Economy / Politics / Technology

Yes, “Gig City’s” Public Broadband is Fast, but its Economic Future is Questionable  

Executive Summary 

  • The impacts of Covid-19 will continue to elicit conversation about funding municipal broadband projects, so we must be aware of the long-term financial obligations associated with these programs.    
  • Chattanooga’s public broadband produces speeds much faster than the national average, but the economic responsibility looms far into the future.  
  • The financial structure of the Electric Power Board’s public broadband will be difficult to duplicate, so the Chattanooga program should not be used as an example justifying future municipal broadband projects. 

Introduction  

The past 18 months have been instructive in understanding the importance of internet innovation and the role of connectivity in the everyday lives of Americans. The Covid-19 pandemic and its accompanying restrictions required workers to develop a home office that has the capacity to connect to video calls and reliably conduct business online. Pew Research now estimates that 86 percent of those aged 30-49 (the group that holds the median age of the workforce) have a home broadband service, almost a 10-percentage point jump from 2019. Even as we move out of the Covid-19 pandemic, it appears as if trends towards adoption of broadband will continue to increase. 

A small, but significant, portion of the population remains unconnected and unable to access the benefits associated with the internet. This problem is often referred to as the “digital divide.” There are myriad propositions and policies that attempt to address the digital divide. These ideas range from subsidized broadband vouchers to funding government-owned broadband services. Inevitably, when grappling with this issue, conversation about implementing more municipal broadband services begins. The first example that many proponents of municipal broadband will use is Chattanooga, Tennessee, which has dubbed itself “Gig City”. The reality is that the ultimate success of this program is unclear, and, in many ways, the long-term economic effects remain to be seen.   

Chattanooga, the Star of Municipal Broadband  

As one of the earliest municipalities to establish a government-run broadband, Chattanooga’s Electric Power Board (EPB) began to build its public broadband infrastructure in 2009. In February of 2021, Forbes dubbed it the “best work-from-home town” making it the gold standard for municipal broadband. Its placement among the Appalachian Mountains makes it a desirable place to escape larger metropolitan areas without losing modern luxuries like high-speed internet.  

Supporters of municipal broadband claim that the program in Chattanooga has improved city-wide internet to 10,000 Mbps, vastly faster than the national average of 42.6 Mbps. Additionally, the program attempted to lessen the digital divide by offering free connections in various public spaces and brought more tech industry opportunities to a town previously overlooked by Silicon Valley. However, these statistics only tell part of this municipal broadband “success story.”  

Even “Gig City” has its Faults  

Chattanooga’s public broadband, although lauded as a policy success, has its fair share of economic hurdles. It was no secret that the economic impact would be extensive. According to the Taxpayer Protection Alliance, the public broadband service cost a total of $390 million. Municipal Bonds account for 58 percent of these funds, 29 percent is sourced from the Department of Energy and EPB took out a $50 million line of credit and additional loans to cover the rest.  For a city with a population of less than 200,000, it is quite a bold economic venture. Generally, the public has been shielded from the economic burden because of Obama-era federal stimulus funding, but it is not expected that other cities would have access to the same funds, making the economic structure of Chattanooga’s public broadband difficult to replicate.   

A study from the University of Pennsylvania Law school has conducted research on the economic impact of these public internet services. In the past 11 years, Chattanooga’s public broadband subscription prices have fluctuated considerably. During the first months in 2010, the price of EPB’s public broadband was over $300 a month. Eventually, they lowered their rates to increase subscriptions. Currently, Chattanooga’s ISP prices vary substantially, EPB’s starting price is $57.99/month, while Xfinity offers a starting price of $29.99/month.   

In the long term, the prognosis for the program is uncertain at best, and disastrous at worst. While there was a positive cash flow reported by the program from 2010 to 2011, the subsequent three years reported a negative cash flow. Due to the marginal rate of return of the program, the UPenn study estimates that it will take over 400 years for the project to break even, and notes that in 2033 the first round of bonds will require principal payments. With the demonstrated instability of cash flow in the first years of the program, it seems doubtful that the program will be able to handle the looming cost of the project in the coming years.  

Conclusion  

There are few avenues, if any, that allow for municipal broadband services to be financially feasible. Even when they are considered “successful”, these programs take decades, if not centuries, to produce substantive economic returns. At that rate, there is likely to be new technology ready to replace it before it can be profitable. Although Chattanooga is heralded as an example of successful government broadband, it will be in debt for years. For programs that are seen as less successful, or outright failures, problems of debt and waste are even more prominent. There is no evidence that shows these programs are more efficient than private providers, but there is evidence they can stifle competition and create barriers for new providers to enter the market.   

We should be wary of these policies and instead focus on funding policies that allot direct subsidies to the consumer, which boosts competition and preserves the choice of the consumer. For most of the US, these municipal broadband services are not feasible. The study from UPenn revealed that 11 of the 20 programs were found to be experiencing “financial distress.” Using Chattanooga as an achievable blueprint for other municipal broadband programs is poor policy and refuses to address the apparent economic uncertainty in its future.   

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