Why Municipal Networks Are Not a Good Tool to Advance Broadband

Doug Brake January 25, 2018
January 25, 2018

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This is the second in a series of blog posts examining some of the more pernicious myths in telecom policy. With a new fire lit under the net neutrality warriors, misinformation runs rampant and there is plenty in the record that deserves correcting. At the same time, we also want to highlight the best arguments made by those we generally disagree with in the spirit of trying to tamp down ever-escalating rhetoric in these debates. If we are ever to make any progress in developing a consensus-driven, stable, long-term framework for broadband regulation, it is going to require charity, cooperation, and willingness to seek common ground—all of which have been in short supply.

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Municipal broadband, like net neutrality, is a perennial telecom policy topic. There are many different flavors of municipal broadband, but the basic idea is that the city takes a much more active role in providing either the underlying infrastructure or the broadband service itself, rather than relying on private firms. We at ITIF believe that muni broadband should generally be avoided: Private broadband, coupled with regulatory oversight, provides much better incentives for efficient operation and long-term innovation.

Muni-builds often represent investment in redundant infrastructure, a waste of resources at the national level. Sacrificing dynamic efficiencies like technological or business model innovation is simply not worth the switch to a model like open-access dark fiber that focuses purely on static efficiencies like price or customer service, even if it means leap-frogging to the latest access technology. The upside to massive amounts of bandwidth (either in the form of more “pipes” or much faster ones) is consistently overstated, and the cost savings for consumers is marginal, while the societal expenditure of resources is anything but. Muni broadband also tends to pick off the lowest-cost, highest-return areas of a region, leaving the less-dense suburbs or rural areas with even worse economics than what prompted the municipality to enter the business in the first place.

As we argued of municipal broadband advocates in discussing “broadband populism” more generally:

Many municipal advocates present their case in instrumental terms: Broadband as a utility, either privately or publicly owned, would be superior to the current market-based system because it would deliver lower prices and better services. But at its heart, their argument doesn’t depend on the relative performance of either system; it’s grounded in an ideological conviction about who should own and control this key communications infrastructure. For them, lightly regulated, for-profit corporations have no place in America’s broadband infrastructure, even if it could be demonstrated (which it can) that they deliver superior broadband performance.

Of course, political opposition to municipal networks from the right is often just as fierce. Here we are talking about government actors, backed with municipal bonds, entering a competitive private market, setting free market types’ hair on fire. With the heated ideological differences, staid discussion of the economics or costs and benefits of muni broadband can be difficult to find.

This pot was recently stirred by a Berkman Center study titled “Community-Owned Fiber Networks: Value Leaders in America.” Unfortunately, this Berkman paper is the latest in a long line of methodologically flawed muni cheerleading pieces. Rebutting them is a Sisyphean effort. But here we go again.

There are several flaws with the Berkman study, many of which have already been pointed out by others. One of the more stunning methodological flaws is that the Harvard researchers simply didn’t include AT&T, Verizon, or Time Warner Cable in their analysis. They point to terms of service on providers’ websites, terms that are clearly designed to prevent automated mass scraping of their servers—not a manual look-up of prices in 27 cities.

AT&T and Verizon are the largest DSL providers in the nation, and are quite likely to offer competitive prices in many of these markets. A serious academic, out of an abundance of caution, might consider reaching out to these companies to ask about collecting prices. Not Berkman! They proudly proclaim that they “did not involve any of the private or public providers in the collection or analysis of the data.” Which is quite odd, because in the notes field of their own data, every single one of the muni providers includes a note of the date, number they called, and who they spoke with to discuss the price offerings. No such notes are offered with the private providers. Seems these “researchers” reached out to find the best price for muni providers (and straight-up lie about it in their methodology), but threw up their hands at a manufactured inconvenience when asked to collect competitive private provider prices.

To be fair, it is possible that inclusion of DSL providers wouldn’t have an outsized outcome on the bottom line conclusion of the report, given other flaws in the Berkman study. Here, we get to the 25 Mbps threshold. This line isn’t arbitrary on the researchers’ part; it was from the controversial FCC decision during the previous administration to rely on 25 Mbps as a threshold for “defining” broadband for the purposes of a report to Congress. It’s important to have aggressive goals as a nation, but a singular measure 25 Mbps isn’t very informative for examining broadband prices, especially as many DSL lines in the United States cap out at 10 or 20 Mbps. If this was real research and not an ideology-driven fluff piece designed to be picked up by the usual crew of reporters who share that ideology, then the authors probably would consider a number of different speeds to figure out the cost curve and where competition makes what kind difference on prices.

