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February 28, 2007

Wi-Fi Waste Report

Quasi-sock puppetry: An extremely detailed financial analysis of municipally owned networks was released by the Pacific Research Institute, a think-tank with strong industry ties. The report is called Wi-Fi Waste: The Disaster of Municipal Communications Networks, although Wi-Fi is not a component of the vast majority of networks that they look at. And they only look at Wi-Fi networks that are municipally owned--three!--a fraction of the wireless networks being deployed.

The speciousness, too, is that Wi-Fi and telecom are related. Most of the Wi-Fi networks being delivered will have small voice components initially, and won't replace residential or business telecom at all. IPTV is a component of most municipal fiber networks, and all incumbent fiber networks, where it's hardly a blip in thinking for early Wi-Fi networks due to the vast mismatch in available bandwidth.

It would take weeks to look through their assumptions and analysis on how these largely fiber-optic or fiber-coax-hybrid networks are huge money sinks. But their statement that the systems have cost taxpayers $840m over 20 years is tricky: some of these municipal entities are utilities that are required to invest continuously in infrastructure, and the money put into networking didn't come from taxpayers--it came from ratepayers or even from the electricity or water markets when surplus was sold--and wouldn't have been returned to taxpayers if unspent.

The reports uses data from no later than 2004, and that's tricky because even though a number of these networks have been in operation in some form for years, the first few years of each network's operation involves extremely expensive buildout that's paid back over many years. So a four-year window of operation could show a disaster. And I'm dubious of any analysis of Tacoma, Wash., that shows it as a financial failure--that reveals something about the assumptions used to analyze the network's revenue. It's also tricky to look back to 2004, before incumbents had deployed any real fiber and before broadband had hit its home tipping point, and expect to extrapolate in a straight line from there into 2007.

The hobbyhorse of broadband over powerline (BPL) is trotted out as a "new" technology that needs encouragement. All anti-regulation thinktanks are pro-BPL as a third pipe to the home, allowing yet another incumbent monopoly (electrical utilities) a broadband option. It's unclear whether BPL will ever be a success, though as I wrote in The Economist in December, changes in US and European spectrum regulation may wind up being a factor in promoting rollouts in certain markets. (Texas is a rare example: TXU Electric Delivery handles just the delivery of power, not retail billing or power plant operations, and their adoption of BPL on a broad-scale is still in the early stages of deployment and relates largely to their interest in having a smarter power grid. The broadband part is extra.)

However, the report authors should be commended for exposing their entire set of collected research, including a long appendix showing the yearly data they used for operating cash flow, interest, capital expense, and other factors to produce their "cumulative free cash flow" number, which is their determination of success. I'm hoping a group with the resources necessary can look through assumptions and recalculate the results. Update: Per a note from Becca Daggett in the comments, I don't mean to imply that the report's numbers are an accurate reflection of generally accepted accounting procedures. Rather, that because the appendix includes all the numbers they used, their process can be reverse engineered and compared against publicly available information from the utilities and municipalities in question.

PRI receives significant funding from industries that they write reports about, according to SourceWatch, and seems to be the last hard-line group opposed to any municipal involvement in broadband except in keeping their filthy hands off it.


Click! was a good move for the City of Tacoma PUD, just like NoaNet is an example of what works.

WiFi networks operated by nonprofits are the key to move beyond the subscriber model, and into an "at-cost" community service model(utility)...what the phone companies should have been without the gross profit-taking that haunts this industry.

Glenn, you commend PRI for exposing all their collected research, but that's not quite true. They include debt principal and interest payments as a cash outflow, but they do not include the proceeds from bond sales or other loans as a cash inflow.

It may be legitimate to criticise networks that have been operating for at least four years for not generating enough revenue to cover operating and debt expenses. (We don't know how they're counting interdepartmental transfers for telecom services, so their operating cash flow figures may be different than the cities' accounting.) But the free cash flow measure they use makes the assumption that all capital expenditures should come from operating cash flow. That's not so.

In one case, a city (Muscatine, I think) took on additional debt in the first few years of operation in order to expand their network to meet customer demand. PRI counts the capital expenditure, but not the inflow from the bonds.

In the most extreme case, almost the entire capital expenditure for Chaska's wireless network is subtracted from operating cash flow in the first year of operation (which happens to be 2004, when they had only two months of operating revenue).

Cedar Falls is another situation where initial capital expenditures are subtracted from operating cash flow before the network was in operation. (It's hard to tell, because they give a negative operating cash flow figure for 1995, but you can't see that it's negative because there are no operating revenues.)

It's sleight of hand.

Also note that their $840 million figure is the "total amount these municipalities have spent in the telecommunications business," which is to say, all their capital investments. You note that some of those funds could not be transferred to the general fund anyway. But you also have to be careful about labeling these capital expenditures as a "cost to taxpayers" because, in the case of loans and revenue bonds, they will be repaid with operating revenues.