Reason Foundation

Reason Foundation

A Dynamic Perspective on Government Broadband Initiatives

Jerry Ellig
December 1, 2006

Executive Summary

Debate over government provision of broadband has generated many of the usual arguments over the pros and cons of government service provision. On the one hand, such initiatives might make broadband more affordable and hasten its adoption. On the other hand, they could also generate significant costs for taxpayers and stunt incentives for cost containment. Such arguments commonly occur when governments consider direct provision of electricity, gas, water, roads, and many other services that tend to be provided by monopolies that invest in long-lived assets. Less extensively discussed, however, are some unique challenges that arise because broadband is anew, fast-changing technology available from competing suppliers. Policymakers need to consider some unique problems when a government enterprise enters a dynamic market such as the provision of Internet services.

Traditionally, infrastructure like water systems, gas distribution and electric distribution has involved a fixed investment that was very large compared to the ongoing operating cost. The technology of the infrastructure itself changed relatively slowly. As a result, local governments could usually invest in what appeared to be the best technology at the time without having to worry much about whether they chose the right technology. Pricing and selling the service was relatively easy. Most people need water, heat and electricity, and the service providers usually had a monopoly. Long asset lives and slow technological change made long depreciation schedules possible. Service providers could be reasonably confident of recovering their capital costs over a long time period.

However, these static monopolies differ significantly from services like Internet provision, which are dynamic due to their fast-changing technology and variety of services. Unlike heat, water and electricity, high-speed Internet service is not viewed as a need by many people. Companies continually change their offerings and prices to appeal to a variety of consumer desires. This dynamic competition upsets the tranquil conditions that make government provision of a service easier.

Scholarship on dynamic competition suggests seven new issues that are likely to be significant in municipal provision of Internet service:

While many broadband initiatives require some type of public sponsorship or investment—either by government or by government-owned entities—a recent twist appears to offer the public a much better deal. In some cities, such as Philadelphia and San Francisco, private firms have proposed to build Wi-Fi networks at no cost to taxpayers. There is nothing inherently wrong with proposals for free or privately subsidized Wi-Fi. However, governments need to realize that rights-of-way and light poles are valuable assets, and access to these assets would bestow a significant competitive advantage on any firm selected to use them.

Any local government that grants one Wi-Fi 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 Wi-Fi service. A monopoly that gives away Wi-Fi to build demand for other services it might sell to Wi-Fi users might be able to charge a higher price for these other services than it would in the presence of other Wi-Fi competitors. For this reason, 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. At a minimum, decision-makers should assess whether exclusive access would distort competition in the markets for other goods and services sold by the Wi-Fi company.

The factors outlined above need not imply that government-provided broadband is a bad idea. However, no plan for government-sponsored broadband should be considered complete or responsible unless it addresses many factors. 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.

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