Commentary
When there's a private option, cities have no business offering broadband service
by Tom StewardAs municipalities across the state consider whether to invest in mega-million-dollar telecommunication systems, the ones really taking the biggest risk are the taxpayers.
In Christopher Mitchell's recent commentary ("To communities that seize broadband initiative, benefits flow fast," Nov. 29), Christopher Mitchell urges local governments to get in the business of competing with the private sector in one of the fastest-changing and most capital-intensive enterprises anywhere -- broadband infrastructure and services. What he leaves unsaid is that cities and taxpayers face the prospect of steep negative fiscal repercussions for dabbling in this sector of the communications marketplace.
Mitchell focused on the newly installed FiberNet system in Monticello, Minn. It's too late to ask whether residents of Monticello really needed a third choice to surf the Internet with marginally increased speeds -- for now. The fact is, the capital costs of installation and construction left the government-owned and -operated network with a $26 million financial liability through its use of revenue bonds to finance the operation.
Unfortunately, taxpayers have not yet seen the true cost of the network. Unlike private companies, government has the luxury of pricing services at rates that do not necessarily reflect the actual cost of the service. Once the city starts paying off its initial investment (as a private entity would), the difference must be made up another way, whether it is reflected in a rate increase, cutback in service, or cross-subsidization through another government source.
The risks are very real. Just ask the city of Moorhead.
The city's GoMoorhead network failed to attract enough subscribers to break even, let alone become self-supporting. To cover its losses, the city issued double-digit electric rate hikes, leaving taxpayers to subsidize the failed GoMoorhead experiment. The city faced expensive equipment upgrades for the system, underscoring the difficulties faced by local governments attempting to compete in a fast-changing, high-tech environment, particularly in an era of budget crunches.
Instead of continuing to force all taxpayers to subsidize their neighbors' Web surfing, the Moorhead Public Service Commission decided to cut its losses, selling off GoMoorhead last year. The system's new owner has already made significant technical upgrades and service improvements, offering special rates to new customers in celebration of its one-year anniversary of private ownership.
Then there's the case of the Burlington, Vt., broadband network, which author Mitchell has described as "one of the best examples" of municipal broadband. And on that, we are in complete agreement. Indeed, Burlington Telecom is one of the best examples of the high risks to taxpayers of publically funded municipal broadband systems.
According to the Burlington Free Press, the FBI has joined a criminal investigation into Burlington Telecom over its questionable use of millions of taxpayer dollars to cover the system's operating losses. In addition, Burlington Telecom's primary lender is in the process of repossessing the service provider's telecom equipment, which will shut down service for thousands of subscribers.
If we've learned anything from these examples in Minnesota and elsewhere, it's that there is no need for municipalities to offer a different version of a service already in place, especially one that puts enormous risk on taxpayers and is done with public subsidies. Instead, cities should focus on providing essential services not already offered by private companies.
In a time of shrinking budgets and service cuts, municipal telecom is a losing proposition both for local governments and taxpayers.
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Tom Steward is investigative director for the Freedom Foundation of Minnesota, which describes itself as "an independent, nonprofit educational and research organization that develops and actively advocates the principles of individual freedom, personal responsibility, economic freedom, and limited government."
Comments (12)
Responding:
" It's too late to ask whether residents of Monticello really needed a third choice to surf the Internet with marginally increased speeds"
Of course, the citizens of Monticello were asked and voted 76% yes to do it. And they have the fastest broadband in the state as a result.
The claim that broadband needs to be subsidized has no basis in fact. Very few muni broadband networks have had the need to subsidize revenue from subscribers. Far more return net income to the general fund.
Moorhead was a wireless network. In fact, it would have had a stronger business case were it able to go into the wired business, but that was blocked by state barriers to community broadband defended by Steward.
Burlington was indeed a "best example" when I wrote of it in 2007. Unfortunately, the political leaders there did indeed ruin the network. This is an example of a poor job governing, not a suggestion that all local governments cannot invest in this essential infrastructure.
Steward compares the fiber networks built by communities to the broadband already in place -- much like suggesting no one sell an automobiles where bicycle shops exist.
