The risky ROI on municipal broadband
Over half of municipal fiber projects generate negative cash flow, a new report finds.
What: “Municipal Fiber in the United States: An Empirical Assessment of Financial Performance,” from the University of Pennsylvania’s Law School and the Center for Technology, Innovation and Competition
Why: Municipalities hoping to attract tech-savvy workers and businesses often consider investing in broadband infrastructure, but little evidence exists on the financial viability of such projects. This analysis of specific projects reveals that the risks are substantial, so officials considering a municipal fiber project should carefully assess whether their effort can deliver on its promise.
Findings: Of the 20 municipal fiber projects that break out the financial results of their broadband operations studied from 2010 to 2014, researchers found that 11 generated negative cash flow.
Of the nine cash-flow-positive projects, five have cash flow that is so small that recovering project costs would take far longer (sometimes more than a century) than the 30- to 40-year expected useful life of a fiber network.
Two potential success stories are discussed. Bristol, Tenn., is on track to recover its project costs within a reasonable life expectancy. The network in Vernon, Calif., generated enough cash flow from 2011 to 2014 to cover its project costs, but it targets primarily business customers, making it an atypical example. In all, seven case studies are presented in which factors for success or failure are discussed.
From the data, the researchers constructed a hypothetical model for the first 14 years of a municipal fiber project and found the time to recover the adjusted project cost per household extends to 125 years.
Acknowledging the small sample size, researchers said their results “should be interpreted with considerable caution.” Yet the results suggest that “the manner in which a municipal fiber project is operated, both in terms or generating revenue and minimizing operating cost, play a more critical role in the success of a municipal fiber project than the upfront capital costs.”
Verbatim: “The simple fact is that financial solvency matters regardless of the presence or absence of other benefits.”
Read the full report here.
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