Susan Crawford on the importance of government policy. People who are concerned about the future of the Internet need to pay attention or the cable and telephone companies will take over the Internet (or at least access to it). Not because they are evil, but because what is best for them (or what they think is best for them in the short term) is not what is best for the rest of us or the vast majority of businesses that depend on access to the Internet.

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Siloam Springs, sporting 15,000 people in the northwestern corner of Arkansas, could be the next community to build its own community fiber network. But first they have to pass a referendum in May in the face of stiff opposition from Cox Cable, which would prefer not to face real competition.

For over 100 years, the city has provided its own electricity via its electrical department. Now, it wants to join the more than 150 other communities that have done so. After last year's changes to Arkansas law, Siloam Springs has the authority to move forward if it so chooses.

Pamela Hill at the City Wire has covered the situation with a series of stories, starting with an explanation of why they are moving forward:

David Cameron, city administrator, said the proposal is not so much about dissatisfaction with current providers as it is about finding new revenue for the city. Cameron said revenue from electric services has been a key source of funding for various projects and necessities for the city. That “enterprise” fund is getting smaller, Cameron said, and an alternative funding source is needed.

“We have done a good job managing accounts, building a reserve,” Cameron said. “We want to keep building on the programs we have. It takes money and funds to do that.”

City officials discussed the issue for the last 18 months and decided to put it to a referendum. Voters will decide the issue May 22.

That is a fairly unique reason. Most communities want to build these networks to encourage economic development and other indirect benefits to the community. Given the challenge of building and operating networks, few set a primary goal of boosting city revenue.

If approved by voters, the city plans to spend $8.3 million to install 100 miles of fiber optic cable directly to homes and businesses. The city should be able to repay the debt in 12 years, if things go according to a feasibility study presented to the city’s board of directors in January. Cameron said projections show the system could begin making a profit after three years.

Just as in Longmont, Colorado, the incumbent cable company has created a fly-by-night astroturf group to oppose Siloam Spring's initiative. In Longmont, the group predictably disappeared shortly after Comcast lost the referendum.

In the Longmont referendum, the opposition came out of Denver. To fight the community in Siloam Springs, Cox is funding a group out of Little Rock that calls itself Arkansans for Limited Government. (If the only threat to my monopoly were a local government, I suppose I would want to limit it also.) Though CenturyLink ostensibly competes with Cox, its DSL cannot offer the same capacity as cable networks (the problem we call a Looming Monopoly).

After the approach was announced, the usual public v. private rhetoric emerged. Among others, the head of the of Arkansas Chamber of Commerce is defending Cox, probably a significant member of that Chamber:

“Make no mistake, when government competes with private business it always has an unfair advantage, and it will stifle economic growth and competition in the Siloam Springs market,” Zook wrote.

And so we see the same false claims we have previously debunked. And right next to claims that the public sector has all the advantages and will crush the private sector, we find a paradoxical claim:

Zook said there are many instances across the country where cities have tried this and failed.

The reality is that Cox and CenturyLink have all the advantages AND that communities generally succeed in creating signficant community benefits by building their own networks. They get real competition, lower prices, more investment, and a better climate for local businesses to succeed.

Another article was dedicated entirely to arguments against the community effort (as though every other article did not devote enough time to these pro-Cox arguments).

In it, a manager for CenturyLink claimed that they would be in favor of a public/private partnership but Cox quickly rejected the idea:

In a public-private partnership, a city pays a certain percentage of costs for new or upgraded services and an established private company does the work and provides the service.

...

Pitcock said Cox Communications has never taken public monies for joint ventures, and probably wouldn’t take part in a public-private venture in Siloam Springs.

If CenturyLink wants a public/private partnership, it should join UTOPIA to offer real services to Utah residents and businesses rather than its patheticly slow DSL.

Following one of several community meetings to discuss the project, reaction to the initiative seemed mixed, with many people wanting more information.

At the meeting, the assistant city director of Sallisaw, which operates a muni FTTH network in Oklahoma, spoke about their experience.

Skelton talked about the success of the Sallisaw system, noting that 99 out of 100 test customers stayed with the city’s service after the trial period in 2005 and said the city should make a profit by the end of the year. Customer bills average $103, he said.

However, Sallisaw had fewer options for broadband when they started. By contrast, Cox has proved willing to get very dirty in its opposition to new competition, as seen in Lafayette (see the last paragraph of this story).

The most recent story from the City Wire discusses other muni broadband networks in Arkansas.

Conway in central Arkansas and Paragould in the northeast corner have had city-owned cable services since 1980 and 1990, respectively. They’ve continued to upgrade and add services as times and technologies changed. Officials for both systems say they operate at a profit.

