Above the Crowd

Believe It or Not: Your State Leaders May Be Acting to Slow the Proliferation of Broadband

March 11, 2005:

A very important battle is emerging between the cities and towns of America and the incumbent telecommunications carriers (ILECs) and cable operators (MSOs).  The former are fighting to retain the rights to control the destiny of their own telecommunications services, while the latter want to ensure that these cities do not become a competitive threat to their core monopolies.  In March of 2004, the Supreme Court ruled (Nixon vs. Missouri) that states "can" restrict their cities from offering telecommunications services if they choose.  The Supreme Court did not say that they "should" outlaw this behavior, but simply that they "could."  The ILECs and MSOs jumped at the opportunity, calling into action their massive state-by-state lobbying campaign contribution efforts to push forward legislation that would attempt to stall the rising competitive threat of very low cost, city-wide, wireless networks.  Currently, the most high profile battle is in Texas, where Sec 54.202 of the Texas House Bill 789 seeks to strip the municipalities of such rights.  There is also proposed legislation in 11 other states including Florida and Colorado.

New technologies, such as 802.11, mesh-networking, and eventually WiMax, allow for the quick and easy deployment of high-performance broadband networks.  Consider the town of Chaska, Minnesota.  Last summer, Chaska, through an ISP that is associated with the city-owned utility, deployed a 16 square-mile, 802.11 city-wide network, leveraging Tropos Networks’ 5110 mesh routers (Benchmark is an investor in Tropos).  This multi-megabit network, operating at speeds similar to DSL and cable, and much higher than 3G wireless technologies such as EVDO, offers coverage to its citizens throughout the entire town (picture an umbrella of 802.11 coverage).  The city priced its broadband service at a competitive $15.99/month, and the citizens voted with their pocketbooks.  In twelve short weeks, over 25% of its citizens signed up for and installed the service.  Chaska believes it has an asset that differentiates itself relative to other cities. This asset improves quality of life, improves the quality of education, and attracts businesses and jobs.  What’s more, due to the low-cost of the infrastructure, Chaska expects to pay for the entire network in less than 18 months.

Some state legislatures, and the above mentioned ILECs and MSOs, feel that the citizens of tens of thousands of towns and cities across America should not be allowed to make a decision like that made in Chaska.  To protect their rights of self-determination, it is imperative that these cities and towns, and their citizens, do everything they can to prevent these state laws from being passed.  Smartly, the states of Indiana and Illinois, and the city of Philadelphia, have already said "no way" to such initiatives.

Here are six key reasons why other states should do the same:

1.  The primary reason these legislators are proposing to "take rights" from these towns and cities is to reduce or eliminate competition for the ILECs and MSOs.  Allowing incumbent carriers with little to no competition to push laws onto the books that blatantly impinge on the rights of the municipalities is unprecedented.  This is equivalent to allowing auto manufacturers to introduce legislation that cities shouldn’t be able to fund city buses or other forms of mass transit.  Or imagine a large real estate developer urging state legislators to outlaw cities from building low-income housing, simply because they compete with their apartment projects.  The ILECs and MSOs wouldn’t even exist if it wasn’t for government cooperation in the form of eminent domain, franchise agreements, etc.  The most restrictive of the proposed anti-muni network legislation (such as that in Colorado) would prevent cities from cooperating in a similar fashion with private entities for wi-fi networks, e.g. banning cities from leasing pole attachment rights.  This is a clear violation of Title 47, 253(a) of the United States Code.  Obviously, this is a direct effort to reduce competition and increase monopoly rents.  The incumbents also argue that the municipalities are ill prepared to deploy the network and provide proper customer service.  Isn’t it ironic that they want to protect them from competition that is in their own view inept and uncompetitive?  It is as if the Harlem Globetrotter’s found out that their nemesis, the Washington Generals, were actually holding practice and now they are up in arms about it.

2.  An oligopoly does not a marketplace make.  Some conservative legislators argue that cities simply shouldn’t be in competition with these private service providers.  However, there is no proof whatsoever that open competition exists in markets were there are only one or two alternatives for service.  In fact, in cases where there are only one or two providers, monopolistic and duopolistic actions tend to work to the detriment of the consumer.  Chaska.net proved wildly popular with consumers because DSL and cable modem services in town cost 2-3 times as much as the wireless network.  Guess what is going to happen to broadband prices in that town now?  The FCC is quite proud of the fact that it was not until a third cellular provider was introduced to most regions (with the auction of the PCS licenses), that competition increased to the point of aiding the consumer.  One proof point that this lack of competition harms customers can be found in the numerous cases around the country where ILECs are being sued for a practice known as "redlining."  Redlining refers to the practice of only pushing new services and technologies in wealthy communities and ignoring the poorer communities.  In Texas, 93 counties have only one service provider and 70% of rural areas have absolutely zero access to broadband.  On top of all this, the US ranks 13th worldwide in terms of broadband penetration per capita, and is falling in the ranking.  Is this really an environment where competition needs to be reduced?

