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Rethinking Universal-Service Policy in a Broadband Internet Era

steven.titch@reason.org (Steven Titch) — Wed, 02 Sep 2009 00:00:00 EDT

Historically, government initiative was behind the great water and power infrastructure projects undertaken during the Progressive Era. Many see parallels between the need for electricity and running water in the past and the need for broadband today, and are calling for even more federal and state government involvement in the construction and deployment of broadband. The general belief is that broadband, like water, power and one-time narrowband phone service, is a utility.

Broadband, in truth, has little in common with classic utilities. The only real similarity is that the underlying infrastructure is expensive to build. Utilities require high investment up front, which can be amortized over several decades. Broadband requires not only high investment up front but continued high investment thereafter. Technology cycles are short. Entire network platforms change every five to ten years. Broadband is also competitive across multiple facilities platforms—telephone, cable and wireless—each with relative advantages and disadvantages. Competition in broadband is a critical dimension and is why government funding and subsidy programs carry a much greater risk of failure, or mere ineffectiveness, wasting public capital and resources.

While the goal remains to bring inexpensive broadband connectivity to as many people as possible, a more enlightened approach shifts away from large infrastructure projects to making the benefits of broadband relevant to all classes of potential users. The best way to accomplish this is to promote universal-service policies that:

• Engage all segments of the broadband industry,
• Create climates conducive to investment,
• Reduce or eliminate central infrastructure planning at the federal level, and
• Energize leadership and expertise at the state and local levels.

VP Biden on Broadband "Information Overline"

steven.titch@reason.org (Steven Titch) — Wed, 01 Jul 2009 19:55:00 EDT

You knew the White House was taking its chances sending out Vice President Joe Biden to talk up the broadband stimulus. And Old Joe was on form, as usual.

This afternoon outside Erie, Pa., the veep was on hand to announce the criteria the federal government will use to hand out $7.2 billion in stimulus funds aimed at developing the broadband infrastructure in underserved areas.

In his address to 200 people at Seneca High School near Erie, The Wall Street Journal reported Biden saying, “The bottom line is, you can't function -- a nation can't compete in the 21st century -- without an immediate, high-quality access for everything from streaming video to information overline.”

Commenters are invited to speculate exactly what “information overline” is. Yeah, it’s funny, until you realize the vice president in an administration that has called for an unprecedented level of aggressive and pre-emptive Internet regulation can’t even speak articulately about basic broadband connectivity.

For more Bidenisms, see this Reason.tv clip.

Billions In Stimulus Going to Broadband Projects

steven.titch@reason.org (Steven Titch) — Fri, 20 Mar 2009 11:17:00 EDT

The federal government doesn’t belong in the Internet business. But, of course the stimulus bill offers up $7.2 billion for broadband projects. In a recent meeting the agencies charged with passing out the taxpayer money couldn’t even agree on which communities are unserved, areas that don’t have high-speed Internet now and aren’t likely to get it anytime soon. My new column looks at the ways the government can identify these communities and which technology is going to be best for them.

Reason Foundation's Telecom Research

Making Sure the Broadband Stimulus Money Isn't Wasted

steven.titch@reason.org (Steven Titch) — Fri, 20 Mar 2009 11:11:00 EDT

It’s discouraging that after a daylong, standing-room-only meeting on the allocation of broadband stimulus funds the two federal agencies responsible for spending the cash couldn’t even define the meaning of an “unserved area.” They couldn’t agree on which areas don’t have, and aren’t likely to get, Internet access in the foreseeable future.

Normally, this wouldn’t matter. The government shouldn’t be in the broadband business anyway. But, as part of the $787 billion stimulus bill, the American Recovery and Reinvestment Act, Congress set aside $7.2 billion for development of rural broadband. The National Telecommunications & Information Administration (NTIA) and the U.S. Department of Agriculture’s Rural Utilities Services (RUS) are charged with dispersing the funds.

While broadband service is available from a mix of phone, cable and wireless providers in even smaller cities, statistics show availability lags in some rural markets. The Pew Internet & American Life Project’s May 2008 survey found that 38 percent of rural residents polled said they have broadband at home, compared to the overall national rate 55 percent. Even so, Pew found rural broadband penetration had grown 23 percent from 2007.

With rural users steadily catching up, there’s a good case to be made that the private sector doesn’t need help in identifying or reaching these customers. But since Congress and the Obama administration are determined to send billions out the door, it’s time to make the best of it.

To be fair, one reason the government is struggling with the rural broadband issue is that each special interest group likes to frame the problem in ways that reflect best on their own solutions.

Incumbent phone and cable companies cite their experience with high-end platforms such as fiber optics, yet bemoan the large capital expenses. Wireless Internet entrepreneurs say they are more deserving of subsidies because their infrastructure is less expensive to build. Municipal broadband supporters insist that the private Internet companies have failed - and high-speed, high-quality rural broadband service can only be provided through local government ownership and operation.

Too often the Internet access debate devolves into techno-speak about the relative merits of fiber vs. wireless; whether market failure means there are no broadband providers, or simply one or two companies in a single town and thus not enough ‘competition’ for some in government’s liking; or if stimulus-funded networks should be “neutral.” This debate distracts from what should be an easily measurable goal—how to wisely bring broadband connectivity to areas without it (and unlikely to get it).

Broadband is a lot like money—no one feels they have enough. The trick is to drill down into the data to find places where there is actually no terrestrial broadband (fiber or wireless) and reasonable likelihood that there will be no commercial construction in the next 12 to 18 months. Kentucky and North Carolina offer models on how to do this.

Agencies in both states used data from Geographic Information Systems (GIS) to correlate information about socioeconomic status, educational systems and health care facilities with geographic availability of high-speed Internet access. Using these numbers, these states have been able to apply funding to areas that truly need it and commensurately improve rural penetration.

Under the ConnectKentucky initiative, broadband availability went from 60 percent to 95 percent between 2004 and 2007, according to ConnectKentucky’s 2008 Progress Report. Further, broadband subscription increased 100 percent and there has been a 24 percent surge in home computer ownership.

Using the methods pioneered in Kentucky and North Carolina, there’s no reason Washington can’t find the areas that private companies are not likely to target for the foreseeable future. Once that is done, choosing the right technology gets a lot easier.

Fiber advocates often muddle the benefits broadband offers residential consumers with the benefits it offers businesses and institutions. There’s no question that fiber delivers high speeds for critical applications in health care, manufacturing, education and other commercial sectors. Connections of 100-megabit per second (Mb/s) are necessary for telemedicine, distance learning and data center operation, and thus can be extremely valuable to hospitals, schools or office parks. But does funding fiber to a rural hospital mean providing the same expensive line to every rural home?

For residential users, a 100 Mb/s remains high-end choice for high-volume users. Even most tasks required for home-based businesses or telecommuters--email, document transfers, basic uploading and downloading of work files, and Web-based teleconferencing can be accomplished by the basic 4 to 6--Mb/s connection delivered by most wired broadband systems today.

The stimulus money needs to be geared toward getting people who don’t have any Internet options connected now, using the technology best-suited to their needs.

Stimulus dollars can be applied to the expansion of wireless systems, because they stand to offer a far greater return than fiber. Wireless is not second-class broadband. Although not as fast as fiber, wireless broadband, which approaches 3 Mb/s today, offers the added benefit of mobility. The popularity of iPhones and BlackBerry smartphones among consumers attest to this. These pocket-sized devices integrate phone, email, texting, GPS and Web access. Meanwhile, employers are finding more and more applications that rely on mobile computing. Perhaps, then, the scope of wireless connectivity will be more critical than conventional wired Internet.

