Muni Broadband Said to Sell Risks Short; Private Incentives Better

Anticipating skepticism from municipal supporters, the report acknowledged its industry funding. But Balhoff and Rowe, who have long histories of independent communications analysis, began the project before funding arrived, it said. Their personal view is that govt. intervention in broadband is appropriate “if there is a clear-and-defined failure in the private sector” to provide a “socially or economically important service.” The report came with praise from former FCC Chmn. William Kennard, Lehman Bros. Managing Dir. Blake Bath, MIT Broadband Working Group Dir. Sharon Gillett, and mayors with muni broadband experience in Salt Lake City and Ashland, Ore.

Arguments between private providers and cities recall the late-1990s rhetoric that preceded the Internet bust, said the report. “There is a common but mistaken assumption that policymakers must choose between publicly sponsored systems or leaving the private sector to mature independent of any social considerations,” Rowe said. “The near-caricature of the extreme positions has the effect of distracting from government’s critical role in changing outmoded regulations, controlling anticompetitive behaviors, and focusing private-sector investments through incentives,” the report said. Bandwidth needs are overestimated; private sector trends in expanding broadband availability, raising speed, adding competition and increasing value are understated.

Citing a 2003 paper by MIT’s Gillett, the report offered 4 ways to improve the climate for broadband expansion: (1) Using municipal buying power to “evaluate, plan, stimulate or aggregate demand.” (2) Reforming local rules on rights-of-way, pole attachments, cable franchise agreements and others. (3) Subsidizing private networks with grants and tax breaks. (4) Sponsoring some or all elements of the network provision.

Talking points supporting municipal deployments largely are out of date, Balhoff and Rowe said. Once seen as needed by small communities telcos and cable ignore and as sources of video and data, fiber and wireless today are discussed most often for metro areas with plenty of competition, and only for data. More likely, municipalities want to generate more revenue and “maybe altruistically make their communities look better” than simply provide access not previously available, Balhoff said. He cited Cox and BellSouth as offering “tremendous service” in Lafayette, La., which has a muni project, and called San Francisco a “hotbed” of new technologies and competitive providers.

Noting San Francisco Mayor Gavin Newsom’s statement that wireless broadband should be deemed a “fundamental right,” Balhoff said targeted subsidies and incentives for private-sector providers to expand access can have a greater effect than full-scale muni deployments. “We have to ask ourselves if entire blanketing of territories solves” complex issues like the digital divide, he said.

Fiber and wireless deployments are the most common forms being considered and implemented by municipalities, but each has serious tradeoffs, the report said. Fiber buildouts are typically “future proof” but have high upfront costs and rarely survive without subsidy, Balhoff said. “Virtually all” municipal fiber deployments have a negative net present value. Six years in, a Lebanon, O., deployment has 40% penetration in video but a 2004 operating loss of $402 per household. In Bristol, Va., the OptiNet network got $4 million-plus in grants, but still had a $3.3 million operating loss and $70 million in long- and short-term debt. The costs of fixed wireless -- Wi-Fi and, eventually, WiMAX -- “are incredibly fluid at this time,” and capex estimates don’t capture “the kind of [infrastructure] refurbishing that’s generally needed” in 3-5 years, Balhoff said. Less than 10 communities are considering fiber deployments, and 30-40 are looking at fixed wireless, but that’s “fairly investigatory,” Balhoff said.

Philadelphia’s wireless project “appears to be based on aggressive assumptions,” the report said. The assumption that capex needs “practically disappear” after initial deployment is inconsistent with other wireless models, and “unlikely in a densely-populated city where competitive pressures and interference factors are high,” the report said. Philly’s first-year penetration-rate prediction of 13% doesn’t jibe with the 7.5% national penetration rate change. And for Philadelphia to achieve that 13% prediction probably would take all incremental growth and nearly the same share from incumbents, accord to the authors. The 30% margin predicted in the first and 2nd year in Philadelphia is opposite the trend in public communications ventures, which, measured in EBITDA, show no positive margins the first few years, the report said. Using “more realistic assumptions” about wireless node expansion, Philly could spend more than $35 million in capital alone the first 5 years.

Cities weighing wireless should consider the lack of transparency encountered so far in municipal fiber, Rowe said. He said he’s seen a “striking failure to provide the kind of documentation, the kind of clear account that as a regulator I would have expected” from any private firm, such as tracking cash flow and separating telecom operations from other govt. spending, he said. Capex accounting is “hidden” in nearly every muni fiber project, Balhoff said: “It is astonishing to me to see investors who are effectively ratepayers who have to invest” in these projects based on financial reporting that’s “very, very sketchy.”

On the positive side, muni deployments aren’t likely to affect private-sector competitors’ stock prices, Balhoff said. Most deployments have been in small communities, but even when larger deployments take off, muni networks’ residential customer base isn’t lucrative: It will “probably be very price-sensitive, likely to churn and not as concerned with the premium services” like security and privacy that business customers will demand, he said.

States are unlikely to meddle in muni deployments, Balhoff said. Most state laws on municipal broadband are “relatively moderate,” he said. Such laws generally require taxpayers to vote on funding “extraordinary” decisions like broadband deployments, bar municipalities from acting anticompetitively and so forth, he said.