On Monday, April 16th, the Technology Policy Institute hosted an event on “Facebook & Cambridge Analytica: Regulatory & Policy Implications.” I was invited to deliver some remarks on a panel that included Howard Beales of George Washington University, Stuart Ingis of Venable LLP, Josephine Wolff of the Rochester Institute of Technology, and Thomas Lenard of TPI, who moderated. I offered some thoughts about the potential trade-offs associated with treating Facebook like a regulated public utility. I wrote an essay here last week on that topic. My remarks at the event begin at the 13:45 mark of the video.

President Obama recently announced his wish for the FCC to preempt state laws that make building public broadband networks harder. Per the White House, nineteen states “have held back broadband access . . . and economic opportunity” by having onerous restrictions on municipal broadband projects.

Much of the White House announcement misrepresents the situation. Most of these so-called state restrictions on public broadband are reasonable considering the substantial financial risk public networks pose to taxpayers. Minnesota and Colorado, for instance, require approval from local voters before spending money on a public network. Nevada’s “restriction” is essentially that public broadband is only permitted in the neediest, most rural parts of the state. Some states don’t allow utilities to provide broadband because utilities have a nasty habit of raising, say, everyone’s electricity bills because the money-losing utility broadband network fails to live up to revenue expectations. And so on.

The US government has spent billions on broadband, and much of it goes to public broadband networks. The activists’ response to the carriers, who obviously complain about this “competition,” is essentially, “maybe now you’ll upgrade and compete harder.”

Public networks are unwise and costly. Every dollar diverted to some money-losing public network is one less to use on worthy societal needs. There are serious problems with publicly-funded retail broadband networks. A few come to mind:

1. The economic benefits of municipal broadband are dubious. A recent Mercatus economics paper by researcher Brian Deignan showed disappointing results for municipal broadband. The paper uses 23 years of BLS data from 80 cities that have deployed broadband and analyzes municipal broadband’s effect on 1) quantity of businesses; 2) employee wages; and 3) employment. Ultimately, the data suggest municipal broadband has almost zero effect on the private sector.

On the plus side, municipal broadband is associated with a 3 percent increase in the number of business establishments in a city. However, there is a small, negative effect on employee wages. There is no effect on private employment but the existence of a public broadband network is associated with a 6 percent increase in local government employment. The substantial taxpayer risk for such modest economic benefits leads many states to reasonably conclude these projects aren’t worth the trouble.

2. There are serious federalism problems with the FCC preempting state laws. Matthew Berry, FCC Commissioner Pai’s chief of staff, explains the legal risks. Cities are creatures of state law and states have substantial powers to regulate what cities do. In some circumstances, Congress can preempt state laws, but as the Supreme Court has held, for an agency to preempt state laws, Congress must provide a clear statement that the FCC is authorized to preempt. Absent a clear statement from Congress, it’s unlikely the FCC could constitutionally preempt state laws regulating municipal broadband.

3. Broadband networks are hard work. Tearing up streets, attaching to poles, and wiring homes, condos, apartments is expensive and time-consuming. It costs thousands of dollars per home passed and the take-up rates are uncertain. Truck-rolls for routine maintenance and customer service cost hundreds of dollars per pop. Additionally, broadband network design is growing increasingly complex as several services converge to IP networks. Interconnection requires complex commercial agreements. Further, carriers are starting to offer additional services using software-defined networks and network function virtualization. I’m skeptical that city managers can stay cutting-edge years into the future. The costs for failed networks will fall to taxpayers.

4. City governments are just not very good at supplying triple play services, as the Phoenix Center and others have pointed out. People want phone, Internet, and television in one bill (and video-on-demand service). Cities will often find that there is a lack of interest in a broadband connection that doesn’t also provide traditional television as well. Google Fiber (not a public network, obviously) initially intended to offer only broadband service. However, they quickly found out that potential subscribers wanted their broadband and video bundled together into one contract. The Google Fiber team had to scramble to put together TV packages consumers are accustomed to. If the very competent planners at Google Fiber weren’t aware of this consumer habit, the city planners in Moose Lake and Peoria budgeting for municipal broadband may miss it, too. Further, city administrators are not particularly good at negotiating competitive video bundles (municipal cable revealed this) because of their small size and lack of expertise.

