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Should Your City Be a Broadband Provider?

Barry D. Umansky
10/3/2014
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Several municipalities across the country have taken steps to deploy government-run broadband networks in their cities. Policymakers and local officials considering doing the same are advised to learn from the experiences in other cities and to evaluate thoroughly the potential risks and costs of municipal broadband ventures, not just the desired benefits.

Following are 10 questions local leaders should consider before diving into the broadband market.

  • How do residents feel about your plans? One thing many state laws regarding municipal broadband demand is that residents get to vote before city leaders can commit millions of dollars to a government-owned network. Have you asked your residents? Are you willing to hold the idea –- and the ultimate business plan –- up to a vote? Have you at least surveyed residents? The results of that survey could help when addressing the next two questions.

  • Where will you set your prices? In Chattanooga, Tenn., the city's utility president said it set the price for its super-fast broadband service at $350 "because we can." After private competitors offered lower prices, the city network lowered theirs. Are you sure you know how to accurately price this service?

  • Will revenues cover costs? A mistake municipal leaders commonly make is overestimating demand and whether that demand will provide revenue sufficient to cover the cost of building, maintaining and upgrading the network. For example, in Burlington, Vt., only about 10% of those served by the Burlington Telecom network eventually chose to subscribe. With penetration numbers like this, deficits mount. How did you arrive at your revenue estimates? Is it worth getting a second opinion?

  • Do you have a contingency plan if revenues don't cover costs? In Utah, city leaders raised sales taxes, even on people who didn't use the municipal broadband service. Are you willing to take more out of your residents' pockets even if they don't want, or use, the service?

  • Have you assessed the risk of bond ratings being cut due to problems with municipal broadband networks? This scenario has played out in several cities, including Chattanooga. You know that lower bond ratings mean higher borrowing costs: How will you cover these additional costs, which will apply to all debt? Will you cut funding for schools? Law enforcement? Fire protection?

  • Which future investments will be impacted? Many municipal networks are funded through bonds, not direct taxpayer investment. However, even if bonds are the funding source, cities and counties can take on only so much debt. What future investments are you willing to sacrifice or delay in order to run municipal broadband system? A new library? Traditional infrastructure, like roads and bridges?

  • Do you have the necessary technical or business expertise? Speaking of traditional infrastructure, creating part of the information superhighway isn't at all like creating a highway and filling in the occasional pothole. Broadband infrastructure requires constant technical upgrades and new investment. Can your city or county afford these expenditures to keep your network on the competitive cutting edge?

  • Do you support a level playing field? The purpose of many of state laws is to make sure there is a level playing field. To help make municipal networks more profitable, many city leaders have exempted the networks from taxes, fees and other rules that private providers must abide by. In Tennessee, city-owned networks even lobbied the legislature to raise taxes on private networks. What subsidies would you give your network? Are these advantages fair, and have you considered what impact they would have on existing and future competition to provide high-speed broadband services, consumer prices for broadband services and outside capital investment?

  • What effect will your network have on competition? Many municipal network supporters say their efforts will enhance competition in their localities by giving consumers another option; however, municipal networks may also have a chilling effect on new entrants coming to the market. In Tennessee, smaller providers have opted not to enter the Chattanooga market because of the city network.

  • How low are you willing to go? Provo, Utah; Groton, Conn.; and Marietta, Ga. each sold their municipal network for multi-million dollars losses. If, after a few years of persistent deficits, are you willing to get out of the business and sell? Do you have an off ramp? If so, what is an acceptable loss?

    The Digital Policy Institute shares the vision of the National Broadband Plan that Internet service should be universally accessible, affordable, and reliable. While government-owned networks can serve a role in areas where there are no other providers, DPI urges policymakers to proceed with caution and evaluate the benefits along with the risks.

    — Barry Umansky, Professor of Telecommunications, Ball State University, and Senior Fellow, Digital Policy Institute (DPI) at Ball State University; and Robert Yadon, Professor of Information and Communication Sciences, Ball State University, and Director, DPI.

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    SachinEE
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    SachinEE,
    User Rank: Light Sabre
    10/30/2014 | 2:07:14 PM
    Re: Fair competition
    In my city there is no Municipal Broadband, however, the municipality keeps track of the records and IP addresses of the broadband owners and customers and does routine 't checks to ensure that data isn't being stolen. The business policies are different, however if the municipality feels like the business policies are being harmed then there might be a municipal broadband for everyone to subscribe to.
    Trojan
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    Trojan,
    User Rank: Light Beer
    10/8/2014 | 9:26:21 AM
    Chattanooga gig
    At no point did the president of Chattanooga's EPB ever say that they were charging $350 for a gig "because we can". What he said was that they were offering a gig "because we can".EPB was also one of the first to lower the price of the gig. It's dishonest to claim otherwise.
    JesseHarris
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    JesseHarris,
    User Rank: Light Beer
    10/7/2014 | 3:04:13 PM
    Not entirely accurate
    I've been covering muni broadband in Utah since 2006. There's a number of inaccuracies in this article.

    No Utah city has raised sales taxes in response to muni broadband despite the insistence of groups like the Utah Taxpayers Association (which includes a CenturyLink VP on its board). WVC and Orem have raised property taxes, but this is primarily because these cities bet very heavily on retail revenues that have been decimated by competition from neighboring cities and online retailers. Provo created a utility fee to pay for their network and they have a waiver for the indigent. Their network is also very deeply woven into city operations.

    Provo did not sell its network. It granted an indefinite lease of the network to Google for $1 and $18.7M in closing costs. At that time, the network was generating enough revenue to cover expenses and bonds, but not enough for new customers or network upgrades. This is a pretty close to break-even scenario.

    You also omit Spanish Fork from the Utah scene, a network that generates more than $500K annually for the city.
    mhhf1ve
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    mhhf1ve,
    User Rank: Light Sabre
    10/6/2014 | 10:43:00 PM
    missed a question...
    I would think the first question should be: is municipal broadband prohibited by state law? :P
    Mitch Wagner
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    Mitch Wagner,
    User Rank: Lightning
    10/6/2014 | 7:37:21 PM
    Fair competition
    There is no reason municipalities should be required to be fair to carriers when setting up muncipal broadband. Particularly considering that municipalities set up broadband when private service is inadequate. 
    MikeP688
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    MikeP688,
    User Rank: Light Sabre
    10/6/2014 | 3:13:31 AM
    Re: Way to go
    As I am sure all know, elements of this already are happening--as epitomized in my local community.    All parks & key city institutions already offer Free Wi-Fi.      I see it as just as  matter of time that the cost becomes so managable that the revenue stream noted is really not for discussion anymore because they can see to it that private sponsorship helps to cover it--This is already seen somewhat in schools (as GYMS/ETC are decorated with sponsorships) and municipal buses.      Cities have to look at such creativity though to help spruce up ease of doing business and to enhance the level of service to the community.   
    sam masud
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    sam masud,
    User Rank: Light Sabre
    10/3/2014 | 3:51:41 PM
    Way to go
    I've been a believer in Muni BB for many, many years. There are some things government, specially local government, can do just as well or better than a for-profit provider, which puts big fat profits over everything else. At the end of the day, it comes down to how you run things, whether you're the government or a company. Finally, with government, folks always have the option to throw the bums out.
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