Sunday, October 31, 2010

UTOPIA: A Costly Lesson in the Failure of Government-Owned Networks

Back in the news this month is UTOPIA, a broadband network venture of several Utah municipalities facing mounting debts. As recently covered in Communications Daily and other news outlets, UTOPIA member cities are considering a $60 million bailout to sustain the project. With local taxpayers potentially on the hook for even more money if the pricey bailout plan fails to make good on its promises, UTOPIA provides an unfortunate – but highly instructive – example of the financial perils of government-owned broadband networks.

Government ownership and operation of broadband networks poses potentially serious problems and pitfalls. Threshold concerns raised by government-owned broadband networks include whether government might use its taxing and rights-of-way powers to its give its own networks advantages over existing or potential private competitors, whether government has the institutional incentives and competency to provide advanced information services undergoing rapid innovation, and (particularly in the case of UTOPIA) whether taxpayers are sufficiently protected from financial failures. Whatever the potential upshots to government-owned broadband projects may be, the potential downsides should strongly caution any community against getting their government in the business of broadband business.

When it comes to government-owned broadband networks, a cautionary case in point is the struggling UTOPIA – the Utah Telecommunications Open Infrastructure Agency. UTOPIA member-city governments built and operate a fiber network, also allowing private ISPs to use the infrastructure to offer services. Launched less than a decade ago, the project was initially funded by a $185 million bond issue for which member cities have (thanks to refinancing) pledged over $500 million to back with sales tax revenue if subscriptions fall short.

In fact, subscribership has run far below the project's initial projections. UTOPIA initially predicted it would run fiber to some 70,000 homes and businesses in six of its member cities and achieve a 40% subscription rate by 2008. The Salt Lake Tribune reported this summer that UTOPIA only had around 10,000 subscribers. The Salt Lake Tribune also reported that "[i]n January, Utopia called on its member cities to begin covering the network's bond payments, something the original Utopia promoters promised never would happen."

UTOPIA has never covered its annual operating expenses. It lost $51 million alone in fiscal year 2009. One recently reported estimate put project loses at approximately $250,000 a month. The Utah Taxpayers Association claims that UTOPIA's budget projects 2011 losses of approximately $20 million.

If the ups and downs and the business failings of some telecommunications and broadband technology companies over the last fifteen years teach anything, it is that the broadband Internet marketplace is competitive and tumultuous. Some companies are winners, and others are losers. And when private broadband providers fail, private company investors and shareholders are saddled with the financial losses. But when government itself becomes a broadband provider – banking its projects with municipal bond issues and backing them with direct taxes – then citizen taxpayers are ultimately left holding the bag whenever government broadband network projects go belly up. Meanwhile, the active presence of government-owned broadband networks can discourage or delay private providers from expanding their operations or entering into the market to bring consumers competing, sustainable services.

So UTOPIA's prior losses and potential future losses should be cause enough for serious concern by UTOPIA member-city citizens. But as pointed out earlier, UTOPIA member cities have now begun deliberations on a UTOPIA bailout plan that includes an approximately $60 million bond issue to sustain the project. At least a handful of UTOPIA city governments have already pledged to throw more money into the project.

Unfortunately, some of the proffered reasons for propping up UTOPIA are less than persuasive. UTOPIA backers have made much of a feasibility study purporting to show how the chances for a turnaround are plausible if certain changes and large infusions of new money are put into the project. Keep in mind, however, that it was overly optimistic plans and studies of that kind that helped launch UTOPIA in the first place. Given how UTOPIA subscriptions and revenues have not panned out as previously planned, isn't a strong dose of skepticism warranted when considering new proposals to inject even more taxpayer money into the project?

Also keep in mind the much-cited feasibility study was performed by a private consulting company providing a variety of support services to government-owned broadband projects, including network design and build-out. This is not an imputation of bad motives behind the study, but the source does suggest an inherent lack of impartiality that should be factored in to any evaluation of the study. Not to be forgotten, Communications Daily and other outlets report that the Utah Taxpayers Association claims additional factors were not included in the feasibility study, such as potential future competition and demographic analysis of its prospective subscriber base. Given the financial stakes of a UTOPIA bailout, those claims are certainly worth exploration and could shed additional light on the study's merits.

Finally, no one should be impressed by the rationale that additional funding is necessary to save prior financial commitments from ruin. One might call it the government-owned broadband equivalent of the "too big to fail" meme. By itself, the claim in no way establishes that investing new funds will salvage a faltering business. And however one tries to answer the question of whether a $60+ million bailout of UTOPIA will, in fact, make the project sustainable, outside observers should see UTOPIA as an example of how faltering government-owned networks can back local government officials and taxpayers into a corner. UTOPIA member-cities and their citizens now have to either accept big losses or incur additional losses in the hope of cutting those losses while risking further losses if the project continues to struggle.

There may be good reason in some circumstances for government to run its own proprietary networks in order to carry out governmental functions. And there may even be instances where total lack of broadband service availability in remote areas might make limited government involvement a plausible option. (The latter seems increasingly less likely as wireless broadband and satellite broadband services continue to be rolled out.) But owning and operating broadband networks involves unpredictable capital and operating costs, market uncertainties, and financial risks that taxpayers should prefer not to be responsible for. The ongoing struggles of the dreamily-named UTOPIA should serve as a warning to others — and particularly to taxpayers — about the real-world hazards of government owning and operating broadband networks.