Los Angeles, December 5, 2006 -- With hundreds of local governments considering getting into the broadband business, a new report warns that cities shouldn't fool themselves into believing that their experience running water, gas and electricity systems has prepared them for the fast moving Internet world.
The Reason Foundation study written by Jerry Ellig, former deputy director and acting director of the Federal Trade Commission's Office of Policy Planning, outlines seven key factors that municipal officials should fully address before moving forward with plans for municipal broadband and Wi-Fi to ensure that the projects are technologically and financially viable.
The study also cautions city officials to beware of "geeks bearing gifts," suggesting that companies like EarthLink and Google are interested in providing free Wi-Fi because the deals will give them rights-of-way and valuable access to public infrastructure like light and telephone poles.
"Proposals for free or privately subsidized Wi-Fi are obviously attractive at face value," said Jerry Ellig, the report's author and a senior research fellow at the Mercatus Center at George Mason University. "Exclusive access to rights-of-way and poles would bestow a significant competitive advantage on any firm selected to use them. Local governments should beware of granting one Wi-Fi provider exclusive access to public assets, even if the Wi-Fi service itself is free of charge to users. Local governments should not let the sizzle of free Wi-Fi obscure the consumer's stake in competition."
The Reason Foundation report details seven critical issues for governments to tackle before jumping into the broadband market:
1. Competition: At the end of 2005, 67 percent of U.S. zip codes already had at least four high-speed Internet providers; 93 percent had two or more high-speed competitors; and just 1 percent had no competitors. Thus, municipal cable and Internet offerings face stiff competition and are unlikely to grab a large market share unless they are willing to lose a lot of taxpayer money doing so.
2. Performance Competition: New government systems will have to offer higher speeds or lower prices to compete with private companies. Existing government systems will need to consistently upgrade their speeds or drop their prices to compete with private sector improvements.
3. Continuous Improvements: The real consumer price index for Internet services has fallen by 23 percent since the Bureau of Labor Statistics started tracking it in 1997. Unlike traditional government-owned utilities, the lightning pace at which broadband technology improves and prices fall is difficult for municipalities to match.
4. Technological Change and "Lock-in": The market can get locked in to an inferior technology if government decides to subsidize the inferior technology, thus blocking out better or less expensive technologies. For example, ISDN was short-lived method for sending data over phone lines. Today we don't know how Evolution Data Optimized (EV-DO) technology and cell phone companies will change the market; if we'll see broadband over power lines; or what fiber optic service by cable or phone companies will mean to consumers and the Internet.
5. Obsolescence: Because wireless technology improves so rapidly, capital investment quickly becomes obsolete. Plans for government broadband need to assume faster depreciation rates than have been used for traditional government utilities. A workable plan for municipal Wi-Fi needs to cover operating costs and recover initial capital outlay in three to five years.
6. Risk: Broadband is a risky endeavor and governments must not finance it as though it is a low-risk infrastructure investment.
7. Uncertainty: Since taxpayers bear the financial uncertainty in their role as the owners of government broadband, officials should ensure the accountability and transparency in these projects is at least as good as that of publicly held companies.
"Each government-provided or privately subsidized broadband plan has its own unique characteristics," Ellig said. "But no plan should be considered responsible until these issues have been addressed. Government faces the daunting challenge of entering a market where technological change is swift, the future is uncertain, and competitors' actions are unpredictable?a playing field fundamentally different from the stable, predictable utility markets that have traditionally attracted public investment."
"As the study shows, the telecom world moves a lot faster than the water or gas systems that many governments are used to owning," said Adrian Moore, Ph.D., vice president of research at Reason Foundation and the study's project director. "With long asset lives and slow technological changes, traditional utility infrastructure costs are not difficult to recover through rates. That is not the case here. If officials get into the broadband business, they are entering a field where millions of taxpayer dollars can be wasted in no time and the technology they bought today is obsolete tomorrow."
To illustrate that point, Reason Foundation has also released a new case study on iProvo, the municipal broadband system in Provo, Utah, that lost $1.36 million in 2003, $1.42 million in 2004, and $1.67 million in 2005. Reason finds iProvo owes more money than it is worth. Overall, assets grew by $2.2 million in 2005, but liabilities grew by $3.9 million. The report finds this gap "shows every sign of increasing and will slowly eat away at iProvo's value and prevent the city from ever getting out from under the debt." And after originally forecasting it would take 10,000 subscribers to break even, iProvo now says it will need 12,000 to 15,000 subscribers just to break even. There are currently 7,700 subscribers, well below the number predicted.
Full Reports Online
The full study, A Dynamic Perspective on Government Broadband Initiatives, is available online at http://www.reason.org/ps349.pdf. Reason's detailed analysis of iProvo's municipal broadband efforts can be found online at http://www.reason.org/ps353.pdf. Reason's municipal broadband research and commentary is here: http://www.reason.org/wifibroadband/index.shtml.
Earthlink Comments on Report
Blake: Saw your editor's note before the Reason Foundation Report. Needless to say, this is certainly one point-of-view, we have another, and there are a number of inaccuracies.
First - we don't offer 'free' networks to cities. Google will do so in San Francisco, when we build that network out, and they will be paying us a fee to do so. Second, as part of the post-Katrina support, we are offering a lower speed service in New Orleans, along with our 1 mbps, symmetrical paid for service. In all of our other markets we've won, or are negotiating contracts for at this time - we are talking about paid services.
Second - you addressed that the report didn't discuss the digital divide issue. Good for you. The old zip code argument doesn't hold water. Everyone knows that high-speed services can be cost-prohibitive for those that are economically-challenged, and the fact that the cities want Muni Wi-Fi isn't just for 'technology sex appeal' but to offer a service to residents that otherwise can't afford the costs of the existing incumbent service!
Third - I could write three pages about our business model. But frankly, not many of the major cities today are considering paying for and owning municipal wireless networks themselves. Companies like EarthLink, that will build, own and operate these networks, build in the cost to upgrade networks.
Maybe Provo did it wrong, but by having EarthLink bear the brunt of the costs - we know the score and will do what it takes to bring the service that customers want to the marketplace - or they will walk away to another service. This is the 'don't use Wi-Fi, wait for Wi-Max argument' many made last year - why not do Wi-Fi now and bring Wi-Max in when certified and ready for prime time? They aren't mutually exclusive, and we see a day, and way, where Wi-Max will play a role in our networks in the future. The point, when you are building and paying the costs of the network, you consider all options for future needs and upgrades. That's why so many cities like this type of model for their potential citywide wireless network solutions.
Jerry Grasso
Corporate Communications
EarthLink