Stimulus policies that respect the private sector’s investment, diversity and expertise will go a long way toward achieving ubiquitous broadband. The government should be looking to partner with the private sector, not making attempts to create competing government broadband operations. To date, no government-run municipal broadband operation has made good on its triple promise to offer lower rates, universal connectivity and better quality service than commercial competitors. The stimulus is about delivering broadband to those in need, not to bailing out municipalities that have shown they can’t.

Combined, telephone, cable and wireless companies invested close to $115 billion in 2007 in infrastructure, much of it going to broadband upgrades. That investment came on the heels of the $350 billion invested in the four years prior, according to the Bureau of Economic Analysis.

ConnectKentucky, mentioned above, achieved most of its penetration goals by helping commercial companies understand the opportunities that existed in rural areas. The result was $860 million in private capital investment being spent in the state.

State and city governments can be excellent facilitators. In Ft. Wayne, Indiana, former Mayor Gavin Richard brought Verizon together with the area businesses that saw local broadband as a strategic investment. Verizon got first-hand information about market demand. Ft. Wayne businesses understood the immediate payoffs of fiber-based infrastructure. A commitment from area employer Raytheon sparked Verizon to build its first citywide fiber-to-the-home project in Ft. Wayne. Public-private partnerships can be used to bring users and providers together and can touch off a torrent of private sector capital, laying the groundwork for even more investment and technological advancements.

Congress and the federal government shouldn’t be in the broadband business. But now that they are, the feds owe it to taxpayers to wisely invest in projects in the neediest areas.

Steven Titch is a policy analyst at Reason Foundation.

It All Depends on What the Meaning of the Word "Unserved" Is

steven.titch@reason.org (Steven Titch) — Wed, 11 Mar 2009 14:03:00 EDT

Yesterday’s hearing on broadband stimulus reportedly was SRO, yet after several hours, most attendees walked away shaking their heads over the lack of general detail and panel’s own reticence to define what an “unserved area” is.

You’d think it would be an easy binary yes/no answer to the question, “Is broadband service available in your city/town/region?” Such are the politics when it comes to a $7.2 bilion government giveaway.

Defining unserved seems to be a no-brainer. But to be fair, it is a little more difficult to define “underserved,” which apparently FCC Chairman-designate Julius Genachowski is going to have to do. Underserved could mean:

1. Broadband is available to one geographical segment of a broader geographical area. The question is, how do you carve up that area to measure relative penetration. Are we talking one small town, or a state the size of Utah?
2. Broadband is available to one group of users, say commercial operations such as a local factory, hospital or school, but not to the general population. This gets a little tricky because the infrastructure serving local business, thereby creating jobs and stimulating the local economy. What you don’t have is a developed consumer market. Does it warrant a stimulus?
3. Broadband speeds are 4 Mb/s or less. Which means the systems are adequate, just not state-of-the-art.
4. Any other creative definition that can be used by a lobbyist to extract broadband funds.

Still, from BusinessWeek’s report, the bureaucratic hand-wringing out-of-the-box left some attendees jaded about the process and whether, in the end, the broadband stimulus will be that productive at all.

The lack of answers proved frustrating for some participants. Charlie Mattingly, chief executive of a small Internet service provider in Texas called Broadband Rural, was taken aback that the meeting wasn't more productive. "I had no idea how full of themselves they are in Washington," he said. "If we had half the money that the government spent to put on this meeting today and half of the money that people spent to attend it, we could have put 1,000 people online," he said.

It Is Broadband Stimulus Day in D.C.

steven.titch@reason.org (Steven Titch) — Tue, 10 Mar 2009 07:36:00 EDT

Today we learn a little more about who might get some of the $7 billion Congress is doling out for broadband infrastructure as part of the Obama’s massive government spending plan.

A public meeting is getting underway this morning. Officials from the U.S. Department of Agriculture, Commerce Department and Federal Communications Commission are on deck to describe “in broad strokes,” according to Dow Jones, how the grant program will work. The Commerce Department is charged with distributing $4.7 billion, and the USDA will give out $2.5 billion for broadband Internet buildout in areas that have little or no connectivity.

Naturally, the big fight will be how the pot is divided among the private sector and the public sector, and how many failed municipal operations might show up looking for a bailout. (Institute for Policy Innovation reminds us of the fiscal wreckage here). Meanwhile, telephone, cable and wireless companies invested close to $115 billion in 2007 alone in infrastructure, much of it broadband upgrades, and some $350 billion in the four years preceding, according to the Bureau of Economic Analysis.

While Ben Scott, director of the progressive Free Press, gives lip service to prioritizing buildout in unserved areas, he nonetheless seems to support the use of government funds to compete with the private sector, suggesting that stimulus funds should be directed to areas “where the standard of broadband being offered is very low.” Unfortunately, we don’t know his definition. Current cable modem speeds of 15 Mb/s can be considered low next to fiber’s potential of 100 Mb/s.

Will The Stimulus Kill Smart Ideas for Rural Broadband?

steven.titch@reason.org (Steven Titch) — Thu, 05 Mar 2009 14:36:00 EST

The Wall Street Journal yesterday reported on efforts of Tim Nulty, a former World Bank and Senate economist and 35-year veteran of the telecom industry, to bring fiber-based broadband to a rural section of Vermont using an innovative business model that combines private sector dollars and a non-profit grassroots effort.

Yours truly is quoted, but my comment had more to do with concerns whether the $7.2 billion set aside for rural broadband would be poured into money-losing, non-competitive municipal broadband initiatives that have already gobbled up millions of taxpayer dollars.

Yet what’s happening in Vermont is just as disconcerting, and raises questions whether the federal government's broadband stimulus will simply short-circuit innovative, market-based financing. While Nulty’s plan could be considered a form of municipal broadband, it was among the few that sought to structure a project around private investment and avoiding taxpayer risk.

(If you lack a Journal subscription, Nulty and his rural broadband plan are also covered here.)

According to the Journal, a group of Vermont towns with a combined population of 55,000 partnered with ValleyNet Inc., a local nonprofit group, which in turn hired Nulty to manage the project. Nulty, who set up a high-speed network for Burlington, Vt., that went live in 2006, to manage the project.

Mr. Nulty's plan is to string 1,400 miles of fiber-optic lines across telephone poles and into people's homes to provide a combo of ultra high-speed Web access, phone and cable TV service. The project is to be financed through a capital lease, with the towns raising money from investors to build the network, and then leasing it back from them over 23 years. It is as “shovel-ready” as they come, Mr. Nulty says, and will create hundreds of construction and customer service jobs.

A fiscal conservative, he says he would prefer federal loan guarantees, which would reduce the risk of private investors without necessarily resulting in any cost to taxpayers in the long run. But a proposal by Sen. Patrick Leahy, a Vermont Democrat, that would have directed loan guarantees to projects like Mr. Nulty's was shot down in the congressional stimulus negotiations. Now Mr. Nulty says he will request a direct cash grant instead.

Note that now that Congress and the Obama administration have decided to federalize local broadband initiatives through the stimulus, it won’t let Nulty do the job his way. Nulty can say bye-bye to private investment and hello to Uncle Sam, who, as his new benefactor, is sure to have some great ideas about how Nulty should manage his network (neutrally of course!), how service should be priced and how his friends and neighbors should be served. Nulty, for his part, will be expected to take the advice and be damn grateful for it.

