Crazy Talk from Another Telco-Funded Think Tank - Community Broadband Bits Podcast 200

Chris Mitchell: Welcome to another edition of the Community Broadband Bits Podcast. I'm Chris Mitchell, and today I'm with--

Lisa Gonzalez: Lisa Gonzalez. Hey everybody.

Chris Mitchell: Hey. Did you see that coming?

Lisa Gonzalez: See what coming?

Chris Mitchell: You. Today we're doing another of our crazy talk series.

Lisa Gonzalez: Crazy.

Chris Mitchell: We haven't done one for while, but boy, while we've been gone the talk has gotten crazy. In particular today we're going to talk about a report from the-- I would say somewhat Orwellian State Government Leadership Foundation, and the report written by a doctor, George S. Ford. A guy who strikes me would insist that you call him doctor. The title of the report is the impact of government owned broadband networks on private investment and consumer welfare.

Lisa Gonzalez: What do we know about Dr. Ford, Chris?

Chris Mitchell: The funny thing is Dr. Ford is like one of those mercenaries. He does what his employers tell him to from what I can tell. More than ten years ago when AT&T-- For people who aren't familiar with the history we'll go through it a little bit, but AT&T used to really like competition. AT&T used to be a long distance company that was not allowed to engage in local competition. Then SBC, one of the former mobile companies that got broken up, they bought AT&T. AT&T went from a company went from a company that really like local municipal networks to being a company that really did not like local municipal networks.

Lisa Gonzalez: Imagine that.

Chris Mitchell: When that happened, the Phoenix center, George S. Ford, these guys that had a long history with AT&T, overnight went from being, "Yay! Municipalities and local competition," to, "Boo municipalities and local competition." He actually wrote a report and I'm just going to pop it up here because it was about 2005, he was looking in Lake County in Florida, and he determined that it was very clear that municipal networks actually encouraged competition rather than discouraging it. Now he changed his tune, but all along I've found him to be very unimpressive. When you read this report, if you actually know what's going on in this space, you quickly realize this guy has no idea what's going on. This guy likes math.

Lisa Gonzalez: He does. He likes graphs too.

Chris Mitchell: I like math too. Lisa, have you ever heard of this idea of you can't actually get across the room, because to go across the room, you have to go halfway, and then you have to go halfway again, and you can never actually get there because you're always just going halfway.

Lisa Gonzalez: Going halfway, yeah.

Chris Mitchell: That's interesting, but fundamentally we go across rooms all the time, and there's a kind of math that I think this guy uses. It's this idea of I'm just going to fool you with numbers, and I'm not going to actually talk about reality. I'm just going to develop these formulas, and the formulas have to be right because they add up, and they are at the both sides, on each side of the equal equation. I find it unimpressive when people try to use their math skills to describe fields that they clearly don't actually know anything about.

Lisa Gonzalez: Things are different on paper than they are in real life.

Chris Mitchell: That's absolutely true. Lisa, you read over this report. Did you have a similar reaction in terms of just the assertions that he makes?

Lisa Gonzalez: I thought all this is fine as long as it's in a vacuum.

Chris Mitchell: Right. If this was a different universe with-- I can understand his points, but when he says things like, all municipal networks were subsidized, that's remarkable.

Lisa Gonzalez: How does this report compare to others we've seen that are of course-- Besides the fact that you are unimpressed?

Chris Mitchell: If you pick out just one item, and this is coming from page V of the report.

Lisa Gonzalez: In the executive summary?

Chris Mitchell: Right. When I read this at first, I read this and I was kind of like, "That actually sounds like municipal networks are doing a pretty good job." He says, "Municipal systems regularly obtain 60% market share and remove major anchor tenant from private networks." If that was true, that would be amazing. That would suggest that every municipal network had more than a half of the-- They're usually competing against two other firms, so that would mean that they had just basically conquered that market. This is kind of the direction Chattanooga is heading in.

