Study Doubts Economic Benefits of Municipal Broadband

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A study released today by a conservative policy group concludes that municipalities should build out broadband networks only as a “last resort” and should instead work to encourage private investment in those networks.

“The debate over municipal broadband networks is heated, and a central question in the argument is how these government interventions into the business of building digital networks affect the economy,” said report author George Ford, chief economist, Phoenix Center for Advanced Legal and Public Policy Studies.

“I conclude that because there are questionable economic advantages resulting from government-owned broadband – but numerous disadvantages – municipal broadband should be a last resort option, reserved for markets where private entry is not possible.”

The report released today by the State Government Leadership Foundation (SGLF) considers the economic impacts of government-run municipal broadband networks and concludes that private sector investment is a “more viable, economical option long-term.”  SGLF Chairman Tom Reynolds, a former congressman from western New York, said that when the FCC preempted state laws in Tennessee and North Carolina last year that restrict the operation of municipal broadband networks outside city boundaries (02/26/15), “SGLF realized it needed to take action to protect taxpayers from the effects of municipal broadband and the FCC’s recent actions.”

Mr. Ford said today that he sought to provide a framework to better understand the data surrounding municipal broadband networks.  And although the report advises “much caution of government-owned networks, it is not an indictment of government-owned networks.”  He added, “there are some cases in which it makes sense.”

In most cases, however, it does not make sense for government to get into the business of providing broadband, according to Mr. Ford’s findings.  Municipal broadband is so highly subsidized that it can’t be sustained in the long run, he said. In Chattanooga, for example, the city’s system received a federal grant equal to about $2,000 per subscriber, while Bristol, Va., received subsidies from various sources equal to about $7,000 per subscriber.

Networks are expensive and will require ongoing investment to be maintained and updated as technology advances, which is why nearly all muni networks eventually fail, Mr. Ford said.

“I understand that cities are frustrated…but I think in the long run what you will find is that these networks will end up leaving taxpayers with a huge multi-million dollar tab without any real payoffs,” Mr. Ford said.

The report lists cities such as Burlington, Vt.; Provo, Utah; Tacoma, Wash.; and Groton, Conn., as examples of the downsides of municipal systems.

“The asymmetric subsidization of a government-owned firm with no regard for profit is a legitimate and serious concern because it presents a serious threat to private investment in broadband infrastructure and competition and exposes taxpayers and captive municipal electric ratepayers to significant financial risks,” the report says.

The report also concludes that subsidized municipal broadband won’t increase competition. The number of firms that can serve the market is determined by economics, and the lack of additional private providers suggests that additional entry is unprofitable, Mr. Ford said.  And “because it is disconnected from profit maximization and asymmetrically subsidized, economic theory suggests that the mere threat of municipal entry can reduce private sector investment,” according to the report.

“Forcing a government-operated firm into the market using subsidies, especially one that obtains significant market share and removes a major anchor tenant (the government) from private networks, is likely to force the exit of private firms and/or weaken the case for private investment in upgrades,” according to the report. “If municipal systems are truly not interested in profit maximization, as is frequently claimed, then municipal entry may be, in the long run, a poison pill for all private sector investment.”

If the government wants to provide subsidies for broadband, it should provide those subsidies to a private firm, Mr. Ford said.  The report shows that the state laws that restrict localities from offering broadband are in many cases economically rational. Many of the laws are intended to “encourage first the pursuit of alternatives to municipal entry, and to protect taxpayers from undue risk,” according to the report.

“This isn’t the private sector manipulating the legislatures to do their bidding,” Mr. Ford said. “These are good polices that have a firm economic foundation.”

In contrast, the “FCC’s current position that municipal broadband promotes competition in any normal sense of the term has no foundation at all, at least it can’t be found in economic theory,” according to the report. “Continued oversight of municipal entry by state legislatures is legitimate if they choose to do so.”

The report further concludes that while broadband is economically important, most of the economic gains attributed to municipal broadband systems are based on “economic migration rather than economic development.”  In other words, cities that improve their broadband offerings to attract new businesses are actually just “stealing” businesses from neighboring cities, Mr. Ford said, so whatever gains the city obtains from obtaining a new business is a loss to the city from which that business came.

“It’s not economic development … it’s stealing businesses from another place,” Mr. Ford said. “On the aggregate, there’s no real economic impact at all, except for the costs incurred from moving a business.  This is just another part of the irrational debate that is going on in municipal broadband.”