Government-Owned Networks Will Not Improve Outcomes for Consumer

In 2020, over $79.4 billion was invested by America’s communications providers to develop and expand broadband access. Last year’s investments brought the total private investment into broadband to $1.9 trillion since 1996, the year the Telecommunications Act was passed and allowed any company to enter the telecommunications market. Unlike municipally-run services, or government-owned networks (GONs), which have consistently failed to expand or improve services, private telecommunications providers are in the strongest positions to make the necessary investments to bridge the digital divide.

Around 900 municipalities in the USA currently maintain GONs, and there is no shortage of advocates for setting up more. For example, the Community Networks Initiative argues that “Publicly owned, open access networks can create a vibrant and innovative market for telecommunications services.” However, the data shows that private networks have consistently invested more and delivered superior results than GONs.

The Federal Communications Commission (FCC) estimates that 14.5 million Americans lack reliable broadband connections, with many living in rural communities. This evidence that America is currently experiencing a digital divide between connected urban regions and rural communities that lack reliable service. In total, 25% of all rural Americans do not have broadband access. Fast and reliable internet allows Americans to work remotely, access necessary educational resources and telemedicine services, and communicate with the wider world. However, expanding GONs will do little to close the digital divide.

While the federal government proposes to invest $65 billion over ten years through the bipartisan infrastructure package, private investments regularly total this annually. The fact that private providers have more money to invest indicates that they are in a stronger position than the public sector to take on the task of expanding access into rural areas.

Public provision of broadband services will result in high price tags when developing the infrastructure. Multiple studies have shown that public provision of goods and services can cost twice the amount of private provision.

Considering that public networks tend to be costly, and taxpayers will eventually have to pay for them, they are not a better and more efficient alternative to the private investments already in full throttle. This was shown in the case of Provo, Utah’s GON iProvo, which cost $39 million to establish. It was sold off to a private provider for $1 after years of failing to turn a profit. The fate of iProvo has been shared by many other GONs.

GONs are built on a broken incentive structure. Since the managers of public networks do not have skin-in-the-game, they rely on public funding rather than a need to operate a profitable service that benefits consumers. With access to taxpayer dollars and government bailouts, GONs are often managed inefficiently. In the cases of unprofitability, they can turn towards the government and taxpayers asking for more public funding instead of fixing their business model, leading to unsustainable and unnecessarily costly practices in perpetuity.

Due to the broken incentive structure, GONs always cost more than advertised. Take the example of Lake County, Minnesota, a rural area that developed its network in 2010 but was ultimately sold off to a private company after years of not being able to turn a profit and being kept afloat with federal loans and grants. The project resulted in a massive $45 million debt bill that fell on local taxpayers.

GONs also crowd out private investment – when a municipality has invested so much into a GON, private companies may be disincentivized from expanding their networks into that area. Crowding out will lead to a publicly-operated monopoly, and the lack of competitive choice for consumers will perpetuate the existing inefficiencies of GONs.

Another  example is Tacoma, Washington, a city that operated the country’s oldest municipal network. After many years of being dependent on government subsidies and only reaching a market penetration rate of 18.8%, the city government decided to hand it off to a private provider in 2019. The availability of a private provider to quickly take over this network speaks to how the private sector is able and willing to expand into more communities.

When GONs fail, residents are left with a hefty tax bill and most often without the promised successes of the publicly-operated broadband network. For example, Dunnellon, Florida, developed their GON using a $7.4 million loan. However, after finding that it was too expensive to manage, they sold it off to a private company for $1 million. This value was significantly less than it cost to develop the network, leaving the city $7 million in debt. When municipalities end up in debt due to failed GONs, spending must be cut in other areas such as education or infrastructure, or taxes must be raised.

GONs’ inefficiency and unprofitability stand as evidence that GONs are not the answer to bridging the digital divide. These municipal projects are distractions and not solutions. They burden taxpayers while failing to close the digital divide and should not be counted upon as a practical policy. Instead, policymakers should allow the private sector to continue its investments in broadband deployment in underserved communities.

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