Is Municipal Broadband Business Case Getting Worse?

Greeley, Colo. has concluded there is too much risk in launching its own municipal broadband network. The city council has voted 6-1 against proceeding with the undertaking. 

Fort Collins, Loveland and Longmont, Colo. have built or are building municipal broadband networks, but the oldest network in Longmont, though hailed as a clear success, might now be encountering a tougher business case, and the other data Greeley lawmakers faced was not strong enough to convince them to take the risk. 

The numbers simply were not reassuring, and there are reasons why early adopters faced a different challenge than cities considering municipal networks today. The price umbrella--the reference price charged by the leading provider in the market--has been reduced. 

According to the U.S. Bureau of Labor Statistics, prices for internet services and electronic information providers were 22 percent lower in 2018 versus 2000. Not lower in relationship to income or local price levels, just lower, period. 

That means any challenger has to confront less topline revenue than once was the case, in addition to stranded assets. Any provider might expect to earn revenue from about one in every three or four locations passed by the network.

The ability to defray costs by voice revenue and video entertainment likewise has shrunk. Where would-be new entrants could build a business case based on selling as many as three key services, most challengers must build a business case on internet access alone.

The municipal network in Longmont, Colo. has been cited as a clear success, so any change in economics is important. And there now are reasons to believe that the business case is deteriorating. 

An open records request by Complete Colorado for updated balance sheets through 2019 that were previously released by the city for 2015 and 2016, show that in 2018, Longmont stopped separating its broadband enterprise liabilities, assets, revenue and expenses from its electric enterprise liabilities, assets, revenue and expenses.

That change coincides with recently increased electric rates in Longmont. Noting that change in reporting, some might conclude that Longmont’s internet service operation is not operating as profitably as it once did, when both incumbents mounted no challenge to Longmont’s gigabit service. 

That no longer is the case, as Comcast and CenturyLink now both offer competing gigabit internet access services. Elsewhere across the country, speeds are higher and prices are lower than was the case a decade ago, or two decades ago. 

It is not just that revenue per bit falls toward zero as consumption grows sharply and internet service providers react by boosting supply. Over time, retail costs have declined, in relationship to household income or disposable income, not just in cost per bit terms. 

We often forget that half to perhaps 60 percent of U.S. internet access customers do not buy, or pay, the posted “internet access” price per month, since they bundle that service in a bundle of some sort with discounts. 

As always in competitive markets, the degree of competition matters, and Longmont got a headstart when the incumbents did not respond quickly. That is no longer the case. 

The policy argument for a municipal network might be stronger, despite hurdles, if no service is available in a community, or if only a single provider operates. In Greeley, both Comcast and CenturyLink already operate, and Comcast offers gigabit service everywhere in the city. CenturyLink speeds top out at about 200 Mbps. There are third parties operating also, such as Front Range Internet, also offering gigabit speeds, and Rise Broadband. 

So a new municipal network would be the number five fixed network supplier. There also are two satellite internet services available in Greeley. The issue is market share required to reach sustainability. Many analyses suggest market share of at least 30 percent is the minimum requirement. 

The other issue is that while network costs climb, average revenue generally does not. In fact, despite much popular complaints, internet access costs about $50 a month, nearly everywhere, globally, when adjusting for local price levels and incomes, and without adjusting for inflation effects. 

That especially is true for municipal networks that must offer lower prices, higher speeds, or both, to get voter approval. Almost by definition, a municipal network has to assume lower revenue per account than an incumbent might expect. 

Even some touted successes might be questioned, when the cost of a network is $23,000 per passing, a figure so high that most industry executives would say does not offer a payback for any private firm attempting to build such a network.

The argument that municipal broadband creates jobs has been refuted by some studies. 

In some ways the economic argument is akin to public funding of sports stadia, which almost all studies suggest provides no net economic benefit to a city. 

Market dynamics can change over time, and that might well be the case for municipal networks. Incumbents open a market opportunity whenever they offer high prices and lower quality for a product in high demand. As Jeff Bezos, Amazon CEO is fond of saying, “your margin is my opportunity.” 

And margin is being sucked out of the access business. In some markets, revenue growth has gone negative, as well. It is one thing to attack a market that is growing, rather than declining. It is one matter to build a business case on the assumption of growing revenues, quite another matter to model strategy when revenues are declining and profit margins shrinking.

We might be a different point in time, where the economics of municipal broadband have become more challenging, simply because the internet access business has gotten more challenging.