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Corporate Research E-Letter No. 56, November-December  2005

By Philip Mattera

 The people of New Orleans need all the help they can get in reviving their devastated city. So it was considered a significant boost when Mayor Ray Nagin recently announced plans to install a municipally owned wireless internet system that would be free for all to use. The initiative, which relies on donated equipment, was seen as a way to lure businesses and residents back to the Big Easy.

Not all parties, however, were pleased with idea. Regional phone giant BellSouth was so angered at this public-sector incursion into what it considers part of its business bailiwick that the company threw a hissy fit. Hours after Nagin’s announcement, BellSouth withdrew an offer to donate one of its buildings for use as a new police headquarters. To his credit, Nagin, a former telecommunications industry executive, is proceeding with the introduction of wireless broadband—popularly known as wi-fi (short for wireless fidelity).

BellSouth’s action was not an isolated act of retribution. Across the country, the phone companies formerly known as the Baby Bells and the large cable TV providers have been fighting moves by a growing number of cities, both large and small, to provide free or low-cost wireless broadband service to their residents. In an era when privatization is usually the order of the day, the spread of publicly sponsored wi-fi is an unusual move in the direction of municipal socialism.

HOT SPOTS AND COOL CITIES

Since its introduction only a few years ago, high-speed wireless internet access has become a familiar part of everyday life. It was initially offered as a fee-based amenity by the likes of Starbucks to attract customers who would check e-mail and surf the web on their laptops while sipping overpriced beverages. Hotels and airports added the service for business travelers desperate to stay in continuous contact with the office. Wi-fi is becoming a standard feature on college campuses. More and more families are setting up their own wireless networks at home.

As ubiquitous as wi-fi seems to have become, laptop users on the move cannot expect seamless service. Cities are unpredictable collections of “hot spots” of wi-fi service surrounded by dead zones. The patchwork quilt is far inferior to the level of coverage provided by wireless phones.

It is in part to rectify this unevenness that local officials in many places are drawn to the idea of a citywide wi-fi system. The assumption is that a locality with such a service will find it easier to attract technologically sophisticated and relatively affluent young people and the businesses that employ them. It’s also considered very cool.

For some smaller cities ignored by the private-sector broadband providers, government involvement may be the only way to get high-speed service. Even before the rise of wi-fi, some localities got into the business of providing broadband via phone lines because the private DSL companies were passing them by. Worried that the trend would grow, telecom companies began pressing state legislatures to pass laws barring localities from providing broadband access. By the end of 2002, about nine states had done so.

In some places, DSL via phone lines or cable is not technically possible, regardless of the provider.  This was the reality facing Cerritos, California, located about 26 miles southeast of Los Angeles. In 2003 it became one of the first localities to offer free citywide wi-fi.

For other localities, the issue was social rather than technical. In 2002 Jacksonville, Florida pioneered the use of wi-fi to address a long-standing national problem known as the digital divide. The phrase gained currency in the 1990s as a way of highlighting the fact that poor households were lagging behind their more affluent counterparts in terms of access to computers and the internet. Jacksonville created what it called Wireless Internet Zones in a series of low-income neighborhoods, some of whose residents were also given free computers.

LAZY PUBLIC UTILITIES OR LAZY COMMERCIAL PROVIDERS?

Municipal wi-fi remained largely below the radar until 2004, when public officials in Philadelphia announced the largest initiative to date—a plan to install a wireless network that would cover all of the city’s 135 square miles. A spokesperson for Mayor John Street said the move was a way to become “a city, literally, of the 21^st Century.” She also cited the need “to bridge the digital divide for residents who wouldn’t have access to the internet, particularly schoolchildren.” The city’s plan was to charge fees roughly half the market rate for broadband, and even less for low-income users.

The companies that want to sell that access, particularly the local phone company Verizon Communications, sprang into action. Their lobbyists, arguing that the city was engaging in unfair competition, got state legislators to pass a bill to limit the ability of localities to provide internet access. Initially, the legislation barred all public involvement but was later amended to allow it where the primary local phone company had failed to provide the service within a specified amount of time.  In last-minute negotiations before the bill was signed by Gov. Edward Rendell, it was also modified to allow systems operating before January 2006 to proceed.