When Monticello, Minnesota, decided to build its community fiber network -- Fibernet Monticello -- it expected the incumbents to lower their prices and fight to keep subscribers. But Monticello had no idea the lengths to which they would go.

The telephone incumbent, TDS, delayed the project for a year with a frivolous lawsuit and then built its own fiber-optic network while dramatically lowering its prices. We have yet to find another community in North America with two citywide FTTH networks going head to head.

Because of the city's network, Monticello's residents and businesses have access to better connections than the biggest cities in Minnesota can get.

Now, Charter has weighed in by cutting its rates to what must be below cost to gain subscribers. It reminded us of a shoot-out, so we created this infographic to explore what is at stake.

Download a higher resolution PDF here.

Charter has taken a package for which it charges $145/month in Rochester, Duluth, Lakeville, and nearby Buffalo (MN) and is offering it for $60/month - price guaranteed for 2 years. A Monticello resident supplied us with this flyer, which this person had received multiple times at their home over the course of a month. (See below for the full flyer).

This is either predatory pricing or the cable industry is out of control with its rate increases. If that package costs Charter more than $60/month to supply, then it is engaging in predatory pricing to drive competitors out of the market. Consider that Charter may be taking a loss of $20/month ($240/year) from each household that takes this offer. They can do that by cross-subsidizing from nearby markets where they face very little competition.

If that package costs $60 or less per month to Charter, then it has an incredibly high profit margin and the fundamentals of the market have to be questioned.

Traditional economic theory tells us that very large profits anywhere will attract new market entrants. Yet the private sector refuses to provide competition aside from the common duopoly of DSL/cable. And these companies use their incredible lobbying power to push bills such as Minnesota HF 2695 that would ban communities from building their own networks.

Unfortunately, building their own networks is often the only way for communities to create real competition and investment in next-generation networks. But communities then have to face dirty tactics from these massive companies bent on maintaining their marketshare using any means necessary.

The aggregate benefit to Monticello is very large right now. Prices for telephone, cable, and broadband have all dropped, keeping millions of dollars in the local economy. But Fibernet Monticello has missed its revenue targets because TDS and Charter care more about driving competition out of town than a fair fight.

The question is whether dirty tactics will successfully run Fibernet Monticello out of business, allowing TDS and Charter to resume gouging subscribers with their ordinarily high rates. If they do, it will be ironic that FiberNet Monticello, which brought the fastest residential speeds in the nation to a small Minnesota town while lowering the prices everyone pays for telephone, broadband, and cable, will be regarded as a failure.

We are running a guest commentary today. Eric Null is a third-year law student at Cardozo Law School in New York City. He is passionate about corporate and intellectual property law, as well as technology and telecommunications policy. Follow him @ericnull or check out his papers.

While researching a paper about municipal broadband networks, I was struck by the tremendous benefits that municipal networks can provide. It can be the first high-speed Internet link for an area without broadband, or it can provide some much-needed competition in areas that currently have access to broadband, but for some reason that existing access is unsatisfactory (e.g. price, service). Municipalities, in theory, can run the network for the benefit of the public rather than with a vicious profit maximization motive. Indeed, municipal networks bring many benefits. But first, a little history.

In the United States, cable providers have set up regional monopolies for themselves, and “competitors” such as DSL and satellite are characterized by slower connection speeds and it is arguable that they are actual substitutes to cable access. Certainly within the cable industry, any “competitive” cable company attempting to compete with incumbents is met with high costs of building new infrastructure and lack of customer base. Municipalities can pick up where smaller, private entities cannot succeed. Municipalities have had a long history of investing in critical infrastructure, and they have the mentality for long-term planning that private companies simply cannot enjoy. A large company like Verizon likely has to justify any expansion of its network to its investors and ensure them that the venture will return a profit relatively quickly. Not so with municipalities; a city network allows its citizens to benefit indirectly (and directly) over the long-term. Thus, city governments can be a formidable competitor in the telecom and cable industries.

Some states, regrettably, have banned or restricted the practice. In Nixon v. Missouri Municipal League, the Supreme Court interpreted so-called vague language in the Telecom Act of 1996 to allow states to ban or restrict municipal networks through state law. (47 U.S.C. § 253(a) states that “No State or local statute or regulation, or other State or local legal requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service.” The Court interpreted “entity” not to include municipalities.) Nothing could have pleased incumbents more. In a number of states (including Wisconsin, North Carolina, and Virginia) incumbents fought tooth-and-nail to convince state legislatures to preclude municipal networks pursuant to this decision—or, short of that, to restrict municipalities in some way that raises entry costs. Incumbent mobilization has been daunting and impressive.

Where are we today? Almost twenty states either severely limit or restrict municipalities from erecting networks. Municipalities within those states must work that much harder to avoid legal sanction when starting a network, and the extra barriers may act as a complete disincentive to starting one at all.

