Government-owned broadband networks crowd out small, rural ISPs – Entner

Roger Entner

Sometimes, the textbook economics that some of us read in university come back to be relevant in our daily work. While I have written in the past about the potential effects of government involvement in the broadband market, a few weeks ago I experienced the reality myself.

We were working with a small rural telco on plans to expand their fiber deployments. One of the locations we recommended already has a municipally-owned broadband network in operation. We were quickly reminded that competing against a municipally-owned network would be a no-win situation. The only way we could compete on price was at scale. This meant our small rural telco could not make the business case to enter the market because, by definition, it’s small and not terribly scalable.

The crowding out effect many have opined on is real and concerning. Due to a government-owned broadband network, a rural, small, independent, commercial broadband provider got squeezed out of the market between municipal providers and the large broadband providers. As a result, government action to proliferate government-owned broadband actually accelerated market concentration where we were looking to expand. Perversely, when smaller broadband providers are squeezed out of a market where there’s a government-owned network, regulators begin to complain about the market being too concentrated which then leads to more regulation of the incumbents.

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Consumers are paying the price for this reality. Where government-owned networks proliferate, consumers of broadband either pay more through taxes as the municipal broadband provider raises the money to construct and operate a network OR they pay higher electric or other utility rates that are used to cross-subsidize the broadband services.

The federal government continues to embrace the fallacy that government-owned networks solve problems of price or access. Consider a recent proposal to offer state, local and tribal entities a 30% tax credit, i.e., a rebate check, to cover initial costs to construct such networks. If Congress and the White House are being honest about closing the digital divide, then any subsidies should go to the end user, the folks who cannot afford to pay for high-speed broadband.

The Senate was correct to reject requests to pad the pockets of the locals when it opted not to offer special preferences for municipal networks as part of the infrastructure legislation.

Without a doubt, connecting the hardest to reach citizens is a challenging task and needs government support. The U.S. is not alone in its efforts to connect inner city and rural populations with high-speed broadband internet. But can it be a leader and design the most effective solution?

The European Union is tackling the same problem in the same way the U.S. is – providing subsidies to providers who can close the rural connectivity gap. The difference between the U.S. and E.U. approaches are primarily of magnitude: the U.S. program is roughly ten-times larger than the E.U.’s, covering three-quarters of the population.

Rather than wasting another round of funding to close the digital divide where it exists, perhaps Congress can seize this opportunity to invest where the subsidies are needed the most – with the Americans who cannot afford it on their own.

Roger Entner is the founder and analyst at Recon Analytics. He received an honorary doctor of science degree from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.

"Industry Voices" are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce.