Operating and Maintenance Costs, not Capital Costs, Conspire Against Rural Broadband Cooperative

February 16, 2021 | By Todd Schmit, Associate Professor-Cornell’s  Dyson School of Applied Economics and Management, and co-author of the recently published “Exploring the feasibility of rural broadband cooperatives in the United States: The new New Deal?” in Telecommunications Policy, Volume 45, Issue 4, 2021.

Working with an existing internet service provider (ISP), we recently estimated the investment and operating costs of starting a new broadband cooperative in a rural region of Northern New York in which the subscribers (users) are also owners.  This structure allows a lower return on investment given priority is placed on meeting subscriber needs.

The financial advantage gained by a cooperative over an investor owned ISP is venture is clear. This model was used extensively in the 1930’s when many rural electric and telephone cooperatives were formed out of New Deal legislation in order to expand service access to rural areas.

While similar in terms of technological advancement and public funding to support construction, rural broadband cooperatives face important financial challenges. The primary challenge is high operational and maintenance costs to sustain broadband infrastructure over the long term.  In our study we found that the subscriber fees necessary to cover these costs exceed existing market prices by a large margin. It is important to note, that these costs were not inflated by high capital investment costs since the costs of build out were assumed to be covered largely by public grant funding and user investment.

Exacerbating the high O&M costs was the low density of users in this region of New York. Based on our analysis, at least nine subscriber-owners per mile are necessary to cover O&M costs under market prices. The maximum possible number of subscribers in our study area was six.

Public socioeconomic benefits of broadband adoption (on-line education, telehealth, access to public services, etc.) support arguments for state and federal policies that lower O&M costs. For example, mechanisms that eliminated property tax levies on broadband infrastructure and pole rental payments to pre-existing electricity and telecommunication firms reduced subscriber fee premiums to 25% above market rates.

While this is a step in the right direction, either further cost reduction polices and/or fee subsidies need to be considered. Also, the ability and willingness of households in rural areas to pay premium rates through user-ownership deserves further study.