City-Run Broadband Internet Is a Disaster in the Making
These projects aren't fiscally responsible, but the FCC has given them a thumbs up.
Government Internet is coming to a city near you. The only question is if anything can be done to stop the politicians scheming to bring it.
Across the country, there's been an explosion in what are euphemistically called "municipal broadband" projects—government-funded and operated broadband services that are competing with community service providers that have been operating for years. All across the country, from Newark, Delaware, to Seattle, Washington, government officials are exploring the possibility of sinking hundreds of millions of taxpayer dollars into these projects.
This isn't a new fad: Government broadband networks have been pursued by officials since the late '90s, when smaller locales like Ashland, Oregon, and Marietta, Georgia, built out their own government-run networks. There are lots of reasons that they've proliferated in the last decade—politicians get glowing national press for their support, for example—but an important ruling by the Federal Communications Commission (FCC) this year has incentivized them to spread further.
In February, the FCC issued an unprecedented order, unilaterally overturning laws in 19 states that had prevented local governments from attempting to build out and compete with their own broadband networks. The given reason for this was to try to tear down barriers to competition and expand access to "advanced" broadband technology.
This was the latest in a string of FCC actions that enhanced the incentives for politicians to pursue these new projects. Just one month earlier, the FCC redefined what they meant by "advanced" broadband by more than tripling those benchmarks. And even by these new standards, 83 percent of Americans had access to advanced broadband, up from 80 percent one year earlier.
So, because a vanishingly small percentage of Americans did not have access to what the FCC determined to be sufficient internet speeds, the FCC found it necessary to unilaterally strike down state laws that were passed with overwhelming legislative support. In a statement of dissent from the FCC majority that passed this order, Republican commissioner Ajit Pai called it "unlawful" and that the FCC "usurps fundamental aspects of state sovereignty."
For now, it is the law of the land. And the sexiness of "infrastructure investment" and the ability for local bureaucrats to play like they can run a business just as well as the private sector means that the odds are pretty high that there's a taxpayer-funded local broadband network being considered near you.
Consider what's happening in Newark, Delaware, where local politicians are building a network that seems superfluous at best. The current market has 98.9% broadband penetration, and residents in Delaware enjoy the fastest average speeds of any state in the country. Broadband customers already have a choice of 16 providers. A taxpayer-funded 17th seems unlikely to increase either network penetration or speed, which are the stated goals of the FCC. In fact, the only possible justification that a project like this could have is, as their exploratory report stated, as a "revenue generator."
A committed federalist may look at some of these government broadband schemes and tell them to go for it—after all, local governments can be laboratories of democracy, and as long as they're only gambling with their own constituents' money, those constituents can vote—both with their ballots and with their feet.
Notwithstanding that making money by operating a business in a service industry has never really been a good justification for new expansions of government, it's unlikely that municipal projects like Newark's are going to function as revenue generators for local governments. The track record simply isn't there.
Take Provo, Utah, whose city-run broadband scheme was supposed to be a model for the entire country. Provo built out and launched a public-private fiber-optic broadband network that broke ground in 2001. By as soon as 2006, the network had thousands of subscribers. Yet it was steadily losing money anyway, to tune of almost $10 million per year. City officials panicked; the boondoggle was hemorrhaging money, and they were still on the hook for $39 million in loans the city took out to pay for its initial construction. After multiple rounds of proposed buyouts, Provo sold its entire fiber-optic broadband infrastructure to Google in 2013—for one dollar.
The end result was that a corporate behemoth benefited by acquiring a massive taxpayer-funded infrastructure for nothing. In the end, this cutting-edge project meant to turn Provo into a tech industry leader was just a big corporate welfare project for Google.
Marietta, Georgia, spent over $30 million on a government-run broadband network that was later sold to a private developer for only $11 million. Burlington, Vermont's network went $17 million into debt on improperly borrowed taxpayer money that contributed to a Moody's downgrade of the city's debt rating. MI-Connection, a joint government project undertaken in 2007 by multiple Charlotte, North Carolina, suburbs, racked up almost $90 million in debt in the first four years of its operation and has yet to get on sound financial footing—all while continuing to float by on taxpayer subsidies.
