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disco-tech | Discovery Institute's Technology Blog: Municipal Wi-Fi Networks Archives

May 21, 2010
Throwing good money after bad

Municipal broadband networks sound like a great idea, and they were a hot trend a few years ago. For one thing, promoters claimed they weren't going to cost taxpayers a dime.

Many attempts were made to blanket towns and cities with ubiquitous, free, public-spirited broadband service, but most of these projects resulted in cost-overruns, construction delays and ultimately poor service. Many were abandoned. That is, supporters walked away from a bad investment rather than build upon it.

In Tennessee, the legislature is considering a "technical" amendment that would allow municipalities to use "public money" and "public debt" to deploy broadband on an "open access" basis "within or without" that municipality's, and (with permission) any other municipality's, boundaries.

This is not a good idea.

Look no further than the National Broadband Plan (at p. 153), which was recently issued by the Federal Communications Commission (the FCC is currently composed of three Democrats and two Republicans). The plan cautions and recommends that

Municipal broadband has risks. Municipally financed services may discourage investment by private companies. Before embarking on any type of broadband buildout, whether wired or wireless, towns and cities should try to attract private sector broadband investment.
The National Broadband Plan advises that towns and cities should have the right to move forward and build networks only in the absence of private sector investment.

This important caveat is missing in the Tennessee amendment. The "technical" amendment would allow Tennessee municipalities to use public resources to compete with the private sector without limitation.

Setting aside the question of whether there actually are sufficient tax revenues and borrowing capability for Tennessee municipalities to become broadband providers in these difficult economic times -- broadband networks are very capital-intensive -- there is also the question whether public investment will promote or discourage private investment. In other words, how will aggregate investment be affected?

The private sector may choose not to compete at all against a publicly-funded and publicly-favored competitor. The private sector might just funnel its investment into other states who are more welcoming of private enterprise.

From Portland to Philadelphia, many municipal broadband networks have failed to meet most initial expectations. There is now a fairly extensive record to prove that municipal broadband networks are a bad bet.

There is also indirect evidence that most of Tennessee's municipal broadband networks are failures, otherwise why would they be asking the legislature for access to public money and public debt? And for authority to expand? Sounds like a party.



August 19, 2009
Legacy regulation killed Google Voice

Reacting to Apple's decision to not allow Google Voice for the iPhone, Wall Street Journal guest columnist Andy Kessler complains,

It wouldn't be so bad if we were just overpaying for our mobile plans. Americans are used to that--see mail, milk and medicine. But it's inexcusable that new, feature-rich and productive applications like Google Voice are being held back, just to prop up AT&T while we wait for it to transition away from its legacy of voice communications. How many productive apps beyond Google Voice are waiting in the wings?
So Kessler proposes a "national data plan."

Before we get to that, Kessler complains that margins in AT&T's cellphone unit are an "embarrassingly" high 25%. He doesn't point out that AT&T's combined profit margin -- taking into account all products and services -- is only 9.66%.

AT&T is actually earning less now than it was legally entitled to earn when fully regulated -- 9.66% versus 11.75%.

Don't fall for the myth that AT&T killed Google Voice.

The truth is regulators are quietly expropriating wireless profits to hold prices for regulated services like plain old telephone service artificially low.

This has always been how the game is played. Regulation has kept prices for basic phone service at or near the bare cost providers incur to offer the service, forcing providers to chase profits elsewhere.

In a normal business, an unprofitable product or service would disappear. But telecom providers are still required by law to provide plain old telephone service to anyone who requests it. It's called the "carrier of last resort" obligation. Believe it or not, providers are still required to provide copper-based, circuit switched phone service in many places, even though they could cut costs by deploying fixed wireless and VoIP to deliver basic phone service.

This service obligation imposes a tax on those of us who have cancelled our landline service in favor of our cellphones in the form of artificially high prices for wireless service.

Kessler offers one solution, but before we get to that, I've got a simpler one.

The solution is to give providers full freedom to set prices and choose their own technology. Yes, I mean freedom to raise prices for basic phone service so cellphones don't have to subsidize it, because cellphone providers who are affiliated with landline units could afford to lower their prices.

Don't lose me here: Cellphone providers would lower their prices, because every time prices fall subscribers consume more minutes of use.

Kessler favors a more convoluted plan, which I will admit is more practical politically than my own:

  • End phone exclusivity. Any device should work on any network. Data flows freely.
This is stupid. There may be instances where exclusivity promotes innovation, and others where it might not.

For example, a wireless provider might be willing to negotiate its customary profit margin, compromise the level of control it normally exercises over product design, promise to make special efforts to promote the product and provide technical support, and even make fresh investments in its network or back office systems to fully exploit the product's innovative features.

A bright line rule would kill both good and bad exclusivity.

  • Transition away from "owning" airwaves. As we've seen with license-free bandwidth via Wi-Fi networking, we can share the airwaves without interfering with each other.
As Kessler notes, Verizon Wireless, T-Mobile and others all joined AT&T in bidding huge amounts for wireless spectrum in FCC auctions, some $70-plus billion since the mid-1990s. The fact is, our rulers in Washington, D.C., fifty state capitals and thousands of city halls view wireless as a giant taxing opportunity.

Wireless providers are recovering the $70-plus billion they deposited into the U.S. Treasury right now from each and every one of us in the form of artificially high prices for cellphone service.

Let unlicensed devices operate in the "white spaces," then refund the $70-plus billion so new and existing carriers can compete on quality of service rather than on artificial cost disparities.

  • End municipal exclusivity deals for cable companies ... A little competition for cable will help the transition to paying for shows instead of overpaying for little-watched networks. Competition brings de facto network neutrality and open access (if you don't like one service blocking apps, use another), thus one less set of artificial rules to be gamed.
Congress invalidated exclusive cable franchises in 1984, and most states have recently streamlined the video franchising process so new entrants can obtain statewide franchises instead of negotiating individually with thousands of local franchising authorities.

Kessler's certainly accurate that competition between telephone and cable providers brings de facto network neutrality and open access. We have that competition already. In 2008, competition has pushed down the rates for bundles of Internet, phone and TV service by up to 20 percent, to as low as $80 per month, according to Consumer Reports.

  • Encourage faster and faster data connections to our homes and phones. It should more than double every two years.
One way to encourage it is to make it clear up front that investors will be allowed to earn a profit -- that's unclear now due to the possibility of extensive new regulation which would lead to bureaucratic control of broadband networks and bandwidth rationing.

The other way to encourage it is to subsidize it to make up for the harmful effects of taxes and regulation.

If we accept the idea there are too many vested interests to permit meaningful reform of legacy telephone regulation, then we are forced to look for ways to treat the various symptoms.

But the advent of wireless and VoIP technology mean that legacy phone service is unsustainable and will die unless politicians are going to treat it like GM because it provides employment for thousands of unionized workers.

There is still time for the politicians to simply let go of it and let it adapt.


March 29, 2009
Why muni Wi-Fi networks fail

A paper by James Valvo published by Americans For Prosperity notes,

Easily the biggest problem with municipal projects is that they commit taxpayer money to projects that nearly always run over budget for construction, are not financially sustainable once they are built and rely on future subsidies to provide so-called "free service." As is always the case when governments enter the free market, distortions in price, customer service and availability hinder competition and ruin what could otherwise be a profitable
venture.

See: Municipal Broadband's Record of Failure: A Profile in Market Intrusion.


May 23, 2007
Municipal Wi-Fi headaches

Lompoc, California financed the construction of a Wi-Fi network that has attracted so few users it won't be able to start repaying the loan -- and a lot of other cities are facing the same predicament, according to the Associated Press.

A $3 million plan to blanket Lompoc, Calif., with a wireless Internet system promised a quantum leap for economic development: The remote community hit hard by cutbacks at nearby Vandenberg Air Force Base would join the 21st century with cheap and plentiful high-speed access. Instead, nearly a year after its launch, Lompoc Net is limping along. The central California city of 42,000, surrounded by rolling hills, wineries and flower fields more than 17 miles from the nearest major highway, has only a few hundred subscribers.

That's far fewer than the 4,000 needed to start repaying loans from the city's utility coffers, potentially leaving smaller reserves to guard against electric rate increases.

And Lompoc isn't alone. Across the United States, many cities are finding their Wi-Fi projects costing more and drawing less interest than expected, leading to worries that a number will fail, resulting in millions of dollars in wasted tax dollars or grants when there had been roads to build and crime to fight.


The article notes that Wi-Fi vendors remain confident that demand will grow as Wi-Fi-enabled phones become more ubiquitous and cities use the networks to reduce the cost of other city services (e.g., reading electric meters remotely).

There is not a problem here specific to Wi-Fi, which -- like all technologies -- has its strengths and weaknesses. The mistake is awarding preferential terms to a single provider. That induces the provider's competitors to look elsewhere for business opportunities, and allows the provider to relax and take the day off.

The Washington Post has an item about the Southernwalk Neighborhood Association in Loudon County, Virginia which signed an exclusive deal a few years ago with a small company to lay fiber throughout the neighborhood and provide Internet, cable and phone service. Many residents now wish it hadn't.

Just a few years ago, developers lured homebuyers to the outer suburbs with the promise of lightning-fast Internet access and high-definition television to go along with Olympic-size swimming pools, tennis courts and other amenities.

Residents bragged about not just keeping up with their inner-suburb neighbors but leapfrogging them altogether -- only to watch their technological advantage give way to newer offerings.