Those who provide the money get the control. What’s unfortunate was that Nulty and ValleyNet may have been on their way to proving the slow rollout of rural broadband was not due to market failure, just an adequate business model. I worry when projects like this, which were attracting the private sector money (and would have again once past the liquidity crisis), get picked off by the government's lumbering fiscal policy. I fear it’s another way this ill-thought pile of pork called the stimulus will do little but generate more debt and less wealth.

Congress Approves Broadband to Nowhere

adrian.moore@reason.org (Adrian Moore) — Tue, 10 Feb 2009 17:00:00 EST

Via Slashdot, a Wall Street Journal editorial takes a look at the broadband portion of the stimulus bill:

...nothing in the legislation would address the key reason that the U.S. lags so far behind other countries. This is that there is an effective broadband duopoly in the U.S., with most communities able to choose only between one cable company and one telecom carrier. It's this lack of competition, blessed by national, state and local politicians, that keeps prices up and services down...In contrast, most other advanced countries have numerous providers, using many technologies, competing for consumers...We're told that we now live in an era of more regulation and more government spending, but neither approach is how problems get solved in technology. Government mandates on how networks should be operated and subsidies administered by USDA aren't going to ensure broadband access, make connections faster, or lower prices. What we need to get the U.S. back into the top ranks of wired countries is more competition, not taxpayer handouts. That would be a real stimulus.

FCC Cancels Meeting on AWS-3 Auction

steven.titch@reason.org (Steven Titch) — Sun, 14 Dec 2008 11:32:54 EST

Responding to a request from Sen. Jay Rockefeller and Rep. Henry Waxman, who will lead, respectively, the Senate and House commerce committees next year, FCC Chairman Kevin Martin has canceled Thursday's meeting that was to have featured discussion and potential vote on Martin's controversial plan to set aside spectrum for a nationwide free, but filtered, Internet service. The set-aside idea has been heavily promoted by M2Z Networks, which had hoped to win the spectrum at a substantially discounted price. The project, however, was dogged by concerns about censorship, expressed below my commentary "Kevin Martin's Kiddie Internet Plan." While the rules allow the FCC to act on the plan without public discussion, as Wireless Week reports, it is unlikely they will do so. And the plan itself may be beached by the change in administrations. Martin, a Bush appointee, is expected to resign after Barack Obama's inauguration. If his successor chooses to continue pressing the plan, it may yet be an uphill battle. Wireless Week catalogs the reasons why the plan has something to bother everyone.

Martin's proposed rules for the auction are controversial for several reasons – incumbent carriers disagree with the requirement to use such spectrum for free public service; a variety of parties claim the rules are designed to unfairly help startup M2Z Networks; incumbents also say that M2Z's plan would cause interference to existing networks; public advocacy groups disagree with the requirement to filter traffic on that service; and government budget-watchers say the spectrum would be grossly underpriced.

Don't Panic! Fiber Is Coming

steven.titch@reason.org (Steven Titch) — Tue, 29 Apr 2008 00:00:00 EDT

The municipal broadband fad has thankfully peaked as more and more cities see the financial havoc such plans can wreak on their budgets and credit ratings.

So, to the benefit of local taxpayers and their annual budgets, smarter cities have become more wary of mounting competitive broadband service. But what about areas where there is no broadband service at all? In many of these cities, usually with populations of less than 10,000, officials who otherwise lean toward fiscal prudence, say the only way to assure their residents will get broadband is if the city itself takes on the project.

Overlaid on this is the broader debate over fiber-to-the-home (FTTH). Pundits point to Japan and South Korea's commitment to FTTH. If these countries are doing it, shouldn't the U.S.?

True, the majority of U.S. broadband today is offered either with cable modems or copper digital subscriber line (DSL). For both, the latest versions deliver a maximum of 15 megabits per second (Mb/s). Translated into user terms, that means about 20 to 30 seconds to download a three-minute video. FTTH, which can offer 100 Mb/s, is indeed superior.

FTTH is available to only about 10 million U.S. homes, about 10 percent of all the homes in North America, according to an April FTTH Council report prepared by RVA Market Research. Of that group, about 2.9 million households have purchased service. While, penetration is still low, it's rising fast. Some 770,500, or 27 percent, of those 2.9 million fiber homes were added in the last six month, the FTTH Council reports.

Fiber is the future. Private capital is becoming available. The only question is how fast it begins to penetrate mid-level and rural markets. There is no doubt that within 12 to 24 months some consumers will be filling a 100 Mb/s pipe. At the same time, however, there will continue to be a substantial portion of households that will only need 10 Mb/s for the foreseeable future. Balancing the cost of fiber construction against FTTH take rates and ongoing demand for, dare we say, pedestrian broadband is going to be tricky. That's why government officials, from the local level on up to Washington, need to be careful about government-funded fiber.

For starters, despite all the attention the Koreans and Japanese receive for the fiber deployments, we don't know how much it's costing citizens in the long run. Foreign service providers are subsidized and competition is managed. Even though 100 Mb/s per second is being delivered to homes in these countries, we don't know the average bandwidth users are consuming. If it is only 10 Mb/s, 20 Mb/s or even 50 Mb/s, they are underutilizing capacity. This extracts an economic cost, because the Japanese and Korean service providers are not getting full value for their investment. In the end, that translates to higher costs for consumers in those countries, although the actual cost might be masked by subsidies, transfers and taxes.

In the U.S., the lack of rural broadband is a business plan problem. Right now, demand for 100 Mb/s and the cost of providing it do not intersect at a profitable point. There's no reason to expect it will stay this way. The history of broadband shows that demand for bandwidth continues to increase while costs continue to decrease. There's also no reason to think rural areas will follow the same deployment curve the big cities are - several years of cable modems and DSL before FTTH.

In the 1970s and '80s, telephone technology in most rural markets jumped from electromechanical to digital switching, skipping the generation of automatic electronic switches that were used in big markets until the early '90s. The current situation of slow rural broadband development is, at worst, is a failure of creativity, not of the market in general.

The key to speeding rural broadband - and broadband deployment anywhere - is to encourage a climate where investment is welcome and works in tandem with market forces. Already communities in at least 10 states can take advantage of cable franchise reforms the way Fort Wayne, Indiana, did. After franchise reform opened all markets in Indiana to telephone company entry, the Ft. Wayne city government aggressively pursued Verizon to invest $10 million in its FTTH rollout there.

There's no reason to limit thinking to incumbent telephone and cable companies. So-called competitive local exchange carriers (CLECs), such as Covad Communications and Level 3, have the resources to build local fiber backbones. Often they will look to serve an area business first, but that can anchor more growth and stimulate more demand. Local governments and state agencies such as ConnectKentucky and North Carolina's e-NC Authority specialize in helping local communities develop broadband applications and then bringing them together with service providers. Not only do the local incumbents support their efforts, but so do information technology companies such as IBM, Dell, Apple and Cisco, all of whom have a stake in seeing greater broadband deployment, especially on fiber optic platforms.

Still, will there be instances where government is the only option? Perhaps. But, unlike municipal models to date, investments do not have to be speculative. Governments run into problems when in attempting to be service providers. They risk millions of dollars in hopes they can effectively deliver sophisticated, tailored services that the private sector itself often struggles with.

A better approach might be similar what a few states are doing with toll roads. States have begun leasing toll roads to private operators, usually for a substantial upfront fee (see the Chicago Skyway and Indiana Toll Road).