The fastest network in the US is in Chattanooga, owned by the city. The next fastest networks are owned by city of Lafayette, LA; Wilson, NC; Salisbury, NC; Monticello, MN, and others.
In fact, only one major carrier, Verizon (who serves no wireline broadband customers in MN) has a network that may be considered top ten.
Let's not forget that "a private option" often means one and only one provider -- in my case, that's Comcast. Nobody else offers "high-speed" internet in my area; I'm too far outside downtown (all of six miles) for Qwest. Comcast sure must enjoy its broadband monopoly over most of the Twin Cities area. If it takes individual communities to compete with Comcast, so be it. Consumers want options, period -- private or public.
Technically speaking, nearly 100% of the country has access to privately-offered internet service, whether it be dial-up, or slow DSL or cable service, but these services are just too slow to foster economic development. If a private service provider does not want to upgrade the service to the level the community wants, the public sector has every right to build the infrastructure they need to be economically competitive. But that is always a tough choice, since public leaders have to make an investment that hurts a local company, just as paving roads probably hurt blacksmiths and horse breeders 100 years ago. But sometimes that is the best choice if a community wants to grow in a competitive global environment.
The author tries to reinforce a narrow political perspective by citing struggling municipally owned telco's. The list of struggling, even failing, privately owned telco's is 100 times longer and cannot fit into MPR's comment limit.
Every community that is not satisfied with their level of telecommunication services should be looking at a variety of options, including doing it themselves. If private companies are unwilling to make the necessary investment, communities should not be held hostage to inferior or obsolete services that condemn them to an uncompetitive economic environment.
Mr. Steward rests much of his case on the state of private sector competition in communities. This explains why his foundation is made of sand - http://bit.ly/gfbz6C.
Mr. Steward also trots out the timeworn false statement that community networks are failures. Here are 10 of 70+ communities doing wireless and wired broadband successfully, some for many years - http://bit.ly/Ejg6L.
If it weren't for community broadband networks such as those in Chattanooga, Santa Monica, CA and Lafayette, LA, you would have almost no networks capable of delivering capabilities these econ dev professionals nationwide say are needed - http://bit.ly/94e8tL.
Communities, you be the judge.
The comment about one provider is an important one.
Nearly 10 years ago Grand Rapids was in that boat. Residents weren't happy with the perceived declining service and rising rates of the single provider. (And Qwest showed no interest in investing in high speed.) The city council decided to act and spent much time researching municipal and other options. About the same time, a rural co-operative (Paul Bunyan Communications) of former rural telephone companies was adding service east from their Bemidji base and indicated interest in a license to overbuild/install fiber-to-the-house to every residence in the city (the drop was free with no commitment to sign-up if done when installers were on-site). Regardless of threats to the city of lawsuits, etc. by the private provider, the license was granted and project completed. And guess what? Qwest suddenly decided to invest in DSL and the former sole-provider opened a storefront in town to offer enhanced customer service and dropped prices on all services, packages.
Not all cities have these options, but city government can play an important role in moving the ball down the economic playing field. The lesson? Competition is a wonderful thing!
2007? Here's Mr. Mitchell with co-author Stacy Mitchell praising Burlington Telecom in an October, 2009 op-ed published in the Portland Press Herald.
Remarkably, I found this information on line (on Mr. Mitchell's website) without the benefit of the "blazing" speed of FiberNet!
http://www.newrules.org/informtion/article/maine-needs-publicly-owned-broadband
Here's the relevant excerpt:
"One of the best examples is in Burlington, Vt. Burlington Telecom, a city department, built a universal, next-generation, fully fiber-optic network that offers fast broadband, cable television, and telephone services at extremely competitive rates in Vermont's largest city. While the fiber network itself is publicly owned, competitors are welcome to offer their own Internet, telephone, and cable services on the system giving subscribers a choice of providers.
Burlington Telecom makes a good financial sense."
2007? Mr. Mitchell and co-author Stacy Mitchell were praising Burlington Telecom as recently as October, 2009 in a Portland Press Herald op-ed.
