Last week, Chicago hosted Supercomm 2005, “the world’s largest annual all-inclusive exhibition and conference for communication service providers and private network managers.” I played a very small role by speaking on a panel titled “Leading Edge Broadband Communities: Wireless.”
Wi-Fi is a relatively new technology that gives users wireless access to broadband services over unlicensed frequencies, the same frequencies used by microwave ovens, cell phones, garage door openers, and other devices. Chicago, Philadelphia, and other cities are considering ways to make the service available citywide either through creation of municipal Wi-Fi utilities or by partnering with private companies and nonprofits.
Whatever Happened to FTTH?
Fiber-to-the-home (FTTH) was once the hot technology being sold to municipalities interested in getting in on the broadband boom. Twenty-five municipalities and public utility districts operate FTTH systems, about 6 percent of the total 398 FTTH systems now operating in the U.S.
But fiber, at about $3,500 per home, is very expensive to install. Private financing for municipal FTTH systems has proven to be difficult to obtain since private lenders don’t like the idea of building capital-intensive facilities that compete head-to-head with enormous multi-national corporations using different platforms that are either already in the ground and paid for or much less expensive to construct.
Nearly all municipal FTTHs serving residential customers lose money. While some report positive cash flow, it seems only one of them — Cedar Falls, Iowa — has started covering its capital costs. The others struggle to make interest payments on their debt or rely on subsidies from other municipally run utilities. The utilities often hide these subsidies from their ratepayers.
A final reason why municipalities are looking beyond FTTH is because states are passing laws to ban or require public referenda before funding can be raised for broadband systems. Such laws are already in place in 14 states, and bills were introduced this year in 11 more states. By requiring less spending up front, some advocates of municipalization believe it will be easier to get a Wi-Fi project past legislators, voters, and investors than an FTTH project.
Why Not Wi-Fi?
Wi-Fi in fact has some advantages over FTTH. Installation costs much less, with estimates typically running around $25/household, though this is very speculative for larger systems. Financing may be easier because the amount of debt to be secured is much less. Wi-Fi is so new it doesn’t have an embarrassing track record like FTTH.
Because they are less expensive and faster to put up, it is possible for city-wide Wi-Fi projects to be structured as nonprofit public-private partnership, thereby possibly avoiding state bans and referenda requirements.
But Wi-Fi presents its own set of challenges. Initial estimates of the cost to construct are almost certainly too low. The estimate for Philadelphia, for example, seems to be just a guess constructed by multiplying the estimated cost per home by the number of households rather than an actual bid. Cost over-runs have been the rule, rather than the exception, in FTTH systems, and of course public-sector projects in general.
Initial estimates of the cost to maintain, operate, and upgrade municipal Wi-Fi systems are also too low. A city-wide Wi-Fi system requires a large number of antennas positioned on telephone poles and then continuously serviced throughout the area. The service requires advertising, billing, and customer support, all of which is delivered in direct competition with much larger companies that specialize in doing these things.
The quality of service delivered by a city-wide Wi-Fi system is still unknown, with many experts expressing doubts. The system is likely to be vulnerable to weather and interference from other Wi-Fi networks and appliances that share the unlicensed frequency. If these factors cause the service to be unreliable, people will not pay to use it.
I am not a technologist, but I am told that other quality problems are likely to plague large-scale applications of Wi-Fi, including lack of online security, degradation of service quality as the number of users rises, and limitations on service for moving customers. I am also told the “mesh” that will link all the antennas is still experimental for applications of the size being discussed in Philadelphia. In plain language, “experimental” means “not ready for mass deployment for the foreseeable future.”
A final challenge faced by Wi-Fi is the lack of earned income. Cable TV is the revenue driver for most residential broadband business plans, and all successful plans. A Wi-Fi network can deliver, at best, one or two channels. There is talk that telephone service will become the financial backbone of Wi-Fi networks, but this too is questionable, since Wi-Fi networks have a difficult time passing the call when a user moves from one service area to the next.
A municipal Wi-Fi network will have to rely on its broadband Internet customers for revenue, but the number of people who need this kind of bandwidth outside their offices is small, and they seem mostly unwilling to pay for it.
All this means municipal Wi-Fi plans are likely to cost more and attract fewer paying users than their advocates claim; be used mostly for recreation rather than business, “telemedicine,” and other hyped applications; and will need to be subsidized by taxpayers, perhaps indefinitely. In my mind, these are reasons enough to reject a municipal Wi-Fi proposal.
Why Not Municipalization?
