The Costly Truth of Municipal Broadband Networks

Last week, the National Taxpayers Union (NTU) released a new study which examined the costs and benefits of municipal broadband programs.  Municipal broadband, for the uninitiated, is government financed Internet that would be provided to a community, free of charge, though financed through tax dollars.  Most would agree that providing access to high-speed Internet access is a noble goal and one that is necessary to further educational opportunities, economic development and job creation.  President Obama, in his National Broadband Plan, has called for 90% of Americans to have access to high-speed Internet by 2020.  According to a recent assessment conducted by the FCC, broadband access is somewhere around 95% of US households.

Many communities have experimented with municipal broadband over the years.  I’ve detailed many of them in the past, including the towns of Mooresville and Davidson, North Carolina, who borrowed $92 million to finance the purchase of an ailing broadband Internet provider. After spending taxpayer dollars on this program, the city found itself having to borrow even more, while struggling to keep up with the pace of new technology and upgrading the required infrastructure.  Reason and Americans for Tax Reform, as well as one ACI scholar, have detailed more failures in public financed broadband.  Municipal broadband programs have proven to be such a failure that 20 states have passed laws against publicly financed broadband programs.

Although many states have banned the practice of municipal broadband, NTU’s new study shows that many governments still have an appetite for it.  Just last year, more than 100 networks were built or being built in 33 different states.  The study goes on to show some of the costs associated with the failed broadband plans:

The hidden costs to taxpayers from municipal broadband are considerable and growing ominously.  Annual debt service costs for nine broadband networks in Tennessee have risen from just over $100,000 in 2001 to nearly $12 million in 2010.  Last month, one sponsoring entity of this project, Chattanooga’s Electric Power Board, faced a downgrade in its debt in part due to concerns over the reliability of its revenue stream from cable and Internet operations.  In Utah, the “UTOPIA” network’s $202 million debt is four times larger than the combined general obligation debt of its 11 member cities (general obligation debt is commonly used to finance municipal infrastructure).

Municipal broadband networks can also be poor investments.  Despite a business model built on leasing broadband “backbone” as opposed to providing actual service, Memphis Networx failed to turn a profit and was sold at a loss of over $27 million.  A somewhat similar arrangement in Burlington, Vermont, led to $17 million of unpaid funds to its parent city, along with allegations of fiscal malfeasance.  In places such as Lompoc, California and Marietta, Georgia, subscription rates have fallen short of break-even targets by 50 percent or more, stranding taxpayers with operating liabilities.

The idea of universal access to broadband Internet is good, but its implementation by government entities often has the opposite of its intended effect.  Government-owned broadband networks almost always operate at a loss, see more service interruptions, and generally have fewer satisfied customers than their private counterparts.  Private enterprise can generally enter the market and provide reliable and cheaper service for consumers, and not saddle taxpayers with an overwhelming debt, as the NTU study has shown often happens.

There could be a better way to ensure high-speed Internet to more consumers—open up more spectrum and allow for an environment where private industry can provide Internet to consumers at an affordable rate.  By financing public Internet, governments are often saddling citizens with hidden costs and debt under the guise of “free” Internet.

Zack Christenson writes on digital policy issues for the American Consumer Institute at www.theamericanconsumer.org.

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6 thoughts on “The Costly Truth of Municipal Broadband Networks

  1. It never ceases to amaze me how people can be so against something while understanding practically nothing about it. The number of basic factual errors in this single post is an achievement, only outdone by the basic factual errors in the report by NTU. The most glaring may be the suggestion that these networks are “free.” The vast majority of muni networks do charge for services, obviously — if they did not charge for services, why would they be criticized for supposedly falling behind on debt service?? If they offered services for free, there would be NO revenue to pay the debt service.

    It would be nice for people to actually opposed something from a position of knowledge rather than half-baked assumptions and false claims.

    1. Some are offered for free, but those that do charge, run at about twice the cost of privately provided services. We have written on this point and provided citations to studies and many examples. Professor Joseph Fuhr released a report on this a few months ago on this, which detailed the failures. In their book, Professors Bennett and Johnson detailed why this is so. In the past, we have, as others have, given case specific examples of the failures in muni broadband. We have never seen one case of muni broadband that breaks even, after correctly accounting for opportunity costs, taxes and capital costs. It is amazing that you can comment without knowing the facts.

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