This compromise, which reflected a public uproar over Verizon’s position, allowed the Philadelphia project to move forward, and in doing so it encouraged other municipal wi-fi initiatives across the country. A February 17, 2005 front-page story in the New York Times stated: “Experts say the Philadelphia model, if successful, could provide the tipping point for a nationwide movement to make broadband affordable and accessible in every municipality.” Among the cities that were inspired to pursue the idea were Chicago and San Francisco.

That prospect did not cheer everyone. The Times article quoted an analyst at the libertarian Cato Institute as calling the wi-fi movement “a growing trend, but an ominous and disturbing one…The last thing I’d want to see is broadband turned into a lazy public utility.”

Critics of the phone and cable companies charge that they were the ones being lazy—in terms of the making broadband more widely available. Data from the International Telecommunications Union show that at the end of 2004 the United States had slipped to 16^th place among the world’s top economies in the percentage of people using broadband to connect to the internet. Countries higher on the list include Canada, Israel and Denmark. An article last spring in the establishment journal Foreign Affairs warned that the lag in broadband development in the United States could have serious consequences for the country’s competitive position in the world economy.

Proponents of municipal wi-fi compare their movement to the situation of electrification of rural America in the late 19^th Century. Back then, electricity was a must-have new technology for a community wanting to experience economic growth, but the private power companies focused on wiring more lucrative urban areas. Many rural communities formed their own publicly owned electric utilities, many of which are still in operation today.

FIGHTING "COM-MUNI-ISM"

Verizon, SBC Communications (recently renamed AT&T), Comcast and the other big phone and cable companies continue to fight against the spread of municipal wi-fi. They have been pressing more state legislatures to ban the practice and have succeeded in getting bills enacted in additional states such as Colorado, Nebraska and Florida. In case the state offensive does not succeed, the industry got a member of the U.S. Congress to introduce a bill that would restrict new municipal wi-fi (or other government-provided telecommunications services) throughout the country. The author of the bill, Rep. Pete Sessions (R-Texas), used to work for Southwestern Bell and Bell Labs.

The case against public telecom has also been made in a series of reports issued by conservative think tanks, some of them supported directly or indirectly with industry funds. So concerned are these analysts at the prospect of government involvement in providing a vital service that they resort to reviving old anti-communist rhetoric. A paper by the Progress & Freedom Foundation concluded by urging local officials to “heed history’s warnings” about the dangers of “central planning.” A telecom trade journal hinted at the same theme by headlining an anti-muni wi-fi editorial COM-MUNI-ISM.

Yet the business world is not united against wi-fi. Producers of telecommunications equipment, such as Cisco Systems, are happy to sell to government as well as private internet providers, while computer and semiconductor companies stand to gain from wider broadband availability. A company called Tropos Networks Inc. has made the sales of “mesh networking technology” to cities the basis of its business model. The company has donated equipment to help get the New Orleans wi-fi system going.

Some entire municipal wi-fi systems have been donated to cities by private companies that expect to make money by placing advertisements on the welcome screens seen by users. In other cases, cities are completely turning over the operation of their wi-fi network to a private company. Philadelphia, for example, decided to put its system in the hands of EarthLink Inc. In San Francisco, EarthLink is competing for that prize with more than two dozens companies, including Google Inc., which has offered to install its system at no cost to the city and to provide basic service to residents for free; revenue would come from advertising.

An advertiser-supported website called MuniWireless covers municipal wi-fi as a business opportunity. The company behind the site has also issued a report projecting that nearly $700 million will be spent creating muni wi-fi systems over the next three years.

All this suggests that municipal broadband is evolving into something other than telecom socialism. Rather than replacing the private sector, local governments are in effect playing off one set of companies against another in order to get the best deal for residents on what is becoming an essential service.

In doing so, cities are to some extent undercutting the potential broadband market for the big phone and cable companies, but the telecom giants cannot really complain. For years they have cherrypicked the more affluent areas for broadband development, leaving much of the country lagging behind. If they had been more aggressive in bringing high-speed internet to the masses, local officials wouldn’t be interfering in their business. Now that broadband is coming to be viewed as a necessity for all, the Verizons and Comcasts of the world don’t seem up to the job. This is one case in which government is the innovator and the private sector is hopelessly out of step.