The costs and risks of having a municipal broadband network – whether FTTH or Wi-Fi – might be worth paying if the benefits were substantial. But they aren’t.
Access to broadband in all metro areas is expanding rapidly, prices are falling, and bandwidth is rising. These are characteristics of a healthy competitive marketplace, so we should wonder if there is a rationale for governments getting into this business in the first place. Critics say penetration and bandwidth aren’t rising fast enough or prices aren’t falling fast enough, but it is difficult to take their opinions seriously when every day’s newspaper brings news of more price reductions and new competitors entering the market.
Advocates of municipalization claim broadband is similar to public utilities that some villages and cities already operate. In fact, there are major differences. For example, municipal water and electricity are generally provided in a monopoly environment requiring little or no marketing. Broadband, by contrast, is usually sold to consumers in direct competition with alternatives, requiring promotion and advertising to maintain and grow revenues and market share.
Traditional public utilities require high investment up front, but low investment thereafter. Broadband requires not only high investment upfront, but continued high investment thereafter. Technology cycles are short, and frequent upgrades and change-outs are necessary.
The notion that municipalities can “lead the way” for broadband, as they did with electric, water, roads, and mass transit in an earlier era, is wrong historically. It is most often the case that these services were privately created and offered for decades, and eventually were turned over to governments for political and ideological reasons, not because they were failing to provide quality service.
A great example was right here in Chicago, where the mass transit system was privately owned and operated, competitive, and characterized by rising ridership and falling prices before the City Council imposed regulations that forced private carriers into bankruptcy. The first traffic lights in the city were installed by Yellow Cab Co. The city’s first water intake station was privately built and operated. And on and on.
We now know that many of the services once thought to be “public goods” properly delivered by governments can in fact be delivered better by private competing companies. Privatization, not municipalization, is a multi-billion-dollar megatrend at the municipal level in the U.S. … and worldwide. Once again, Chicago offers a good example. Since 1995, 27 services have been privatized, saving taxpayers about $45 million a year. This includes everything from street and sewer design, replacement, and repair work to maintaining street lights and running the city’s Mainframe Data Center.
Faulty Rationales for Municipalization
The #1 reason for municipalization in the presentations of most of its advocates is economic development: Cheaper and more universal access to broadband will attract business or tourism to a city … 3,000 new jobs, according to the proponents of the Philadelphia Wi-Fi network. But the connection between municipal broadband and economic growth has never been demonstrated and probably never will be.
Studies purporting to show a link (e.g., an often cited report on Cedar Falls, Iowa) are little more than anecdotes combined with opinions and written by boosters. Access to high-quality broadband at a reasonable price is surely becoming an important element of a good business climate, but that is not the real question. The question is whether the public sector is better at delivering this than the private sector. Experience says it is not.
Another standard part of the pitch for municipal broadband is that the U.S. lags behind other countries in penetration rates and bandwidth. True. But the reasons for this gap don’t point to municipalization as a solution. The three big reasons are geography, regulatory uncertainty, and lack of content requiring European-level bandwidths that more than a tiny minority of the public is willing to pay for. Now that some degree of regulatory certainty has arrived and content is catching up with technology, we are closing the gap with Europe.
A third part of the pitch for municipal broadband is “closing the digital divide.” As near as I can figure, it is included in these pitches only out of political correctness, because no municipal broadband system will reach more than a tiny fraction of low-income households, or be used by those households for anything other than cheap cable TV. You don’t need high-speed broadband Internet access to look for job ads or to check on your child’s homework – dial up works just fine for both, or a trip to the local library or school.
If broadband were an “essential service” like electricity or water, there would be 100% pick-up rates in areas where it is made available. In fact, the pick-up rate even after heavy marketing by incumbent telcos, cable companies, and wireless companies is less than 50%. According to a recent survey by Pew Trusts, nearly half the people who don’t currently have broadband access say they simply don’t need it, and nearly as many say they don’t want it out of fear of identify theft, annoyance at being spammed, or giving others in the household access to pornography.
You and I might believe broadband is an essential service, but that is an opinion the market has yet to validate. Price isn’t the only or even the most important barrier for a large part of the market. Studies such as the Pew Internet and American Life study find that many people do not perceive the value of paying for broadband. Consequently, the overwhelming majority of users of a municipal broadband system – Wi-Fi or fiber-to-the-home — will be upper-income and business-types who can already afford to purchase service.
Crowding Out and Unfair Competition
At the risk of beating a dead horse, let me briefly mention two final objections to municipal Wi-Fi.
