The Law and Economics of Municipal Broadband.

• Author: Beard, T. Randolph

TABLE OF CONTENTS I. INTRODUCTION 3 II. SUMMARY OF FINDINGS 9 III. THE ECONOMICS OF THE BROADBAND BONUS 14 A. The Externality Issue 15 B. Competition is Not the Solution to Externalities 16 C. Economic Development and Municipal Broadband 17 D. Economic Migration Versus Growth 18 IV. MUNICIPAL BROADBAND, COMPETITION, AND WELFARE 19 A. The Equilibrium Number of Firms 22 B. Welfare and the Number of Competitors 27 C. Adding Competitors to a Market Already in Equilibrium 29 D. The Value of the First Firm 32 E. Externalities and the Equilibrium Number of Competitors 32 V. SUBSIDIES, PREDATION, AND PRIVATE INVESTMENT 34 A. Municipal Broadband and the Number of Firms 35 B. Municipal Broadband is Subsidized Entry 39 C. Direct Subsidies 42 D. Indirect, Implicit, and Cross-Subsidies 44 E. Private Investment and the Threat of Municipal Entry 52 VI. EXTERNALITIES, COMPETITION, AND SUBSIDIES 53 A. Subsidies vs. Entry 54 VII. PRACTICAL CONSIDERATIONS FOR REASONABLE POLICY 56 A. Burlington, Vermont 57 B. Provo, Utah 59 C. Tacoma, Washington 60 D. Groton, Connecticut 62 E. Lake County, Minnesota 63 F. Salisbury, North Carolina 63 G. Summary 65 VIII. RECENT EMPIRICAL EVIDENCE ON MUNICIPAL BROADBAND 65 A. Labor Market Outcomes 65 B. Incumbent Responses to Municipal Entry 66 C. Welfare Effects of Municipal Entry 68 D. Municipal Provider Prices 69 IX. OUTSTANDING LEGAL ISSUES: PREEMPTION, PREDATION, AND DUE PROCESS 76 A. Preemption of State Laws Governing Municipal Entry 77 1. Nixon v. Missouri Municipal League 78 2. The FCC'S 2015 Preemption Order 79 3. Sixth Circuit Review 86 4. Postscript: Mozilla v. FCC 88 5. Summary 89 B. Municipal Broadband and the Antitrust Laws 89 C. Municipal Entry as A Due Process Problem 92 X. CONCLUSION 96 I. INTRODUCTION

Broadband Internet service is integrated into nearly every aspect of contemporary American society, perhaps even to a fault. Kids sleep (or not) with their Internet-connected mobile devices under their pillows, mental health professions treat afflictions like Internet Addiction Disorder and Compulsive Internet Use, and half of the nation's ministers are having issues with online pornography. (1) Like all things, there are downsides, but broadband Internet connectivity is now seen as essential for modern life, not only because of the significant private benefits to its users, but also because of the alleged sizable social payoff--a "broadband bonus" above and beyond the purely private benefits of the service. (2) Consider the FCC'S 2010 National Broadband Plan's take: "Broadband is a platform to create today's high-performance America--an America of universal opportunity and unceasing innovation, an America that can continue to lead the global economy, an America with world-leading broadband-enabled health care, education, energy, job training, civic engagement, government performance and public safety." (3) While the rhetoric is often melodramatic, broadband is unquestionably important to consumers for its private benefits and to policymakers for its purported social payoffs, leading some political leaders to label the service a "necessity" and even a "human right." (4) Ubiquitous availability of broadband, if not universal adoption, is now a policy goal. (5)

Private investment has gone a long way to providing ubiquitous deployment and about 86% of U.S. homes now subscribe to the service. (6) There remains work to be done, however. Nearly 5% of households still can't subscribe to a basic fixed broadband service of 10 Mbps download speeds and 1 Mbps upload speeds (and 6.5% at 25/1 Mbps) and the capabilities of broadband connections vary widely across the country. (7) Adoption, while high, is still deemed too low, especially in certain segments of the population, causing what is often dubbed the Digital Divide. (8) Working against the lofty goals of policymakers with respect to broadband are a number of factors, including variations in consumer demand based on income, education, age, perceived value, and so forth, and the high deployment and operating costs of broadband networks. (9)