Remarkably, I found the piece on line on Mr. Mitchell's website without the "blazing" speed of FiberNet!
http://www.newrules.org/information/article/maine-needs-publicly-owned-broadband
Here's the relevant excerpt: "One of the best examples is in Burlington, Vt. Burlington Telecom, a city department, built a universal, next-generation, fully fiber-optic network that offers fast broadband, cable television, and telephone services at extremely competitive rates in Vermont's largest city. While the fiber network itself is publicly owned, competitors are welcome to offer their own Internet, telephone, and cable services on the system giving subscribers a choice of providers.
Burlington Telecom makes a good financial sense."
Fascinating that Tom Steward has no response to the many other points raise by myself and others.
Yes, I wrote an op-ed in 2009 in which we noted positive aspects of the BT network. At that time, the City Council was discovering the impropriety of the Mayor and his chief financial officer. The fact that a public network was mismanaged does nothing to change the fact that most communities are far better off with community networks.
When countless private sector providers go bankrupt or are found to have embezzled funds, it somehow never seems to discredit the whole model. Indeed it shouldn't. Finding non-representative examples and trying to pass them off as ordinary is the height of laziness and poor policy.
It's worth noting that the majority of responses to this piece seemingly come from individuals with a personal or financial stake in taxpayer-funded broadband networks. This includes Mr. Settles of Oakland, California, who appears to be taking an unusual interest in Minnesota broadband issues. http://www.successful.com/msp/ngfsummary.html
Mr. Steward's article misses one very important point, if the incumbent providers were already providing ultra-high speed internet, there would be no need for municipal involvement in providing these services. However, those providers are not providing the broadband service that the U.S. needs to be competitive in the 21st Century global economy. According to the website speedmatters.org, this year "the third-annual international study of the quality of broadband connections revealed that despite solid gains in global connectivity worldwide, the United States remained in 15th place. The United States' 15th place finish is shared with Latvia, France, and Canada. Though the U.S. has increased fixed-line customers' broadband access . . . [t]here are worries that despite steady gains and the implementation of the National Broadband Plan, the U.S. won't be fully prepared for new technologies on the horizon. As highlighted in the paper: 'broadband leadership is strongly associated with competitiveness, knowledge economy and innovation.' The need for a robust Internet to power an innovative economy should be driving the U.S. to meet the goals of universal broadband access and greater speeds." This lack of comprehensive broadband service threatens our nation's economic security. The citizens of Monticello saw this problem, voted overwhelmingly to do something about it and it may take more municipalities like Monticello to take action to ensure our nation's economic future.
Once again Mr. Steward's comment suggests he is either ignorant or lying about what the facts.
The vast majority of these networks are funded by outside investors and never see a taxpayer dollar. For instance, Spanish Fork in Utah makes contributions to the city's general fund with it net income, lowering pressure on the tax base.
As for having a stake in this, I find it interesting that Mr. Steward is so concerned about what others are deciding to do in their communities based on the reality they face. He need not worry about his apparent home city of Minneapolis, it is extremely unlikely for the City to make any public broadband investments.
As an American who's spent ALL his adult life living in foreign lands, I can't understanding Americas persistent resistance to 'public' projects and ownership.
I'm in the process of purchasing a rural property in the Ely MN area and the best internet connectivity I can find is a DSL hookup offered by Frontier Communications that, they tell me, will provide me with about a 4 Mbps download speed.
My current cable broadband in England has a 20 Mbps download speed that has NEVER dropped below 12.6 Mbps.
And so, in America I will have to settle for 4 Mbps? What a load of crap!!!
When many countries around the world are aiming at 100 Mbps universal broadband, the best US proposal seems to be Minnesota's stated aim to connect EVERY home and business by 2015 to a 10 to 20 Mbps (download) broadband system.
The US Governments broadband plan doesn't propose these download speeds till 2020, and even then their aim is only for 100 million homes. This will effectively be a denial of full American citizenship to vast numbers of (mainly) rural based Americans who will be limited to sub 4 Mbps broadband connectivity, evidently forever.
I can see a really big class action lawsuit over all this in America's future.
How is America going to recover it's global competitiveness when their elected leadership is hamstringing broadband development by aiming so low?
If this is the best that free market capitalism can provide, Americans should start examining other social/financial models!
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