The private operator is completely responsible for maintaining the highway and expanding it as needed. The company charges user fees to recoup its investment. State taxpayers benefit because they pay less in road taxes. Drivers "pay for use," but at a lower net cost gained from having a business, not the government managing the road. The large upfront payments in these leases can then fund much-needed infrastructure projects that the state couldn't have afforded otherwise.

Likewise, it is easy to imagine a scenario in which a small town builds a fiber network, than leases it, again at a substantial upfront cost, to a network management company, which then takes on the responsibility of signing up retailers and ensuring delivery of services. The municipality benefits from recouping its initial investment, through the initial payment and then through regular lease payments which service the remaining debt. Taxpayers end up far less liable, yet the community will end up being served by one, two or more providers who buy capacity on the backbone.

But even then, municipal ownership should be the final option, not the first. In broadband and information technology, nothing stands still. Demand is there and dollars are there. Fiber is coming. Don't panic.

Think Tank: iProvo's Losses at $8 Million and Counting

Wed, 16 Apr 2008 00:00:00 EDT

Los Angeles (April 16, 2008) - iProvo has already posted over $8 million in losses according to a new Reason Foundation policy brief that concludes that Provo is destined to join a list of cities like Ashland, Oregon, and Marietta, Georgia, that have "thrown away millions of dollars on broadband projects that, in the end, failed to deliver any of the promised benefits."

iProvo's total losses are likely to exceed $10 million by the end of this fiscal year - and that figure doesn't include the $39.5 million borrowed to launch the project, most of which still needs to be paid back. The Reason Foundation report says Provo "faces the dilemma of continuing to fund iProvo with no break-even point in sight, or it can sell and recoup as much of its investment as it can."

"Provo's taxpayers are being fleeced," said Steven Titch, policy analyst at Reason Foundation and author of two reports on iProvo. "The only question is how much of this fiscal recklessness they are willing to take before saying 'enough.'"

In 2003, iProvo lost $1.3 million in taxpayer money. It posted a $1.4 million loss in 2004, a $1.6 million loss in 2005, another $1.9 million loss in 2006, and in 2007 iProvo was over $2 million in the red. That's over $8 million in losses, and things don't look much better for 2008. In January, iProvo posted a net-gain of just 29 subscribers and could be headed for over $2 million in losses again this year.

"The city can continue to prop up iProvo by shifting and transferring money around, but taxpayers are ultimately going to be stuck with the multi-million dollar bill," Titch stated.

A December 2006 Reason Foundation study found that iProvo's financial losses were inevitable and correctly predicted the red ink would only get worse. Yet, in a response to the Reason Foundation report, Mayor Lewis K. Billings said that iProvo just needed more time and lamented, "How would you like it if the world judged your entire education only on the grades you received during your freshman year?"

Well, iProvo and Mayor Billings aren't freshmen anymore. iProvo has failed to meet nearly every benchmark set for it and is on pace to hit $10 million in total losses this June.

"No matter how many times the city tries to move the goalposts for what success means or how many subscribers iProvo needs, it can't get away from the fact that iProvo is a dismal financial failure by any standard," Titch said.

The Reason study notes large cities like Los Angeles, Houston and Chicago have recently backed away from municipal broadband plans because it is increasingly clear that government agencies aren't equipped to compete in the fast-moving, ever-changing Internet, phone and cable television business.

Full Report Online

The Reason Foundation policy brief iProvo Revisited: Another Year and Still Struggling is available at www.reason.org/pb69.pdf.

Reason Foundation's detailed analysis of iProvo's municipal broadband efforts, published in 2006, can be found online at www.reason.org/ps353.pdf.

Jerry Ellig, former deputy director of the Federal Trade Commission's Office of Policy Planning, wrote a 2006 Reason Foundation study that concludes cities shouldn't fool themselves into believing that their experience running water, gas and electricity systems has prepared them for the fast moving Internet world. The full study, A Dynamic Perspective on Government Broadband Initiatives, is available online at www.reason.org/ps349.pdf.

Reason Foundation's municipal broadband research and commentary is here: www.reason.org/telecom/index.shtml.

About Reason

Reason Foundation is a nonprofit think tank dedicated to advancing free minds and free markets. Reason Foundation produces respected public policy research on a variety of issues and publishes the critically acclaimed Reason magazine and its website www.reason.com. For more information, please visit www.reason.org.

Contacts

Steven Titch, Telecom Policy Analyst, Reason Foundation, (312) 925-0464
Chris Mitchell, Director of Communications, Reason Foundation, (310) 367-6109

iProvo Revisited: Another Year and Still Struggling

steven.titch@reason.org (Steven Titch) — Tue, 01 Apr 2008 00:00:00 EDT

...

DTV Transition Illustrates Video Competition

steven.titch@reason.org (Steven Titch) — Sun, 30 Mar 2008 09:59:17 EDT

The FCC-mandated conversion to digital TV broadcasting next February is touching off a battle among cable TV and telephone companies to hook-up so-called "nevers," consumers, who for whatever reason, have been content to watch over-the-air TV and have never been interested in purchasing cable, so reports cable industry trade Multichannel News. When the DTV conversion becomes effective Feb. 17, 2009, consumers who have older analog models will have a choice of purchasing a new TV, using a government-provided $40 voucher to purchase a digital signal converter, or sign up with a cable, telco or satellite TV provider. Naturally, multichannel video service providers are hoping to entice consumers to embrace the last option. AT&T reportedly will offer a bundled package at $44 a month. Comcast is prepping a basic cable tier, with less frills, priced at $15 to $20 a month. Their target: people like Andrew King, a 45-year-old airplane mechanic who watches off-air television in Culpeper, Va., 70 miles from Washington, D.C. King is satisfied with his free TV experience. He picks up broadcast stations from two markets, Charlottesville, Va., and the nation's capital. He is unenthusiastic about the prospect of paying a cable, satellite or telephone company for television. "I'm kind of a cheapskate," he said wryly, adding he'd sign up for subscription television and then the "rates will shoot sky high." King's objections echo responses cable researchers have long heard from TV viewers they classify as "nevers" or "formers." This audience of 14 million to 19 million households are viewers who have steadfastly refused to take, or keep, pay television programming. Winning the hearts, minds and pocketbooks of such consumers is a top priority for cable, satellite and telco TV providers during the next year. "Frankly, this may be the last big chance to gain market share," said Cox Communications vice president of product marketing David Pugliese.
Regulators and legislators should note, that despite accusations that cable TV is a stagnant duopoly and needs competition from local government to meet all consumer needs, the article lays out four important facts, backed up by market research: 1) There is heated competition for cable customers. 2) Consumers are aware of service provider choices. 3) Video service providers are interested in attracting budget-conscious customers, even those who might pay only $15 to $30 a month. 4) That even when prices drop, there is still a segment of the population who does not desire cable service.

