Hance Haney

Competition In Broadband Is Thriving

Critics claimed broadband access is a duopoly (a market in which there are only two providers) but this is technically inaccurate in much of the country so now the complaint is that 98 per cent of broadband customers receive their service from either the telephone company or the cable company. Even this criticism is irrelevant. Consumer harm occurs where prices are excessive or quality is deficient. In the case of broadband, competition is leading to lower prices and higher bandwidth.

Most economists agree it’s misleading to read too much into market shares, although I could point out that regional bell operating companies–the main targets of net neutrality regulation–report only 39.3% of total high-speed connections and that this is far less than a dominant position (other providers who are not telephone companies are lumped together in the FCC’s broadband status report). More important is whether consumers could vote with their feet if an incumbent provider abuses its customer relationships. They could if there are alternate providers or new providers could enter the market. According to the FCC, satellite providers have at least some presence in 88% of the nation’s zip codes, ADSL in 82% and cable modem in 57%. These numbers suggest a lot of consumers have more competitive choices than the critics like to point to. Other technologies, such as fixed and mobile wireless (cellular, PCS and WiMAX) and power line, are growing fast and have enormous potential. They prove that new providers can enter the market.

Broadband is spreading rapidly, according to the FCC. High-speed lines increased by 18% during the second half of 2005 compared to a 12% increase during the first half of 2005. This wouldn’t be happening if broadband providers were gouging their customers or restricting their choices. In order to recoup their multi-billion dollar investments, the providers need to attract all the traffic they can.

The report also says that 99% of the nation’s zip codes have at least one provider who serves at least one customer, and that 99% of the nation’s population lives in those zip codes. Most would agree if only one household or business or a privileged handful have a choice of competitors, that’s a problem. The numbers are actually more positive and the methodology used to gather them more useful than it seems. Cable and telephone networks are never built to serve small groups of people. Networks are capital intensive with high fixed costs, so the cost of bringing on an additional user is always lower than it was for the most recent user. If you have a network you want to build it out as fast as you can, because every additional customer will generate a higher profit margin than the one before. Satellite and wireless providers are capable of serving small groups or even only one customer in an entire zip code, but the fact is they market their services widely and have no incentive to market in such a way as to manipulate the statistics that the FCC gathers in this report.

Duopoly is one of those frightening terms that can either be meaningful or meaningless. In the context of broadband access services, it is meaningless.

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See: “High-Speed Services for Internet Access: Status as of December 31, 2005,” Report of the FCC’s Industry Analysis and Technology Division, Wireline Competition Bureau, July 2006

August 25, 2006 | Comments |

Viewing 5 Comments

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    Ah, this again. It amuses me that this is the same argument that's been trotted out before here and has been shown to be wrong.

    First, the FCC's numbers have already been discredited. You use their wording, but you don't note how problematic it is: "at least some presence." That means, if a provider serves one house in a zip code it's counted as fully covered. That's not real.

    Second, the claims of these "new technologies" like satellite and wireless. You're comparing apples to oranges. None of these technologies delivers true, unlimited broadband. Satellite is extremely limited. So far, almost every wide area wireless network (such as EVDO) is greatly limited. Even though they sell it as "unlimited" they kick people off if they use more than 10 gigs a month (which is not very much).

    So, yes, hopefully it will change over time, but it's fair to say that for a large part of the country right now, they effectively face a duopoly situation. Claiming that lesser technologies are equal substitutes or that some future technology is an effective substitute is bogus.

    Repetition doesn't make it right.
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    I live in duopolyland. Our choice: Cable internet from Mediacom or DSL from the phone company or go suck an egg. Regular prices for basic service are virtually the same for either. If you bundle, you get discounts, again similar. (The phone company is offering TV deals too, via satelite receiver)

    DSL can be had for an introductory $32/month plus sales tax, until the introductory period ends. This sounds good relative to what was available a few years ago. But relative to the ads we see on Yahoo for SBC service as low as $15, it feels like a lack of competition. Which is exactly what it is.

