Municipally Owned Telecom Networks, an Economic Boondoggle

Municipally Owned Telecom Networks, an Economic Boondoggle
September 27, 2005

Joseph Bast

Joseph L. Bast c.v. Joseph Bast is president and CEO of The Heartland Institute, a 29-year-old... (read full bio)

Do you pay too much for broadband access at home and at work? Can you even get reliable and affordable service where you live?

Many people aren't satisfied with their current broadband providers. They are tired of waiting for the local telephone or cable company to roll out high-speed Internet access and don't want to pay more than $100 a month for slow satellite broadband.

These frustrated consumers are easy marks for advocates of municipally owned broadband systems and the consultants and vendors who financially support them. At first, these advocates tried to sell communities fiber-optic networks that were enormously expensive--$3,500 per home.

With only a few exceptions, voters didn't fall for it. Those who did are paying dearly for their mistake, having to subsidize, with their tax dollars or higher rates charged by other utilities, systems that relatively few residents choose to use.

Now along comes Wi-Fi, a new wireless technology that promises to be faster than cable or DSL and costs only $25 per house to set up. Quite a deal, right?

Wrong.

There aren't many municipal Wi-Fi systems in operation, and those that exist haven't been around long enough to produce much financial data, but one municipal Wi-Fi system in Michigan has received extensive positive press coverage around the country. It is in the resort town of Grand Haven, population 11,000.

The Detroit Free Press sent a reporter to Grand Haven to report on this newest thing in wireless broadband. On July 11 he reported the service to be "agonizingly slow" and "one-third of the time I couldn't get access at all." He ended up sending his news story to the home office from the Jumpin' Java Coffee House, using its private Wi-Fi hotspot!

Grand Haven doesn't report how many paying customers it has, but you can work backwards from some of the numbers appearing in the newspaper article and make a pretty good guess: no more than 300. Of a population of 11,000, that's a penetration rate of less than 3 percent. In the world of Wi-Fi hype, that gets you in Business Week and The New York Times and cited over and over again as an example of the "success" of municipal broadband.

Gartner Inc., which bills itself as "the world's largest Information Technology research and advisory company," released a report on municipal Wi-Fi last December which said, "in the long term, municipalities have typically fared poorly at running networks and have been inefficient at providing for-pay services. There is no reason to believe that public data networks will be any different."

In July, Jupiter Research released a report on Wi-Fi predicting that "roughly 50 percent of current initiatives will fail to breakeven even if the benefit of the initiative is assumed to be $25 per user per month."

Wi-Fi is much cheaper than fiber-optic systems, but the quality of service delivered by a city-wide Wi-Fi system is still unknown, with many experts expressing doubts. Quality problems are likely to include lack of online security, degradation of service quality as the number of users rises, and limitations on service for moving customers.

The Gartner report said, "Government projects have a long history of being late and over budget. There is no reason to assume wireless networks would change this trend. In addition, not only is the equipment usually exposed to the effects of the weather, it is also vulnerable to vandalism. As a result, maintenance costs are likely to be much higher than those incurred through normal wear and tear."

A final challenge faced by Wi-Fi is the lack of earned income. Cable TV is the revenue driver for most residential broadband business plans, and for all successful plans. A Wi-Fi network can deliver, at best, one or two channels.

There is talk that telephone service will become the financial backbone of Wi-Fi networks, but this too is questionable, since telephone charges are dropping and phone service may even be offered for free when bundled with video and Internet access offered by companies using other technology platforms.

The point is that municipal Wi-Fi plans are likely to cost more and attract fewer paying users than their advocates claim. Taxpayers would be forced to subsidize these crippled and obsolete systems for years. The wait for better quality broadband from the private sector may be even longer if the subsidized municipal utility crowds out new investment by private competitors.

People hungry for affordable high-speed broadband shouldn't settle for municipal broadband schemes. To the extent there are political solutions to their "need for speed," they probably lie in getting municipal officials to remove the zoning, licensing, and other regulatory barriers that limit competition and investment.

Economists like to say "there's no such thing as a free lunch." Wi-Fi is no exception to that rule.


Joseph L. Bast (jbast@heartland.org) is president of The Heartland Institute, publisher of IT&T News, and author of a policy study on municipal broadband published by The Heartland Institute in 2004.

Joseph Bast

Joseph L. Bast c.v. Joseph Bast is president and CEO of The Heartland Institute, a 29-year-old... (read full bio)