3.  Taking these rights from municipalities will have a negative overall impact on American innovation.  The technology industry at large has a ton to lose if initiatives like these are adopted.  Why?  Because it is the efforts of the more progressive cities and towns that push the envelope forward in terms of technology and innovation, especially when it comes to communications services.  Additionally, more broadband competition leads to faster and cheaper broadband, which will obviously have a huge impact on the demand for technology products and services.  Faster and cheaper broadband will greatly expand the breadth of services that can be offered into the home.  Services such as IP video on demand, VOIP, picture telephony, and streaming online education are all dependent on a massive broadband footprint.  Considering that this is at a time when many Americans are concerned about high-tech job growth and innovation shifting to Asia, why are we considering proposals that will cause America to fall further behind?

4.  Even if a city has no intention of deploying wireless services, it is still in that city’s best interest to retain the right to do so.  Consider the example of two cities, City A and City B.  City A has the right to deploy telecommunications services if it so chooses, whereas City B is in a state where the legislators have taken away its rights to do the same.  Now consider what happens when the ILEC that serves each city begins to drag its feet on a new broadband deployment, or it decides it is going to "raise rates" on its DSL service.  Which city is more likely to be able to negotiate a better outcome: the city that retains the leverage or threat of being able to be able to deploy its own services (City A), or the city that has no leverage whatsoever because the state has already stolen its key leverage point for negotiation (City B)?  Anyone that has ever sat down to the negotiation table knows the answer to this one.  Over the next 5-10 years, the states that restrict the rights of their cities will be surprised to find that the ILECs and MSOs moved much faster in deploying services, and deployed them at much lower prices, in the states that allowed their municipalities the right to compete.

5.  In 2005, isn’t it reasonable and potentially enlightened for a city to choose to offer broadband as a community service?  It is common practice in America for a municipality to provide services to its citizens in areas where (1) there are economies of scale for the city providing those services, and (2) where it is in the best interest of the community.  As such, local government agencies are the primary provider of schools, libraries, road construction and maintenance, security, fire protection, judicial services, and certain registrations and licenses.  In 3,600 cities across the US, cities currently provide utilities such as power, water and electricity.  Today’s 21st century American city finds itself concerned with (1) the quality of education of its children, (2) whether or not those students will be competitive in a global marketplace for jobs, (3) the reduction of employment opportunities in such staple American industries as agriculture, manufacturing, and textiles, (4) the fact that even "new economy" jobs such as call centers, help desks, and even software engineering are increasingly moving overseas.  In such an environment, who is to say that the future citizens of any municipality will not be better served by having subsidized or perhaps even free access to the Internet?  Isn’t this the library of tomorrow?  The reason America is 13th in the world in per capita broadband is precisely because government entities in other countries invested in broadband as a community service to the people.  Perhaps Michael Copps, FCC Commissioner, said it best in a recent interview, "I think we do a grave injustice in trying to hobble municipalities.  That’s (municipal wireless) an entrepreneurial approach, that’s an innovative approach.  Why don’t we encourage that instead of having bills introduced?"

6.  A founding American principle – localized government whenever possible.  Perhaps the most insupportable aspect of these efforts to take rights from American cities is that the effort reeks of heavy-handed, centralized government.  One can be certain that these same legislators seethe whenever our national government attempts to impose rules and regulations on the states.  Those states recognize that their local constituency is smart enough to make decisions for themselves.  The effort to restrict the rights of these municipalities from a state level is denying the citizens of these communities the right to make their own decisions.  Moreover, it infers that these citizens, and their elected officials, are not intelligent enough to make these decisions themselves.

In what is ostensibly the cornerstone "democracy" on the planet, one would think that the citizens in each of America’s cities could simply "vote" on the services they believe make sense for their city to provide.  Running a wireless network in a city like Topeka, Kansas simply has no overriding impact on the state as a whole.  As Thomas Jefferson aptly wrote in a letter to William Jarvis in 1820, "I know of no safe depository of the ultimate powers of society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them, but to inform them."

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If you would like to ensure your town or community has the right to deploy innovative broadband services (and you don’t live in Indiana, Illinois, or Minnesota), please send letters, emails, faxes and phone calls to your local legislators to urge them not to pass laws that take broadband service rights away from your city.  In Texas, please let the members of the house and senate telecommunications committees know where you stand on this.  Save Municipal Wireless.

9 Comments

  1. Save Muni Wireless March 12, 2005

    Bill Gurley: Six reasons states should say no to broadband limits

    Venture capitalist and tech visionary Bill Gurley lists six reasons why states should say no to laws banning municipal networks. 1. The primary reason legislators are proposing to “take rights” from these towns and cities is to reduce or eliminate…

    Reply
  2. Brian Duper March 14, 2005

    Great article Bill. Now if we can only break up the contractual obligations that prevent me from watching the “good” NFL/MLB games, vs. my local teams, we will be all set. Ooops, I forgot one important detail … The NFL/MLB makes very lucrative deals with specific networks. Even with broadband coming out of my ears, the content makers are going to partner with those same monopolies that these laws are protecting.

