’t repay the private loan.

Montgomery says the loan guarantee isn’t so much an indication of financial need as it is a token to show investors that the city is committed to Wicked.

Corliss tells The Pitch that he cannot recall a time when the city guaranteed a private company’s loan, and Montgomery’s ask has been criticized on the editorial page of the Lawrence Journal-World. In a November 10 editorial headlined “Gigabit Gimmick,” the Journal-World‘s editorial board wrote that Wicked’s loan guarantee “isn’t a wise investment for the city.”

Montgomery says Lawrence’s newspaper has a beef with him because he has tried to compete with Dolph Simons Jr., that city’s media mogul. Simons’ family owned Lawrence’s dominant cable and Internet company, Sunflower Broadband, until 2010, when it was sold for $165 million. The family still owns the Journal-World.

But it’s Bosch who is haunting Montgomery. The city and the Journal-World‘s editorial board have taken to heart RG Fiber’s threat that it won’t enter the Lawrence market if one company is given a financial advantage over another. RG Fiber hasn’t asked Lawrence for incentives, though it did pursue $5 million in tax breaks from Baldwin City — a proposal that Bosch eventually abandoned.

Montgomery points out that the city offers taxpayer-assisted advantages to private developers frequently, most recently a tax rebate for a developer looking to build apartments near the KU campus.

“Nobody calls them [developers] on the hypocrisy of not actually needing the money but getting corporate welfare from the community,” he says.

The Lawrence commissioners’ recent wariness of Montgomery may owe something to a couple of embarrassments the city has suffered in recent weeks.

Journal-World readers learned on November 14 that the city would be liable for $10.45 million of a total $11.59 million in infrastructure costs for Rock Chalk Park, a privately owned athletic facility that KU leases for its nonrevenue teams, including track and women’s soccer. And earlier that month, Lawrence voters had turned down a sales-tax increase to fund public-safety projects, a defeat that opponents of the tax interpreted as a mandate against the current commission’s management of the city.

If Montgomery defaulted on his loan, the $300,000 guarantee would represent a small portion of Lawrence’s $85 million general-fund budget. But Wicked has been dogged by liens filed in 2011 ($3,276) and 2012 ($2,794) by the Kansas Department of Revenue for unpaid taxes. The liens have been paid, but the memory of them remains in the minds of Lawrence commissioners, and Montgomery has so far been unwilling to show the city detailed financial data. He says that’s because the data would become an open record that Bosch or another competitor could view. He counters that a third-party company has looked at Wicked’s books and said the company showed positive cash flow in 2013 and has a decent credit rating. And Montgomery says Wicked is profitable and has more than doubled the $200,000 annual revenue that Bosch cited in the October meeting.

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So how can Wicked Broadband, which Montgomery calls a roughly $500,000 revenue company, secure another $30 million?

“The next thing I do is put on my monkey suit and go raise money,” he says. “Something I haven’t done since 2008.”

“This is why I want fast Internet,” Bosch says on a dreary November afternoon in Baldwin City.

He has just opened a browser on his MacBook, but the page he wants is loading slowly. In Baldwin City, a town of about 4,500 people, eight miles south of Lawrence, CenturyLink and Mediacom are the primary cable Internet providers.

Bosch’s Reflective Group has just moved into new offices off the main drag in downtown Baldwin City, a street where speakers mounted onto light poles play 1980s hits — Genesis’ “In Too Deep” and Heart’s “These Dreams” are two so far today — at curiously loud volumes. Reflective’s space isn’t much to look at yet. Wood beams on the first floor demarcate where not-yet-hung drywall will form office and conference-room walls. The second floor is a lake of sawdust.

Bosch is trying to show his visitor where the backbone of North America’s fiber-optic network can be found. Massive runs of fiber-optic cable largely follow major interstates. He points to a city-owned fiber ring at Seventh Street and Vermont in downtown Lawrence, the starting point for his proposed network.

From that nexus, Bosch wants to run a fiber-optic line to Baldwin City so he can start hooking up gigabit lines to residents there. He says a preregistration drive by RG Fiber has yielded 300 potential customers in Baldwin City, which he calls home. He has an agreement to connect fiber to Baker University, a small private school in Baldwin City, by the end of the first quarter of 2015. Baker would be his first customer.

That’s why Bosch wants Lawrence commissioners to make their decision quickly. He can’t plug the university in until he runs that fiber-optic line from Lawrence.

Connecting through Lawrence has another advantage: the potential to sign up customers in Lawrence.

Bosch says he’s backed by $2 million of private equity, much of it coming from Schick. He says he has commitments for future investments but adds, “I’m not going to share details on who or how much.”

Bosch graduated from KU in 2004 with a political-science degree. Starting in 2000, while he was a student, Bosch spent the better part of a decade working for UPS and FedEx.

While working for UPS, Bosch became Cindy Bracker’s shipping representative. Bracker, a Lawrence native, runs a ceramics shop not far from the Lawrence Municipal Airport. The two struck up a friendship, which later turned into plans to open an Internet café that would include an Apple-service store in Lawrence. Their iCafé opened in May 2009; Bracker owned 51 percent of the partnership and Bosch the rest.