Lisa Gonzalez: There would be a big scramble.

Chris Mitchell: It's preposterous frankly. A lot of municipal networks have between thirty and forty-five percent market share. They are doing well. They are paying their bills, that's why they need the cash flow. They don't have sixty percent, sixty percent is ludicrous. I think the biggest number that I've seen came from 2009 when the average number of systems had fifty-six percent market share. And since then that number has dropped dramatically because those were generally systems that were in less competitive areas. Municipal networks that have been built in places like Chattanooga, Chattanooga being the outlier in that they have over fifty percent now, most of them don't' achieve over fifty percent. So they are pulling that average down. I don't know where he got this sixty percent market change.

Lisa Gonzalez: That's what I was wondering, did he just pull it out of the air, or--

Chris Mitchell: The second thing is that the claim from industry is overwhelmingly that municipal networks are failures because nobody wants to sign up because they are poor service and what-not. Well this directly contradicts it. And in fact, when you read this his claim seems to be that municipal networks are too successful and that they are somehow cheating. Right? They are cheaters.

Lisa Gonzalez: Oh, right because they are too successful.

Chris Mitchell: Again, in a vacuum this sort of stands for itself, but this very much negates all the other criticism against municipal networks if it were correct. Which unfortunately is actually not correct.

Lisa Gonzalez: Right.

Chris Mitchell: We know that municipal networks do not regularly obtain sixty percent, that is just-- they don't need to obtain sixty percent, I'm sure they would want to obtain sixty percent, but they're competing against at least two others providers. Generally a telephone company and a cable company, so they are not obtaining that. When someone has no sense of even the basic facts of how these systems operate. In other cases he talks about how they don't regularly compete against a cable and telephone company because they wouldn't build them in areas where there is already cable and telephone investment. He doesn't understand that DSL is not good enough. That cable is not good enough. He doesn't understand the track record for municipal networks. He doesn't understand why communities build them and he has no sense of what subsidies are which I think is something that we're going to talk about.

Lisa Gonzalez: Well, lets talk about subsidies. I remember in the paper him bringing up subsidies. First of all, he assumes that municipal networks all have to start with subsidies.

Chris Mitchell: Right, and he says he's going to prove it, and he proves it by--

Lisa Gonzalez: Where did I miss that?

Chris Mitchell: It was in a footnote.

Lisa Gonzalez: Oh.

Chris Mitchell: He kind of points to a couple of arguments from a few people here and there in which they talk about how local governments could go about funding and theoretically-- it's sort of like, to a local government, these are different sources you could tap into. That certainly doesn't prove that they're subsidies. Lisa, you've done a lot of work on this, how many networks have you seen, would you say that half of them are subsidized?

Lisa Gonzalez: No.

Chris Mitchell: Yeah, I wouldn't either. Most of these networks are--

Lisa Gonzalez: To him he said that they are non-starter unless they are subsidized.

Chris Mitchell: Right, that's one of the things, and in part he justifies that because he claims that municipal networks are only being built in areas where there is no investment. Or where there is low investment--

Lisa Gonzalez: Yeah, the valleys of death. How would you like to be one of the people who like to live in a valley of death?

Chris Mitchell: Right, and there again he is confused.

Lisa Gonzalez: How offensive!

Chris Mitchell: Well, he's confused about the difference between zero service and crap service.

Lisa Gonzalez: Uh-huh.

Chris Mitchell: Maybe he's had a good experience maybe he has a small provider that meets his needs. I don't think that he's an AT&T customer, out in the end of the line basically. He would understand then that these are networks that are built in areas that have some crap service. It's slow DSL, it's unreliable. I just actually was talking to people in Iowa where one of the big companies, I think it was CenturyLink, would tell businesses, "sorry, we're not sending someone out to fix that problem until there's multiple people that have a problem and we can roll a truck. You know, we aren't just going to send it to fix your problem."

