Ministry of Innovation / Business of Technology

Evaluating the pros and cons of municipal wireless

We look in-depth at two different reports on the feasibility of municipal WiFi …

A report (PDF) issued earlier this month by the Reason Foundation illuminates potential challenges faced by municipal broadband deployments. Authored by Dr. Jerry Ellig, senior research fellow at the Mercatus Center at George Mason University and former deputy director of the Office of Policy and Planning at the Federal Trade Commission, the report contends that government provision of broadband services entails far more risk than conventional public services like water and power.

The report challenges some common assumptions about municipal broadband and serves as a counterpoint for research published by organizations like the Institute for Local Self-Reliance (ILSR), which released a study (PDF) earlier this year evaluating the viability of publicly-owned wireless technology in San Francisco. Municipal broadband is a complex issue with many implications. To provide insight into some of the pros and cons of municipal wireless, we will examine the studies from Reason and ILSR and take a look at the wireless program proposed by Google and EarthLink for deployment in San Francisco.

The city of San Francisco has been evaluating the feasibility of public broadband since 2004, when the city's board of supervisors allocated several hundred thousand dollars for feasibility studies. Since then, the board has reviewed proposals, searching for a solution that could be implemented at no cost to the city. In April, the city selected a joint proposal from Google and Earthlink for further evaluation.

If the proposal is accepted by the city, Earthlink and Google will cover the initial roll-out costs of a wireless network, which will be owned, operated, and maintained by Earthlink. Google would then purchase network access from EarthLink in order to provide free 300 kbps wireless service supported by advertising, and Earthlink would sell 1 Mbps wireless access for about $20 a month. Free network connectivity for consumers at no cost to the city? It certainly seems like a great deal. ILSR is of the opinion that the city would be better off paying for the hardware itself.

ILSR's study and arguments in favor of publicly funded broadband

ILSR's study specifically addresses an arrangement in which network hardware and the associated technological infrastructure are owned and maintained by the city, and the network is operated by a private non-profit organization which would sell wholesale network access to private companies, which would in turn provide Internet services to users.

ILSR's report claims that publicly owned wireless could yield a 25 percent annual return on investment and generate over $6.1 million in surplus revenue during its first five years, assuming a) that Google pays for network access from the city for its free 300 Kbps service and that b) private companies purchase network connectivity in order to sell 1 Mbps access to 10 percent of households and businesses. The study assumes that the initial cost to the city would add up to about $10 million, and that upgrade requirements would cost about $9 million over a ten year period.

According to ILSR, the excess revenue could be used to fund other elements of the city's digital inclusion program, which could eventually provide "affordable hardware, community-sensitive training and support, and relevant content to all San Franciscans, especially low-income and disadvantaged residents." ILSR also points out that network ownership could additionally save the government tens of millions of dollars every year because government agencies would no longer have to pay for broadband services from commercial providers. In response to the city's assertion that public ownership is beyond the city's fiscal means, the report notes that "an $8 million investment in citywide wireless is just one half of one percent of the Mayor's proposed five-year $2 billion capital investment budget and 4 percent of the $87 million needed to maintain and operate the city's existing infrastructure."

ILSR's research is compelling. By allowing private companies to bid for network access and provide competing services, ILSR's approach could potentially enable the government to profit from a network infrastructure investment without having to construct a local monopoly. Google's involvement would still ensure availability of free access to underprivileged users without taking financial opportunities away from commercial providers. More importantly, the investment could save taxpayer money by lowering city operating costs and generating revenue.

It's also important to keep in mind that what ILSR is proposing is hardly novel or untested. Municipal broadband programs have been implemented with varying levels of success by numerous cities in the United States, and the specific model proposed by ILSR has been implemented with some success in Corpus Christi, Texas. Unfortunately, there are many factors that contribute to the failure of municipal broadband programs, and the issue isn't quite as simple as ILSR depicts it. Most of the numbers in ILSR's study are highly speculative, and there is no guarantee that the study accurately reflects the costs of implementing such a program. Critics of municipal broadband programs have serious concerns about the financial risks.

Reason's study and arguments against publicly funded broadband

Reason's study doesn't overtly argue against municipal broadband, it merely calls for prudence and highlights some of the hidden pitfalls associated with both publicly funded broadband and privately funded free broadband services like the one currently planned for San Francisco by Google and EarthLink. Reason's study argues that wireless Internet is a highly dynamic technology that entails much higher risk for providers. The study also points out that the "elasticity of demand" forces Internet service providers to "continually change their offerings and prices to appeal to a variety of consumer desires."

