News Story

Municipal Broadband Boosters Like City Of Marshall’s Chances

But research suggests most government-run internet operations are a money pit for taxpayers

A 2017 study from the University of Pennsylvania Law School found that for most cities, a government-owned internet service loses money. But according to a recent story in the Battle Creek Enquirer, the municipal broadband operation in Marshall has been a success.

“Internet service in Marshall was slow, so the city built its own fiber-optic network,” reads the headline. But the article does not address controversies surrounding governent-owned internet service, including competing with private providers. It also does not quantify the financial losses that have been the pattern in municipal broadband ventures, which then fall on taxpayers.

The article cites insufficient interest from private internet providers as a reason for government intervention.

“In our experience, the cities will reach out to the providers and ask them to improve service,” it said, quoting Chris Mitchell, director of the Community Broadband Networks Initiative at the Institute for Local Self-Reliance. “They will typically respond and say it’s adequate and doesn’t need to be improved. Those companies have a limited amount to invest, and they will invest it where they can get the most profit.”

But Theodore Bolema, founding director of the Institute for the Study of Economic Growth at Wichita State University, doubts that claim.

“These companies are in the business of expanding and looking at costs versus benefits,” he said. “They also don’t have a limited amount to invest: If a project looks like it will be profitable, capital markets will provide the financing because they expect to get a return on the investment.”

Bolema said he suspects the real reason internet companies don’t expand into towns like Marshall is because city officials pave the way for municipal operators to establish themselves while making the process expensive and difficult for everyone else.

Ed Rice, Marshall’s director of electric utilities, said that the city had an easier job in developing the network than a private company would.

“The city had an advantage because we are a municipal electric utility,” Rice said, according to the Enquirer. “It was pretty straightforward to get the fiber attached to the poles, because sometimes that could be a pretty convoluted process.”

“Mr. Rice is right about this being a big advantage for the Marshal electrical utility,” Bolema said. “Getting right-of-way access is one of the most expensive and time-consuming tasks for any broadband service, and Marshall is letting its municipal internet service have that access for free with no delays in getting regulatory approvals. If Marshall can make it so easy for its own service to get access, then presumably the city could make it just as easy for any private company to come into Marshall.”

Bolema pointed to Traverse City, where the broadband company LightSpeed had been in talks with the local government about building a 1-gigabit fiber network. The company eventually decided not to enter the market. It cited disagreements with the city-owned utility over access to conduits and pole attachments, and whether it would be allowed to expand to all homes in the city.

Traverse City is now moving forward with government-run broadband.

According to the Enquirer, the city of Marshall decided to construct a $2.5 million broadband network using loans from other city accounts, including the electric department. The city, Rice told the newspaper, had not yet begun to pay off the loans, though it expected to begin doing so in 2019. Last month, the city told Michigan Capitol Confidential that it still hasn’t repaid any of the borrowed money but now plans to start making payments in 2020.

Bolema warned that borrowing from other city departments is a strategy with potential negative consequences.

“First, if the city fails to sign up very many customers, any losses will probably have to be recovered from electricity customers, including those who are not interested in the city’s internet service,” he said. “Second, this suggests that the electricity and internet operations are comingled, which may make it difficult later to assess how well the project does.”

The University of Pennsylvania Law School discovered that only two of the 20 projects it analyzed earned enough to cover their costs during the useful life of the networks. When projects fail to generate enough revenue, residents and taxpayers end up holding the bag. The study also noted that researchers were only able to find 20 cities that separated out their financial reporting for municipal broadband operations from other city operations.

Bolema said the article’s most glaring omission is how quickly broadband technology becomes obsolete. While financing plans for municipal broadband systems often anticipate 20-30 years of use, network equipment often goes out of date before then. Cities risk fiscal harm if customers switch to new providers due to changing technologies or other reasons.

“They are investing for the long term in technology that quite likely won’t be the prevailing technology in just a few years,” Bolema said. “If that is the case, then we will likely see a lot of municipal broadband systems with high rates of signing up customers and financial reports that look fairly good in the early years but that may well change in a few years with new developments.”

Marshall’s construction cost estimates have been relatively accurate, and its operating cost projections have come in slightly under budget.

“But if that is the case,” said Bolema, “then Marshall is not typical of other municipalities, and not a very good example to cite for why more cities should consider launching municipal broadband networks.”

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.