July 25, 2007 — Broadband Bandwagon

Government is helping to provide high-speed Internet access for communities large and small, but does it need to?
By Ernie Siciliano

Gov. Tim Kaine wants all Virginia businesses, including those in rural areas, to have affordable, high-speed Internet access by the year 2010. Since 1998, the commonwealth has invested almost $313 million in broadband networks. Virginia's online efforts are similar to those in many other states.

For consumers, even the slowest broadband provides Internet access at more than three times the speed of a traditional dial-up connection. For economic development officials, broadband promises to help spur growth, leading some to argue that government should provide it when the private sector doesn't. But the precise economic benefits of increased broadband access remain uncertain, and measuring the potential benefits can be difficult.

In one study, researchers from the Massachusetts Institute of Technology and Carnegie Mellon University compared communities with and without broadband access after 1999. Where broadband was available, they found significant increases in employment, number of businesses, and number of information technology-related businesses. Wages showed no significant growth, although prices for rental homes were almost 7 percent higher in broadband communities.

The study's authors caution that the correlations may not imply causation because they looked at broadband penetration instead of utilization. People in the analyzed ZIP codes could have had access to broadband but not used it, and the employment growth could have been due to economic and demographic factors that weren't controlled for. Nevertheless, the researchers conclude "at the least, the data demonstrate a clear association between broadband and positive economic outcomes."

With this promise of economic benefits in mind, Bristol Virginia Utilities built OptiNet, an 800-mile fiber-optic network that connects the city of Bristol and surrounding counties in southwest Virginia. The public utility paid for the network with revenue bonds and tobacco settlement funds.

After the network was built in 2002, Northrop Grumman and CGI-AMS began building data centers in nearby Russell County, projects that may eventually bring an estimated 1,500 high-paying jobs to the area. They have already begun hiring employees in temporary offices.

"We are just now beginning to market ourselves as a place for data centers or anyone who wants broadband Internet," says Jerry Brown, executive director of Bristol's economic development committee.

In smaller or rural areas like Bristol, government intervention has been deemed necessary because private companies often cannot collect a return on investment that justifies building broadband infrastructure. "We're a very small city, so no one else has been willing to [provide fiber-optic broadband]," Brown notes.

Cable and telecommunications companies provide broadband service in Bristol, but Brown says that OptiNet's fiber-optic connection is higher quality. In theory, broadband over fiber-optic lines is faster than broadband over cable or copper telephone lines. In practice, the difference in speed depends on how the service providers manage the fiber.

Some economists argue that offering broadband as a public good discourages private firms from entering the market. With less competition, the government's incentive to improve is reduced and innovation is stifled.

In a 2003 study, researchers from Polytechnic University in Brooklyn, N.Y., and the University of Central Florida compared a public wireless broadband network in New York City to two different private broadband providers. While they found that the public program was highly cost-efficient for users, its "technological robustness" was ranked "very low" and "incentives to technological upgrade" was "low" compared to the private networks.

Gregory Rosston, former deputy chief economist for the Federal Communications Commission, is opposed to providing broadband as a public good. After the telecommunications industry was privatized in Third World countries during the 1980s and 1990s, more competition entered markets and more people got phone service. "Wireless has just gone wild [in these countries]," Rosston says.

If municipalities insist on pursuing a broadband access program, Rosston believes communities should foster competition. He criticizes a municipal broadband wireless program in San Francisco that contracted with one service provider, calling the arrangement monopolistic. "If a single company is willing to do it, why not let many companies?" Rosston explains.

When government does compete against private industry, some economists argue it competes less efficiently. "[Governments] lose a lot of money" when they invest in broadband, notes economist Thomas Lenard at the market-oriented Progress & Freedom Foundation. "They are competing against telecom companies and they are not as experienced."

In Bristol, Brown says that contrary to such concerns, OptiNet is doing quite well. OptiNet generates "good cash flow," he says, but declined to give a number. "So far we have been [competing]," he says. "We're constantly replacing equipment and adding channels."