Viewpoint: Government-Funded Market Cornering
There is something rotten in the city of Cleveland. The City Council’s recent decision to divert $200,000 in public funds toward wireless internet service from an allegedly tight budget should raise a host of questions. Number one on that list ought to be why residents living in a city burdened with economy-stifling taxes and poorly delivered public services are being forced to subsidize a private company’s entry into an emerging market.
Telecommunications is a highly competitive industry undergoing unprecedented technological innovation. Wireless service, for instance, is a relatively new development that has captured the imagination of communities around the country. Such enthusiasm, however, should not dictate public policy. Investment in nascent technology is a high-risk proposition better suited to entrepreneurs than local government.
In the classic Democracy in America, Alexis de Tocqueville warned against this tendency to expend public funds on the latest fads – jumping in headlong without fully grasping the implications. “There is…in democratic societies a stirring without precise aim,” he declares, “some sort of prevailing feverish excitement finds expression in innovations of all sorts, and innovations are almost always expensive.”
Wi-Fi is presumed by many to be the next big step in telecommunications and the launching pad for widespread adoption of technologies such as Voice over Internet Protocol, or VoIP. In business, however, there are no guarantees. Of course, it is easier to bet on an idea if someone else is underwriting the cost.
In light of this, it is also appropriate to ask what the motivations are behind Intel’s push for public support. As mentioned above, telecommunications is a rapidly changing and intensely competitive industry. By involving government in the rollout of its particular product line, Intel is effectively shielding itself from the risk associated with entering this new market by shifting a portion of its costs onto taxpayers.
A second important question that arises from these concerns is whether the decision to back Intel is locking the city into a technology stream that simply will not remain dominant over the long term. Wi-Fi already faces certain technological obstacles that other challengers are quickly moving to address. What is the contingency plan if it turns out Cleveland is a BetaMax city in a VHS world?
Intel has committed hundreds of millions of dollars to market Wi-Fi technology and integrate Wi-Fi “Centrino” chips into its computers. “Motley Fool” financial columnist David Mock points out that this creates an incredibly powerful incentive for the company to sell local officials on its concept, regardless of whether it is in the community’s best interest. “Of course, Intel would love to see Wi-Fi spread across every city in the U.S.,” says Mock, “all the more Centrino chipsets to be sold.”
Cleveland officials are betting that they can “prime the pump” and improve the city’s economy by speculating on Intel’s claims and wireless service generally. But is their gamble likely to pay off?
By draining resources from the community, city officials are presuming to somehow know more than individuals acting in the marketplace where investment should be allocated. The reality is that far from being a driver of new investment in a community, the funds utilized to build such projects merely represent a diversion from better uses.
This leaves Clevelanders with two scenarios. If Intel’s product is simply the wrong technology at the wrong time, then their entire investment could be lost. On the other hand, if Intel succeeds in spreading Wi-Fi and its products become the industry standard then taxpayers will be out less but will have subsidized one competitor’s product over another’s. Either way, Cleveland residents assume unnecessary risk and there is no way to calculate what other opportunities will have been passed up as a result.