In pursuit of broadband's social payoffs, some municipal governments have taken on the enormous financial risk of building and operating their own communications networks in order to provide telephone, video, and highspeed Internet connectivity to their constituents (and to some persons beyond the municipal boundaries). These government-owned networks ("GONs") are most often being built in areas where communications services are not available or where the connection speeds and market coverage of existing private providers are deemed by local officials as inadequate. (10) Municipal governments generally have no interest in constructing and operating a communications network and most cities will never even consider it--yet out of desperation for modern communications services (i.e., high-speed broadband) and the benefits they are believed to provide, a few hundred cities are doing so. In markets where private firms already provide some level of service, these government-owned and operated systems become "competitors" to the existing private firms, typically amassing significant market share and serving most, if not all, government buildings.

Not surprisingly, these types of municipal broadband systems are highly controversial. Opponents contend that having to compete with the government is inherently unfair. (12) Opponents also claim that the presence of a government-owned firm threatens private investment, a position supported by the National Broadband Plan and economic theory (as detailed herein). (13) A number of high-profile failures, forcing taxpayers and captive municipal electric utility ratepayers to shoulder millions in financial losses, provide potent warning regarding the risks and likely consequences of such ventures. (14) Such arguments have proven compelling: twenty-three states have passed laws overseeing how their political subdivisions enter the communications business. (15) In a few states, cities are prohibited by law from doing so. Like municipal broadband itself, these laws are highly controversial and there is a movement afoot to have them either repealed or preempted by the federal government. (16) In 2015, the FCC preempted such laws in the states of Tennessee and North Carolina at the request of cities in those states. (17) While the Agency's efforts to preempt ultimately did not withstand judicial scrutiny, (18)its actions confess to the intense political nature and emotional investment in this issue. While the mounting evidence of near inevitable financial failure of municipal systems has weakened interest, the push for municipal broadband remains strong in some cities and political circles. (19) Whether they want to or not, federal and state legislatures will be addressing the question of municipal broadband networks, and laws related to them, for years to come.

While the controversy surrounding municipal broadband has generated a rich, varied, and informative literature on the phenomenon, what is missing is a careful economic analysis of the underlying nature of municipal broadband and its advocacy, (20) and why we see government entry in an industry where private investment is abundant. (21) In this Article, we try to fill that gap. AS we see it, the economic essence of the municipal broadband debate can be boiled down to a simple question: why is the municipality the only one willing to build the network? Evidently, the answer is '"because no one else will." (22) This question and its restatement as an answer help frame up the economic analysis of the issue, or at least key parts of it.

The reader should be aware, however, that our effort is admittedly and necessarily modest. It is unlikely that a single exercise will tell us all we need to know about the advisability of municipal entry in cities as diverse as Seattle, Washington (population 670,000), Chattanooga, Tennessee (population 173,000), Barbourville, Kentucky (population 3,200), Lenox, Iowa (population 1,359), and American Samoa (population 55,000). (23) Admittedly, our analysis may lead to more questions than answers, but we do believe the contemplation of these new questions will improve policy making in this space. As is posted on the reading room door at Tromso University in Sweden: "We have not succeeded in answering all our problems. The answers we have found only serve to raise a whole set of new questions. In some ways we feel we are as confused as ever, but we believe we are confused on a higher level and about more important things." (24)

2. SUMMARY OF FINDINGS

   Our analysis relies heavily on (somewhat basic) economic theory, so our findings are general in nature. (25) Nevertheless, much of the evidence and anecdotes on municipal broadband fits nicely into this general framework. The economics also have a long-run view, revealing the underlying yet powerful forces that produce outcomes. Much of the evidence has, unlike the theory, a short-run view, whether for or against municipal broadband. (26) While there is always the possibility of the exceptional anecdote showing a short-run departure from prediction, policy should not be based solely (if at all) on anecdote and naive, short-run considerations. Systematic departures of the evidence from the theory presented here, if they occur, point to areas for further research. Our review of the available evidence is broadly consistent with theoretical predictions.

   Our purpose is not to disparage or promote municipal broadband as a policy option, but rather to provide an economic framework that aids in understanding what municipal broadband is and how one might reasonably support or oppose it. Municipal broadband is a complex issue, and this Article is but one entry into a portfolio of analysis on the topic (much of which remains to be done).

   Our findings may be summarized as follows: First, the exceedingly high standards set for ubiquitous deployment...