Broadband internet access has quickly moved from a luxury to a basic utility
demand. Local governments recognize that demand and look at broadband services
as a crucial economic development tool. Impatient with the roll of broadband by
private firms, hundreds of local governments have considered getting into the
broadband business. But two new reports from Reason warn that cities shouldn't
fool themselves into believing that their experience running water, gas and
electricity systems has prepared them for the fast moving Internet world.

The first study, "A Dynamic Perspective on Government Broadband Initiatives," is
available online at (www.reason.org/ps349.pdf). A summary of the study is
available at (www.reason.org/ps349polsum.pdf). The author Jerry Ellig, former
deputy director and acting director of the Federal Trade Commission's Office of
Policy Planning, outlines seven key factors that municipal officials should fully
address before moving forward with plans for municipal broadband and Wi-Fi.

The study also cautions city officials to beware of "geeks bearing gifts." As
Ellig puts it, "Proposals for free or privately subsidized Wi-Fi are obviously
attractive at face value. Exclusive access to rights-of-way and poles would
bestow a significant competitive advantage on any firm selected to use them.
Local governments should beware of granting one Wi-Fi provider exclusive access
to public assets, even if the Wi-Fi service itself is free of charge to users.
Local governments should not let the sizzle of free Wi-Fi obscure the consumer’s
stake in competition."

The report details seven critical issues for governments to tackle before jumping
into the broadband market:

1. Competition: At the end of 2005, 67 percent of U.S. zip codes already had
at least four high-speed Internet providers; 93 percent had two or more high-speed
competitors; and just 1 percent had no competitors. Thus, municipal cable and
Internet offerings face stiff competition and are unlikely to grab a large market
share unless they are willing to lose a lot of taxpayer money doing so.

2. Performance Competition: New government systems will have to offer higher
speeds or lower prices to compete with private companies. Existing government
systems will need to consistently upgrade their speeds or drop their prices to
compete with private sector improvements.

3. Continuous Improvements: The real consumer price index for Internet services
has fallen by 23 percent since the Bureau of Labor Statistics started tracking it
in 1997. Unlike traditional government-owned utilities, the lightning pace at
which broadband technology improves and prices fall is difficult for municipalities
to match.

4. Technological Change and "Lock-in": The market can get locked in to an
inferior technology if government decides to subsidize the inferior technology,
thus blocking out better or less expensive technologies. For example, ISDN was
short-lived method for sending data over phone lines. Today we don't know how
Evolution Data Optimized (EV-DO) technology and cell phone companies will change
the market; if we'll see broadband over power lines; or what fiber optic service
by cable or phone companies will mean to consumers and the Internet.

5. Obsolescence: Because wireless technology improves so rapidly, capital
investment quickly becomes obsolete. Plans for government broadband need to
assume faster depreciation rates than have been used for traditional government
utilities. A workable plan for municipal Wi-Fi needs to cover operating costs and
recover initial capital outlay in three to five years.

6. Risk: Broadband is a risky endeavor and governments must not finance it as
though it is a low-risk infrastructure investment.

7. Uncertainty: Since taxpayers bear the financial uncertainty in their role as
the owners of government broadband, officials should ensure the accountability and
transparency in these projects is at least as good as that of publicly held
companies.

Each government-provided or privately subsidized broadband plan has its own unique
characteristics, according to Ellig. But no plan should be considered responsible
until these issues have been addressed. Government faces the daunting challenge of
entering a market where technological change is swift, the future is uncertain,
and competitors' actions are unpredictable—a playing field fundamentally different
from the stable, predictable utility markets that have traditionally attracted
public investment.

As the study shows, the telecom world moves a lot faster than the water or gas
systems that many governments are used to owning. With long asset lives and slow
technological changes, traditional utility infrastructure costs are not difficult
to recover through rates. That is not the case here. If officials get into the
broadband business, they are entering a field where millions of taxpayer dollars
can be wasted in no time and the technology they bought today is obsolete tomorrow.

A case in point of these risks is iProvo, the municipal broadband system in Provo,
Utah and one of the most widely touted government broadband enterprises in the
nation. Reason 2nd study, by Steven Titch, looks in detail at iProvo's municipal
broadband efforts and can be found online at (www.reason.org/ps353.pdf). iProvo
lost $1.36 million in 2003, $1.42 million in 2004, and $1.67 million in 2005. Titch
finds iProvo owes more money than it is worth. Overall, assets grew by $2.2 million
in 2005, but liabilities grew by $3.9 million. The report finds this gap "shows
every sign of increasing and will slowly eat away at iProvo's value and prevent
the city from ever getting out from under the debt." And after originally
forecasting it would take 10,000 subscribers to break even, iProvo now says it
will need 12,000 to 15,000 subscribers just to break even. There are currently
7,700 subscribers, well below the number predicted.

The bottom line is that broadband services are rolling out at a very rapid pace
with the technology changing almost as rapidly. The risks of a government
broadband enterprise winding up behind the curve in service rollout or technology
are just too great.