California Proposes ëBroadband Bondsí

steven.titch@reason.org (Steven Titch) — Sun, 10 Feb 2008 10:21:13 EST

Government still tends to view the broadband usage problem in the U.S. as a paucity of infrastructure. The California Broadband Task Force (CBTF) blundered in the same policy direction in its recommendation last month that the state issue "broadband bonds" to fund infrastructure development in all parts of the state. Writing for the Pacific Research Institute, Daniel R. Ballon immediately found the flaw: According to the CBTF's final report, a full 96 percent of households have access to high-speed Internet services, but only 56 percent opt to subscribe. This gap indicates a lack of broadband demand, not a lack of infrastructure. This demand correlates strongly with household income. Instead of increasing the affordability of available commercial services, "broadband bonds" will displace existing services with inefficient government-run versions. This strategy would be akin to replacing grocery stores with a chain of state-run commissaries. Government bureaucrats cannot possibly micromanage a rapidly evolving technology such as high-speed Internet. Unlike roads and similar capital improvements, broadband networks require constant upgrades to serve the changing needs of consumers. In the past four years, Verizon has built more than 7,000 miles of high-speed capable infrastructure in California. How does this compare to the government's record of upgrading transportation infrastructure? More than a decade after the legislature introduced plans for a high-speed train system connecting San Diego and Sacramento, lawmakers have yet to finalize the 700-mile route, much less begin the projected 15-20 year construction process. The CBTF's plan dwarfs this train proposal.
While there are spots in California where wired broadband does not exist, Ballon goes on to raise questions as to whether attempting to run expensive fiber on the taxpayer's dime is worth it when private investment is stepping up. Again, current policy's overemphasis on infrastructure tends to view fiber as the sine qua non of broadband platforms, when in truth, you can meet consumer demand and bandwidth expectations with alternatives. Technically, universal access exists in the U.S. Satellite service is available everywhere. Admittedly, it's clunky, but terrestrial-based wireless alternatives are on the rise, that may not deliver 100 Mb/s, stand to deliver 30 to 40 Mb/s. And for the record, few U.S. households are using 100 Mb/s of bandwidth right now, even if they are among the 2 million that the Fiber-to-the-Home Council estimates are connected directly by fiber. This may be heresy, but there is no "right" to fiber. Living in rural areas has trade-offs. Fresh air, cheap real estate and elbow room are great and I bet you can still get a good cup of coffee in town, it just may not be Starbucks or Seattle's Best (and some think that's a good idea). Companies like Zayo Bandwidth and Bend Broadband are showing that commercial carriers can reach rural customers. California should let them and others go for it rather than funnel subsidies to technologies that are costly and inefficient for the purpose.

Municipal Broadband Fails - Again

steven.titch@reason.org (Steven Titch) — Mon, 28 Jan 2008 00:00:00 EST

City officials in Provo, Utah, are still scratching their heads over the persistent low revenues and high subscriber turnover from iProvo, the city's municipal broadband network.

iProvo, the $39.5-million wholesale fiber-to-the-premises network, is halfway into its fourth year. In December, Provo Municipal Council Chairman George Stewart, told the city council that the operation is still behind on its business plan in terms of revenues and number of customers. After receiving nearly $1 million in extra funding last year, iProvo asked the city to budget and additional $1.2 million to cover expected losses for the current fiscal year, which ends June 30, 2008. In its December 2007 report, iProvo said losses from July through October 2007 totaled $214,000.

What can't iProvo gain traction? To understand why, let's start with the reasons for its creation.

At heart, iProvo was supposed to assure local residents and businesses would not be left out of the so-called digital economy. But from a practical policy perspective, iProvo's experience, which tracks with most other cities that have mounted similar attempts at large-scale municipal broadband, including Ashland, Oregon; Lebanon, Ohio; and Marietta, Georgia, to name three, shows that simply building a municipal broadband network does little for the wider adoption of broadband services. All cities do is waste resources when they go this route.

Construction and expansion of a broadband network is purely a matter of physical and capital resources, all of which can be obtained through a variety of means. The City of Provo chose to finance and build this infrastructure itself. It did this in direct competition with commercial providers and just as the private equity market was beginning to fund commercial projects.

This was the city's first mistake. It called on its own citizens to shoulder the cost of building and financing a network that private shareowner capital was available for. Provo, like many other cities, did so with eyes wide open. Comcast executives told city officials in 2003 that by 2007—now—they would have broadband service available not only in Provo, but the entire Wasatch Valley, a schedule it has made good on.

That brings us to the second mistake Provo and other municipal broadband systems make. To achieve their goal of wider availability of broadband service, they force themselves first to create a successful cable TV franchise. This all but guarantees that after borrowing or allocating millions to build the infrastructure, municipalities will have to keep on borrowing and spending millions just to stay competitive with other providers.

Right now, iProvo isn't so much a broadband network provider as an ailing cable TV company. Stewart admits that iProvo's financial struggles stem from lower-than-expected take-up of the triple-play combination of phone, cable and Internet. And while iProvo's retail partners are signing up customers at a rate of 260 a month, those gains are offset by a monthly average of 140 customers who drop service. Unlike overruns that occur on an infrastructure project of fixed duration, say a highway expansion, which are most often related to time and materials, iProvo's losses stem from marketing problems and subjective consumer perceptions about quality of service. They will be difficult, if not impossible, to contain.

For several years, Reason Foundation and like-minded policy think tanks were warning that cities were basing municipal broadband plans on market misperceptions. The past year has seen cities that were once enthusiastic about the idea back away because the growing number of muni failures can no longer be ignored or explained away.

What cities are learning, however, is that local non-profits and neighborhood-level technology programs can be highly effective at addressing the digital divide. Agencies such as New York's NYCwireless, Cleveland's Computer Learning in My Backyard (CLIMB), One Economy Miami and SimHouston all help provide broadband access, equipment, training and technology assistance to inner-city areas. Many are funded by private sector companies and rely on little or no government money. Since they are managed by focused and motivated personnel, these initiatives stand to achieve greater digital inclusiveness than multimillion dollar government infrastructure projects.

If it truly wants inclusive broadband in Provo, the city should treat the commercial sector as a potential partner, not an antagonistic competitor. It should see beyond Comcast and Qwest. Apple, Cisco Systems, Google, Intel and Microsoft are just six major companies that have an interest in the spread of broadband. Rather than working against the industry, iProvo should work with it to identify and encourage grassroots initiatives aimed at educating individuals who feel cut off from the digital revolution. It's far less grandiose than a fiber-to-the-home network, yet it would be a far more responsible use of taxpayer money and yield a far more gratifying result.

Details of Corpus Christiís Muni Wireless Deal

steven.titch@reason.org (Steven Titch) — Sun, 23 Sep 2007 07:33:19 EDT

Corpus Christi is remains one of two cities to which EarthLink remains committed, the other being Philadelphia, which stands as EarthLink's highly visible entry into muni wireless. At the Public Technology Institute conference I report on below, Oscar Martinez, assistant city manager, disclosed some details of the 10-year EarthLink contract, stating that part of the success is understanding the culture of business, which can be much different from a government operation. "You must understand the goals of your partners and how they fit into the city goals." Under the terms of the Corpus Christi-EarthLink partnership: -- EarthLink paid Corpus Christi $5.3 million for the 147-square mile city network built and financed by the city's municipal gas and water utility for $7 million. -- EarthLink pays the city a franchise fee of 5 percent of revenues to pay for right-of-way and other costs associated with network maintenance. -- EarthLink pays $237,000 per year for use of the city's fiber optic backbone to backhaul wireless network traffic. -- EarthLink provides 10 free hot spots within the city, although not at airports and convention centers. -- EarthLink must optimize the network to provide access to 95 percent of Corpus Christi Households -- Corpus Christi is committed to paying $450,000 this year in wireless network services from EarthLink, although if the city fails to reach that plateau in 2007, the payments will be credited toward billings next year. -- EarthLink will provide 100 hours a month of maintenance as part of the agreement. Above that limit, maintenance is billed at $200 per hour. -- EarthLink must provide wholesale access to its network, but is permitted to charge prevailing market rates. The city did not antagonize the private sector, but did its best to work with it, acknowledging upfront that their vendors and suppliers–EarthLink, Tropos Networks, Northrop Grumman, National Metering Services, not to mention the dozens of hardware and software companies that the various city departments have turned to provide equipment to work with the network–are in this to make a profit. Corpus also uses Verizon Wireless' high-speed cellular data network as a back-up. While this is only the first year of service and time will tell if Corpus Christi sees the return on investment it hopes, the city got off on the right foot by not pretending that the economics of broadband networking were somehow vastly different because it was a municipality and not a commercial company (as opposed to, say Lafayette, La.; Provo, Utah; Ashland, Ore.; and San Francisco, to name just four).

