OHIP: Ownership Has Its Privileges

When this little industry first flew out of its nest, the prevailing model was for the city to own its own network (Corpus Christi, Cerritos, etc.). That made sense then, and I think it makes more and more sense now.

But in 2005, public ownership came under assault from industry groups who saw a rising competitor in publicly-owned communication networks. They challenged that model and we saw the momentum in Philadelphia turn away from public ownership in the face of that challenge, hearing the siren song of a privately-owned network, perceptively taking the risk away from the city. The argument against city-owned networks ultimately proved to be a legislative loser, but the tide had shifted and the deals that followed were all about "how the private-sector assumes the risk," with EarthLink leading the charge.

Philadelphia's muni wireless network is in a holding pattern as it waits to see what EarthLink's proposed sale of the network will mean to its future. Last week, in a interview with local radio station KYW, city Chief Information Officer Terry Phillis discussed the implications of the sale, calling it "by far the best alternative" for the future of the network.

He acknowledged that finding an appropriate buyer will be challenging. Phillis said the buyer "would have to have a financial model that would make sense for them" and that a limited number of customers would likely accompany the purchase. He said he has not seen EarthLink marketing its commercial service in Philadelphia "for some time now." Philly muni Wi-Fi sale is city's "best alternative"

Well, we know how that story of risk avoidance through private ownership turned out - folks, we've turned the page and finished that chapter titled "Private Sector Owns the Risk." We're on to a new chapter now... Thank Heaven for small favors.

But since last August when the EarthLink pull out began, we've pondered the question, "what is to be the title of that next chapter?" The prevailing wisdom has made it look like it was going to be "City as Anchor Tenant" - where the public sector would share the risk with the private sector player...but there's a problem - a big problem - with that alternative...the private companies who want government to share the risk are in fact engaging in a wholesale transfer of risk in practice, when service providers price their services at such a high rate that have most of the risk handed off to their erstwhile public sector partners.

But there was more wrong with the new model than met the eye - we're still in a transition, and I'm arguing that Anchor Tenancy under high service contracts is yet another distraction and dead end...

Just for a start - why would anyone turn to one of the least risk-friendly partners - namely, public sector elected officials who are subject to press and political scrutiny - to take on so much risk in order to make an acknowledged risky deal work ... hmmmm, I see a few problems with that. Why would a public partner take on that risk of buying services when it comes with so little control? Why rent a couch when you can buy one for a little more? Usually people rent rather than own only if there is a huge price break for renting, if there are other significant advantages (tax-breaks?) or if they are desperate and have no other alternatives (e.g., lack of credit).

In point of fact, Anchor Tenancy when examined a little closer has started to resemble a game of Hot Potato - when you get a twice-burned private partner (as many of the entrepreneurs in this sector are), who seeks to lay off most or all of the risk in the deal to the public partner through inflated service fees, they have to look far and wide for a potential public partner desperate enough to take such a deal. I'd argue that's where the slowdown in this industry lies. The current Anchor Tenant business model isn't selling for a reason - it's not a good deal for the cities.

All of a sudden, shared risk became assumed risk, but with no control to make the city better able to offset the risk of the deal. Small wonder there have been few takers. It just won't fly for cities to take all the risk via a long-term service contract yet have none of the control on the long-term development of the network that would offset that risk...control and risk need to go together or the deal won't fly.

This recent essay from California - Public ownership of broadband access is best - makes the argument for public ownership in a compelling way, saying that if cities don't step up to take ownership and bring in affordable broadband, nobody will (my underlining for emphasis).

Too many cities in California are stuck with slow (or no) broadband access. As the United States continues to dip in international broadband rankings, individual communities have a choice: build their own broadband network or hope someone else does it for them.

California's Broadband Task Force has released its final report, complete with maps showing some 2,000 communities without any access at all. Many more communities are underserved, offered an always-on connection faster than dial-up, but not by much.

So far, so good - lots of cities need broadband. But where do the smart guys and girls in California take the cities in their report? Back to the flawed private sector ownership model, it seems.

Unfortunately, the Broadband Task Force has chosen the seductive path of dependence on private providers for these networks. Public ownership is a better plan. Broadband networks are here for the long haul, and our dependence on them will only increase. Many citywide wireless networks are privately owned, depending on city government as an anchor tenant. The network requires city money without offering the city any control. Under such circumstances, owning beats renting.

Public ownership should not be a fallback option.

The author goes on to hit the nail on the head: infrastructure is an investment that cities are used to making and with ownership they get control and other benefits that lower the risk.

The Broadband Task Force's first recommendation should have been to encourage every community to evaluate its needs and assets to determine whether it would be best served by investing in a publicly owned network.

A number of large private providers have managed their networks in a questionable manner. These companies have one goal. The law requires them to maximize their shareholder value. In contrast, a publicly owned network should maximize social benefit. If it does not, residents can change it. Try getting AT&T to modify its network management policies.

So, to recap, we have these benefits from public ownership of broadband infrastructure.

1. An infrastructure tailored to the specific needs of the community.
2. The flexibility to add and upgrade the network as needed as the community changes.
3. The control of self-determination.
4. Assurance of fairness regarding the use of the network for all citizens of the community.
5. A focus of priority on social benefit rather than corporate profit, which means coverage and affordable rates for all society, not just those segments that can afford to generate profits for the corporation.

I would add these benefits of public ownership, based on my recent experience in developing a model for the City of San Marcos down here in Central Texas.

A. A new focus on efficiency in public government - ongoing cost reductions in operations through a focus on leveraging digital infrastructure to provide greater efficiency.

B. A new diverse revenue source for the city that is not based on a tax. How many of those do we see everyday? The excess bandwidth left over after public sector needs have been met can be sold to the residents and businesses of the community, even the current communication providers. That revenue can be used for network upgrades, new applications and equipment, subsidization of disadvantaged population needs (Digital Divide), and economic development, just to name a few potential ways to spend that money.

C. Insurance against a potential shortage of broadband capacity in the future. As broadband use becomes more prominent and as high bandwidth uses grow on the Internet, the availability of infrastructure to carry all that network traffic will become more and more important. Investing now in broadband infrastructure is akin to securing water rights to provide a hedge against future price increases and to secure ready access to a vital resource.

I'll leave the conclusion to the author of the essay from California, who puts it well.

Investing in broadband networks is an important decision that should come after developing a strong business plan that identifies how the network will sustain itself. Successful municipal networks across the country offer many different models and technologies. From western Utah to tiny Vermont, they also offer reliable fast speeds at affordable prices in areas long ignored by private companies.

Broadband networks have become essential infrastructure. Depending on a private network may be the easier course of action, but gives away too much power. Network owners make decisions; they do not have to beg providers for faster speeds, lower prices or better customer service.

In my humble opinion, the title of the next chapter in the unfolding saga of Metropolitan Broadband will not be "City as Anchor Tenant." The next chapter must be titled "Ownership Has Its Privileges." Vive L'Independence!