What was once state of the art is now par for the course, a frustration familiar to any early adopter who has bought the latest and greatest only to find something better, or cheaper, soon after. For Southernwalk, the price of chasing Internet Nirvana turned out to be a contract that could run 75 years.

About 40 fuming residents recently attended a neighborhood meeting to blast OpenBand for services they call, among other things, unreliable and overpriced. They also directed their ire at Van Metre. When they moved in, residents agreed to pay a fee, now $149, for the services as part of their monthly homeowners association fees.

"It was the only way to get Internet out here back then, so the concept seemed like a good idea," said Hodell-Cotti, who moved into the neighborhood with her husband four years ago. She recently bought a satellite dish for better reception, but she still pays the mandatory fee for OpenBand services. "Now there are more options out there, but we're stuck in a monopoly."


In both cases, someone picked winners and losers rather than looking for ways to remove barriers to investment for all broadband vendors.

_______________

See: "Cities struggle with wireless Internet," by Anick Jesdanun, Associated Press, May 22, 2007.

See: "In Suburbs, Locked Into a High-Tech Lure: Fiber-Optic Service Disappoints Many, but Contracts Span Decades," by Kim Hart, Washington Post, May 21, 2007.


September 25, 2006
San Francisco's brave experiment

Writing in Technology Review, Mark Williams provides some fascinating detail on the San Francisco Wi-Fi network that Google and EarthLink have teamed up to build (emphasis is mine).

  • Google would foot the bill for free Wi-Fi service, which would run--or crawl--at 300 kilobits per second, about five times the speed of a dial-up modem connection. EarthLink would build the network hardware and offer, for $20 a month, a megabit-per-second service with customer support. The proposed network would require at least seven Wi-Fi access points per square kilometer, mounted on city property such as light poles and traffic lights. At this density, the network would meet the city's coverage goal but would not be guaranteed to reach above the second floor of buildings.
  • Mirkarimi, a Green Party member sporting a modish soul patch and representing District 5, which includes Haight-Ashbury, at least posed some of the right questions. Would users of the ad-supported Wi-Fi simply go through a Google portal page, he asked, or would they also have to suffer through pop-ups? And since Google said that its technology could "target advertisements to specific geographical locations and to user interests," what would prevent users' locations from being tracked? To such questions, the response from the bureaucrats at the city's Department of Telecommunications and Information Services (DTIS), and from the private consultants they'd hired, was essentially, "Wise up and quit griping--the city is getting a great deal for free."
  • The DTIS officials were equally unforthcoming when asked whether it made much sense for San Francisco to effectively grant Google and ¬≠EarthLink a monopoly on wireless Internet service for the proposed 10-year term of the contract, given how rapidly information technology advances. As Ralf Muehlen, director of the nonprofit Wi-Fi network SFLan, pointed out, "In 2021, 300 kilobits per second is going to seem a bit ridiculous. ... it's a great solution for, like, 1996."

See: "Golden Gate Lark: Should San Franciscans trust Google and their mayor to improvise the city's Wi-Fi network?" by Mark Williams, Technology Review, Sept. 8, 2006


October 26, 2005
Ashland still searching for ways to save municipal network

City officials in Ashland, Oreg. have delayed their plans to raise electricity rates by $7.50 per month to cover the unexpected cost of their municipal fiber network. Meanwhile, the local newspaper calculates the problem could be solved if 90% of the customers of Charter Communications switch over to the municipal network and "accept steep price increases to top market rates." They might as well outlaw private enterprise while they're at it.


October 4, 2005
Dark side of municipal networks

What happens when a municipal broadband network fails to cover its costs? The costs get shifted. Residents of Ashland, Oregon will see a monthly surcharge of $7.50 on their electricity bills. Ashland's cable rate payers will also get hit with a surcharge. (See the article from the Ashland Daily Tidings.) The fact that Ashland's fiber network is not profitable, that Ashland cross-subsidizes it and that Ashland's taxpayers/captive rate payers will foot the bill for a bailout proves what many of us have been saying about municipal networks: (1) Cities lack the expertise to successfully build and operate broadband networks, (2) Cities will discriminate in favor of their own network ventures and (3) Cities are unprepared to continually modernize the networks once built.


June 29, 2005
Orlando unplugs its Wi-Fi network

Despite high hopes, Orlando's Wi-Fi network doesn't attract enough users to justify the expense, according to Mark Schlueb writing in the Orlando Sentinel.

  • ... the service worked well -- as many as 200 people using laptop or hand-held computers could log on at once to check e-mail or surf the Web ...
  • ... only about 27 people a day, on average, accessed the free service. City officials said they couldn't continue to justify the $1,800-a-month expense.

See: "City Yanks Plug On Free Wireless Zone for Internet," by Mark Schlueb, Orlando Sentinel, Jun. 21, 2005.

Dotted Divider Line





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