Economic Study Takes Aim at Muni Broadband

Conservative policy group, the State Government Leadership Foundation (SGLF), has released an economic analysis that counts the reasons why municipal broadband should be treated with a "heavy dose of caution," though the report comes off more as a big red "stop" sign than a flashing yellow caution light.

SGLF makes it clear it is no fan of efforts by the FCC to preempt state laws limiting muni broadband buildouts. "State laws that oversee and constrain government ownership of broadband networks are under threat," it says. "Such laws are important due to the adverse impacts of government-owned broadband networks on consumer tax bills, competition among private broadband providers and the flow of private investment into digital infrastructure."

While muni broadband buildouts are often justified with the claim that nobody else is building there, SGLF argues that is not the case, asserting that in every instance there were private providers without access to the special advantages of subsidized buildouts.

The study, which was produced by George Ford, chief economist of the Phoenix Center, says it does not unequivocally indict municipal broadband, but it comes pretty close.

While it says municipal broadband buildouts "may" have a role in deployment where there is no private service and private entry is not profitable, in other cases, not so much.

The study concludes that:

1) Muni broadband buildouts are almost always subsidized, and that a government firm with no regard for profit is a legitimate and serious concern" because it threatens privacy investment and "exposes taxpayers and captive municipal electric ratepayers to significant financial risks." (The study cites Chattanooga, one of the two cities where the FCC has preempted state laws limiting muni broadband buildouts).

2) Economics suggests subsidized muni broadband won't increase competition because it will be a "poison pill:" for investment in the sector or drive out unsubsidized private competitors.

3) Subsidized entrants are "prone to be predatory," attempting to capture market share and even possibly exposing cities to antitrust actions.

4) Because there is no profit motive, having deterred private investment, that lack of investment can then be used to justify the municipal entry that caused that lack of competition.

5) Subsidies are more costly than they appear because "every  dollar  of spending by government costs much more than a dollar to gather and distribute." The study asserts that "hundreds of millions in federal, state and local subsidies have been used to support failed municipal networks."

6) Incurring "massive" fixed costs of building broadband nets with subsidy dollars is an inefficient means to the end of broadband deployment, with subsidies to existing firms a more efficient approach. While such subsidies are continuous and can be targeted, subsidizing buildouts are "discrete, untargeted, relatively expensive, risky for taxpayers, and arguably predatory (see above).

The study comes just weeks after the Tennessee legislature voted down a municipal broadband expansion bill  and, elsewhere, the FCC was squaring off with that state and others over the issue of municipal broadband buildouts and the states' ability to limit them.

John Eggerton

Contributing editor John Eggerton has been an editor and/or writer on media regulation, legislation and policy for over four decades, including covering the FCC, FTC, Congress, the major media trade associations, and the federal courts. In addition to Multichannel News and Broadcasting + Cable, his work has appeared in Radio World, TV Technology, TV Fax, This Week in Consumer Electronics, Variety and the Encyclopedia Britannica.