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April 20, 2005

Why Incumbent Fear of Muni Nets?

Glenn Reynolds asks from the right side of the aisle, what do incumbents fear? Reynolds, the No. 1 Google Glenn and author of the Instapundit blog, has a decidedly and honestly conservative viewpoint, but he's as interested as folks to his left as to why the incumbent telecommunications providers are so worried about the interest by cities and towns to build their own broadband networks or have those networks built for them under franchise.

He writes, "There's nothing illegal or improper, of course, about companies talking down competition, or hiring lobbyists to persuade cities to do things their way instead of somebody else's way, but there's nothing terribly impressive about it, either. In fact, the more those companies criticize the municipal wi-fi approach, the more it makes me wonder what, exactly, they're afraid of."

I have to agree. I'm not a fan of sub rosa lobbying, which is why I've written so much that complains about the attempts by incumbents to fund reports from groups that appear independent. What's ironic, of course, is that if incumbents bid to build the networks that the reports say are impossible to run reliably and are unnecessary, how do the incumbents explain to their shareholders their participation in those projects?

Reynolds also has the very reasonable concern that city-run networks could be subject to city-run monitoring. I've heard this concern in poor contexts before; here it's presented without any baggage. The most rabid pro-municipal-broadband supporters should acknowledge that under the current set of laws in the U.S. having municipalities directly responsible for the operation of new broadband networks could lead to personal information finding its way into government hands. Filtering laws, if they ever make it past the U.S. Supreme Court, might also affect these networks.

The proposals we're seeing from cities that want to have networks built are morphing, though, probably due in part to the firestorm of Philadelphia's initial reaction and the rash of laws spreading from state to state to restrict what some cast as a vital public utility that's underbuilt and others view as municipal attempts to regulate on a local level what only states or the federal government should have the ability to micromanage or not micromanage.

Philadelphia's plan hands off its network fundraising, build-out, and operation to a non-profit that will be ostensibly outside city control. This arm's length plan would also ostensibly remove the city's ability to monitor or be required to filter the network. Further, the non-profit would only sell wholesale access to ISPs. Minneapolis's request for proposal says, "keep the city out of it!" A private company or consortium would receive essentially a franchise and a commitment for city telecom business. This would remove filtering, monitoring, and censoring from the pile of concerns as well.

Reynolds, like me, is interested in diversity, and that's probably the broadest argument one can make for more competition of all kinds: "...municipal services are likely to be better when people have a standard for comparison, too. Being the only game in town is never good for service."

Update: There are some great comments below. But a number of those commenting seem to have missed the point that many municipal networks are being planned as (or already set up as) hands-off affairs from the standpoint of funding, taxation, and operation. If a city can't pay to have trash removed, but they're not paying for the municipal network, you have to readjust your attitude. If the structure is set up so that taxpayers are completely insulated--that is, it's encoded in a charter or local legislation that there's no bail out--then the network might go belly up, but it didn't cost you, as a taxpayer, any money.

Interesting side note here, too, on funding and taxes. Most municipal projects are criticized as having two tax and funding advantages: a city can issue tax-free bonds, and a city doesn't pay a variety of taxes. The newest projects I've seen don't provide that advantage to the municipal project. And if you look at one of the oldest broadband networks in the country run by Tacoma Power, they pay cable franchise and local and federal taxes. They even devote a page to their tax bill. Of course, Tacoma Power is separate organizationally from the local government.


In my opinion, Verizon's #1 worry is NOT that municipal wifi will hurt Verizon's EVDO revenue. Currently, I think they've got a lot of bread-and-butter revenue that stands to be impacted if more municipal wifi goes into place. If I'm a Verizon customer that has some combination of Verizon local voice service, DSL, and cell service, I may eventually cancel my DSL service in favor of the municipal wifi. I might cancel my Verizon voice service and use VOIP over the municipal wifi; eventually my Verizon cell phone minutes might also be reduced or eliminated as cell phones increasingly detect and use wifi connections.

I think all the RBOCs have a lot to lose if municipal wifi gets ubiquitous, and their worries are completely justified.

A few questions: for municipal broadband/wireless:

1. Would those who didn't want the service be able to opt out, and not have to pay anything? (including general tax dollars for maintaining the system)

2. Would other companies be allowed to compete? I assume the answer is "yes" since you say "Reynolds, like me, is interested in diversity"

[Editor's note: 1. Some of the newer proposals from cities like Philadelphia and Minneapolis specifically bar the use of taxpayer money or bonds. In both cases, the cities will give their business to the new networks for voice and data, but Philly estimates a large cost savings over their current systems.

2. This is my big beef with de facto franchises. There's no way to keep another Wi-Fi network from being built in a city: only the FCC can control that. The FCC issued a specific opinon stating that only the FCC can regulate the use of unlicensed frequencies. But Minneapolis and Philadelphia will be giving some kind of special access possibly at no cost to city buildings, utility poles, etc. That's an awfully large cost advantage for whichever company builds the network for these cities and operates those networks. Worth following as this develops. --gf]

What bothers me is that I suspect that once the local governments get involved they may act to restrict the multitude of free wifi hotspots that now exist or more likely say a company is contracted to run a citywide wifi and goes back to the city to ask that the city restrict the competition from all these guys who are giving it away for free.

[Editor's note: The FCC has specifically said in a ruling last year that only the FCC can regulate the use of unlicensed frequencies. Wi-Fi uses unlicensed frequencies, and there have been cases in which landlords and government entities have tried to prevent tenants and neighbors from offering hotspots. Those efforts have been beaten back. There are certainly other ways to try to regulate Wi-Fi hotspots, but luckily bloggers tend to use hotspots and thus any covert attempts wind up widely covered.--gf]

My fear is that once the muni networks are established they will become bureaucratic and slow to respond to new trends. Then, in order to protect the franchise, the municipalities will limit competition either directly (as they have in cable - one franchise per city) or indirectly (you want to put a transmitter where? hmm that will need special permit and 5 hearings.)