Lisa Gonzalez: It's not worth their time to send somebody out there. Okay, so subsidies--

Chris Mitchell: So then he talks about subsidies and he talks about Chattanooga was subsidized because it got a grant. He claims Sandy, Oregon got a grant. I think he's actually confusing Sandy with the county in which it sits. Let's just take that and assume that these grant programs, which gave a lot of money to the private sector, and gives some money to the public sector.

Lisa Gonzalez: Yeah, i was like why are you even going here? You know?

Chris Mitchell: Because in his world everyone is subsidized.

Lisa Gonzalez: Yeah.

Chris Mitchell: AT&T is subsidized, the cable companies are subsidized, and he's like municipal networks they're just winning because they are subsidized.

Lisa Gonzalez: I know, it's like what are they talking about? I mean-- and then he was talking about how subsidies should only be given to existing networks.

Chris Mitchell: Oh, yes. The right of first refusal, we come across this all the time. I actually have had a note for six months on my monitor reminding me that next time we did a crazy talk, I wanted to talk about the right of first refusal.

Lisa Gonzalez: Okay, talk away.

Chris Mitchell: Well, the right of first refusal says if you come upon an incumbent provider who has refused to invest in the community and is not doing a good job, the best thing you can do is throw money at them. It's so crazy. The problem with this sort of thinking is that if you're thinking to yourself I'm an independent entrepreneur I want to build the next great network, and maybe I'm going to try and get a subsidy or maybe I'm just going to try and compete in this area, but the incumbent has a right of first refusal. You're thinking to yourself "no, I'm going to go over to this other city where I don't have to deal with that crap. I don't want to have to deal with the right of first refusal." So the right of first refusal has all kinds of impacts and we're seeing this in Minnesota where if there is a grant program to try and boost connection speeds in an area between both a community that has some DSL and a surrounding area that has nothing really, but if you apply for funds to connect everyone then the incumbent provider might be able to challenge that and say I have the right of first refusal. Well that just means you are going to be taking those cities out of contention because nobody wants to go through the process of developing an application only to have it rejected by an incumbent. That incumbent had its opportunity, they've had their chance to invest. We've been talking about this for ten years, they've had plenty of opportunity to invest, they have not. The AT&T's and the CenturyLinks, they get all this money from the universal service funds, to try and do this. The co-op's get that money and they've somehow figured out how to go from copper to fiber in a lot of areas. CenturyLink's gotten that money and they've figured out how to give it to their investors, and to the shareholders, and to their executives and in obscene pay. I have no patience for this right of first refusal nonsense, and the idea that the most efficient way is to--

Lisa Gonzalez: Right, and that's his argument. I think the phrase he uses is it's clunky to start with a new entrant receiving a subsidy when a firm that's already in the market, has their processes all figured out, they've already got some equipment and some lines in the market and all that. That's his argument.

Chris Mitchell: So let's just make this point, it presupposes in this world in which you are this guy this 'dr, dr, dr' kind of guy who is very much "I know math". It presupposes that there is this product called broadband and you can get it from AT&T, and from Chattanooga, or from Sandy, Oregon, and it's the same thing, right? Tell me, is it the same thing?

Lisa Gonzalez: Well that depends. No, it's not the same thing, you know. But if I were Dr. Ford I would say "well yes, it's the same thing. For what people need it for today who needs a gig?"

