The late 1990s saw the introduction of DSL over copper lines and cable modems provided by cable companies – both technologies offering broadband download speeds of around 1 Mbps. Cable companies and telephone companies slugged it out and competed fiercely for a few years. However, over time we saw the broadband market settle into duopoly competition – a term used by economists to describe a market with only a few competitors. After only two or three years of real competition, we saw the marketing rhetoric cool down as both sides reached a steady equilibrium share of the broadband market. In duopoly competition, both sides stop competing on price and instead compete with rhetoric describing their advantages as a company. Both sides charged relatively high prices for the time, and cable companies and telcos were largely happy with the market.
The duopoly equilibrium didn’t last long when cable modem technology improved more quickly than DSL. It became clear by 2005 – 2006 that the cable companies were going to win the speed battle. Since that time, the cable companies have gained market share every year at the expense of DSL. The conversion of DSL customers to cable modems accelerated in recent years when homes found DSL speeds to be inadequate. This exploded during the pandemic, and the cable companies are now capturing millions of DSL customers each year. From a pricing perspective, the telcos went after the low end of the market, chasing those that didn’t want to spend too much for broadband. The cable companies cautiously raised rates for a few years until they realized that people didn’t drop cable modem service to return to DSL – and they started to regulatory jack up broadband prices.
There was one exception to the DSL/cable modem duopoly when Verizon started building FiOS fiber in the Northeast. With FiOS, Verizon was clearly the fastest technology and was far ahead of the cable modem technology of the time. As would be expected, Verizon and the cable companies also reached a duopoly equilibrium after a few years of fierce marketing, and both sides seemed to be happy to be making good profits.
The cable companies reacted differently to competition from anybody who was not a telephone company. We saw a fierce reaction by the cable companies when municipalities built fiber. I think the cable companies knew that the public would prefer broadband from a city instead of a large unresponsive cable company. In the first few markets with a municipal provider, the incumbent cable company engaged in what can only be called predatory pricing. The cable companies dropped rates extraordinarily low, hoping to cause large losses for the new municipal providers. While this happened in only a few places, the reaction by the cable companies was so extreme that the FCC warned that it would investigate the predatory pricing issue. Predatory pricing died as a strategy and I can’t remember a case of an incumbent dropping prices far below a competitor in over fifteen years.
The more common practice for cable companies is to drop rates to match or almost match any new competitor. Bigger cable companies have nationwide rates and don’t want to establish different rates in different markets, so they started to compete with promotional discounts that bring prices down to the level of the new competitor in each market. Over time, the cable companies adopted this philosophy for competing with any new fiber builder, not just municipal ones.
The cable companies never got this quite right. They offer lower rates for a year or two to compete with a fiber provider, but at the end of the contracts, the rates return to normal. Customers can usually still get the lower prices by calling and negotiating, but over time we see the public tiring of the rate game and eventually moving to the company with the permanently lower rates.
Cable companies adopted another interesting way to compete through what is called hidden fees, which are fees that are not clearly identified when new customers sign for service. Hidden fees have been around a long time, but in recent years have become gigantic. The motivation for having hidden fees is clear – it lets a cable company advertise a low price for basic service by not mentioning the hidden fees. It’s an odd tactic since customers find out about all of the hidden fees when they get the first bill.
The FCC has proposed to make it harder to use hidden fees by using a report card that will require ISPs to report all of their charges. It’s going to be interesting to see how the report card changes the pricing strategies of the big ISPs. I have no doubt that it will force some changes, but as they’ve always done in the past, the big cable companies will find new ways to look like they have low rates while extracting as much money out of customers as possible.