These are just a few of the most egregious examples. But despite project after project proving that local bureaucrats can't effectively run these private networks and despite the millions and millions that keep getting flushed, the projects keep getting planned. They're in search of a holy grail that would be well-run and provide optimal service at low prices universally and at a profit to the government.
So far, that doesn't exist.
The go-to for government broadband advocates so far has proven to be the Chattanooga EPB fiber network in Tennessee. And give them this: Unlike other government networks that have struggled to even provide service equivalent to the private sector, the Chattanooga project has actually provided competitive service to a good portion of the potential market. Local government officials tout the project as a form of stimulus, bringing jobs to the area and transforming it into a tech hub.
"It's really altered how we think of ourselves as a city," Chattanooga Mayor Andy Berke said.
"We're a model for the nation and I'm proud of it," Chattanooga City Councilman Chris Anderson said.
Officials in other cities no doubt salivate at the possibility of being able to tout their own high-tech projects in such glowing terms to the press.
What goes unmentioned is the cost. Chattanooga didn't build the network cheaply, nor did they even pay for it themselves. No, it took $111 million in federal tax dollars to get the network off the ground. This was doled out to Chattanooga as a part of President Obama's stimulus program. The success that Chattanooga has had in putting federal tax money to work was actually the impetus for the FCC's unilateral, unprecedented overturn of state-level municipal broadband laws; the Chattanooga EPB wants to bring its service beyond the lines of its current authority.
We can see the folly in using Chattanooga as a model for how other municipal broadband projects could work. Not every city can use the federal government to extract money from taxpayers in other cities and states to pay for their government broadband projects. The money has to come from somewhere; the feds can't redistribute hundreds of millions to every city in the country, and the cost for these networks in larger cities would be much, much higher. A proposed network in Seattle, for example, has been projected to cost up to $660 million.
And considering how so many government infrastructure projects see cost overruns, it's likely that these estimates are all going to run on the low side. It might be the case that a successful government-run broadband service can't subsist on its own, or even with the subsidies of its own taxpayers. It might have to be paid for with the money of people who will never even have the possibility of subscribing to it.
Despite the failures, local government bureaucrats around the country are still trying to press ahead, lured by the prestige of having their own broadband networks. But there may be hope on the horizon: honest reporting and government officials who are willing to believe it.
In Seattle—a bastion of progressivism whose belief in government may usually be enough to carry the day—a report that was commissioned over the summer put their own government-run broadband network plans on ice. The report put the price tag for the network between $480-660 million merely for the infrastructure alone. Then they estimated that they'd need to own 43 percent of the broadband market in a city that Forbes ranked in 2010 as the third most-wired city in America. (Chattanooga, the "success", has a 33 percent take-up rate in its market.) These are just absolutely untenable numbers for a local broadband start-up to be looking at. Activist groups have promised, however, that this isn't the end of the government project in Seattle. A group called Upgrade Seattle has promised they won't give up the fight.
This most recent study was the seventh time in the last decade that Seattle has explored the possibility of establishing a government network. It cost the city $180,000 to commission.
We've seen failure after failure, and we've seen governments hope to live up to completely unrealistic expectations when it comes to running a competitive service in what has traditionally been a private marketplace. Unfortunately, the FCC didn't acknowledge the limitations that have caused these projects to be failures when they unilaterally overrode state laws that had governed the growth of these projects. They've now incentivized more governments to explore the idea of setting up their own boondoggles. The FCC's policy used to focus on expanding access to high-quality broadband to those who didn't have it. They've now explicitly advocated for government-owned networks—akin to the health debate's "public option"—not to expand access, but to compete on speed and price with incumbents. The truth is that these networks can only hope to exist with the support of taxpayer subsidies, and that the scales are heavily weighted towards historical failures.
Government at all levels, from the FCC to your local city hall, is conspiring to bring you the service of Comcast with the experience of the DMV. It's one of the sexiest projects that a local government can undertake. There are lawsuits in the works to overturn this year's unprecedented FCC order, but in the meantime it's the law of the land, and there may be very little to stop them as they repeat the failures that dozens of others have made, over and over again.