Network Neutrality

At the end of 2010, the FCC announced its Open Internet regulation, forcing broadband Internet service providers (ISPs) not to block traffic, not to unreasonably discriminate between traffic, and to be transparent about their network management practices. The response was cacophonous, many viewed it as not going far enough, including this author; others thought the regulation did too much, including the House of Representatives.

What was the problem the FCC was trying to address? Increasingly, ISPs want to create a “smarter” network (as opposed to the traditional “dumb,” non-discriminating network that treats all traffic equally regardless of content) that will filter, on its own, “harmful” traffic (spam, viruses) and anything else the network owner wishes to filter. But, as the FCC Order states, ISPs have an incentive to discriminate against certain traffic opportunistically: ISPs can threaten any content provider with slowed speeds or blocked access over its network unless that provider pays an extra fee, so-called pay-for-priority contracts. (For example, assume Comcast tells Amazon it will not carry the website unless Amazon pays Comcast X% of its profits, or $X per year.) Larger content providers could arguably afford this. Smaller content providers and up-starts certainly cannot. Either way, this is not a result that will benefit Internet commerce or the free and open exchange of ideas and content. It is axiomatic that most (read: all) large content providers were at one point a small up-start, often created by college students in a dorm or in a garage. If ISPs were able to strangle content providers with pay-for-priority contracts or similarly stifling plans, they could be artificially cutting-off future YouTubes, Facebooks, Apples, and Microsofts. Working in the counter-factual is difficult, but it is at least feasible that opportunistic use filtering technology favors the status quo at the expense of future innovation.

One potential solution to this content filtering threat is municipal broadband. While private ISPs may have a motive to filter content to gain a competitive advantage and increase profits, municipalities may not have to run the network for such a narrow benefit. Instead, a city government could run the network in a way that favors the public interest and the prosperity of its citizens—such as making it widely available for a low (or no) price, or using it to promulgate emergency warnings akin to the (failed) FCC/FEMA National Emergency Alert System test late last year, but on a much smaller scale (think about cities in Hurricane Alley). If municipalities running their own networks were to pledge to leave Internet traffic alone and to deliver packets under the current best-efforts system, the network neutrality issue could be solved for citizens of cities electing to enact this type of plan. Users would have increased choice. Even if the private ISP provided faster speeds to certain content, the user could still choose the municipality’s network instead if the user decided that he or she preferred the non-discriminating best-efforts system. This could provide a reprieve from the contentious network neutrality debate by allowing municipalities to own the network and to make the rules it wants.

Some may argue that the public interest lies in the “free market.” But unregulated markets thus far led to the Summer of Love (where the large telecom companies split the U.S. into different regions to establish regional cable monopolies (see p. 250 in link), skyrocketing prices (at much higher rates than inflation), and little rural buildout. If municipalities agreed to keep their pipes open to all content providers and users, it could avoid opportunistic filtering by private ISPs and monopoly rents that result from one high-speed (cable) provider. In other words, the Internet and access to it would be cheaper and more open, consumers would be happier, innovation would flourish, and local businesses could compete on a level playing field (to name just a few benefits). Another benefit is bridging the digital divide.

Bridging the Digital Divide

The digital divide has in some sense worsened as wealth and income inequality in the United States has been exacerbated. While it seems that many, including the poor and many minority groups, own smartphones, the affluent own them in much higher numbers. The poor that do have access to these technologies have access to only a limited supply and are often lower-quality, and low-income users do not use as much bandwidth as the affluent.

What is the problem here? The problem is that in the information age, the most valuable commodity is information itself. The Internet is used by hundreds of millions around the world to learn about breaking news, to take online classes (MIT now offers certificate programs through online courses), to view funny or interesting videos on YouTube, to debate politics, and to read super-interesting blog entries about municipal broadband (for more, see Brett Frischmann’s Network Neutrality chapter in his upcoming book, Infrastructure). Increasingly, low-income individuals are being left behind because they are less likely to learn about breaking news, take online classes, or access most things others with high-speed cable connections can access with ease. If low-income individuals do not have access to the information that can inform and inspire, how are we supposed to live the American dream?

Municipal broadband can provide a solution: affordable or free broadband Internet access for everyone. St. Cloud, Florida, despite ending its service, reported that those who used its Wi-Fi network were often the same people who were unable to afford private ISP service in St. Cloud. This was clear when the city determined it would shut down the service, and those citizens loudly voiced their opposition. “St. Cloud is not a hick town anymore . . . . We’re country folks, but we’re not backwards. One of the reasons for that is our Internet.” Corpus Christi, Texas, also provides free Wi-Fi successfully, which allows anyone in the 147-square mile town to access the Internet for free at a high speed. The Digital Divide Committee in Lafayette, Louisiana, determined in 2005 that municipal broadband can help bridge the digital divide. That is still very much true today: with more affordable (or free) services, lower income citizens are better able to access the high-speed Internet.

