David Rodeback's Blog

Friday, April 28, 2006

Broadband's Economic Impact: Public vs. Private

In comparisons between municipal broadband systems and private industry's broadband offerings, measuring their respective economic impacts, it turns out there is a clear winner and a sound economic reason why.

Note: This is the third in a series of articles about municipal Internet broadband services, particularly AFCNet in American Fork, Utah.

Previous Article: Broadband's Economic Impact: Haves vs. Have-Nots

The previous article addressed the subject of broadband's economic impact generally. This article compares the economic impact of municipal and private broadband systems. It has some noteworthy policy implications for American Fork.

Studies of this topic are harder to come by than studies of broadband's effects generally, which themselves are still rather sparse. But there is an illuminating recent paper by economist George S. Ford and telecommunications attorney Thomas M. Koutsky, published last year in Applied Economic Studies . Ford and Koutsky compared economic growth in Lake County, Florida, which has a municipal broadband system, to growth in similar Florida counties where broadband is provided only by the private sector.

In summary, their findings are that Lake County experienced "a dramatic increase in economic growth" (as measured by gross sales, a common indicator), when the municipal broadband system became widely available. It was dramatic indeed: The growth rate in Lake County in the next few years approximately doubled that of comparable counties in the study, if you compare merely the totals. If you measure economic growth per capita, Lake County fared even better, comparatively.

Some of the benefits of municipal broadband come from the widespread availability of affordable broadband to businesses. But some of the benefits also come from making broadband affordable and available to residences, where home-based businesses, telecommuters, and students can exploit it. Even those who spend the work day in offices are often more productive if they can communicate effectively and work conveniently from home, before and after the business day. Broadband at home facilitates this.

Note the following details about the Ford/Koutsky study:

• Like American Fork's, Lake County's system is wired, not wireless. It is county-wide, but was mostly deployed by the City of Leesburg.
• The municipal system is widely available to hospitals, schools, and businesses, which to date is not the case in American Fork -- but should be.
• Lake County's population is about 250,000, or a little more than half of Utah County's and roughly ten times American Fork's population.

This leads us to another very interesting question: Why would it make that much difference whether government or the private sector provides broadband to the community? Ford and Koutsky explain this in relatively simple economic terms.

The Bureau of Economic Advisors estimates that a community receives almost three dollars of benefit for every dollar it spends providing broadband, but most of this does not go to the provider. In other words, most of the benefits are not accessible as profits, so the financial incentive to private industry is disproportionately small. Therefore the tendency is for a community's broadband needs to be significantly underserved by the private sector.

In the language of economics, we're talking about the presence of large externalities, or consequences of economic activity experienced by third parties. This is generally considered a strong indicator that public ownership of resources is desirable, if the full potential benefits are to be realized.

The policy implications of this for American Fork are the following:

• It really does make sense for a municipality to have its own public broadband system, because the private sector will tend to underserve the market. It makes sense to consider AFCNet a public utility, an essential part of the city's infrastructure -- like roads, water and sewer service, etc.
• Whether the fate of AFCNet is to be purely public, a public/private hybrid, or purely private, it is very much to the City's advantage to insure that it remains a citywide, affordable system, both for residents and businesses, in order to realize the full economic benefits of broadband.
• Much of the economic benefit of AFCNet is unrealized, because the system has not been extended to businesses, schools, etc., to any significant degree. This delinquency should be corrected with dispatch.

In summary, the available research demonstrates that broadband has a positive economic impact in a community (see the previous article), and that municipal broadband is a much better catalyst for economic growth than reliance solely on private industry (this article). The economic picture will be more complete after the next article, which is a discussion of why the positive economic impact of broadband was and is expected. Parts of the answer are obvious, and other parts are not.

Next Article: Broadband's Impact on American Fork's Economy and Quality of Life

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Copyright 2006 by David Rodeback.
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