The first is the “crowding out” argument that is very unpopular with municipal broadband advocates. Once the city commits to building and subsidizing its own Wi-Fi network, other providers will reduce their investment in new networks and other platforms.
It is true that cities can operate wholesale broadband backbone networks, whereby the city owns and operates the backbone portion of these networks, offering connectivity to commercial Internet, telephone, and television providers, who then resell to businesses and consumers. In such cases municipalization can bring about a larger number of competing service and content providers than the typical private sector model.
But this wrongly puts the focus on competition instead of new investment and innovation. It is the same mistake made in regulating the telcos under the FCC’s “unbundling” rules, which caused investment in infrastructure to crash. It should be obvious that telcos, cable companies, and other competitors won’t invest as much in communities that offer subsidized broadband services.
Finally, municipalization is unfair competition to businesses already offering services without taxpayer subsidies. Those businesses are already operating in these communities and paying taxes, taxes that will be used to subsidize a competitor who could put them out of business. And make no mistake that it is unfair competition: Private companies can’t use eminent domain, tap taxpayers to pay for their capital expenses or annual deficits, or impose mandatory service or other restrictions on their competitors. Municipalities can do all these things. That makes them unfair competitors.
Alternatives to Municipal Wi-Fi
What should communities do when they are not being well served by their incumbent telephone and cable providers or other competitors offering broadband from other platforms? Should they sit on the curb and watch their businesses and best and brightest citizens leave for other, better wired, communities?
Of course not. Cities can remove the obstacles to affordable broadband services that their agencies have erected, often unintentionally, during the years when telephone and cable services were genuine monopolies. Six such actions come to mind.
First, do a better job determining just how much unmet demand there really is for high-speed broadband services. Often it is a very small group of heavy users who are behind the push for municipal broadband, or someone in the municipal bureaucracy looking to boost his career. Neither justifies the expenditure of public funds.
Second, remove regulatory barriers to the expansion of cable into voice markets and telcos into video markets. Obviously, franchising agreements and fees are a huge obstacle. Now that monopolies have disappeared from the industry, the rationale for franchise agreements has evaporated. They ought simply to be terminated or allowed to expire.
Third, remove zoning and licensing regs that keep out small competitors. Some of these rules can delay roll-out of new services for years. In Internet-time, it might as well be decades, since new technology and content is emerging every day and week.
Fourth, remove existing taxes or avoid imposing new taxes on new services. If you want less of something, tax it; if you want more, untax it. Too many municipalities and states are crying about the need for more affordable access to broadband yet impose big taxes on the cable and telephone services that are usually bundled with broadband services.
Fifth, help market existing broadband services. When a community near the Tri-Cities here in Illinois was asked to join the municipal broadband bandwagon, they did some market research and discovered that the real problem wasn’t lack of access or high prices, but that businessmen and women didn’t know about the access that already existed. So the village helped market existing broadband services.
Finally, sixth, continuously scrutinize the “build or buy” decision by schools, libraries, and government agencies for opportunities to partner with the private sector. Just because the government owns and operates the library doesn’t mean it can’t or shouldn’t contract out for its broadband services. Similarly, a system built by the government might be beneficially sold or leased to the private sector.
In conclusion, we’re hearing a lot about municipal Wi-Fi because broadband enthusiasts are facing growing opposition to expensive fiber-to-the-home schemes. The new plans are less expensive but they are also likely to be of lower quality and able to generate fewer paying users. The result will be systems used mostly for recreation rather than business, and that need to be subsidized year after year by taxpayers.
The case for municipal broadband is weak on economic, historic, financial, and ethical grounds. With prices falling and services expanding rapidly, broadband is an unlikely candidate for municipal provision. Where is the need?
Broadband isn’t “just like sewers” or other traditional public utilities. It’s a fiercely competitive industry with rapidly changing technology. Most municipalities are not up to the challenge, and their business plans show it. They will likely be money losers from the day they launch their first hotspots.
Municipal broadband is unethical because it forces low-income and elderly people who have little or no interest in going online, and who are pinching pennies just to afford the real necessities of life, to subsidize a service used largely by an upper-income and well-educated minority. That’s not right. If you can afford to buy your broadband on the market, you ought to do so, not force your neighbors to buy it for you.
There are alternatives to municipalization that elected officials ought to pursue. Governments ought first to “do no harm.” Once they’ve stopped discouraging affordable broadband, then we can discuss ways they might encourage it.
Joseph L. Bast ([email protected]) is president of The Heartland Institute, publisher of IT&T News, and author of a policy study on municipal broadband published by The Heartland Institute in 2004.