Thursday, January 6, 2005 - The Progress & Freedom Foundation Blog

Laissez le fiber roulez

David Isenberg posts regarding the battle over municipal broadband network in Lafayette, Louisiana -- something like the Battle for New Orleans without Andrew Jackson, but with more lobbyists. The post -- complete with a snide and gratuitous aside about this august institution -- asks a question:

Does the government have the right to say what sectors of a community should be served? He proceeds that if you answer the question in the affirmative, that the government can then dictate service areas (presumably through franchise agreements, as it does with cable, or public utility regulation, as it does with telephony), or build it itself. If the answer is no, he claims then that democracy is lost and that path leads to the vicious cycle of a digital divide. (This may be a slightly uncharitable recounting, but then again I am accused of being an ILEC zombie, so my false consciousness probably clouds my thinking.)

To Mr. Isenberg, then, municipalization is a valid expression of universal service policy. I suppose it is, but one with a rather spotty track record and thus warranting skepticism.

It seems to me that there are inevitable consequences from municipal broadband entry. First of all, private capital will flee. Competing with a municipal network -- particularly one with run out of a municipal electric utility with the ability to cross-subsidize and predate -- is a loser's proposition. Second, governments are prone to embrace the sunk costs fallacy; that is, they will not innovate or keep investing after the initial investment. Third, governments -- particularly when not facing competition -- tend to act like the most indolent monopolists ever when running a service. Fourth, there is an opportunity cost to communities. The bonds or taxes or electric ratepayers' money could be used elsewhere, for potentially much more pressing social needs -- like subsidizing a baseball stadium, say.

It seems to me that second path of Isenberg's dichotomy -- the government does not mandate who serves and where -- is much better at providing universal service than the path of "democratic" mandates. It may seems a paradox, but the lifeblood of networks and innovation is capital -- and capital goes where it is most welcome. Most of the economy works in this non-government mandatory way -- and finds a way of serving all segments of the population, albeit in different ways. In communications, cellular telephone adoption is perhaps the best example of the free market model working. Cell phones started as a high cost, low use accessory for the well-off, and now have penetrated throughout society.

The tension here is ultimately between capital, which follows its own path despite government's best efforts, and universal service. At its worse, the latter impulse becomes a prescriptive egalitarianism that drives capital away and leads to the worst sorts of monopolies -- government-owned ones.

I personally think municipalization of broadband is a Music Man folly. Communities fall for the pitch, and unless they can indefinitely cross-subsidize off an guaranteed rate base of an electric utility, will end up with a second-rate network that keeps eating cash. To be sure, this is a predictive judgment premised on some assumptions about the nature of government, but it is not without precedent. Ask Iowa how its communications network worked out.

Finally, if for social reasons, you do need to mandate a buildout, I suppose the franchise agreement model (taking out the shakedown aspects) is preferable, so long, like with cable now, economic regulation is precluded.

posted by Ray Gifford @ 4:57 PM | Broadband , Municipal Ownership