    I know you VC’s like to “pump” technologies and products, but I really question how fast technologies like WiMax will be adopted. My NYC apartment already has a “moat” around it. I have already invested in my wireless network, and broadband provider. WiMax would have to be near free to get me to switch. I simply can’t be bothered with all of the switching hassle to save $10. Hell, sometimes my wireless network drops, and I am 5 feet from the access point. I can’t imagine how these WiMax guys are going to deliver a good user experience. I know many people that have “ripped out” their home wireless because the technology is so un-reliable. Like any technology effort, I am sure that quality will suffer, just so we can spend valuable R&D dollars on getting 100×100 pixel poor quality video highlights of an NBA game that I don’t care about (cough: VCAST).

    Note to all wireless players reading this post: Spend your R&D dollars on quality of service. I live in midtown Manhattan and my cell phone drops calls all of the time! Who cares that I can take a picture or watch a video clip.

    In my Bizarro VC world, I would be funding new analog telco startups. There are profits to be made on the millions of disenchanted new age digital users like myself. Just think of a world, with no dropped calls, viruses, worms or spam. Where do I sign up?

    Reply
  3. Deep Green Crystals March 14, 2005

    Bill Gurley sounds the alarm (again) on broadband

    Bill Gurley’s Above the Crowd recent posting (welcome to the Blogsphere Bill!) about locel ILECs and MSOs trying to restrict local government’s ability to provide broadband as a public service is a timely and very important article to read. Basically…

    Reply
  4. Frank Ruscica March 15, 2005

    Of course, the simple alternative is to build out the WiMax/WiFi alternative at cost.

    When it comes to cheap, plentiful residential broadband, the biggest spillover benefits will accrue to providers of customized education and career services (CECS).

    These providers, then, can be expected to run the build-out of their favorite ‘cheap complement’-to-be.

    Better still, CECS providers will speed the WiMax/WiFi build-out via a franchise model, which doubles as a nice career service.

    Send email if more details are of interest (my CECS biz plan is MSFT-/Amazon.com-approved).

    Enjoy,

    Reply
  5. Mark Cramer March 15, 2005

    It might have been a while since you’ve posted anything, Bill, but this one was, in my humble opinion, fantastic. In response to Mr. Duper, people can (and will) argue about which technology is better, if the level of service for each is satisfactory or not, if the price is too high or switching cost too high, etc., etc., but the point being made in the article is that all this should be sorted out in the marketplace, not the legislature. I could not agree more.

    Reply
  6. Michael Parekh March 15, 2005

    Good post…one wonders why this issue hasn’t been on the frontburner for MSM (mainstream media). It’s much more compelling than any re-creation of the Michael Jackson trial.

    Reply
  7. Frank Coluccio March 16, 2005

    Bill, your article was very well written, imo, and I thank you for posting it. I’d like to add to a couple of your excellently chosen points:

    Redlining may never have been more pronounced, or so blatantly promoted in the past as it is today, as demonstrated by the RBOCs’ new Starship Services being sold under the umbrella moniker of FTTP (FTTH, FTTN, and FTTB). They are being targeted – in a way that is entirely unabashed in public statements by the RBOCs – strictly at upper economic scale neighborhoods, thus bolstering the proverbial digital divide that already exists instead of helping to bring it down.

    In my own town of New York City there’s an organization known as the Center for an Urban Future that published an exemplary report recently (Dec. 2004) highlighting the eventual effects of such practices over the life of a service provider’s outside plant provisions, or lack thereof. I commend this paper to anyone with an interest in promoting an awareness of the importance of municipal networks as an option to what the incumbents are offering and have offered for the past hundred plus years:

    NEW YORK’S BROADBAND GAP
    By Jonathan Bowles
    http://makeashorterlink.com/?H15D12FAA

    Elsewhere, you state that Topeka’s wireless network would not have any overriding effects on the state as a whole, I see from whence you come with this, but I’d view the matter a bit differently. The overall effects to the State would indeed be felt by a proliferation of wireless and even wireline (e.g., iProvo/UTOPIA) networks in towns and cities. But the effects would be felt in a positive way, as more of the state’s municipalities improved their overall quality-of-life attributes and their economic positioning as a result improved communications infrastructures (or merely having the option of such, as you’ve duly noted), as they would with improved roads, airport access and electrification, etc.

    Incidentally, if anyone looking in here can point to a broadband report for their own, or other, towns and cities, similar to the one I’ve cited above (New York’s Broadband Gap), I’d appreciate your emailing the specifics to me. TIA.

    frank@coluccio.net

    Reply
  8. Jonathan Baltuch March 17, 2005

    Bill –

    One of the best pieces I have read on the subject. It is critical that the public and the main stream media picks up on this thread.

    The only way to stop the back room politics the Telcos are using is to make it impossible for an elected official to get re-elected if they support this type of legislation.

    Educaton is the key

    Reply
  9. Alan Taetle March 20, 2005

    The MSOs and ILECs clearly have a ton to lose when more broadband options present themselves. If and when IPTV becomes a reality, MSOs core business in particular is clearly at risk. How does a community organize to fight such a well-trenched, well funded, lobby-rich competitor who will be pressing for restrictions? It’s not obvious to me who will lead the charge you so eloquently argued for..

    Reply

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