5. A municipal network can chase away commercial network expansion and investment. This, of course, is the main complaint of the cable and telco players. If there is a marginal town an ISP is considering serving or upgrading, the presence of a “public competitor” makes the decision easy. Competing against a network with ready access to taxpayer money is senseless.

6. When cities build networks where ISPs already are serving the public, ISPs do not take it laying down, either. ISPs use their considerable size and industry expertise to their advantage, like adding must-have channels to basic cable packages. The economics are particularly difficult for a city entering the market. Broadband networks have high up-front costs but fairly low marginal costs. This makes price reductions by incumbents very attractive in order to limit customer defections to the entrant. Dropping the price or raising the speeds in neighborhoods where the city builds and frustrating city customer acquisition is a common practice. You can look back at the late 1990s when municipal cable was briefly popular. Cities often hemorrhaged tax dollars when faced with hard-ball tactics and their penetration rates never reached the optimistic projections.

There are other complications that turn public broadband into expensive boondoggles. People often say in surveys they would pay more for ultra-fast broadband but when actually offered it, many refuse to pay higher prices for higher speeds, particularly when the TV channels offered in the bundle are paltry compared to the “slower” existing providers. When cities do lose money, and they often do, a utility-run broadband network will often cross-subsidize the failing broadband service. Electric utility customers’ dollars are, say, then diverted to maintaining broadband. Further, private carriers can drag lawsuits out to prevent city networks. And your run-of-the-mill city contractor corruption and embezzlement are also possibilities.

I can imagine circumstances where municipal broadband makes sense. However, the President and the FCC are doing the public a disservice by promoting widespread publicly-funded broadband in violation of state laws. This political priority, combined with the probable Title II order next month, signals an inauspicious start to 2015.

There’s a small but influential number of tech reporters and scholars who seem to delight in making the US sound like a broadband and technology backwater. A new Mercatus working paper by Roslyn Layton, a PhD fellow at a research center at Aalborg University, and Michael Horney a researcher at the Free State Foundation, counter that narrative and highlight data from several studies that show the US is at or near the top in important broadband categories.

For example, per Pew and ITU data, the vast majority of Americans use the Internet and the US is second in the world in data consumption per capita, trailing only South Korea. Pew reveals that for those who are not online the leading reasons are lack of usability and the Internet’s perceived lack of benefits. High cost, notably, is not the primary reason for infrequent use.

I’ve noted before some of the methodological problems in studies claiming the US has unusually high broadband prices. In what I consider their biggest contribution to the literature, Layton and Horney highlight another broadband cost frequently omitted in international comparisons: the mandatory media license fees many nations impose on broadband and television subscribers.

These fees can add as much as $44 to the monthly cost of broadband. When these fees are included in comparisons, American prices are frequently an even better value. In two-thirds of European countries and half of Asian countries, households pay a media license fee on top of the subscription fees to use devices such as connected computers and TVs. …When calculating the real cost of international broadband prices, one needs to take into account media license fees, taxation, and subsidies. …[T]hese inputs can materially affect the cost of broadband, especially in countries where broadband is subject to value-added taxes as high as 27 percent, not to mention media license fees of hundreds of dollars per year.

US broadband providers, the authors point out, have priced broadband relatively efficiently for heterogenous uses–there are low-cost, low-bandwidth connections available as well as more expensive, higher-quality connections for intensive users.

Further, the US is well-positioned for future broadband use. Unlike many wealthy countries, Americans typically have access, at least, to broadband from telephone companies (like AT&T DSL or UVerse) as well as from a local cable provider. Competition between ISPs has meant steady investment in network upgrades, despite the 2008 global recession. The story is very different in much of Europe, where broadband investment, as a percentage of the global total, has fallen noticeably in recent years. US wireless broadband is also a bright spot: 97% of Americans can subscribe to 4G LTE while only 26% in the EU have access (which partially explains, by the way, why Europeans often pay less for mobile subscriptions–they’re using an inferior product).

There’s a lot to praise in the study and it’s necessary reading for anyone looking to understand how US broadband policy compares to other nations’. The fashionable arguments that the US is at risk of falling behind technologically were never convincing–the US is THE place to be if you’re a tech company or startup, for one–but Layton and Horney show the vulnerability of that narrative with data and rigor.

Google’s announcement this week of plans to expand to dozens of more cities got me thinking about the broadband market and some parallels to transportation markets. Taxi cab and broadband companies are seeing business plans undermined with the emergence of nimble Silicon Valley firms–Uber and Google Fiber, respectively.

The incumbent operators in both cases were subject to costly regulatory obligations in the past but in return they were given some protection from competitors. The taxi medallion system and local cable franchise requirements made new entry difficult. Uber and Google have managed to break into the market through popular innovations, the persistence to work with local regulators, and motivated supporters. Now, in both industries, localities are considering forbearing from regulations and welcoming a competitor that poses an economic threat to the existing operators.

Notably, Google Fiber will not be subject to the extensive build-out requirements imposed on cable companies who typically built their networks according to local franchise agreements in the 1970s and 1980s. Google, in contrast, generally does substantial market research to see if there is an adequate uptake rate among households in particular areas. Neighborhoods that have sufficient interest in Google Fiber become Fiberhoods.

Similarly, companies like Uber and Lyft are exempted from many of the regulations governing taxis. Taxi rates are regulated and drivers have little discretion in deciding who to transport, for instance. Uber and Lyft drivers, in contrast, are not price-regulated and can allow rates to rise and fall with demand. Further, Uber and Lyft have a two-way rating system: drivers rate passengers and passengers rate drivers via smartphone apps. This innovation lowers costs and improves safety: the rider who throws up in cars after bar-hopping, who verbally or physically abuses drivers (one Chicago cab driver told me he was held up at gunpoint several times per year), or who is constantly late will eventually have a hard time hailing an Uber or Lyft. The ratings system naturally forces out expensive riders (and ill-tempered drivers).

Interestingly, support and opposition for Uber and Google Fiber cuts across partisan lines (and across households–my wife, after hearing my argument, is not as sanguine about these upstarts). Because these companies upset long-held expectations, express or implied, strong opposition remains. Nevertheless, states and localities should welcome the rapid expansion of both Uber and Google Fiber.

The taxi registration systems and the cable franchise agreements were major regulatory mistakes. Local regulators should reduce regulations for all similarly-situated competitors and resist the temptation to remedy past errors with more distortions. Of course, there is a decades-long debate about when deregulation turns into subsidies, and this conversation applies to Uber and Google Fiber.

That debate is important, but regulators and policymakers should take every chance to roll back the rules of the past–not layer on more mandates in an ill-conceived attempt to “level the playing field.” Transportation and broadband markets are changing for the better with more competition and localities should generally stand aside.

Many of the installments of our ongoing ”Problems in Public Utility Paradise” series here at the TLF have discussed the multiple municipal wi-fi failures of the past few years. Six or so years ago, there was quixotic euphoria out there regarding the prospects for muni wi-fi in numerous cities across America — which was egged on by a cabal of utopian public policy advocates and wireless networking firms eager for a bite of a government service contract.  A veritable ‘if-you-build-it-they-will-come’ mentality motivated the movement as any suggestion that the model didn’t have legs was treated as heresy.  Indeed, as I noted here before, when I wrote a white paper back in 2005 entitled “Risky Business: Philadelphia’s Plan for Providing Wi-Fi Service,” and kicked it off with the following question: “Should taxpayers finance government entry into an increasingly competitive, but technologically volatile, business market?,” I received a shocking amount of vitriolic hate mail for such a nerdy subject.  But facts are pesky things and the experiment with muni wi-fi has proven to be even worse than many of us predicted back then.

A new piece by Christopher Mims over at MIT’s Technology Review (“Where’s All the Free Wi-Fi We Were Promised?“) notes that “no technology happens in a vacuum, and where the laws of the land abut the laws of nature, physics will carve your best-laid plans into a heap of sundered limbs every time.” He continues, “the failure of municipal WiFi is an object lesson in the dangers of techno-utopianism. It’s a failure of intuition — the sort of mistake we make when we want something to be right.”  Too true.  Mims was inspired to pen his essay after reading a new paper, “A Postmortem Look at Citywide WiFi“, by Eric M. Fraser, the Executive Director for Research at the Committee on Capital Markets Regulation.  “Almost everyone was fooled by the promise of citywide WiFi,” Fraser notes, because of the promise of a “wireless fantasy land” that would almost magically spread cheap broadband to the masses.  But, for a variety of reasons — most of which are technical in nature — muni wifi failed.  Fraser summarizes as follows:

