Broadband, we are told, is too important a resource to be left to the “vagaries of the marketplace.”
It apparently doesn’t matter that as a group, telephone, cable, satellite, and wireless companies have succeeded in getting broadband to more than 90 percent of the zip codes in the U.S. It doesn’t matter that the U.S. leads the world with 34 million wireline broadband connections, accounting for more than 20 percent of the worldwide total of 150 million broadband lines at the end of 2004. And it doesn’t matter that, in pure broadband numbers, the U.S. is well ahead of China, France, Germany, Japan, the U.K., and just about every other industrialized country with a land area larger than New Jersey.
All this is not good enough for the Consumer Federation of America, Media Access Project, and Free Press, who are urging state legislators to turn back attempts to pass laws preventing municipalities from setting up their own broadband networks.
State governments–which are the ultimate guarantors of the financial obligations taken on by counties and municipalities within their borders–correctly understand these broadband projects to be the taxpayer money pits they are.
Consumers Not Guaranteed
But broadband is a necessity, cries CFA and its good-government friends. In their call to cities to take up the broadband cause, the three groups invoke a fashionable but flawed argument that likens municipal broadband to municipal water, power, and narrowband telephony, services many localities set up during the mid-twentieth century.
It is true that all of these rely on an underlying infrastructure that is expensive to build. But that’s where the similarities end.
When a new housing development is built, a municipal power company can count on serving every new home. It can calculate the costs of getting the lines to every home in the development against the revenues it will receive from every home. From there, it can make reliable cash flow forecasts for the future.
A municipal broadband provider, however, cannot count on the 100 percent uptake that a municipal power or water company can. The problem is, would-be municipal broadband providers sell their business plans as if this were the case, or set unrealistic goals such as attaining 50 to 60 percent penetration. That is where the wheels of responsible business planning fly off the track.
Comcast, which leads in market share among broadband Internet service providers, averages just 18 percent penetration across all of its markets. For all broadband providers combined, the national broadband penetration rate is 45 percent.
Municipal broadband proponents overlook or dismiss a key point: One of the lessons of the dot-com bust was that consumers need a compelling reason to purchase broadband. There are factors other than incremental cost difference between broadband and dial-up that influence a consumer’s decision to buy broadband.
If broadband were really a consumer necessity the way electricity is, we would see virtually 100 percent penetration in the areas where broadband is available, just as we do for electricity. Municipal broadband proponents say we don’t see that level of penetration because of high prices. That assumption is questionable, though: Many households are willing to pay $100 a month or more for electricity, while broadband tops out at about $50 a month (and on average runs closer to $30 or $40).
The notion that low-cost high-speed Internet access by itself will be enough of a demand-driver to cover the cost of building a network large enough to reach every home has proved false. Yet that is the premise proponents of municipal broadband ask cities to buy into.
Go to any municipal broadband Web site, such as lafayetteprofiber.com, tricitybroadband.com, or muniwireless.com, and you’ll find the discussion is focused solely on the size and virtues of the bandwidth pipe–with very little attention paid to the importance of a value proposition to the business plan.
All existing municipal systems have had lower-than-expected penetration. The landscape of municipal broadband systems is littered with revenue shortfalls against the original plan.
Don’t Fit the Model
There are many other ways broadband does not meet the utility model.
Utilities require high investment up front, but low investment thereafter combined with lengthy amortization of infrastructure.
Broadband requires not only high investment upfront, but continued high investment thereafter. Technology cycles are short, and frequent upgrades and change-outs are necessary.
When municipalities buy water and electricity from other providers, rates are usually regulated and, when not regulated, at least predictable. Municipal broadband, by contrast, calls for technology, software, and sometimes content to be purchased from a diverse supply chain market where prices can be volatile and unpredictable.
Municipal water and electricity are generally provided in a monopoly environment. Municipal broadband, by contrast, is generally a competitive alternative that requires extensive promotion and advertising to maintain and grow revenues and market share.
In 2004, Bristol Virginia Utilities spent almost 5 cents on marketing for every dollar of revenue raised by its municipal broadband operation. For its electricity unit, marketing costs were about one-tenth of 1 cent per dollar of revenue. The utility’s water and wastewater units needed no promotion budget all.
These and other reasons explain why Florida and many other states are considering legislation that would prevent local governments from going into debt on municipal broadband.
By most estimates, there are some 350 municipal broadband systems in the U.S. The Consumer Federation of America and its allies have yet to present a single one that has delivered on its promise of payback, below-market pricing, and high penetration into a residential market.
Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute and managing editor of IT&T News.
|Not The Same: Conventional Public Utilities vs. Broadband|
and Landline Dial-Tone
|Incremental cost of additional users||Low||High|
|Business Model||Stable, Predictable from year-to-year||Unstable, Prone to Disruption|
|Value Proposition Necessary For Sustained Market Share||No||Yes|
|Allows long-term (>20 years) plant amortization||Yes||No|
|Predictable costs and revenues||Yes||No|
|Barriers to competitive entry||High||Low|
|Consumer Price Elasticity||Low||High|
|Speed of technology cycles||Slow||Fast|
|Nature of Competition||Regulated and price controlled, where permitted||Unregulated; no price controls|
|Table by The Heartland Institute|