While telecommunications isn’t often controversial (aside from the mega-mergers that rise every few years), the concept of municipal broadband, or free/subsidized citywide Internet access paid for by the city (or county or state), has been a sticking point, particularly for large telecom service providers. Many cities have provided citizens with free or discounted Wi-Fi access for years, and some are even experimenting with municipal fiber-to-home networks. Statewide restrictions on municipal broadband – often the result of lobbying efforts by Internet service providers (ISPs) – have been largely overruled by the Federal Communications Commission (FCC (News - Alert)).
A new study, however, has shown that about half of municipal fiber projects are financially unsustainable. University of Pennsylvania Law School Professor Christopher Yoo and co-author Timothy Pfenninger identified 88 municipal broadband projects, but only 20 of these projects reported their broadband financials separately from electric power. Of the 20, 11 projects were not generating enough to cover operating costs. For the nine projects that are cash-flow positive, seven would need more than 60 years to break even. Only two generated sufficient cash to be on track to pay off the debt incurred within the estimated useful life of a broadband network, which is typically projected to be 30 to 40 years, according to the study.
B&C’s John Eggerton recently attended a press conference to highlight the new study, and reported that Yoo said even if the goal of municipal fiber networks isn’t to make money, the projects need to keep up with the debt service on the bonds (which is how most of these projects are financed), or cities could default on the bond or, in at least one case already with a build, become insolvent. Defaulting on broadband bonds makes future bond issues for roads and schools more expensive.
“There were caveats to the report,” wrote Eggerton. “It was based on five years of data, not the entire length of the project, so the systems may do better as the technology improves or more people sign up. And future builds could adopt the Google (News - Alert) Fiber model of getting subs signatures on the bottom line before building out—akin to signing up land owners for municipal water before deciding whether there is a case for laying the pipe.”
Still, municipalities should understand the “worst case scenarios” before they make a decision to launch a municipal fiber project, according to Yoo and Pfenniger’s study.
“These results suggest that municipal leaders should carefully consider all of the relevant costs and risks before moving forward with a municipal fiber program. Underperforming projects have caused numerous municipalities to face defaults, bond rating reductions, and direct payments from the public coffers.”
Edited by Alicia Young