Massachusetts Municipalities Warned Away from Broadband Business

Massachusetts Municipalities Warned Away from Broadband Business

But Are We Falling Behind Other Countries in Internet Access?

By Georgia Pellegrini
February 5, 2002

Municipalities should be cautioned to think twice before entering into the cable TV/Internet business, according a study released by the Beacon Hill Institute of Suffolk University.

But others are worried that the U.S. is falling behind other countries in Internet access. They wonder whether the towns could help correct that, at least for their citizens.

The broadband issue addressed by the study is one that has become widely debated recently. Many citizens in the Commonwealth are concerned that they cannot work out of their homes or businesses because AT&T has no plans to wire their town.

The latest $45 billion merger agreement between Comcast and AT&T Broadband has fundamentally changed the scene in the cable business, allowing one company to control nearly 40% of the nation’s cable market. If high-speed Internet service is left solely to a cartel is that going to guarantee good, reasonably priced service to everyone?

Some point out that it was a monopoly by the same AT&T up until only a few years ago that gave us the best telephone system in the world at very low costs. But many of the small Internet service providers say that as a result of the market imbalance, the giants in the telecommunications business are able to keep prices artificially high by charging very high fees for the use of the phone lines that they control.

They say the giants encourage an anticompetitive environment by preventing municipalities from providing cable service, thus allowing the situation to continue. The large companies retort that the tax regulations imposed by local and federal governments are what force them to charge higher prices.

What’s the Solution?

So what is the solution? Should the government continue to regulate these companies, which may cause inflated prices? Or should local towns be allowed to enter into the market and increase competition with the chance that they too may have to charge higher prices?

At a time when every industrialized country except for the United States has begun a nationwide initiative to expand broadband use, some fear that we are falling behind.

According to CEO John Chambers of Cisco Systems Inc., “We are falling behind in our K through 12 education system, and now we are falling behind in broadband.” The importance of broadband has been outlined repeatedly by various proponents, for it determines competitiveness, promotes innovation, creates opportunities, allows for e-commerce, digital distribution, and video on demand. If the U.S. is the last industrialized country to make it a priority, what does that say about the future?

At a joint hearing of the House Small Business Committees, Mike Cook, vice president and general manager of Spaceway, a division of Hughes Network Systems, suggested a possible solution to universal accessibility: satellite broadband.

According to Cook, “the only technology that will ubiquitously provide cost-effective broadband access across the entire U.S. is satellite technology. With satellite broadband, there is no digital divide. There will be no have's or have-not's.” These Spaceway satellites, scheduled for North American launch in 2002 and service in 2003, will transmit data over 1,000 times faster than data carried over conventional telephone lines.

Others are not convinced, however, that a nationwide initiative to get high-speed telecommunication access into every home should be a national priority. A recent article in the Wall Street Journal, suggests that these proponents may need to shift their priorities, and focus not on supply, but on demand.

Consumers Not Interested, but Businesses Are

Right now, there is not a compelling enough reason for consumers to pay an extra $20-$30 a month for speedy Internet access that does not afford them much more capability than a dial-up. In a survey of Internet users, Jupiter Media Metrix found that the most frequent activity of dial-up users was reading and sending email, while the most frequent activity of broadband users was also reading and sending email. It is also interesting to note that 70-80% of U.S. households have the option of signing up for high-speed cable modem Internet access, but only 10% actually subscribe.

Moreover it appears to many that it is for those who have gotten used to the high-tech internet use of the past ten years, and who no longer have the patience to wait for a dial-up connection. They want to download digital entertainment and music, and they want to do it fast. It is indicative of a generation that has become accustomed to immediate gratification.

However, others point out that it is the serious businessperson who needs the high speed service. This will begin to increase as many more people begin to work from their homes. They say it would be analogous to a town being without any telephone service today. How ridiculous that would be. Just because the telephone is used by many merely for gossip doesn’t mean that it is not a necessary part of our society.

Congress has been considering ways to increase broadband access. A bill sponsored by Representatives Billy Tauzin, a Louisiana Republican, and John Dingell, a Michigan Democrat, would relax requirements on local phone companies, allowing them to provide Internet access nationwide, while not requiring them to share their networks with competitors. This may be an attempt to solve the conflict between government regulation and big broadband business but does it guarantee opportunity, affordability, availability, and competitiveness? For now, only 10% of the families in the U.S. have bought into that idea.

Towns Advised to Move Slowly

Meanwhile, the Beacon Hill Institute is warning the towns to look before they leap. The warning came in a report, entitled “Cashing in on Cable: Warning Flags for Local Government,” by economist John Barrett and others.

It suggests that Mass. Towns, such as Norwood and Braintree that already have existing electric power businesses, are particularly prone to believing that they can compete effectively with private sector companies such as AT&T.

Under the misconception that they can effectively compete in the highly competitive ever-changing technology of the industry, these local governments are said to put themselves at financial risk. This risk is substantiated in five parts:

The case history of five communities from across the country that have lost money and/or threatened to increase electric rates or local taxes after their attempts to be competitive proved unprofitable.

Towns such as Norwood have failed to adequately assess the financial risks of entering into the business, demonstrating that financial data that is interpreted as profitable to the local accountants could in reality be unprofitable, as interpreted by the economists at BHI.

Cross-subsidization can occur between industries in the local towns, pointing to Braintree as an example. This was a case in which Braintree transferred $2.2 million from its electric department to its cable business last year, creating the illusion that the cable business was more profitable than it really was and simultaneously penalizing the electric ratepayers.

The cable TV/Internet business will further drain funds away from other community needs, citing Braintree once again as an example. The BHI study states that as the broadband business calls for “$1.5 million in new funding, Braintree finds itself increasingly unable to fund urgent school, sewer and building renovation projects.”

The possibility that the TV/Internet business may be taxable under the “Unrelated Business Income tax” of the IRA. Thus the municipalities would be simultaneously jeopardizing the tax-exempt status of their electric power divisions.

The study concludes that once a municipality enters the telecommunications business, it is unlikely to withdraw from it, even if it is losing money. Instead, it will raise rates, divert revenue, raise taxes and attempt to limit competition from other providers. Thus local governments should evaluate the risks carefully in the increasingly competitive, constantly developing broadband market.

A copy of the BHI study can be obtained at BHI’s web site at www.beaconhill.org