When a government maintains a local monopoly on water or power services, there is a built-in market of captive consumers that will have to pay whatever price has been established by the government. There is very little risk associated with providing such services, because there is no competition. By comparison, municipal wireless services will have to compete directly with cable and DSL services already made available by incumbent providers. Even though the broadband Internet market in the United States isn't particularly competitive, there is still very clear evidence that the rate at which broadband prices are falling has steadily increased since about 2001. Can a municipal wireless provider afford to continuously reduce prices in order to keep up with private companies?

Some might say that competition isn't a problem for the plan proposed by ILSR because the 300 Kbps and 1 Mbps services associated with the program target a niche of low-budget consumers that are generally ignored by mainstream Internet service providers anyway. The Reason study points out that services tailored to low-budget consumers "might be attractive as social policy" but might not be self-sustaining "over the long term and would likely require ongoing subsidies." There are other problems with targeting low-budget consumers as well. Real ISPs with diverse offerings have more flexibility within the market. ISPs can afford to sell Internet service at lower costs (even potentially at a loss) if they think that they can compensate for it by using cheap Internet to push other services like phone and video offerings. I know of at least a few low-income college students that absolutely love the way that phone/television/Internet bundles simplify their bills and reduce their monthly payments. Government-funded wireless programs simply don't have the ability to compete with that.

Another major problem cited by Reason's study is technological lock-in. The extremely fast rate at which wireless Internet technology is evolving implies a much higher risk of obsolescence. ILSR's estimates of excess revenue generated over a five-year period are based on the assumption that current wireless technology will remain relevant for five years and that all of the necessary technological upgrades and maintenance will cost less than about $1 million a year. There is absolutely no guarantee that 1 Mbps wireless service will remain relevant for that long. In fact, it is likely that wireless technology will advance considerably in the immediate future, especially when one considers the implications of recent and upcoming spectrum auctions that could facilitate the development of revolutionary new wireless Internet technologies.

If the city invests in millions of dollars of wireless hardware and then innovative new Internet service providers enter the market after only a year or two, it is possible that the city will never be able to recoup the costs. If users switch to faster and cheaper services as new technologies emerge, lack of revenue could make a government wireless program untenable. Consider Verizon's ongoing fiber rollout. Will consumers still want 1 Mbps connectivity when fiber makes it possible to get service that is at least ten times faster for about the same price? Companies like EarthLink can afford to risk creating technology that will be made obsolete, but a major city can't.

Government projects, particularly those that relate to technology, are notorious for racking up expenses that exceed their initial budgets. The government has far less experience and expertise in the field of Internet technology than incumbent Internet service providers, so it is very likely that there will be unexpected setbacks that inflate the costs. Consider, for instance, the FBI's Virtual Case File system, a $170 million software platform that was so inherently defective that it had to be shut down and completely discarded after only a month of operation. If the organization tasked with protecting the country from terrorism can't even implement a paperless case management system with the assistance of private contractors, how will a city with less resources and expertise be able to deploy and operate a wireless Internet service? Of course, all government services aren't unreliable and inherently inefficient, but the risk of a negative outcome is serious if the city government botches the deployment of municipal wireless technology. If the resulting connectivity is unreliable, commercial providers wont have any interest in buying wholesale access from the city to provide services to customers.

The report also addresses some of the potential risks associated with giving right-of-way privileges to a single provider. The joint proposal authored by EarthLink and Google for San Francisco would give EarthLink a lot of control. Reason's study points out that:

 "any local government that grants one WiFi provider an exclusive right to use right-of-way and poles risks distorting competition in whatever markets are generating the revenue stream that will subsidize the WiFi service. The only provider of advertiser-supported WiFi allowed to use city light poles, for example, could likely charge a higher price for advertising than if there were competing providers of advertiser-supported WiFi. A monopoly that gives away WiFi to build demand for other services it might sell to WiFi users might be able to charge a higher price for these other services than it would in the presence of other Wi-Fi competitors."

What does it all mean?

According to Reason's study, the "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." For that reason, municipal wireless should be considered an extremely high-risk endeavor, and local governments that are considering the deployment of publicly funded network technology must look ahead of the curve, attempt to anticipate every possible problem, and plan for massive budget overruns.

Do the considerable risks mean that municipal wireless is just pipe dream? Successful implementation may be an elusive challenge, but it is not impossible, and there are many potential rewards. A properly implemented municipal wireless service can promote greater competition between Internet providers, facilitate the availability of cheap service for low-income consumers, and reduce operational expenses for government agencies that can take advantage of publicly funded connectivity. Politicians and public officials can only make objective and informed decisions when they look beyond the hype and assess the risks and rewards from an objective viewpoint.

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