Chicago Scraps Muni WiFi

steven.titch@reason.org (Steven Titch) — Mon, 27 Aug 2007 18:00:23 EDT

Chicago is the latest city to pull the plug on plans to build a citywide municipal wireless system after failing to come to terms with EarthLink, its perspective partner, the Chicago Tribune reports today. Chicago is the largest city so far to scrap its municipal plans in the face of new demands from commercial partners to act as "anchor tenant" and commit to purchase a certain level of wireless data services each year. Earlier this summer, Anchorage, Alaska, and Corona, California, decided to drop their plans for similar reasons. MetroFi was the commercial partner in both cases. In addition to the disagreement over the city's role as anchor tenant, a number of other factors influenced the decision, including the wider availability of affordable wired and wireless Internet connections, some provided by the city itself through other departments. For example, free wireless Internet is available in all 79 city public libraries as well as in large downtown public spaces such as the city's Millenium Park and Daley Plaza. Chicago never intended to be a leader in municipal Wi-Fi, said a city official, preferring instead to watch what happened in other cities and learn from that. Some of what's happening isn't pretty. In San Francisco, bickering among elected officials has stalled progress for months. In Houston, where the city council approved a contract with EarthLink last spring, work on the project has yet to start. As municipal wireless projects have hit one snag after another, prices for wired Internet have fallen. AT&T charges $20 a month for speeds of 1.5 megabits a second in Chicago and will provide connections half that fast for $10 to new subscribers, although more than 10 percent of residences in the metropolitan area cannot get digital subscriber line service because they are located too far from AT&T's switching centers.

Muni Wireless's Not So Free Lunch

steven.titch@reason.org (Steven Titch) — Mon, 06 Aug 2007 14:09:20 EDT

A doff of the chapeau to Adam Thierer at Progress & Freedom Foundation for citing for the San Jose Mercury's critical look at "free" municipal wireless in Silicon Valley. The article is only the latest in a series of skeptical reports in papers around the country about what the actual cost commitment these projects are going to require from cities. Here's a portion of the report, available in full here (registration may be required). While initially the project was lauded as a way to give the masses affordable Internet, key organizers have gently shifted the focus of the network from serving residents, for free, to giving businesses and city governments wireless access, for a price. "The idea that we've always had is that this is not just a WiFi network for people to get their e-mail," said Seth Fearey, project leader for the Joint Venture Wireless Project. "Right from the start we said, `We know the operator has to make money; it's very, very important there be a sustainable business model."'
As system costs rise, there's a certain degree of retconning going on about these systems–namely that the plan from the start was to serve city agencies first and the public second. Minneapolis wasted no time in getting word out about how its municipal wireless system aided first responders during last week's bridge disaster. That's all well and good, but that's not how most of these projects were sold to taxpayers (the ComputerWorld article cited above mentions but ignores the significance of the fact that on the day of the disaster there were just 1000 people using the system. If it's really outdoor wireless coverage for emergencies the city wants, it then begs the question if the city actually needs to create exclusive franchised municipal WiFi monopolies for the purpose. Why not open right of way to all would-be players, just like Anaheim did? As business models evolve, it's simply a false dichotomy to assert it's muni or it's dead air.

A Lesson Plan for Public Colleges

shikha.dalmia@reason.org (Shikha Dalmia) — Sat, 07 Jul 2007 20:04:09 EDT

While researching a story on the admissions practices of elite American universities for Reason magazine recently, I stumbled across a comparison of public and private technical colleges by Kent A. Farnsworth in the October 27, 2006 issue of The Chronicle of Higher Education, that was remarkable for two reasons: One, it was favorable to the point of glowing toward private colleges, even advising public colleges to follow their example. And two, it was written not by some free market enthusiast, but a professor and director of the Center for International Community College Education -- who describes himself as a long-standing "community college devotee." Fransworth said he had his epiphany about private colleges when he attended a conference in Beijing organized by the World Bank's International Corporation in 2005. He said that as president of a community college, he had always been troubled by why so many students chose to pay 10 times more to private or proprietary schools over public community colleges. The participants from emerging economies at this conference provided him the answer: Much to his amazement, he found, that, unlike the academic establishment in this country, these folks viewed the private sector in First World countries as the being far more effective in responding to the technical education needs of an economy than public colleges. "Most educators in the United States have chosen to believe that proprietary technical institutions cannot compete in quality and respectability with the public sector," he wrote. "Yet educators in many other countries view them as setting the standard." Why? Fransworth identifies four reasons: One, private colleges firmly keep the needs of employers in mind when developing their curricula. This allows them to build relationships with local businesses so that sometimes they guarantee jobs to graduates years in advance. Two, in order to prepare students for the workplace, these colleges place great emphasis on inculcating an ethic of professionalism, including insisting on proper attire in the classroom both by teachers and students. No strolling into class in torn jeans and an unwashed T-shirt. Three, private colleges impose on themselves strict competency-based performance standards. They don't just indicate to employers what skills their students have been taught as public colleges do, they offer an assurance that their students have actually mastered these skills. And finally, they don't force all students to waste time and money on courses in abstract liberal arts disciplines that have little relevance for employers. Rather, they emphasize applied courses in communications and mathematics. By the way, a lot of private colleges in India too are embracing the applied over the theoretical approach to education as I reported in a piece for Reason magazine last year called: Where did India's skilled force come from? http://www.reason.com/news/show/36681.html This is one big reason for India's IT boom. Academics who feed at the public trough might not understand this: But the bottom-line, so to speak, is that profits are a far more effective way of enforcing accountability on the higher education industry than either the good intentions of professors or heavy-handed state regulations.

Forget college, what you need is free WiFi

steven.titch@reason.org (Steven Titch) — Sun, 13 May 2007 15:27:47 EDT

In a textbook case of how a politician can get caught up in the sizzle and hype of the Internet, Melissa Noriega, a city council candidate in Houston, declared Internet access was more important than a college degree. "I think every family in Houston needs a computer. That's really what the difference is now. It's not a college degree. It's not any of that. It's whether you are wired, and whether you can get online and figure out your way," Noriega told KRIV, the local Fox TV affiliate. Noriega, who garnered 47 percent of the vote in Saturday's municipal elections, qualified for a run-off against Roy Morales, who won 19 percent. The two are running for the council seat vacated by Shelley Sekula-Gibbs, who stepped down last fall to make an unsuccessful Congressional bid. Noriega was speaking in support of a public-private municipal wireless project underway in Houston–which stands to rank second largest after LA. While it does not stand to be as big a risk to taxpayers as some other projects, the political motive here, as well as in other cities, tends to stem from misplaced panic that without a government-mandated program for cheap broadband, cities will be left behind. Admittedly, Noriega's "chuck-school-and-get-online" is the most extreme example of the breathless hyperbole that has surrounded municipal broadband, but it shows how civic leaders have a tendency to mislay perspective the moment someone says "broadband."

