Heartland Statement on Municipal Broadband Studies

Published April 26, 2005

(Chicago, IL) On April 11, three liberal advocacy groups released two new reports claiming to make a case for allowing local governments to build broadband networks in competition with private companies and nonprofit organizations. The three advocacy groups are called the Media Access Project, Free Press, and Consumer Federation of America. Their reports are titled “Connecting the Public: The Truth About Municipal Broadband” and “Telco Lies and the Truth about Municipal Broadband Networks.”

The groups also released a third report, titled “Broadband and Economic Development: A Municipal Case Study from Florida,” by George S. Ford and Thomas M. Koutsky.

The following statement can be attributed to Joseph Bast, president of The Heartland Institute, a national nonprofit organization based in Chicago, and author of two Heartland Policy Studies on municipal broadband.

None of these studies adds anything new to the debate over whether there is a genuine need for municipalities to get into the business of offering commercial broadband services. Instead, they simply repeat the rhetoric put forward by municipalities in the past.

The authors claim many municipal broadband systems recover their costs or are even profitable, yet their analyses invariably ignore the cost of repaying debt. According to municipalization expert Ronald Rizzuto, professor of finance at the University of Denver, virtually all municipal broadband systems serving residential customers today are costing taxpayers money, even when the benefit of lower rates for cable television is included in the calculation.

The authors of today’s reports seem unaware of data comparing private and public costs for a wide range of public services, which show conclusively the benefits of privatization. This isn’t a “sweeping assumption,” as one study claims, but the result of hundreds of studies by independent scholars over the years. To imagine that broadband is an exception to such a well-documented rule is dishonest or naive.

Finally, the authors fail to mention data showing rapidly falling prices and rising levels of broadband penetration and service levels (bandwidth), which contradict the notion that broadband markets are uncompetitive. Monopolists do not cut their prices and invest billions of dollars in new facilities and services, yet that is precisely what cable, telecom, and wireless broadband providers are doing. Without monopoly, there is no case for municipalization.

Rapid changes in information technology are creating competition and choice in an arena once ruled by government-regulated or -owned utilities. It is no surprise that municipal officials, seeing their power diminished by the entry of new competitors, view municipal broadband as a way to retain their status. But taxpayers and consumers will be hurt, not helped, if this power grab is allowed to occur.

The third pro-muni piece, “Broadband and Economic Development: A Municipal Case Study from Florida,” by George S. Ford and Thomas M. Koutsky, is a very misleading piece of work, from its layout resembling a published journal article (which it is not: “Applied Economic Studies” is the name of Ford’s consulting company) to its deliberately confusing econometrics, which do not support the assertions made in the introduction or conclusion.

Ford and Koutsky claim to “quantify the effect of the municipally-owned broadband network on economic growth” in a county in Florida (p. 5). Actually, all they do is document how gross retail sales in one Florida county (Lake) rose faster during a three-year period than such sales grew in seven other counties which had rates of sales growth similar to Lake County’s in the three years prior to Lake launching a municipal broadband system.

What is missing from this study is:

  • Any comparison of pick-up rates for broadband services in Lake County and the “control” counties, without which we cannot know if businesses actually use the municipal service more than they use private services in other counties. If broadband pick-up grew faster than or at the same rate as Lake county in any of the control counties, the logic of the authors’ arguments is destroyed.
  • Any comparison of prices of broadband services in Lake County and the “control” counties, without which we cannot know if the municipal service was any cheaper than private services offered in other counties. If prices in Lake aren’t any lower than in other countries, why assume there is any business benefit?
  • Any comparison of the quality or bandwidth of broadband services between Lake County and the “control” counties, without which we cannot know if the municipal service actually improved service.
  • Any explanation of why “gross retail sales” was chosen as a proxy for economic activity. Why not personal income, unemployment rate, business relocations or creations, or job creation rate? How does Lake County and the “control” counties compare by these measures?
  • Any explanation of why the entire difference in growth in gross retail sales should be attributed to the presence/absence of municipal broadband. This is no more plausible than attributing the entire difference to a new football stadium, Wal-Mart, tax cut, highway, or some other “event” that may have occurred during this specified time period.
  • No justification to assume that the economic growth of these counties would have stayed the same in the absence of the introduction of municipal broadband in Lake County. Similar rates of retail sales for three years does not constitute a long-term trend, and finding seven counties with similar sales growth rates is meaningless if there is substantial variation in year-to-year sales growth among the larger universe of counties.
  • No effort to control for other variables known to influence economic growth rates, particularly tax levels and change in tax levels. If Lake County was lowering taxes relative to its neighbors during this period, there would be no need to speculate about the role broadband might have played, as this one variable has been proven to play a significant role in job creation.
  • No discussion of the finances of the municipal broadband system. If, like virtually all other municipal systems, it is running a deficit or underinvesting in capital, its allegedly positive impact on gross retail sales will be short term as the bills come due and taxes must rise or spending in other areas must fall.

This new study resembles in many ways the phony “study” by Doris Kelley of the economic impact of Cedar Falls, Iowa’s municipal broadband network, which I recently critiqued. See http://www.heartland.org/Article.cfm?artId=16238.

Bast’s latest policy study on municipal broadband is available online at http://www.heartland.org/PublicationIssue.cfm?pblId=3&pisId=579. For scores of objective reports on municipal broadband, visit The Heartland Institute’s Web site at http://www.heartland.org, click the PolicyBot button, choose “Telecommunications” from the topic list, and then “Broadband: Municipal.”