Ahead of his State of the Union address, President Barack Obama went to Cedar Falls, Iowa to tout municipal broadband. Despite a landscape littered with missed goals, incomplete build-outs and outright financial ruin, Obama still thinks local governments should saddle themselves with millions in debt to fund broadband systems that would compete with service providers that have been there for years.
To press the point, the Obama administration is pushing for federal legislation to pre-empt states from blocking municipal broadband projects, even though, as ultimate guarantors of the bonds, they have full right to. A number of states, after seeing the financial damage these projects do, have done so already.
The principal argument for municipal broadband is market failure: Internet service providers are entrenched duopolies that have no interest in serving residents without the financial means to pay upward of $100 a month for a broadband package. Yet while touting the wonders of the 10 Gb/s fiber to the home access the City of Cedar Falls is providing, Obama neglected to mention that it costs $275 a month. Broadband for the people, indeed.
Let’s say it one more time: municipal broadband doesn’t work. Even systems that are operating — such as those in Lafayette, La., and Chattanooga, Tenn. — have not achieved their goals of providing ubiquitous fiber-to-the-home, higher-quality service and cheaper rates than incumbents. While the may boast positive cash flow, they are still losing money and behind their revenue plans.
It’s only going to get worse. Current municipal systems followed the “triple-play” model, bundling phone, cable and high-speed Internet into a package that could generate the average revenue per user necessary to meet operating costs and service debt.
Ten years ago, these business plans made some sense, although in most cases, the consultants who wrote them played down the competitive threat of satellite TV and the high cost of programing acquisition.
But what the feasibility studies didn’t foresee was the rise of over-the-top (OTT) video networks that bypassed cable TV systems. First came Netflix and Hulu, then Showtime and CBS announced plans to stream programming. Then came the real game-changer—ESPN’s plan, announced in January, to stream live sports.
This was significant because live sports is one of the main reasons people retain cable TV. Make the Super Bowl an OTT option, and suddenly, cord-cutting becomes attractive not just for twentysomething renters content to watch movies on their tablets, but for entire households. (Thanks to devices like Google’s Chromecast, video programming downloaded from phone or tablet can be routed directly the family widescreen TV.)
This trend has the major ISP/cable concerned. An estimated 7.6 million U.S. households have scrapped pay TV over the past several years. Nearly one-fifth of Americans who have Netflix or Hulu Plus accounts don’t subscribe to a cable or satellite TV service, according to research from Experian Marketing Services. These consumers may be holding onto Internet service only, or using 4th generation wireless service. But for large wireline ISPs that banked on bundling, these numbers present a bleak outlook.
How much more a problem is this going to be for munis? For example, Lafayette’s $140 million broadband bond issue anticipated it would see 3 to 6 percent annual growth in cable TV revenue for next 15 to 20 years. That’s just not going to happen. These operations face a major reckoning.
UTOPIA, a fiber-based broadband network financed by a group of 11 Utah cities, provides a grim preview. After failing to reach the threshold of customers needed to pay the debt on construction, the project was turned over to Australia-based Macquarie Capital. As part of the agreement for Macquarie to fund completion of the network, the UTOPIA cities proposedassessing residents a $20 a month utility surcharge for the next 30 years. Who knows what broadband will be like in 2045, but Utah homeowners will still be paying off a technology platform that, by then, will be as old as a Commodore 64 is to us. Is it any wonder that five of the UTOPIA communities have balked at this deal?
Despite the president’s continued cheerleading for municipal broadband, it’s hard to see, given the pressure on conventional ISP wireline bundling, even a conservative municipal broadband project plan getting the necessary underwriting—at least at rates below junk status.
Google Fiber, which prices 1 Gb/s access with TV at $120, is expanding into more cities. Now the company has plans to enter wireless with a new business model. New market developments like these make the cries of monopoly less and less credible. Municipal broadband is hardly the “necessity” for digital inclusion Obama claims it is.
Rather than sink millions into building a system that will never come close to paying for itself, cities can do more for broadband investment by revisiting the franchise fee process, streamlining the wireless tower siting process and reducing right of way fees. This has helped attract disruptors like Google, and overall, will do more to foster private investment and development far better than the government-funded approach.
For more about market-friendly ways cities can spark broadband investment, see my R Street paper, “Alternatives to Government Broadband.”