In order to service Apple products outside an Apple-owned store, iCafé struck a deal with MacXprts, an authorized network of Apple service and resale franchises. Apple is strict with companies such as MacXprts, which in turn impose precise rules on their retail partners. MacXprts operated an outlet inside iCafé, similar to the way a Starbucks franchise opens inside a Target store.

Bracker says Bosch started bending MacXprts’ policies soon after iCafé opened. When Bosch tried to run MacXprts’ sales and services through iCafé’s accounting system, she adds, MacXprts threatened to deauthorize iCafé. Bracker exercised her majority rule and fired Bosch.

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“I had to make a business decision,” she says. “I felt Mike was smart enough that this was the only choice. It would be bad enough for both of us if we got deauthorized. We were four months into our three-year lease. We bought custom furniture. We had a $30,000 loan at the bank. We couldn’t let the business fail. The only other option was Mike had to leave. He didn’t have any other ideas.”

Bosch’s version of events differs. He says he was working too many hours at iCafé, while Bracker spent time with her family and volunteering with Girl Scouts.

“If she’s not there, I have to be there — and I ended up being there all the time,” Bosch says. “That became really difficult.” He adds that he tried to grow the business while Bracker seemed to want to keep it small.

Either way, Bosch arrived at the store one day and found that the locks had been changed. (Bracker says she called the locksmith only after Bosch had shut down her website without warning.)

Bracker assumed all of iCafé’s debt after she and Bosch couldn’t reach a buyout agreement. She says she didn’t see Bosch again until that October 7 Lawrence City Commission meeting. That night, she told commissioners about her business dealings with the Baldwin City entrepreneur.

“Mike once described himself to me as a serial entrepreneur,” Bracker said. “And it concerns me that the city of Lawrence would want to get into business with somebody who might not be around tomorrow.”

Around the time that Bosch and Bracker started iCafé, Bosch was trying to establish other startups tied to the shipping industry. Those companies, Shipping Guru LLC and Shipnotic LLC, didn’t make it.

Bosch’s Reflective Group counts among its successes a phone system that the Osawatomie Police Department uses and an enrollment app employed by the Baldwin City school district.

When Bosch wanted to get into the fiber-optic business in Baldwin City, in 2013, he partnered with Kennis Mann, a former Black & Veatch engineer, to start Dawn Fiber LLC. But that partnership collapsed acrimoniously, and neither side will say much about why, owing to the out-of-court settlement that dissolved the partnership. Bosch bought out Mann’s stake.

“It was ugly,” Bosch says of the breakup.

RG Fiber started in Dawn Fiber’s place, with a logo nearly identical to the previous enterprise. Bosch still sometimes uses Dawn Fiber letterhead in his communications with Lawrence.

When Google Fiber came to Kansas City and its surrounding suburbs, the company left Lawrence out of its plans. It has since expanded tepidly into other cities, including Austin, Texas, and Provo, Utah, but Lawrence still doesn’t appear to be part of Google Fiber’s equation.

WOW remains the dominant cable provider in Lawrence, though the company announced a rate hike in early December, followed the next day with staff layoffs. That leaves Lawrence with two startups as its most immediate prospects for high-speed Internet — neither of which the Lawrence City Commission seems excited to acknowledge. The commission has delayed approving anything throughout a series of meetings, study sessions, staff reports and fiber-policy changes.

The most recent study session took place December 9. Bosch was seated at a conference table with his investor, Rex Schick. Across the table were Lawrence’s five commissioners. Directly behind Bosch was Montgomery, punching away at his computer as Bosch spoke.

The commissioners asked Bosch why he wanted the city to reject Montgomery’s request for a loan guarantee when he had asked Baldwin City for tax breaks, which he later abandoned. They wanted to know whether he had the financial wherewithal to build a fiber network. (Bosch said he would provide financial data if the city wouldn’t allow the data to become public record.) And the commissioners quizzed him extensively on his opposition to open-access networks.

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“I’m in no way endorsing open-access or common-carrier networks,” said Mike Dever, a longtime member of the commission. “I’m trying to understand why it’s a bad thing.”

Bosch pointed to the failed open-access networks in Utah and Vermont but admitted that he hadn’t studied the matter extensively. The answer didn’t seem to satisfy Lawrence commissioners, who asked city staffers to analyze the track record of open-access networks.

Afterward, Bosch felt that he’d gotten the kind of treatment Montgomery has complained about.

“It seems like the city is really trying to figure out how they can support Wicked and give them a possibility to stay in the game,” Bosch said. “On one hand, I can understand. But on the other hand, it doesn’t sit well for a startup that’s sitting on capital.”

Google Fiber isn’t a startup and doesn’t lack for capital. That’s why Kansas City is the first metropolitan area to get plugged in quickly to the possibilities of high-speed broadband. Google has been highly selective about where else it will go, and Lawrence doesn’t appear to be in its immediate plans. That’s why the college town has ended up looking at two companies with fewer than 10 employees apiece. But its fiber-connectivity future doesn’t necessarily depend on these companies’ proposals, which come with risk and unanswered questions. City commissioners may decide there’s no rush.