Investing in the Internet: Municipal or Misguided Broadband?

The idea of universal Internet access is a noble one, but taxpayers shouldn’t be strapped with sustaining failing businesses in order to reach that ideal. Innovation and investment by private broadband providers in the free market has put universal access within reach. Private enterprise avoids the risks to taxpayers when municipal government-owned broadband networks go bust.

State and local governments have a critical role to play in ensuring universal access to broadband Internet. By ensuring economic conditions favorable to marketplace innovation and investment, states can do more to advance broadband access than risky muni broadband projects.

The expansion of Internet service to nearly 98 percent of American households is due to private investment, not local taxpayer-funded measures. According to Broadband for America, private industry spent a total $250 billion between 2008 and 2010 to expand broadband access. Between 2004 and 2011, Verizon invested $130 billion in broadband infrastructure. And heavy investment and innovation have transformed wireless networks from an analog radio voice service to a vibrant digital access point for the Internet.

One of the reasons many muni broadband projects have descended into financial ruin is due to the gross miscalculation of the amount of capital needed to be invested in broadband infrastructure. The close connection between government and public utilities services may offer an explanation for such miscalculations. All too often, advocates of muni broadband projects mistakenly characterize broadband Internet in public utility terms.

But modern high-speed information technology networks and classic utilities are simply not the same. The sunk costs associated with building infrastructure are far more expensive for broadband Internet networks. The difference lies not only in the “high investment up front, but ongoing significant investment thereafter,” according to the Reason Foundation. Broadband cycles are rapid and require entire network upgrades. Between 1984 and 2012, wireless networks went from analog radio to its fourth generation of digital technology. That averages to a major network overhaul every seven years.

Moreover, the significant up-front investments needed for muni broadband networks often result in crippling interest. According to Dr. Ronald Rizzuto’s report, “Financial Performance of Tennessee’s Municipal Cable and Internet,” all of the municipally run networks in the state had amassed a debt of $176 million by 2010. This means an increase in debt by 3,750 percent since 2001, when debt was only $4.7 million. However, muni broadband advocates still chalk this one up to a victory.

Now that Tennessee’s Electric Power Board has a $270 million taxpayer subsidized boost, it is competing directly with private companies. This artificial advantage will detract from the profits of corporations who will see less reason to invest in Tennessee’s infrastructure. This may cause commercial servicers to devote more of their entrepreneurial capital where head-to-head competition with government is less likely and profits more likely.

In Lafayette, Louisiana, a $110 million plan was put in place to boost economic growth. A specialist in municipal broadband planning predicted the Lafayette Utilities System (LUS) “would break even by its fifth year of operation and could ultimately win 50% of the cable and telephone market in Lafayette.” Such dreamy expectations made the popularity of the plan palpable. By 2012, the LUS fiber plan was supposed to be breaking even. Instead, they were operating at a $12 million yearly loss by the 6th year.

One of the claimed benefits of muni broadband projects is their ability to lure businesses to an area. Debt and mismanagement problems aside, such benefits may prove illusory given their costs. In the case of the Lafayette Utilities Service, only two companies have attributed their move because of LUS Fiber: Pixel Magic, a special effects company, bringing 100 to 200 jobs, and Tapes Again, a company that does CD and DVD duplication.

Lafayette’s municipal broadband program likely had larger tech companies in mind. The issue comes down to a poor understanding of the factors that govern job growth: Private investment, lower taxes and limited government. If community development is the objective, gaining a few thousand jobs at the expense of so many is not a sound plan.

Against all of this evidence of the financial risk and ruin, why does municipal broadband continue to look like the answer? Private sector providers have invested $1.2 trillion in broadband networks since their inception in 1996. Thanks to their efforts, over 200 million Americans enjoy broadband access today. State policymakers should build on this approach that has proven so successful by continuing to foster the free market forces that have been responsible for bringing the online world to our fingertips.