Municipalities, Beware of Free Wi-Fi Offers

With hundreds of local governments considering getting into the broadband business, a new report warns 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 Reason Foundation study written by 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 to ensure that the projects are technologically and financially viable.

The study also cautions city officials to beware of "geeks bearing gifts," suggesting that companies like EarthLink and Google are interested in providing free Wi-Fi because the deals will give them rights-of-way and valuable access to public infrastructure like light and telephone poles.

"Proposals for free or privately subsidized Wi-Fi are obviously attractive at face value," says Jerry Ellig, senior research fellow at the Mercatus Center at George Mason University. "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 none. Thus, municipal cable and Internet offerings face stiff competition and are unlikely to grab a large market share.

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: 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.

5. Obsolescence: Because wireless technology improves so rapidly, capital investment quickly becomes obsolete.

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.

"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," Ellig says.

Telecom world moves a lot faster than the water or gas systems that many governments are used to owning.

For the full study, "A Dynamic Perspective on Government Broadband Initiatives," visit www.govinfo.bz/5973-50.

For a detailed analysis of municipal broadband efforts in the City of Provo, UT, visit www.govinfo.bz/5973-51.

The Reason Foundation is a nonprofit think tank dedicated to advancing free minds and free markets. For more information, visit www.govinfo.bz/5973-52.