WiFi cannot deliver a citywide network because technical and regulatory limitations combine to require access points at least every few hundred feet outside and even closer together indoors. Mounting that many access points is generally too expensive and is nearly impossible inside private buildings. WiFi deployments require high-touch, high-density installations. Meanwhile, users often have WiFi access in homes, at work, at coffee shops, in hotels and airports, and in select government buildings. For users who require wireless access outside those areas, private cellular companies offer high-speed 3G wireless data networks using technologies better suited for widespread coverage (because of not only technical differences but also regulatory differences). As a result, the major public WiFi projects were destined for failure and municipalities instead should devote resources to small, focused networks.

Policy makers would be wise to remember the lessons of this experiment next time regulatory activists groups come knocking on their doors with more grandiose “public utility” or even “public media” schemes.  The recent experiment with muni wi-fi again points to the failure of the top-down driven model of planning complex networks and the risks inherent in letting government gamble taxpayer dollars on these risky bets.

As we’ve noted here before in our ongoing series on “Problems in Public Utility Paradise,” municipal wi-fi experiments and local government fiber investments don’t have a very impressive track record. The Philadelphia experiment, which I have discussed here before many times, has been particularly instructive.  As Dan P. Lee documented in this spectacular Philadelphia magazine article last year, the city’s subsidized wi-fi system, Wireless Philadelphia, was a political and technical fiasco of the highest order right from the start. It unraveled fairly quickly after its 2005 launch and now, according to The Philadelphia Business Journal:

The city of Philadelphia said Wednesday it intends to purchase, for $2 million, the wireless network constructed by EarthLink Inc. to turn the entire city into a Wifi hotspot. The city said it intends to exercise an option in an agreement signed in August to buy the network from Network Acquisition Co. LLC, which took the network over from Atlanta-based EarthLink in June 2008. The city said the purchase will be the first in a series of steps to create a wireless network it will use to enhance public safety, improve government efficiency and provide Internet access in targeted public places. The city said creating that network will require it to spend nearly $17 million over its 2011 through 2015 fiscal years. The money would go to building out both the core fiber network it already owns and the wireless mesh network it intends to purchase from Network Acquisition Co…

In other words, taxpayers are stuck picking up the tab for this failed experiment and now have to hope that the city can somehow manage it into profitability. Well, good luck with that.  Even Karl Bode of Broadband Reports, someone who usually has nothing but nice things to say about Big Government high-tech projects and regulation, is forced to admit that the script for muni wi-fi paradise didn’t quite play out as expected:

Network Acquisition Corporation purchased the network from Earthlink back in 2008, when Earthlink bailed (and we really mean bailed) on their muni-fi ambitions. The buyers briefly tinkered with free access and claimed they’d expand the network, but ultimately wound up being only a stepping stone between Earthlink and Philadelphia control. Philadelphia’s use of Wi-Fi as a municipal efficiency and communications tool is a growing trend among cities, many of which found that broad, free Wi-Fi for all simply wasn’t sustainable.

Do you mean to say that there is no such thing as a free lunch?  I am shocked, shocked!  Well, actually, I’m not. Because back in 2005, I wrote a white paper entitled “Risky Business: Philadelphia’s Plan for Providing Wi-Fi Service,” and it began with the following question: “Should taxpayers finance government entry into an increasingly competitive, but technologically volatile, business market?”  In the report, I highlighted the significant risks involved here in light of how rapidly broadband technology and the marketplace was evolving. Moreover, I pointed to the dismal track record of previous municipal experiments in this field, which almost without exception ended in failure. I went on to argue:

Keeping these facts in mind, it hardly makes sense for municipal governments to assume the significant risks involved in becoming a player in the broadband marketplace. Even an investment in wi-fi along the lines of what Philadelphia is proposing, is a risky roll of the dice. [… ]  the nagging “problem” of technological change is especially acute for municipal entities operating in a dynamic marketplace like broadband. Their unwillingness or inability to adapt to technological change could leave their communities with rapidly outmoded networks, and leave taxpayers footing the bill.

