The Lack of Broadband Competition

There is one statistic from the FCC annual report on the state of broadband that I’ve been meaning to write about. There is still a massive lack of broadband competition at speeds that most households are coming to think of as broadband.

Here are the key statistics from that report:

  • 13% of all households can’t get broadband that meets the FCC’s definition of 25/3 Mbps
  • 31% of homes have access to 25/3 Mbps, but not speeds of 100 Mbps
  • 15% have access to 100 Mbps from more than one provider
  • 41% have access to 100 Mbps from only one provider

It’s the last statistic that I find astounding. The current FCC declared with this report that the state of broadband in the country is healthy and that the market is taking care of the country’s broadband needs. I’ve written number blogs about the households in the bottom 13% that have little or no broadband, but I want to look closer at the top two categories.

Households in the 15% category are in markets where there is a fiber provider in addition to the incumbent cable company. The biggest fiber provider is still Verizon FiOS, but there are numerous others building fiber like AT&T, CenturyLink, Google Fiber, smaller telcos, small fiber overbuilders and municipalities.

This means that 41% of households (51 million homes) only have one option for fast broadband – the cable company. I see numerous problems related to this huge monopoly that has been won by the big cable companies. Consider the following:

  • The US already has some of the most expensive broadband in the developed world. The high prices are directly the result of the lack of competition.
  • This lack of competition is likely the driving factor for why most of the big ISPs in the US are rated at the bottom of all US corporations in terms of customer service. We know that customer service improves in markets where is broadband competition, but the big ISPs don’t make the same effort elsewhere.
  • We also know that competition between a cable company and a smaller fiber overbuilder lowers broadband prices. For example, there are markets where competitors like Google have set the price of a gigabit connection at $70, and the cable companies generally come close to matching the lower price. But preliminary pricing from Comcast and Charter for their new gigabit products where there are no competitors will be significantly north of $100 per month.
  • Even where there are competing networks, if both networks are owned by large ISPs we see duopoly competition where the big ISPs don’t push each other on price. For example, Comcast largely is able to offer the same prices when competing against Verizon FiOS as it does in markets where there is no fiber provider.
  • Industry analysts expect the big ISPs to start raising broadband rates for various reasons. The ISPs continue to lose telephone and cable customers and the national penetration rate for broadband is nearing a market saturation point. In order to satisfy Wall Street the big ISPs will have little choice other than raising broadband prices to maintain earnings growth.

I’m sure that the households in the bottom 13% of the market that can’t get good broadband are not sympathetic to those who can only buy fast broadband from one provider. But these statistics say that 41% of the whole market are dealing with a monopoly situation for fast broadband. Telecom is supposed to be a competitive business – but for the majority of the country the competitors have never showed up. For the FCC to declare that we have a healthy broadband market astounds me when so many households are hostage to a broadband monopoly.

There is always the chance that over the next decade that fixed 5G will bring more broadband competition. My guess, however, is that at least for a few years that this is going to be a lot more competition by press release than real competition. Deploying gigabit 5G like the big ISPs are all touting is going to require a lot more fiber than we have in place today. Deploying 5G without fiber backhaul might still result in decent broadband, but it’s not going to be the robust gigabit product that the ISPs are touting. But even poorly deployed 5G networks might bring 100+ Mbps broadband to a lot more homes after the technology gets a little more mature.

Unfortunately there is also the risk that 5G might just result in a lot more duopoly competition instead of real competition. If 5G is mostly deployed by big ISPs like Verizon and AT&T there is no reason to think that they will compete on price. Our only hope for real market competition is to see multiple non-traditional ISPs who will compete on price. However, it’s so tempting for ISPs to ride the coattails of the big ISPs in terms of pricing that 5G might bring more of the same high prices rather than real competition.

The Value of Broadband Competition

A recent study by the Berkman Klein Center for Internet and Society at Harvard University looked at the prices charged by community-owned broadband networks and found that in 23 out of 27 networks they studied that the municipal provider offered the lowest price in the market for broadband.

They didn’t just consider the monthly fees but looked at the total costs to a customer over a 4-year time frame and considered connection charges, equipment and other ancillary charges and fees along with price increases that come after the end of introductory specials.

I’m not surprised by these findings, but my experience is that this phenomenon is not limited to municipal providers. Around the country there are now hundreds of commercial ISPs and fiber overbuilders who are also building into competitive markets and competing against the big cable companies and telcos. And for the most part they compete with a combination of lower prices and better service.

It’s interesting to watch how the big cable companies react to competition. Most of them react by offering special rates that are lower than the published rates of a new competitor. They will often blitz a market with these special rates when a competitor is building a network to try to lock up customers before the new ISP launches. Some of these ‘special’ prices are incredibly cheap and I’ve seen markets where the special rates are half of the regular rates offered by a cable company. What I find surprising is that I sometimes see special package rates that look to be even lower than the cost of the cable TV programming – meaning no margin for the cable company. It’s also not unusual to see the incumbents enforce customer contracts in competitive markets and make it hard and expensive for customers to leave them.

But even with special rates the cable companies often can’t resist sliding other charges onto bills. If you haven’t looked at a big cable company bill in detail, you ought to. In addition to the normal triple play product bundle there are usually charges and fees that are tacked onto the base prices. These fees might be for network programming, for sports programming or just some invented fee that’s not particularly for anything. The cable companies hope that customers mistake these for taxes, but they are just ways to increase the base price of the triple play advertised or special prices. The big ISPs also have jacked up ancillary charges or the last few years, like Comcast’s most recent increase to $11 per month to use one of their cable modems. If a fair comparison is made of the charges on bills, then it’s going to be rare when competitors don’t have the lowest prices. These extra fees and charges are likely to be the reason that incumbents cost more even in markets where they try to ‘match’ rates of competitors.

One thing that these comparisons don’t discuss is how competition lowers the prices for everybody in a market. Customers jumping to a competitor get lower prices, but so do most customers that stick with the incumbents. I’ve seen a number of competitive markets where the incumbents stop raising rates every year, and it’s not unusual to see rates in a competitive market fall significantly below prices in nearby markets with no competition. I wish this Harvard study had looked into this in more detail. I’ve only ever seen once study that looked at this phenomenon and it must have been ten years ago when a study showed that competitive markets had overall rates roughly 15% lower than surrounding communities. I’d like to see how that looks today.

Competition also brings other benefits to a market. For example, one of my clients a few years back was competing in a major market with Comcast and noticed that when customers called Comcast customer service that their calls went straight to the top of the call cue. But even without such trickery it’s pretty normal for incumbents to up their game in competitive markets with better customer service, more repair technicians and other changes to help retain customers. Fees that punish customer behavior also largely disappear in competitive markets, such as charges for exceeding monthly data caps.

The other thing that I often see in competitive markets is a win-back program. It’s not unusual to see an incumbent make it hard for a customer to leave without having to first suffer through a long call offering major incentives to stay. Some of the most famous customer service horror stories are about overzealous employees in a win-back program who do crazy things to try to keep customers from leaving.

There are not that many truly competitive markets in the country. There are only a relative handful of urban municipal providers, and other fiber overbuilders have still barely made a dent in the potential market. Where Comcast competes with Verizon FiOS the two companies stopped competing with price years ago and have largely reach a stasis in each market. It will be interesting to see if fixed 5G wireless and other new competitors bring more real competition. The strategies the incumbents use today to deal with real competition work because they can cut prices in the few competitive markets and make up for it elsewhere. But that dynamic will change if we ever see widespread competition.