Municipal networks only go so far. A lingering problem is the inability of the poor to afford the technology to access the network. That is why some municipalities (Philadelphia, Lafayette) made it part of their mission to provide the tools to the people that need them, including computers, software, and training. Though, even without these programs, municipal networks still provide cheap Internet access, increasing the chances of bridging the digital divide.

Much, Much More

Social and economic benefits abound when a municipality implements a network. Bristol, Virginia, and Chattanooga, Tennessee, are seeing businesses move to their cities in part because of the excellent municipal network. Corpus Christi, Texas, has seen the spring break tourism sector boom while still being able to ensure the safety of visitors through constantly streaming video cameras. Santa Monica, California, lowered telecom costs for local businesses by 67% by leasing capacity directly to local businesses. That competition lowered private ISP prices by 20%. Many municipal networks include smart systems that increase government efficiency (Corpus Christi’s network, for example, began as a system for Automated Meter Readers after a meter reader was bit by a dog). Hospitals use the networks for tele-medicine in Santa Monica and Bristol. Best of all, municipal broadband networks can be run by people who actually prioritize the well-being of customers, rather than distant shareholders. Bristol employs local citizens for customer support, meaning customers are treated with respect. As a gauge, six of the top nineteen most hated companies are telecommunications or cable companies. Having exemplary customer service can go a long way toward making citizens happy.

Many benefits accrue as a result of municipal broadband. Just ask Bristol or Santa Monica: both municipalities have setup consulting organizations to help other municipalities in their attempts to create city networks. The benefits contribute to a healthy, vibrant community and an efficient government. Municipal broadband can be the gateway to social and economic prosperity. A municipality would be silly not to at least consider providing broadband access itself.

Barriers to This Potential Solution

First, Nixon v. Missouri Municipal League is a significant barrier to this solution. Incumbents have secured their effective monopoly in many regions of the U.S. in the shadow of this decision. A simple solution would suffice: Congress should amend the Telecom Act of 1996 to expressly include municipalities within the definition of “entity” such that states would not be able to enact legislation preventing them from offering broadband services. However, this would be very difficult—read Lawrence Lessig’s book Republic, Lost to figure out why. (Hint: money distracts Congress, and who has all that money?) Therefore, the best we can hope for at this point is to convince state legislators not to ban or inhibit municipal networks. But again, ask Lawrence Lessig about this—he fought valiantly, but unsuccessfully, against the North Carolina municipal network law erecting significant barriers to municipal networks.

Second, there is only a limited, concerted effort to actually bring municipal broadband to unserved or underserved areas (Local Institute of Self-Reliance and New America Foundation’s Open Technology Initiative are both working to spread municipal networks, but we need more). Municipal networks are significant undertakings, and without outside help to plan these complicated networks, the amount of work and planning required can be intimidating for a small municipality (that is, if a city network on is the municipality’s radar in the first instance). Many municipalities either do not know this is possible, do not know where to begin, and/or do not know what such a network would look like. A significant coordinated effort to inform and execute such networks would be a tremendous boon for the growth of municipal networks, and could go a long way in solving network neutrality, the digital divide, and many other issues.

Third, there is simply not enough attention being paid to this issue, and the attention that is being paid is largely from the incumbent side (someone has to fight/smother the little guy, after all). There is only a small number of public interest organizations dedicated to this issue. Perhaps more organizations (or people within these organizations) would help give the idea some publicity and help launch it, or perhaps it would not. Either way, ask the typical citizen whether he or she knows what municipal broadband is, and chances are you will get a blank stare. But, ask him or her to comment on Internet, phone, and cable prices, and you will get a diatribe about the horrific provider. There is a disconnect here—people see and live the problem, but cannot see, and definitely do not live, the solution.

Conclusion

If municipalities were the primary provider of Internet access in America, the Internet would look and feel generally the same as it does today. The difference is in the future. There are two divergent paths ahead: one where the private ISP is able to seize a chokehold over traffic that moves across the Internet’s pipes, capturing every opportunity to monetize on that chokehold; the other is where communities themselves slowly become an increasingly powerful player in the next-generation Internet access industry, and can say to incumbents that their monopolistic behavior will no longer be tolerated. The path we take largely depends on whether citizens are able and willing to make important decisions about how they are governed by their municipality, and whether they can give municipalities a chance to compete with private ISPs. In today’s political culture, deregulation at the federal level is all the rage, which may indicate an increased tolerance for local governments to play a heightened role in the lives of its citizens. It would be one form of pulling us up by our bootstraps.