    The whole of this metro area, the largest metro area in Iowa, has two and only two realistic choices, which are hardly different from one another, in service or price. If they can fool everyone into thinking this is competition, then shame on us. I think Masnick is closer to the truth here.
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    Mike: using the FCC's logic, you can probably claim that 60% of all Americans have access to rolls royces- I mean, hey, if there is one in your zip code somewhere, you've got access!
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    My point is that once a network provider has a point-of-presence -- even if it's in an adjacent zip code -- the declining marginal cost of adding additional users provides a powerful incentive to expand the network, particularly in the absence of regulatory uncertainty. Because the network is expanding rapidly, the locations of these points-of-presence is more important than the number of households served when these statistics were gathered.


    The other technologies are admittedly not identical substitutes, but they don't have to be identical. These offerings are continually improving and are sufficient to constitute a strategic threat that will discipline the behavior of competitors.


    I agree the FCC has painted a somewhat idyllic picture. The U.S. is way behind other countries in broadband deployment. But it would be a mistake to insist upon a commoditized, perfectly competitive marketplace with lots of small suppliers as a prerequisite for deregulation. A marketplace like that won't attract any investors. Aside from competition that is actually on the ground, I and others maintain that the threat of competitive entry also acts to discipline competitive behavior and provides a justification for not re-regulating DSL. Investment will beget more competition, net neutrality mandates will beget more regulation.

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    I've heard these arguments from both sides time and time again on this issue of broadband competition as well as the larger net neutrality debate and must inject a few points that have been glossed over or missed.

    Duopoly?
    First, what exists (in the market as a whole) is a technology duopoly not a provider duopoly. Cable modems and DSL are the primary technologies for residential broadband access but, in many markets, there are more than just two providers offering these services.

    A liberal analogy could be made to the two most relevant computer platforms; the PC and Mac. Here are only two platforms but there is competition in the companies that provide them (more so in the PC market than Mac). No one says there is a duopoly with computer platforms and demands that regulation be in place so UNIX can have the chance to take a sizeable market share from the PC and Mac. Granted this may be a little oversimplified but lots of markets see significant competition more than just incumbent cable and telephony. Just as computers have sellers of clone PCs so does broadband access.

    In that, there are numerous CLECs and other resellers of DSL ( due to unbundled access from the ILECs as defined in the Telecom Act of '96) as well as some for cable. For example, you have EarthLink (nationwide presence), Covad (presence in 44 states), RCN, and hundreds of regional companies that provide broadband access. Granted it is dependent upon your area but certainly more and more markets are continually being introduced to competition as technologies improve, demand (hint, hint) increases, networks expand, etc. It just takes more time for competition to reach certain markets.

    Supply & Demand!
    Another issue is that there has been a lot of focus on the supply side in these arguments but not much discussion on the demand side, which also must be addressed. Right now, there isn't the ubiquitous demand present to warrant ubiquitous supply and the perfect competition that is holistically desired.

    A Census Bureau study (from October 2005) reported that almost 40% of households with no Internet Access didn't have it because they "don't need it" or are "not interested" in it. Another 23% didn't have it because they have no computer or their computer was inadequate. Only 23% stated that the "costs are too high" as the reason for no Internet access.

    Other Access!
    Lastly, I grant that satellite may be but wireless and BPL are not lesser technologies, quite to the contrary, they are very promising broadband access technologies that have already (in limited cases) and will provide more sizable competition to incumbent cable and DSL as they are deployed. BUT you have to give it some time to let the technologies, the demand, and the markets mature.

    Instead of looking to hastily regulate, the government needs to work with industry to educate consumers in order to increase demand for broadband, foster innovation through partnerships, and closely monitor how the market evolves and then utilize existing means to police anti-competitive practices or isolated market failures.

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