Engler's Broadband Ambition

Gov. John Engler's ambitious plan for state control of high-speed Internet lines gets its first hearing in the Legislature today. In considering the proposal, lawmakers would do well to heed the dismal results of similar schemes in other states.

The governor is pressing for swift passage of a new $50-to-$70 million tax on telephone and cable lines with which to subsidize deployment of broadband statewide. An accompanying measure would authorize the state to own and operate portions of this fiber optic network. (Synopses of S.B. 880 and 881 are available at www.michiganvotes.org.)

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But the collapse of technology stocks and the failure of comparable ventures in other states illustrate the risk to taxpayers in gambling on a volatile industry. Suffolk University researchers, having studied government provision of Internet services, recently concluded: "Entering the broadband market is not like providing sewer or electrical service. Supplying broadband services is an unruly, rough-and-tumble business."

Even as savvy a player as the Enron Corp., once the nation's largest energy broker, miscalculated this complex industry. Much like Gov. Engler, Enron officials figured that everyone everywhere is itching for broadband access. But the company recently went belly-up after investing more than $1 billion on 40 million miles of fiber-optic cable for which little demand materialized.

Well-intentioned though it may be, government is far less equipped than the private sector to play entrepreneur. Impelled by political rather than economic forces, government cannot respond to market signals that force fiscal discipline and efficiency. As James Q. Wilson notes in his book Bureaucracy: "The Ford Motor Company should not have made the Edsel, but if the government had owned Ford it would still be making Edsels." Meanwhile, the tax and regulatory advantages enjoyed by government ultimately distort prices, thereby inhibiting the very economic growth it supposedly seeks to promote.

This is more than just theory, as demonstrated by the experience of other states.

Miles of empty cable conduits now crisscross the Twin Cities, a consequence of Minnesota officials pulling the plug on a $200 million plan to wire the state. The "Connecting Minnesota" project granted exclusive rights-of-way for network infrastructure to a single contractor in return for a 20-percent cut of broadband capacity. But uneconomic requirements demanded by the state, such as rural deployment (a key element of the Engler plan), scared away investors. And unable to attract financing, the project folded. As Project Director Adeel Lari, told Newsbytes.com: "The times changed, and that (original) business model doesn't work now."

Iowa invested $350 million to lay 4,000 miles of fiber optic cable. But the Des Moines Register reports that the network is experiencing "more failures than ever" because the state lacks the revenue for basic repairs. U.S. taxpayers, meanwhile, are bailing out the system with a $3.1 million outlay to keep school connections operating.

California, too, launched a state-owned telecom system in hopes of saving money by aggregating the state's demand for broadband — another feature of the Engler plan. But after wracking up some $20 million in debt, officials privatized the system. Said Peter Stamison, director of California's Department of General Services: "Running a telephone company is not a core competency of state government."

Montana took a different tack in 1999, becoming the first state to offer tax credits for broadband deployment. But budget constraints forced suspension of the program.

Municipalities have fared no better. Officials in Tacoma, Wash., for example, raised electric rates to cover the cost overruns of the city's Click! Network. Higher property taxes are being considered in Paragould, Ark., to repay bonds sold to maintain the municipal cable service. And so uncompetitive is the service run by Scottsboro, Ala., that local officials actually petitioned the Federal Communications Commission to prevent business rivals from offering lower rates.

The perils of the Engler plan are all the more unjustified considering the availability of broadband here. The state ranks 10th nationwide in the number of high-speed lines, and 11th in the number of broadband service providers. The Telecommunications Association of Michigan reports that T-1 lines are available across 91 percent of Michigan's rural telephone exchanges and nearly 100 percent of Ameritech exchanges. Some 73 percent of the state has access to cable-modem broadband.

To the extent broadband access does lag in rural areas, it is the unavoidable consequence of higher costs associated with serving sparse populations. Rural telephone companies, for example, serve only 19 households per square mile on average compared to thousands in major cities and suburbs.

There is a role for government in promoting broadband: To eliminate the tax and regulatory obstacles that inhibit deployment. As the experience of other states makes clear, however, anything more invites higher costs and fewer choices for consumers.

"There is a role for government in promoting broadband Internet access: To eliminate the tax and regulatory obstacles that inhibit deployment."