Cities elsewhere in Michigan and around the country are regretting building government-run internet networks that their taxpayers must subsidize. On Aug. 2, Holland voters will decide whether they want to gamble that Holland can succeed where so many other cities have failed.
Holland voters should vote "no" on whether to impose a millage to subsidize a government-run internet system to compete with private companies already in the market.
What Holland is proposing is not unique, but at least Holland has the opportunity to learn what has happened elsewhere. Cities around the country launched municipal broadband systems that quickly proved to be financial failures.
The pattern is always the same. Local governments claim that private businesses are not providing adequate internet access and that they can do better. They make projections about how cheap the service will be and how many people will want to sign on. And then the actual results don’t come close to the rosy predictions.
Take the Traverse City public broadband system. Its proponents said it needed at least 40 percent of the city residents to sign on to break even, which they predicted would happen by 2021. Yet the latest financial report for the Traverse City utility shows it has only 640 customers — half of the number needed to break even, and revenues are only 39 percent of pre-construction projections. The Traverse City internet operation just took out a $14.7 million loan to stay afloat, and claims it still needs to come up with another $3.2 million.
The City of Marshall’s public broadband system isn’t faring much better. Although it may be at least covering operating costs, the Marshall broadband operation failed to pay back a loan from the electricity side of the utility. In March, Marshall had to raise internet rates to cover the failure to repay the borrowed funds. The head of the Marshall project even bragged before the project launched that the city was giving their own project some major regulatory advantages that were not extended to private companies considering expanding in Marshall.
Local government internet boondoggles are hardly unique to our state. A 2022 study found that 87 percent of government-run internet systems in the United States have not generated enough cash flows to put them on track to achieve long-run solvency, and 73 percent generated negative cash flows over the past three fiscal years, causing them to fall further into debt.
The Aug. 2 ballot proposal would authorize the millage for up to 25 years. Internet technology today is far different from 1997 technology. It is nearly certain that today’s technology will be outdated long before 2047. When that happens, Holland residents will be locked into paying for a wire network offering far worse performance than the private-sector alternatives of the near future. Sports teams often end up regretting the long-term contracts they offer to superstar players, but at least their contracts are not for 25 years.
Indeed, the transition away from wired broadband has already started. Many people, especially younger internet users, are already cutting the cord on their wireline internet plan because they can get everything they want from their cellphone service. This trend will continue as wireless service continues to advance and overtake the kind of wired network Holland proposes to build at taxpayer expense.
Holland is already served by at least a dozen private-sector internet providers. Many of them serve only part of the area, but some cover nearly the entire market. Internet providers grow by expanding into new areas, so they have the incentive to reach out to areas that are less well served. But this investment by private companies in Holland will quickly dry up if they know they have to compete against a taxpayer-subsidized broadband system run by a government that is both the referee and a competitor.
The best-case scenario is that the Holland public internet proposal will improve service for a relatively short time for a relatively small number of residents. It is not even clear that the Holland Board of Public Works, starting with $30 million from taxpayers and stimulus funds, can do better than private companies already providing service without being subsidized by taxpayers. It is crucial that Holland use its funds appropriately, and not put taxpayers on the hook for 25-year commitments with meager benefits unlikely to last more than a few years.
— Ted Bolema is the executive director of the Institute for the Study of Economic Growth at Wichita State University and a Holland resident.
This article originally appeared on The Holland Sentinel: My Take: How does Holland think its internet utility will succeed where so many have failed?