Chris Mitchell: Well, I'm glad you asked that. This is something that we have a video that's going to be tackling in a very short time, a very short video that is going to be tackling that. It's not just about who needs a gig and that is a question that is certainly raised as a diversion. The question is I could pay forty or fifty dollars a month and I could get fifty megabits symmetrical, or a hundred megabits symmetrical of a high quality network. In which when something goes wrong I have customer service that works, I have fewer outages, when I need to talk about upgrading I can talk to somebody who is actually a human being. There is all kinds of things that go along with that, that you don't get. But in his world in this world of just numbers, where you only look at the things that you care about, when the people who are writing the checks who are paying for the report care about, when you are in that world then you can just pretend like AT&T is the same thing as Chattanooga or Verizon is the same thing as Chattanooga, and that's an example I've used many times. If Chattanooga had gotten Verizon FiOS, which is practically the same sort of fiber-optic technology, it's very similar gear and network architecture, they would have thousands of fewer jobs. There would not be people flocking to Chattanooga to set up new businesses because these things are different. The service you get from a municipal fiber-network in this way is fundamentally different, and when you look at a cooperative like RS fiber here in Minnesota, the kind of service they are going to have in ten or fifteen years from the fiber network is going to be far different than if CenturyLink had suddenly decided to build it, because CenturyLink is not going to invest in the community. They are going to harvest profits out of the community, they are going to suck stuff out of the community, and nowhere do those sorts of things come into his analysis.

Lisa Gonzalez: Okay, so you brought up the idea or the concept of economic development and jobs, let's shift to that because that is also in this report. We all the time see how the municipal networks are good for economic development and Dr. Ford talks about economic development, not so much as development as relocation and how municipal network may bring jobs to a community--

Chris Mitchell: It's job stealing, Lisa! It is job stealing.

Lisa Gonzalez: To be honest, look at Westminster. They took a business away from New York. There was this women's' clothing distributor who called Westminster even before the network was there and said, "Hey, we're looking to move."

Chris Mitchell: That, in the words of Dr. Ford, I believe that would be acceptable job stealing because that is job stealing that came about as a public private partnership, and public private partnership job stealing is different from municipal network job stealing.

Lisa Gonzalez: You say tomato, I say to-ma-to.

Chris Mitchell: But here, this is a good question, this is something I thought was very smart. Rick Perry ran for president saying, "look at how great I've been, I've built all these jobs in Texas." People pointed out when you are President of the United States you can't do what he did in Texas. When he was in Texas he went around the country telling other states, to the companies in those states, move to Texas we won't tax you, and people moved there. Now if he's the president of the United States what's he going to do? Tell the businesses in Ireland or-- that is not how this works. In fact, in the interview we did last week with Valparaiso I made this point and in part I may have been knowing we were going to have this conversation, but we made the point that very clearly that municipal networks often come as result of jobs, of businesses within the community that want to expand. That are worried frankly if Valparaiso had not developed this plan then its businesses would be the ones that would be moving to other cities. And so, it's not a matter of job stealing, the larger picture is one-- in Dr. Ford's world there are a certain amount of jobs in the economy and the economy is a certain size and that doesn't change. I don't think that's accurate. I think that when we have more productive investment that allows more innovation, we have the economy grow and there are more jobs than there would have been otherwise.

Lisa Gonzalez: He totally left out the whole idea of innovation.

Chris Mitchell: And there are so many communities, so many people that are like that. They didn't bring a job to Chattanooga, they moved themselves to Chattanooga to create a business and in the future those businesses will be creating jobs, we hope. This is so ludicrous, and it's so-- I wouldn't expect an economist to make such an elementary error in ignoring the role of innovation. I really think this is one of those things that's just a hack job. I don't know why people take this seriously, I have to assume it's because most people don't actually read it. They look at the title, they look at a short report about it that was written by a reporter who may have skimmed a part of it, to take it seriously. This is a joke. This is not interesting. This is not even moving the debate forward in terms of challenging cities as to why they are actually doing this because this guy has no idea why they are building networks. He has no idea what happens when they do. He has no idea how to critique it in a way that might challenge them and force them to do a better job of it. This is really just garbage in so many ways.

Lisa Gonzalez: I think you should invite Dr. Ford to call you.