The report’s narrow focus on a subset of companies offering 25 Mbps or more excludes low-cost, low-speed offerings, for which the ITU consistently ranks (pdf) the United States as the third-best country in the world. The U.S. has fairly progressive broadband pricing compared to other nations, with low speeds being relatively cheap and faster plans more expensive. This price discrimination is generally good policy, allowing the costs of supporting the network to be spread more equitably, but it is hidden by a narrow focus on offerings faster than 25 Mbps. That threshold excludes a lot of DSL, fixed wireless, and mobile, as well as Comcast’s “Internet Essentials” program, which provides 15 Mbps to low-income users for $9.95 a month. If you think that 10 Mbps gap makes a big difference, perhaps it’s worth at least mentioning Charter’s similar program, “Internet Assist,” which offers 30 Mbps for $14.99 to qualifying users. The user set qualifying for these programs is relatively narrow, but if you are worried about affordability and public policy, it’s probably worth acknowledging.

Another weird methodological choice—the researchers collected data for munis and private providers over separate time windows almost six months apart, and they didn’t update any of their data. I started trying to replicate their data, and quickly hit a snag. In Lafayette, LA the Berkman team were able to find a small telco that requires purchase of a bundle (meaning a considerably higher price than standalone Internet offered by the local muni). This saw reports of municipal offering savings of “up to” 50 percent (without mentioning you are also getting television at that price). Regardless, looking at the data in that particular market, the cable incumbent, Cox, now offers a lower price, and the muni a higher price, than what is listed in the Berkman report. In that market today, the municipal provider offers a similar speed for 5 percent less than a private provider, not 50 percent.

When you substitute that 5 percent (without going through to look for other errors) the average savings in the markets Berkman looked at is 13.5 percent. That is not nothing, but also doesn’t really seem worth losing the benefits of private provision, not to mention the massive debt these cities are taking on.

The fact that municipal broadband providers have pretty much the same pricing as private sector providers in the U.S. undermines the thesis that there is a lack of competition in broadband. If too little competition and too high of profits were the reason for supposedly higher U.S. prices, then their data suggest that these municipal broadband providers must be raking in a pretty penny from their unsuspecting local consumers. You would think if it was a lack of competition that was to blame for broadband prices being what they are, a third provider would be able to offer lower prices—much lower than 13 percent. More likely, it is simply the tough economics of our suburbanized, single-family homes that prevents munis and private providers alike from raining down broadband abundance.

Muni providers especially should have dramatically lower prices: Beyond the lack of profit motive, munis have a much longer time horizon to recoup capital investment (a Penn study found more than half of munis examined were cash flow negative), generally don’t face the same fees for access to the right-of-way, are likely not subject to the same local regulatory requirements as private companies, and are sometimes able to cross-subsidize off of electrical utility fees (we don’t know how many do this, but at least one muni has been sued over the practice). What is more, virtually every muni provider is a cherry-picker—focusing first on a city’s “anchor institutions” and denser neighborhoods, and only incrementally expanding into the next lowest-cost, highest-return areas of a city. Again, this makes the economics even more difficult for private providers, who are left with the high-cost suburbs and rural areas.

All this doesn’t mean we should just sit on our hands and wait for private companies to do all the work. There are of course significant externalities to broadband access that are not captured by private providers—good policy should enable entry and upgrade, and also see the government step in where the economics fail. Rural broadband infrastructure, in particular, needs greater support. Effective price discrimination and federal subsidies under the Lifeline program must be expanded and protected to make Internet access affordable for all low-income residents. Municipal broadband, for the reasons listed above, can indeed be an effective tool for small rural areas that are legitimately unserved. The positive externalities of getting some service rather than none certainly outweighs the drawbacks to government-provided broadband. But trying to rely on municipal broadband as another competitor or as a source of a gig hurts more than it helps.

We have a long way to go when it comes to universal broadband in the United States, but municipal broadband is not the way to get there.