I can think of almost no area (cable, garbage, transportation, electrical) where there are municipal franchises that the municipalites are open and welcoming of competition. So, short run, maybe good, long term….. Though the RBOC’s may not be much better…

The major concern I have is that "free" wifi lacks any financial incentive to make customers happy – i.e., supply strong QOS, upgrade systems and innovate.

My own experience with govt "services” has been sub- optimal, and I don't really see how this will be any different over the long term, even if the service is (for now, anyway) provided by organizations outside of the government bureaucracy.

[Editor's note: None of the municipal proposals out there and none of those built include free Wi-Fi for residents. This has been widely misreported. The goal of many of these networks is to offer speeds about 10 to 20 times faster than dial-up at dial-up prices, but still one-fifth or one-tenth as fast as cable and DSL.--gf]

My take on the incumbents is that they really aren't afraid but are just reflexivly trying to protect a potential revenue stream down the pike. They recognize (correctly) that the pols are both greedy (campaigne contributions), uninformed and kneejerk supporters of technological companies. I hate to say this but the incumbents' behavior can only be described as a contemptious manipulation of boob legislators and city fathers. We saw this once before when monopoly cable licenses were dished out because "If we don't we may never get cable."

Another point is that the municipality wants to have complete coverage for its own use. Think building inspectors and social workers with WiFi access to their government databases from their laptops, on site somewhere away from their offices. This is where general revenue, collected from all residents, might reasonably be spent. The city may see the cost of building their own network, possibly offset by resident user fees, as less than paying Verizon et al to provide EVDO or 3G to the municipal employees.

I can't say that a city network, with this justification, is the best idea, but I think it is appropriate to allow individual cities to explore the option if they wish.

I agree with Tom Nelson regarding the LEC/RBOC issues with muni WLAN. Also, I'm not convinced that there is a business model (admitedly I've not read the RFPs) in providing very low cost, low speed WLAN service. Billing, collections, support, network back haul costs, etc. are no less expensive for that network than for any other. Arguably support may be even more expensive. Is the lower revenue stream and presumably higher churn offset by the freebies provided by the municipality? I don't know, but I'm skeptical.

Just a couple of points that I usually make on this. First off, cities already can't fill potholes or pay emergency personnel and teachers wages, so it's always a surprise to me when they roll out some new service. If they can save money in the long run that's a good thing of course, since it opens up cash for other things that are endemically underfunded.

Also worth remembering that Korea's spam-relay problem came about when the gov't decided it would be a good thing to give email to all the schools, but left no budget for fixing stuff. When all their mail servers were discovered to be open relays, they had no cash to fix it. This and the other argument about cash shortages is always my biggest concern. I mean, if it comes down to ending the fireman's strike or upgrading the wifi firmware, which do you guys think they'll go for?

In regard to the worries about the gov't having access to my info, that bothers me less than having (say) Comcast have access to it. The government, particularly the city, is, at least in theory accountable to me. Comcast is accountable only to the bottom line, and only the next quarter's at that.

In the end, all revolutions boil down to economics.

The cost to provision broadband cable and DSL in a non-rural environment typically runs to about $300-600 per home passed. Fiber to the home (FTTH) costs as much as $3000. The equivalent numbers for broadband wireless can be much, much lower. In the case of metro-scale Wi-Fi mesh, the cost per home passed in a deployment like Chaska, MN is an order of magnitude lower than that of cable and DSL! Even if you stretch the assumptions a bit by adding more dense Wi-Fi mesh routers per square mile, CPE, etc, the capex difference is truly extraordinary. This is a great example of a new technology displacing the old and creating new markets by providing an order of magnitude cost benefit.

No wonder the incumbents are threatened! They are wedded to huge investments in cable and DSL plant, while municipalities and others may soon make those investments redundant with a faster, cheaper solution. The real question is what best serves the consumer -- enabling the development of an innovative new technology/service that brings consumer costs down and extends the reach of broadband, or protecting the incumbents' existing investments?

In my experience, muncipal governments answer to voters, and they tend to be quite risk averse. If you don't believe me, just try selling something to them. I don't think they are doing this as a fad. I think they see an opportunity to save money. The fear mongering by incumbents that envisions munis running amok with poorly administered, ill-planned projects is just that - fear mongering.

In fact, most projects to date have been public private partnerships, with munis prudently seeking private partners to bear most, if not all of the risk of these networks. In return, munis offer themselves as anchor tenants to lower their partner's risk - fair trade, lower cost services, win/win all around.

And muni networks enable so much more than wi fi Internet access for computers. How about field service automation for city workers, public safety applications for first responders, utility meter reading, video surveillance for lower crime rates...when cities think about efficiencies in delivering services, shouldn't we applaud them, rather than impede them? Do we expect an incumbent to provide these services to a muni?

After providing for all these functions, if there is excess bandwidth, doesn't it make sense to offer that free or at a reduced rate as a public service for those who can't afford premium-priced broadband from the private sector providers?

Municipal governments have traditionally built water infrastructure, road infrastructure, electric infrastructure ... why should we object to them building broadband infrastructure? Broadband is a utility, its just so new we are not used to thinking of it that way.

The real discussion we should all be having is how long it is going to take us to get a ubiquitous network. That's when the fun starts. This debate is a tremendous distraction fostered by the incumbents to slow things down.