Who pays for smart cities?

This post was originally published by TDWI (The Data Warehousing Institute) as a Flashpoint feature on January 12, 2018.

One recent sunny morning there was a traffic jam on Cottage Street, a narrow street within view of my house, aptly named for its width. Commuters heading toward the nearby bridge over San Francisco Bay found themselves inching forward after their “smart” navigation devices had sent them on a shortcut.

The trouble with “smart” tech is that it starts out stupid. Users and neighborhoods suffer inconvenience to train developers’ algorithms—which is one part of to a common question about smart cities: “Who pays?” After all, most cities can’t afford the out-of-pocket expense for the fancy new technology. Instead, cities find other ways to get it and many of those involve compromise.

Financial capital does seem to be available. Smart Cities Financing Guide, published by the Smart Cities Council in 2015, lists 31 potential sources in three broad categories. Two of them put money under city control. Government-based funding includes, for example, general obligation bonds. These raise money from private bond buyers and are paid back mostly by taxes. A second category is called “development extractions,” which show up as tap fees, charged for new utility hookups, and other direct fees.

A third category—public-private partnerships—complicates the whole “who pays?” matter. In such arrangements, vendors provide technology in exchange for market presence (a fertile ground on which develop their technology) and often ownership of the data that results.

Navigating Competing Agendas

Naturally, the public and private sides of the bargaining table come with conflicting priorities. The private side has to satisfy regulatory and funding requirements and perhaps also a few broad mandates from top city leadership. One unspoken mandate is to keep the citizens happy. Citizen groups, at least the effective ones, persistently and perhaps dramatically advocate their various agendas. Better street lighting, better transit, and better protections for privacy and other causes exert steady pressure. Now and then, an ad hoc uprising may object to letting modern travel-direction apps clog horse-and-buggy-era streets.

On the other side of the table, technology vendors want a place to perfect technology, reap data, and build reputations. “[Technology vendors] believe that this will be a big market,” said Todd Walter, in Internet of Things marketing at Teradata, itself an interested vendor. “They all want to sell their stuff to the projects beyond the pilots and proofs of concept.” Vendors have already gone on their own to build or schedule such projects as “smart buildings” in which analytics finely tunes heating, cooling, and other basic functions; “smart” utility grids; integration of interagency emergency systems; data sharing among taxis and public transit; on-street video security; and video toll booths.

The two sides can seem farther apart than a mere table’s breadth. “When public and private sectors get together,” said Peeter Kivestu, Teradata director of travel industry solutions and marketing, “the public sector thinks they’re sitting across from a bunch of sophisticated hustlers who’re going to rip them off. The private sector thinks they have a bunch of public sector guys who can’t be trusted to achieve consistency because of the political and policy flows that go on.”

The Winding Road to Infrastructure ROI

Some vendors avoid any such involvements. Some telecommunication carriers, for example, are funding their own upgrades. So far, it looks like their networks will be the backbone of “smart.”

“[Smart systems] are very chatty,” said Dennis Duckworth, a product marketing and strategy consultant who’s recently worked with telecommunication carriers. “You take those maps and there are millions and millions and millions of [bits transmitted], and they’re taking up a lot of aggregate bandwidth.” During the long retrofit for beefier networks, there will be no shutting down. The rolling-upgrade will be expensive, and the carriers have to monetize the new, beefier networks somehow.

That payback, explained Duckworth, may well start not directly from the carriers but through appliance purchases by consumers. New, so-called “smart refrigerators” will signal to a mother ship, “Hey, my ice maker is faulty. Send a new one!” For that, the consumer will pay a little bit extra even when a “dumb” refrigerator might do just as well. Even the everyday water pipe will come with sensors built in, said Duckworth, whether you can use them or not.

Why do the carriers go to the trouble? They want the data, explains Duckworth. They’ve been watching Google and Facebook reap data that now flows over the telcos’ lines. The carriers want to play, too.

As any streetwise city dweller knows, those who pay call the shots. The only difference is that now the answer to “who pays” may also tell you who controls the technology and the data.