Villaraigosa Should Ask If a WiFi Plan Is Really Necessary

steven.titch@reason.org (Steven Titch) — Mon, 12 Mar 2007 16:20:00 EDT

Los Angeles Business Journal

With the recent announcement that Los Angeles will seek bids for a citywide wireless Internet network, Mayor Antonio Villaraigosa has joined some 300 other U.S. cities and towns hoping to create a low-priced, ubiquitous form of Internet service.

In proposing a private-public partnership Villaraigosa has greatly improved chances for success at the outset. Under the proposed WiFi Initiative, Los Angeles would contract with a commercial service provider. In return for use of city property and right-of-way – light poles, buildings and other real estate – the service provider would agree to cover 498 square miles at an estimated cost of $60 million. The deal might also include a low-price or free tier of wireless service aimed at low-income residents, although more will be known once the city issues a formal request for bids.

The advantage of a private-public partnership is that it places the responsibility of funding, building and operating the system on the private sector. With more than 400 WiFi hotspots already in place throughout the L.A. area, any wireless venture will have plenty of competition from the get-go. So Villaraigosa has wisely taken use of taxpayer dollars and municipal loans off the table.

He knows that, with the exception of a few very small towns, governments that have attempted to build and operate their own wide-area broadband networks have found themselves in deep money pits. Chaska, Minn., for example, ended up spending $900,000, 50 percent more than planned, on its municipal wireless network, before turning to a private partner to solve chronic signal coverage problems. St. Cloud, Fla., spent $2.6 million but couldn't get a signal to most residents in a town of just 28,000.

Right now, San Francisco is the only major city seriously considering a city-owned network. The city's Board of Supervisors is battling Mayor Gavin Newsom because it wants a municipally-owned system, even though Earthlink and Google offered to build it for free.

"We never thought it would be so hard to spend money in a city – or such a hard sell to give something away," EarthLink Vice President Cole Reinwand said.

"I'm not going to take $10 million from poor people to pay for something that a private company has offered to pay for," said Newsome.

Public-private partnerships definitely present less risk, but Villaraigosa should ask if a citywide WiFi plan is even necessary at all. There's a common assumption that government needs to provide some sort of spark for urban broadband growth – a bridging of the so-called digital divide. But all evidence indicates the market is reaching new customers on its own.

Last year, the Pew Internet & American Life Project found there was a 40 percent increase in home broadband adoption from March 2005 to March 2006, double the 20 percent of the previous 12 months. Moreover, in the same period, broadband adoption grew by 68 percent among people living in households with incomes between $40,000 and $50,000 per year, by 121 percent among African-Americans, and by 70 percent among those with less than a high-school education.

Unfair competition

Secondly, even without direct taxpayer funding, municipal agreements may constitute unfair competition. After all, in most cases, the commercial WiFi partner gains exclusive access to city property, which reduces operating costs. Proponents argue that this benefit offsets anything in the deal requiring private partners to serve low-income communities. But that assertion itself assumes that serving low-income users is either undesirable or uneconomical. The evidence from Pew counters this assumption. The low-end broadband market is viable and growing. A government-sponsored project to deliver cheap broadband may not be necessary, and may in the end, serve as a barrier to competition in this segment because the commercial partner is getting a break on right-of-way costs that other companies won't enjoy.

Neighboring Anaheim came up with the best WiFi approach – offering non-exclusive, low-cost access to city right-of-way. As a result, it became one of the first cities to inaugurate a citywide system last summer, with plans ranging from $3.95 per hour or $21.95 per month. It also makes residential service available though partnerships with PeoplePC and DirecTV. Offering right-of-way to all-comers enabled Anaheim to ensure greater competition and avoid lock-in to a specific technology, which could quickly become obsolete.

L.A. seems to have bought in to the notion government needs to "do something" to make citywide WiFi happen. Villaraigosa's plan isn't as good as Anaheim's and isn't as bad as the government-run route pushed by some in San Francisco. The mayor's timetable calls for WiFi roll out in 2009, but chances are that by then, working on its own, the free market may well have pre-empted city's broadband goals.

Civitium Breaks with the Muni Left

steven.titch@reason.org (Steven Titch) — Sun, 18 Feb 2007 12:14:42 EST

The founder and managing director of the biggest national consultancy for municipal wireless systems has ripped left-wing activists in San Francisco for their attempts to get the city dump its deal with EarthLink and Google and pursue a multi-million dollar, taxpayer-financed city-owned wireless network. In what amounts to a repudiation of San Francisco's chapters of the Institute of Self-Reliance, Media Alliance and the American Civil Liberties Union, Greg Richardson, head of Civitium, which provides consulting services for cities that are pursuing and evaluating municipal wireless systems, accused both groups of promoting a political agenda at the expense of a sound business plan that would create a metropolitan wireless system that could provide free service to low-income residents. Last week, the San Francisco Board of Supervisors voted to put the EarthLink-Google contract on hold in order to study the feasibility of a government-owned system. As a result, many feel that EarthLink and Google will ultimately pull out. Civitium was hired by San Francisco to evaluate the bids for its citywide wireless plan. The company also is working with Chicago, Corpus Christi, Tex., Houston, Philadelphia and Phoenix. A list of client cities is available here. "For the record, Civitium supports private-ownership of Wi-Fi for San Francisco, and we support the recommendations for public-ownership of fiber (with an open, wholesale model) presented by our partner, CTC," Richardson wrote Feb. 14 on Civitium's blog.

You Donít Need Municipal Broadband To do Telemedicine

steven.titch@reason.org (Steven Titch) — Wed, 06 Dec 2006 14:40:40 EST

It's darn near a clich�: one of the big justifications municipalities make for finding their own broadband systems is for telemedicine applications. But much more can be accomplished for much less. Discussing the Arizona Telemedicine Program at the American Legislative Exchange Council (ALEC) States and Nation Policy Summit in Phoenix, Dr. Ronald Weinstein, program director said uses a high-speed leased network backbone to connect 171 hospitals, medical centers and other health care organizations throughout the state. Applications include 24/7 teleradiology, patient consultation and observation and telepsychiatry. The network reaches rural hospitals, prisons and Indian reservations and just marked its tenth anniversary (it's not has if telemedicine is that new). A program of the University of Arizona Health Science Center, the project received finding from the Arizona state legislature, but largely subsists on grants from diverse federal funds, which totaled $20 million in 2005. Although municipal projects make much of the need for high-speed local networking, the Arizona network, while making use of a high-speed backbone, uses managed bandwidth allocation to balance loads. Much of the manpower and investment goes for equipment and the hospital end, and even then the accent is on economy. The network even supports IP telecommunications. Weinstein told me that one of the Navajo tribes funded and extension of the network throughout the reservation. I'll concede that government funding is involved here, but the program's grants come through a competitive process. Needless to say, no one felt that a municipality had to ask its taxpayers to take up the cost burden. Arizona certainly didn't go out and build the infrastructure itself. The project also recognized that a sound business plan, training and standardization were more critical elements. All of these alternatives are important to remember, especially as Reason releases its report on the difficulties in Provo, Utah, a municipal system that started with high hopes and ends up in mounting debt.

Study: iProvo's Financial Woes to Worsen

Tue, 05 Dec 2006 00:00:00 EST

Los Angeles (December 5, 2006) — With revised subscriber figures showing iProvo is still nowhere near breaking even and likely to lose well over a million dollars for the fourth consecutive year, a think tank's analysis of iProvo, the municipal fiber optic network owned and operated by the city of Provo, Utah, finds the operation's current financial problems were inevitable and will get worse.