Chris Mitchell: I would love to have Dr. Ford on the phone. Frankly, I don't want to waste my time trying to convince him to come on the show, but if he's interested than I would be very happy to have a conversation with him, and that's true of other people who oppose us as well. We had a wonderful debate with Ryan Radia from the competitive enterprises institute. I'm somewhat loath to have people on that will just lie. To some extent-- I say that because I have a lot of respect for Ryan, and I have strong disagreements with him, but I have not seen instances in which he just says things that are not true.

Lisa Gonzalez: Right.

Chris Mitchell: Dr. Ford I don't think is a liar, I just think he has no idea what he's talking about. He get's paid to go off in his little fantasy world and talk about these models that have no bearing on the reality that we see.

Lisa Gonzalez: Okay. I also want to address another thing that Dr. Ford brought up in the paper, and that deals with state laws, because he'd also mentioned how there are state laws that have been passed, and we've talked about this so many times on our website and I'm sure the people who are listening know exactly what I'm talking about. In his paper he says the state laws that have been passed, and have been accepted as having sound economic basis.

Chris Mitchell: So there is a couple of different things. One of the things that one is struck by reading this is that this organization, the State Government Leadership Foundation talks about how we need less dictation from Washington.

Lisa Gonzalez: Yeah, well shouldn't they be able to decide for themselves?

Chris Mitchell: And the next sentence he should have said we need more dictation from the State Capitols because these are not people who want local communities to have any freedom. They want to be the ones to tell local communities how it is, and they just don't like Washington. Not because they are opposed to preemption, but because Washington is not them. It's not cohesive argument. This is just a bully that's mad that there's a bigger bully out there.

Lisa Gonzalez: Well they are just protecting the people. They are trying to protect people from making bad choices.

Chris Mitchell: There is an argument for trying to protect people from making bad choices, usually these are the people that call that the nanny state--

Lisa Gonzalez: They get to vote. They get to vote on these things.

Chris Mitchell: So, the second piece is that they argue the focus of attention should not be in D.C. and again I would agree with them in terms of that. The focus of attention should be in the communities. This idea that D.C. doesn't get it but that the State Capitols do-- I don't believe that for a second. I think the State Capitols get it more than a lot of people in D.C. but at the same time the State Capitols don't really know what's going on in the communities. They just don't, and I see that of both the good people that I like, and of the good people that I don't like, in terms of the decisions that they make. They are generally removed from their communities because they are focusing on state issues. If we believe that the decisions should be made locally, which we do at the Institute for Local Self-Reliance, is so you don't get to say no. You're an employee for the Institute for Local Self-Reliance.

Lisa Gonzalez: You know I wouldn't say no. You know how I feel about that.

Chris Mitchell: Then this is an absurd point to suggest that we shouldn't have tyranny at the federal level, that we should have tyranny at the state level. That's great. So then they come up with this argument, and this is where I feel like it's perhaps not appropriate to make fun of this guy for perhaps being pompous or coming off as being pompous, but when you are claiming that you're the only person doing a serious economic analysis or whatever he's claiming in terms of how serious this is, and this is the only way you can analyze this sort of stuff. Then you act as though there is this thing called municipal broadband. Well that's dumb. That means that Santa Monica which took zero risk in building their network, using an incremental approach, and not spending any new money on it, and immediately creating a new revenue stream. That means that took the same amount of risk as a city that borrows hundreds of millions of dollars like Chattanooga did to go into competition with Comcast and AT&T. There are vastly different risk profiles. There are vastly different impacts in terms of the competitive environment. He even notes, he does note that open access is a different thing and then he kind of waves his hand a little bit. So there is not this thing called municipal broadband, there are lots of different models that have lots of different approaches. If you lay one fiber line from a trunk-line to connect your business park when you know that it's going to be paid off, that's no risk. That's entirely beneficial, I would argue. To somehow suggest that a state law that says "you can't take on zero risk projects, and you can't take on higher risk projects at the same time.." That's not a sound economic law. If you want to restrict, if you want to be in the nanny state, and you want the state to say, "we don't trust you local people, you're too stupid to make decisions for yourself." Then you should say okay, but if you want to do a really low risk approach then we will let you do that. I don't know of a state that does that. Every state basically-- because these were written by the telephone and cable companies that want to restrict all competition, all of these state laws basically say, "No, you just can't do anything." Which is not sound economic judgment.

