The rapid advancement of technology in recent decades has led to many peoples’ lives becoming increasingly digitized. Whether through shopping, keeping track of finances, getting a ride somewhere or keeping up with friends, the internet is an integral part of everyday life.
Yet some areas in America still don’t have access to quality high speed internet. This is mainly because these areas are far more expensive to reach, and the private sector has little incentive to make the investment. Instead of encouraging the private sector to bring internet to their area, some cities decide to take it upon themselves to build their own internet infrastructure – referred to as municipal broadband – and later find they made a huge mistake that costs taxpayers millions and drives away competition.
Municipal broadband proponents claim that by having a government owned and operated broadband network, their city will reap all the social and economic benefits that come with having an internet connection. While their intentions may be good, the consequences, as many municipal networks have found, are often dire when government gets into the broadband business. A study from the State Government Leadership Foundation (SGLF) confirms this by looking at the economics of municipal networks and why any municipality considering building its own broadband network should only do so as a last resort.
Municipal networks are anti-competitive
A key argument made by many municipal broadband supporters is that their market lacks competition and more internet providers would make it more competitive. The SGLF study found the opposite to be true. Broadband markets have a limit to how many providers can be present while also maintaining profits. The number of providers in an area is determined by market forces – not by governments or politicians – and once that number is exceeded, providers will start to lose profits and be forced out of the market. In short, economic theory finds that competition is not determined by the number of competitors but by the capacity of the marketplace.
Municipal networks themselves are anti-competitive in nature and are likely to drive away private sector investment, the study finds. They are completely subsidized by taxpayers and not concerned about maximizing profits. Instead they are focused on capturing market share from their privately-funded competitors by offering cheaper services. Such behavior is viewed as predatory and anti-competitive considering the private sector is incapable of offering similar pricing on their services without losing money. The private sector needs to turn a profit in order to keep operating in a market, and since they don’t have the luxury of taxpayers backing their networks, they aren’t likely to stick around when a government-owned network comes along.
Trouble for taxpayers
Additionally, the overall cost of the networks and the risk posed to taxpayers should raise concerns. Government broadband networks are very costly to build and maintain – much higher than it would be in the private sector. Governments, the study finds, spend money less efficiency than private sector companies. A dollar, when spent by the government, ends up costing much more than a dollar. It would be more cost effective to subsidize private-sector internet providers instead of the government getting into the business themselves.
The inefficiency and high costs of municipal networks have spelled trouble for unsuspecting taxpayers. Burlington, Vermont wasn’t in the broadband business long before problems started surfacing. After receiving reports of mismanagement, the Vermont Public Services Board had to launch an investigation into Burlington Telecom. Eventually, the network ended up $16.9 million in debt, excluding a lawsuit where they were sued for $33 million and settled for $10 million, leaving Burlington taxpayers covering the bill. In 2014 to rid itself of the problem, the city entered into an arrangement with a local businessman to privatize the network.
Government must stay out of the broadband business
In 2004, Provo, Utah put up $39 million in bonds to cover the costs of its broadband network. To help keep the network afloat in 2011, the city started charging $5.35 on electric bills just so they could afford bond payments. Two years later, the city sold the $39 million failed network to Google for $1. As a condition of the cheap sale, Google agreed to provide free 5mbps internet to residents for seven years, as well as other free internet services to public institutions and schools. Taxpayers were left to foot the bill of $3.2 million in bond payments for 20 years, excluding additional costs not assumed by Google.
It is critically important to ensure Americans continue getting connected to the internet. However, if there is one thing that economic theory and real life examples demonstrated, it is more beneficial – from a societal and fiscal standpoint – for government to stay out of the broadband business. Since government entry into the broadband market drives out competition and puts taxpayers at financial risk, cities should only consider offering their own broadband services after all private-sector options have been exhausted.
See the original article here.