Should states sell high-speed Net access?

A proposal by Virginia's state government to sell discounted high-speed Internet access to the business sector has touched off a battle pitting small ISPs against the government.

Virginia offers universities, state agencies, and public schools a steeply discounted Net access service though a Virginia Tech-affiliated agency dubbed Net.Work.Virginia. By buying large amounts of infrastructure and service, the agency has been able to persuade Bell Atlantic, Sprint, and other smaller service providers to offer deep price cuts when offering their services to schools and state offices.

But Net.Work.Virginia now is planning to use its market power on behalf of the private sector, offering its discounted Net access services to local businesses looking for cheap bandwidth. The proposal has lit a fire in the local ISP community, who say the state would be undercutting their business on the taxpayer's dime.

"To have the state be involved in direct competition with taxpaying businesses is completely inappropriate," said Ray Everett-Church, an attorney for the Virginia ISP Alliance.

The Virginia proposal marks the leading edge of an idea beginning to filter across the country, as state governments look for ways to boost their local Internet businesses and bring Net access to underserved low-income and rural areas.

The Texas state legislature looked at proposals for selling excess state bandwidth to the private sector this year but did not act before the end of its legislative session. ISPs in Iowa have also been fighting a low-key effort to prevent that state's Internet access network from being offered to commercial businesses.

City and municipal governments across the country have been jumping into the bandwidth business more aggressively, building fiber optic and cable TV infrastructure and selling their own broadband services to residential and business customers.

Silver cloud with dark lining?
The Net.Work.Virginia program is structured a little like a buying co-op, with state agencies and universities as the members.

By offering such a large number of customers, the state has been able to win low prices for high-speed Internet access from Bell Atlantic and Sprint, and to a lesser extent smaller providers. A T1 line, which is used by many large businesses for Internet access, ordinarily costs in the neighborhood of $1,400 to $1,500 a month. The state program can get the same service for about $1,000 for its customers.

Now nearly 3 years old, the program has saved the state considerable money--and it now plans to pass on the savings to the private sector.

"The Net.Work.Virginia infrastructure has been in place for almost three years, the initial costs to the service providers have been substantially amortized, and similar prices should now be available to businesses," wrote Donald Upson, the state's secretary of technology, in a letter to the ISP association. The service should be available to the "broadest possible participation across all economic sectors," he added.

The idea of cheap bandwidth for business sounds like a winner to many, particularly since the state isn't actively subsidizing the lines. Upson is careful to note in response to any criticism of the policy that the state provides no provider with a subsidy.

But ISPs say the state is out if line in trying to set itself up as a competitor to the private sector, and one with enough clout to drive smaller companies out of business. "It's certainly not in keeping with the spirit of the [1996] Telecommunications Act," Everett-Church said.

Everett-Church and the ISPs say the Net.Work.Virginia program, which is open to other telcos but is dominated by Bell Atlantic and Sprint, would help those telcos solidify their foothold in the private sector at other ISPs' expense.

"It's a bad idea to have state involved in deciding the outcome of the bandwidth deployment battle," Everett-Church said. "It won't take very long for small and midsized service providers to feel the effects of this."

ISPs in Virginia and elsewhere know they're fighting an uphill battle. Expanding the state programs promises to bring Net access to new areas and lower the cost for businesses that participate, both goals that few oppose.

"It's an absolutely defensible goal," said Gene Crick, executive director of the Texas Internet Service Providers Association.

But allowing the state to help provide low-cost service for some customers will help drive other ISPs out of the market, hurting the overall Internet business in the long run, Crick added. "The effect would be to suppress growth by tax-funded companies," he said. "I think that's short-sighted."

ISPs in Virginia are still talking to Upson's office, hoping to deflect the program before it gets rolled out to the commercial sector. The launch date has already been pushed back once, but Everett-Church said the ISPs aren't wildly optimistic about blocking it altogether.

"We're at a point where we're starting to be closer in having each side understand the other side's issues," he said. "But if this goes forward, we're going to have to go to the legislature and ask if they want the state competing with taxpaying businesses."