A recent story in the telecom trade press quoted spokesmen for consumer organizations in opposition to including tax credits for broadband network infrastructure providers as part of the President-elect’s economic stimulus package now being shaped in Congress. One stated: “Telecom companies should not get tax breaks to build out broadband networks…Money should go to state and local governments to provide broadband service to underserved areas.” Another elaborated on that theme and stated categorically: “Expanding financial support for municipal-sponsored Internet services would be a better help to consumers.” (Communications Daily, 12/5/2008.) Both are wrong. Let us count the reasons.

The Case against Federal Subsidies for Muni Broadband Networks
The record of municipal provision of broadband services is extensive and marked by numerous failures dappled with a handful of “incomplete efforts,” restructurings and business cases on which “the jury is still out!” There is not one successful business plan or set of institutional arrangement that might be replicated in major or mid-sized urban markets. One Wi-Fi pioneer was quoted in the Wall Street Journal: “It was a great idea..[but] it wasn’t a great business.”

Ignoring the fact that it took several decades to achieve 95% household penetration by ordinary telephones, Muni wireless advocates cite a “failure” of the private sector to achieve universal broadband penetration in a decade or so. Ironically, Muni wireless failures mirror cost economics that assure long time horizons for broadband build-outs — sunk costs are substantial, unit costs high, rates challenge many household budgets, penetration tends to be low, and revenues tend to fall short of breakeven. In the Muni case the problem is compounded by well meaning efforts to provide service to some users for free or at subsidized rates – an approach that inevitably raises the question of who is going to be taxed publicly or privately to make up the deficit. Advocate’s promises notwithstanding, there is no such thing as a free lunch.

The deficit problem of Muni networks is especially acute in the current economic climate. Local fiscal authorities face deficits and many are calling attention to their inability to fund existing commitments for education, public safety, local transport infrastructure, and social services for those dependent on such and other services which local governments have traditionally provided. In this context it is absurd to suggest that any federal aid to local government be earmarked for business experiments with such a consistent record of failure, while ignoring the need to shore up and support traditional services provided by local governments.

Advocates often try to finesse the dilemma of distorted spending priorities by suggesting “public-private partnerships” of various forms. Virtually all of these provision of private capital mixed with various doses of public management, direction or control. Again, given the reluctance of private investors to underwrite private networks in the current environment, it defies credibility to expect them to fund extension or deepening of networks to be managed by political, no matter how well meaning, rather than earnings objectives.

Even if, counter to experience and expectations, municipally controlled broadband networks might have a better success rate, federal subsidies to support them cannot be defended as a short term jobs stimulus program. Design and planning periods, procurement and contracting delays, and assorted other political glitches sure to arise in the context of disposition of the funds would no doubt result in implementation lags outside the bounds of the President-elect’s goal of creating or saving 2.5 million jobs in the next year or so.

In view of the fact that Munis have been searching for a successful business model for nearly a decade, it is simply not credible to suggest that they could in that timeframe do more than create an administrative apparatus for a handful of bureaucrats. In this regard, it is indeed ironic that advocates of Muni systems cite (ambiguous) data indicating that the US trails the rest of the world in different metrics of broadband development. It is painful to imagine our ranking if we were to rely on municipalities to close the current gap.

The Case for Tax Credits to Stimulate Private Investment
The case for tax credits for broadband infrastructure providers is compelling for several reasons. First, private firms have well established business plans, they have the resources, and they have done the preliminary work necessary to convert cash flow from tax credits to economic activity quickly; and, in many instances, the tax credits would merely add to investment programs already committed to providing broadband networks. Amending existing capital programs of current broadband network providers promises less delay, lower startup costs, and less uncertainty than launching new public programs in hundreds of American cities.

Studies inside and outside government indicate that private broadband investment creates high-paying jobs and does so with dispatch. The IT and telecom sector accounted for about half of all new jobs in the most recent year for which data are available and IT and telecom jobs pay wages 40% higher than average hourly earnings. Private broadband networks accounted for a disproportionate share of recent productivity gains since 2000, as telecom sector productivity was 111%, or 4X the manufacturing rate and 8X the nonfarm business rate. IT and telecom is credited for 38% of U.S. productivity growth since 2000. Large US carriers have invested substantially more than their European peers both in the aggregate and on a per line basis in the last four years.

All this has resulted in lower consumer prices as reflected in an overall reduction of 6% in telecom rates, versus 18% increase in the consumer price index since 2000. While municipal systems have searched for a workable model, private broadband networks have generated tremendous environmental benefits. Work done at the American Consumer Institute estimates reduced greenhouse gas emissions (2008-2018) by more than 1 billion tons and energy savings on the order of 10% of U.S. oil imports. Finally private broadband networks have been an essential input into IT sector contributions of nearly 20% of all U.S. economic growth (2002-2007).

Investment in broadband telecommunications networks is correctly included in any infrastructure stimulus program. Such investment will create jobs directly, in other parts of the information technology sector, and in sectors like healthcare and others that will benefit from improved online access.

In contrast, funneling money away from the private sector to underwrite public provision of broadband networks is fundamentally a very bad idea with no basis in experience. Well informed consumers would not support the suggestion by some of their spokespeople that the Congress substitute subsidies to municipalities for tax credits to private providers as a means of closing the digital divide or otherwise expanding citizens’ access to broadband and creating jobs. A fair reading of the track record of the private sector and municipalities in constructing and managing broadband systems provides absolutely no support for careless claims that consumers are better off relying on local governments to provide broadband services.”

Dr. Larry F. Darby, Senior Fellow of the American Consumer Institute and former FCC Common Carrier Chief

Posted December 17, 2008