The Pitfalls of Wi-Fi Municipalization

by on April 11, 2005

[cross-posted from the PFF blog]

Last week, Philadelphia released its long-awaited blueprint for a municipal wi-fi project called “Wireless Philadelphia.” This week, Tom Lenard and I have released two studies outlining our reservations about the Philly proposal and municipalization more generally. Here’s Tom’s paper, and here’s mine.

First let me provide a summary of the Philly muni proposal and then outline my specific reservations about the plan.

Summary of the Philly Plan

Although the report notes that the city of Philadelphia already has 430 dial-up Internet service providers and over 93 wireless hotspots within the city, it proposes the creation of a city-wide wireless network for a wide variety of economic and social reasons. According to the blueprint, the city estimates that it can cover its approximately 135 square miles of land area for roughly $10 million in capital expenditures over the next five years. It also projects immediate and sustained operating revenue and $5 million in aggregate free cash flow by Year 5 of the plan.

The blueprint proposes the creation of a nonprofit corporation to oversee the implementation of a “cooperative wholesale” business model for Wireless Philadelphia. As a cooperative wholesaler of service, the nonprofit entity would sell bulk broadband access to private retail Internet service providers and communications firms “for low wholesale fees.”

The city would not directly manage this new utility, rather, the nonprofit corporation would oversee all operations and generate its startup funding from foundation grants, bank loans and other sources. At least in theory, therefore, the city would not be required to kick-in any of the initial funding for the project. The blueprint stipulates, however, that the city will grant the non-profit entity access to all city-owned structures (such as light poles) and also would act as the “anchor tenant” for the new network. In essence, this means the city would agree to give most (if not all) of its communications business to the non-profit corporation and grant it preferential access to publicly owned infrastructure that private firms would not have. In exchange for these favors, the nonprofit entity would (1) provide some basic level of free wireless access in major public spaces (like parks); and, (2) would direct any free cash flow into economic development and “digital divide” programs aimed at providing PCs to low-income households and providing training to use them.

The city expects construction of the network to begin this summer and hopes to have the city-wide network up and running by summer of 2006.

So, What’s Wrong With This?

There are many stated rationales for the push to municipalize broadband and Philadelphia’s wi-fi plan in particular. Timely rollout of high-speed services to all residents is certainly one motivation. Concern with the cost of access is another. Many local officials simply want to keep prices down on what is increasingly perceived to be a vital service. Still others argue that there is insufficient competition in the local marketplace or that government action is needed to overcome the threat of monopoly. Combined, these rationales represent an informal declaration that broadband should be treated as a public utility, owned and operated by local governments.

Contrary to such claims or assumptions, however, broadband access is not a public utility like water, sewage, or even garbage collection. Indeed, broadband is an increasingly competitive business market that is undergoing rapid technological change. These factors alone should disqualify broadband from consideration as a public utility, since public utilities are characterized by a lack of competition and limited technological change. With Philadelphia jumping into this market as a competitor, the city is also assuming substantial risks since there is no guarantee that tomorrow’s high-speed networks and technologies will resemble today’s. If recent telecommunications and Internet history has taught us anything, it is that there is no such thing as a sure-fire bet in this dynamic sector.

Moreover, there are serious fairness issues raised by Philadelphia’s entry into the broadband marketplace. First, there is the question of how fair it is to other competitors in the field when governments gets involved in the provision of service. In particular, when government becomes a market participant, it can have a “crowding out” effect on private sector competition, innovation, and investment. These deleterious effects could reverberate outside the Philadelphia market by hindering efforts by carriers to fill out their network coverage maps and offer more reliable state, regional, and national service.

A second fairness concern involves the question of fairness to the city’s taxpayers, who will ultimately be the ones left picking up the bill for these investments. Needless to say, if Philadelphia’s bet doesn’t work out, the costs for local taxpayers and consumers could be enormous. There is also the question of what else could be done with the money Philadelphia is proposing to spend to build its own public high-speed networks. Today’s projected expenditures are also unlikely to account for the ongoing technological disruptions we can expect in the future. Many municipalities, including Philadelphia, are currently betting on wi-fi as the technology of the future. Just a few years ago, however, it was fiber-to-the-home that dominated the municipalization agenda. Who knows what the technology du jour will be next year. Thus, technological change and market uncertainty add to the risks that Philadelphia will be forcing taxpayers to assume.

In sum, in their rush to ensure that local residents are provided with affordable high-speed access, city officials may be doing them a great disservice by crowding out private sectors investments that do not require public bailouts should things go wrong. If private actors are willing to assume the risk, and expend the significant sums it takes to deploy high-speed networks, it makes little sense for local governments to intervene and force citizens to assume those risks instead.

Finally, should city officials deem it necessary to assist Philadelphia’s low-income residents, there are better ways to facilitate access to high-speed networks without resorting to government-backed public utilities. Before taking such an extreme step, lawmakers can work to reform regulations and tax policies that discourage private sector investment. Also, means-tested financial assistance can be delivered directly to needy households should city officials feel those citizens cannot afford to pay the going market rate for broadband services. This has the advantage of not locking-in Philadelphia to any specific broadband technology. Instead, residents could use the equivalent of “broadband vouchers” to shop for service on their own from competing providers.

Again, I encourage you to read our new PFF white papers for more details. This debate is really heating up. Dozens of major cities are gearing up to follow Philly’s lead and march into the broadband market despite government’s lackluster track record as a provider of high-technology services. If I had to make a bet regarding how the Philly plan turns out, I’d predict that the city will have some moderate success in the short term building out a wi-fi infrastructure, but then very quickly realize just how far in over their head they are and sell off the network to a private provider. This morning on Philly’s NPR station, I debated the woman heading up the Wireless Philadelphia plan and she even came out and said that might happen and suggested it wouldn’t be such a bad thing. But since when is it government’s job to subsidize the construction of high-tech infrastructure and then sell it off to private providers for pennies on the dollar? Wouldn’t consumer be better served by just letting private operators continue to build out these networks using their own cash? In light of the volatile nature of wireless and broadband technologies, that certainly would seem to be the best way to go.

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