The Reason Foundation study concludes iProvo's net assets will continue to decline as its debt and interest load grows. While iProvo still has positive net assets, Reason shows it owes more than the system is worth. Overall, assets grew by $2.2 million in 2005, but liabilities grew by $3.9 million. The report finds this gap "shows every sign of increasing and will slowly eat away at iProvo's value and prevent the city from ever getting out from under the debt."

After originally forecasting it would take 10,000 subscribers to break even, iProvo recently revealed that it needs 12,000 to 15,000 subscribers to break even. There are currently 7,700 subscribers who get various combinations of phone, cable and Internet services.

"Provo entered a fast-moving broadband market that it, like most local governments, is ill-equipped to compete in," said Steven Titch, the study's author and a policy analyst at Reason Foundation. "At this point, taxpayers can only hope to limit their losses."

iProvo lost $1.36 million in fiscal 2003, $1.42 million in 2004, and $1.67 million in 2005.

"Provo, like some other local governments, operates its own electric utility which officials thought prepared them for expanding into telecom," stated Adrian Moore, Ph.D., vice president of research at Reason Foundation. "Broadband and Wi-Fi is a different beast. Competition is fierce and technology changes rapidly. Unfortunately, Provo isn't the only place we're seeing that the municipal broadband plans and forecasts didn't reflect reality."

Full Reports Online

Reason's analysis of iProvo can be found online at http://www.reason.org/ps353.pdf.

Reason Foundation's new study, A Dynamic Perspective on Government Broadband Initiatives, outlines seven key factors that municipal officials should fully address before moving forward with plans for municipal broadband and Wi-Fi to ensure that the projects are technologically and financially viable. That report is available online at http://www.reason.org/ps349.pdf.

Reason's municipal broadband research and commentary is here: http://www.reason.org/telecom/index.shtml.

About Reason

Reason Foundation is a nonprofit think tank dedicated to advancing free minds and free markets. Reason produces respected public policy research on a variety of issues and publishes the critically acclaimed monthly magazine, Reason. For more information, please visit www.reason.org.

Contacts

Steven Titch, Telecom Policy Analyst, Reason Foundation, (281) 571-4322
Adrian Moore, Vice President of Research, Reason Foundation, (661) 477-3107
Chris Mitchell, Director of Media Relations, Reason Foundation, (310) 367-6109

Beware of Tech Geeks Bearing Gifts

Tue, 05 Dec 2006 00:00:00 EST

Los Angeles (December 5, 2006) — With hundreds of local governments considering getting into the broadband business, a new report warns that cities shouldn't fool themselves into believing that their experience running water, gas and electricity systems has prepared them for the fast moving Internet world.

The Reason Foundation study written by Jerry Ellig, former deputy director and acting director of the Federal Trade Commission's Office of Policy Planning, outlines seven key factors that municipal officials should fully address before moving forward with plans for municipal broadband and Wi-Fi to ensure that the projects are technologically and financially viable.

The study also cautions city officials to beware of "geeks bearing gifts," suggesting that companies like EarthLink and Google are interested in providing free Wi-Fi because the deals will give them rights-of-way and valuable access to public infrastructure like light and telephone poles.

"Proposals for free or privately subsidized Wi-Fi are obviously attractive at face value," said Jerry Ellig, the report's author and a senior research fellow at the Mercatus Center at George Mason University. "Exclusive access to rights-of-way and poles would bestow a significant competitive advantage on any firm selected to use them. Local governments should beware of granting one Wi-Fi provider exclusive access to public assets, even if the Wi-Fi service itself is free of charge to users. Local governments should not let the sizzle of free Wi-Fi obscure the consumer's stake in competition."

The Reason Foundation report details seven critical issues for governments to tackle before jumping into the broadband market:

Competition: At the end of 2005, 67 percent of U.S. zip codes already had at least four high-speed Internet providers; 93 percent had two or more high-speed competitors; and just 1 percent had no competitors. Thus, municipal cable and Internet offerings face stiff competition and are unlikely to grab a large market share unless they are willing to lose a lot of taxpayer money doing so.
Performance Competition: New government systems will have to offer higher speeds or lower prices to compete with private companies. Existing government systems will need to consistently upgrade their speeds or drop their prices to compete with private sector improvements.
Continuous Improvements: The real consumer price index for Internet services has fallen by 23 percent since the Bureau of Labor Statistics started tracking it in 1997. Unlike traditional government-owned utilities, the lightning pace at which broadband technology improves and prices fall is difficult for municipalities to match.
Technological Change and "Lock-in": The market can get locked in to an inferior technology if government decides to subsidize the inferior technology, thus blocking out better or less expensive technologies. For example, ISDN was short-lived method for sending data over phone lines. Today we don't know how Evolution Data Optimized (EV-DO) technology and cell phone companies will change the market; if we'll see broadband over power lines; or what fiber optic service by cable or phone companies will mean to consumers and the Internet.
Obsolescence: Because wireless technology improves so rapidly, capital investment quickly becomes obsolete. Plans for government broadband need to assume faster depreciation rates than have been used for traditional government utilities. A workable plan for municipal Wi-Fi needs to cover operating costs and recover initial capital outlay in three to five years.
Risk: Broadband is a risky endeavor and governments must not finance it as though it is a low-risk infrastructure investment.
Uncertainty: Since taxpayers bear the financial uncertainty in their role as the owners of government broadband, officials should ensure the accountability and transparency in these projects is at least as good as that of publicly held companies.

"Each government-provided or privately subsidized broadband plan has its own unique characteristics," Ellig said. "But no plan should be considered responsible until these issues have been addressed. Government faces the daunting challenge of entering a market where technological change is swift, the future is uncertain, and competitors' actions are unpredictable�a playing field fundamentally different from the stable, predictable utility markets that have traditionally attracted public investment."

"As the study shows, the telecom world moves a lot faster than the water or gas systems that many governments are used to owning," said Adrian Moore, Ph.D., vice president of research at Reason Foundation and the study's project director. "With long asset lives and slow technological changes, traditional utility infrastructure costs are not difficult to recover through rates. That is not the case here. If officials get into the broadband business, they are entering a field where millions of taxpayer dollars can be wasted in no time and the technology they bought today is obsolete tomorrow."

To illustrate that point, Reason Foundation has also released a new case study on iProvo, the municipal broadband system in Provo, Utah, that lost $1.36 million in 2003, $1.42 million in 2004, and $1.67 million in 2005. Reason finds iProvo owes more money than it is worth. Overall, assets grew by $2.2 million in 2005, but liabilities grew by $3.9 million. The report finds this gap "shows every sign of increasing and will slowly eat away at iProvo's value and prevent the city from ever getting out from under the debt." And after originally forecasting it would take 10,000 subscribers to break even, iProvo now says it will need 12,000 to 15,000 subscribers just to break even. There are currently 7,700 subscribers, well below the number predicted.

Full Reports Online

The full study, A Dynamic Perspective on Government Broadband Initiatives, is available online at www.reason.org/ps349.pdf. A summary of the study is available at www.reason.org/ps349polsum.pdf.

Reason's detailed analysis of iProvo's municipal broadband efforts can be found online at www.reason.org/ps353.pdf. Reason's municipal broadband research and commentary is here: www.reason.org/telecom/index.shtml.

About Reason

Contacts

Jerry Ellig, Senior Research Fellow, Mercatus Center, (703) 993-4925
Steven Titch, Telecom Policy Analyst, Reason Foundation, (281) 571-4322
Adrian Moore, Vice President of Research, Reason Foundation, (661) 477-3107
Chris Mitchell, Director of Media Relations, Reason Foundation, (310) 367-6109