Lisa Gonzalez: You mention that there's all different risk profiles but the highest risk profile of all are the places that don't do anything when they need to do something.

Chris Mitchell: Well, I certainly think that's true.

Lisa Gonzalez: One of the things that we talked about when we were making comments for the case that's before the appellate court right now is how in Provo the risk comes when the State has actually created a higher risk for them because they have to use a wholesale model. So it makes it harder for them to make any sort of money off what they're doing to continue their service.

Chris Mitchell: I think that's a really good example. So, Dr. Ford, Mr. Fantasyland-living guy, he is saying that the Utah law, which effectively says, "You know, cities, we think that this is kind of a risky business for you to get in and the only way you can do it is if you use the most risky model. That's the only way you're allowed to do it." That's a sound economic decision? No, that's ridiculous. It's the law that was written by the incumbents to stifle competition, that's what it was. It's not hard to figure out. From my point of view one of the things that one has to get from this is that they believe that the incredibly fast-growing movement of people. These fifty communities in Colorado that have just voted to reclaim local authority, and the ten more that did it more recently than that, and probably the thirty or forty that are going to do it the next time they do it on the ballot. They are all crazy because they just haven't understood that this things a failure and it's a disaster, and if only they would read the evidence. Every now and then I have these moments where I think what if we're wrong? And it's something-- one of the reasons I think we've had a lot of success is that we try to check what we say. We try to be very serious about that. I just keep coming back to the fact that there are high-risk models and there are lower risk models, and when we look at it-- these communities aren't lying when they talk about the benefits that they have seen from it. I understand whey there is such a temptation when you believe that another community is doing something wrong, to try to prevent them from doing it. What continually surprises me is the basic lack of work that our opponents do on this. To claim that these municipal networks tend to be failures and then to publish a report that says, "Yeah, but usually 6 out of 10 people in the community choose them for service." It's mystifying! Take a little bit of time to understand what you are writing about before you jump into the math.

Lisa Gonzalez: Because we can't keep up with correcting you.

Chris Mitchell: Right, it's a lot of work to read this stuff. You have no idea how many times I had to go *face-palm. You get a headache at a certain point when you read these ridiculous statements. Like 'municipal broadband is in almost all scenarios subsidized entry', and then when you figure out what he means by subsidized entry, he means everything, and there is no entity. I defy everyone to find an entity in the United States that has not benefited from what he would classify as subsidized entry.

Lisa Gonzalez: Yeah, anything but a bake sale.

Chris Mitchell: That's a subsidy, Lisa. A tasty, tasty subsidy. So that was it folks. That's another edition of crazy talk, perhaps a little bit crazier than usual. Love to hear what you have to think, if you think we should do more crazy talks, if you have any ideas for people we should talk to, or topics we should cover, reach out to us.

Lisa Gonzalez: Send us your cakes and doughnuts. That was Chris and I poking our fingers through the many holes of the recent report written be Dr. George Ford of the Phoenix Center. The center recently joined forces with the State Government Leadership Foundation to publish his report. If you want to read the transcript of this, or any other of our 199 podcasts, you can find a link to the index at the podcast page. Muninetworks.org/broadbandbits send us your ideas for the show, email us at podcasts.muninetworks.org. Follow Chris on twitter his handle is @communitynets. Follow muninetworks.org on Twitter, the handle is @muninetworks.org. We have new music this week. Thank you to the group Forget the Whale, for their song 'I Know Where You've Been'. License to creative comments. And thank you for listening to episode 200 of the Community Broadband Bits Podcast.

Thanks to Jeff Hoel for the typo corrections.