One of the benefits of living next to a municipal Internet Service Provider came into focus this month. Residents of Monticello, Minnesota found a hastily composed flyer in their mailboxes. The missive listed Charter Cable's basic and digital tier offerings, with an extra enticement scribbled in hand on the right side of the page:

Fantastic OFFER! ONE TIME OPPORTUNITY includes Cable TV with all channels and a DVR! Plus THIRTY-MEG HIGH SPEED INTERNET! Both for only 59.95! Locked in price for 2 years! Please call A.S.A.P. to check for availability. Thank you.

A Monticellan who received this document several times faxed it over to The Institute for Local Self Reliance Community Broadband Networks blog, where they strongly support municipal broadband projects and don't appreciate efforts to undermine them. Monticello has a beleaguered city-run fiber-to-the-home ISP, FiberNet, which offers 30Mbps and another service such as video for a little over $50 a month (before taxes and franchise fees).

"This is either predatory pricing or the cable industry is out of control with its rate increases," CBN's Christopher Mitchell protested. Mitchell checked the Charter rates over at various Minnesota sister cities, and identified comparable packages that are indeed much pricier. In the Rochester area, for example, a Charter deal with some hot movie and sports channels, a DVR, and 30Mbps runs for $144.98.

Cross subsidies

We found a Charter offer that came somewhat closer to the one page ad: "TV in Digital + Internet Plus(30mbps)" for $74.98 in the same city, but without a DVR, the cool channels, or the two-year lock in.

Intrigued, we called the contact listed on the flyer, who went into sales mode pretty fast. He became far less enthusiastic about the discussion when the journalistic intent of the inquiry was revealed. The $59.95 deal has come and gone, we were then informed. "It was something they [Charter] were doing," he explained. "It is not happening any longer."

Whatever the duration of the offer, Mitchell has no kind words for it. "If that package costs Charter more than $60/month to supply, then it is engaging in predatory pricing to drive competitors out of the market," his blog post observes. "Consider that Charter may be taking a loss of $20/month ($240/year) from each household that takes this offer. They can do that by cross-subsidizing from nearby markets where they face very little competition."

On the other hand: "If that package costs $60 or less per month to Charter, then it has an incredibly high profit margin and the fundamentals of the market have to be questioned."

We also contacted Charter. The company "does not engage in predatory pricing," a Charter spokesperson told us. "Charter has been a long standing and proud provider of broadband services to the residents and businesses of Monticello."

If you don't have a system...

As in other states, municipal broadband in Minnesota faces strong opposition from incumbent Internet providers. A bill has just been introduced into the State Assembly that would bar a city or country from using tax revenues to "construct, acquire, own, or operate, in whole or in part, a system to deliver broadband service."

FiberNet was a struggle from the start. First proposed by the city in 2005, the idea won over 74 percent of local voters in a 2007 referendum. A bond sale was put up to finance construction and drew in $26 million, but TDS/Bridgewater (the incumbent telephone service provider) sued the city to stop the project.

This forced the city to put its bond windfall in an escrow fund until the outcome of the lawsuit. In 2008, a District Court judge ruled in favor of Monticello. TDS appealed the case all the way to the Minnesota Supreme Court, which denied a petition for further review.

The city's victory came with a price, however, putting FiberNet substantially behind projected revenue goals. Citing city budget reports, the Monticello Times noted the service had run up a shortfall of over $1 million in the first three fiscal quarters of 2011. The municipality's Liquor Fund is currently making up for the deficit.

"Obviously if you don't have a system, you can't bill people for it," City Administrator Jeff O'Neill told the newspaper late last year. "The delay has created a substantial impact in our ability to cash flow because money had to be spent paying for costs related to the lawsuit."

At risk?

It's in this context that Charter's flash 30Mbps deal surfaced, alarming FiberNet's defenders. "The future of FiberNet is at risk," a graphic wild west style poster drawn up by MuniNetworks warns. "If Monticello's residents choose Charter's temporary discount prices, FiberNet Monticello could fail for lack of customers."

Ironically, both supporters and opponents of municipal broadband warily eye aggressive discounts—if they come from the other side. North Carolina's law reining in city ISPs, for example, restricts their ability to offer low introductory prices to consumers. And when Charter offers cut rate plans to Monticellans, critics worry about "predatory pricing."

But assuming FiberNet can stay afloat over the difficult years, there's some good news in this little controversy. Well-run muni ISPs appear to provide more affordable and faster Internet/pay TV packages. In doing so, they'll force the private sector to offer better deals too.