I got a stunning amount of hate mail and cranky calls from people after I released this paper.  Everyone accused me of being a sock puppet for incumbent broadband providers or just not understanding the importance of the endeavor.  But as I told everyone at the time, I wasn’t out to block Philadelphia from conducting this experiment, I just didn’t think it had any chance of being successful.  And, again, I tried to point out what a shame it would be if taxpayers were somehow stuck picking up the tab.

And now that is what has happened.  Folks, I am not above saying it… I told you so!   Anybody want to place bets on how much this will cost Philly taxpayers before all is said and done?

At the rate they are going, it would be cheaper for the city to just give everyone a voucher to go buy service from a private broadband provider. It would make a lot more sense, and spur more real competition and investment.

[This is part of an ongoing series about “Problems in Public Utility Paradise.”]

According to this recent article by Donald Meyers of the Salt Lake City Tribune, five candidates for mayor of Provo, Utah are falling all over themselves to declare their support for continuing the public utility fiasco that is iProvo, the city’s fiber-to-the-home network. According to Wikipedia, it is the largest municipally-owned Fiber to the Home network in the United States.” Steve Titch of the Reason Foundation, who has been following iProvo for many years, has documented its millions of dollars of losses and risk to taxpayers, saying “iProvo is a dismal financial failure by any standard.”  But that isn’t stopping city officials and mayoral candidates from proposing to throw more money at this massive “if-you-build-it-they-will-come” fantasy. “One thing most of the candidates running for mayor agree on: iProvo is too important to fail, even if it means bailing out the company that bought it,” Meyers reports. Here’s the relevant passages from his article, with the key bits of bad info highlighted:

The city sold the troubled fiber-optic network to Broadweave Networks in 2008 in a deal in which Broadweave would take over the payments on the city’s $39.6 million bond. Since November, Broadweave has had the city draw on its $6 million surety deposit to make its bond payments in a bid to build up cash to pay for growth. In August, Veracity Communications merged with Broadweave, becoming Veracity Networks. The company’s leaders, Drew Peterson and David Moon, have asked the city to restructure the payment schedule to allow the company to cut back on its payments for 18 months while it strengthens its coffers. It later would pay extra money over a seven-year period and reimburse the city with interest. Provo would draw on its Energy Department’s reserves to make up the shortfall in bond payments — $1.4 million.

[Mayoral candidate Don] Allphin, chairman of the Lakeview North neighborhood and a real estate agent/professional bass fisherman, said the city would have to accept the proposal, since the alternative is too costly: Taking back the network and paying off the bond itself. When the city ran iProvo, it had to subsidize the network with about $2 million annually from Energy Department funds. Part of the problem was the city was restricted by law from providing an actual telecommunications service and had to rely on individual service providers to market the system. [Another mayoral candidate, state Rep. Stephen D.] Clark said he was concerned about last year’s iProvo sale since Broadweave did not have what he believed was enough financial backing to buy it. But since the deal was done, the city has no choice but to move ahead and make sure Veracity succeeds — as long as it learns from the mistakes.

“As long as it learns from the mistakes”???  Sounds to me like the people who need to learn from their mistakes are Provo politicians who got behind this fiasco in the first place.

For some time now here at the TLF, we have been documenting the track record of various government-owned or subsidized utility projects — municipal wi-fi projects, locally-owned telecom ventures, city or state fiber projects, and so on.  We’ve attempted to see if the rhetoric matches the reality when it comes to the grandiose promises made about government investment or ownership of communications or broadband networks being our ticket to high-tech paradise.

The results?  Well, the record speaks for itself.  It’s been one miserable failure after another.  And yet the high-tech pork barrel rolls on and taxpayers are all too often stuck picking up the tab.

I just wanted to make everyone aware of the fact that I finally got around to collecting most of our essays on the subject here into an “Ongoing Series” page that will be permanently housed here.  (As far as I can tell, we’re up to about 18 or 19 installments).  I encourage my TLF contributors to help me contribute entries to the series and I also invite our readers to continue to submit examples of these experiments so we can continue to document their failure.  Of course, if there are success stories, we’d like to hear about those too.  But that will likely be a much shorter series!