Why are US Broadband Prices so High?

I’ve wondered for years about why broadband prices are higher in the US than the rest of the world. The average price in other industrial counties is significantly lower. In France broadband averages $31, Germany is $35, Japan is $35, South Korea is $33, and the UK is $35. The average price of broadband in the US is approaching $70, so we’re at twice the price as other countries.

Thomas Philippon tackles this question in his new book The Great Reversal: How America Gave Up on Free Markets. He’s an economist at NYU who moved to the US in the 1990s but has kept an eye on Europe. The book looks at a lot more than just broadband prices and Philippon looks at other major industries like airlines, pharmaceuticals, and the US food chain.

He says something that was a wake-up call to me. Go back 30-40 years and the situation was reversed. At that time the US had some of the lowest prices in the world for things like telecom, airline tickets, pharmaceuticals, and food – and not just a little cheaper. Prices here were 30-40% lower than in Europe at that time. In just a few decades the situation has completely reversed and US prices from major industries are now much higher than in Europe.

How did this happen? He says the cause is almost entirely due to what he calls corporate concentration. In every one of the industries where prices have climbed in the US, there have been numerous large corporate mergers that have had the net impact of reducing competition. As fewer and fewer giant companies control a market there is less competition. One result of corporate concentration is the ability of industries to squash regulations through corporate lobbying – and lowering regulations inevitably leads to higher profits and higher prices.

It’s not hard to trace the history of consolidation through any of the major industries in this country. Since the readers of the blog are telecom folks, consider the telecom landscape in 1990:

  • At that time the Baby Bell companies were still separate from AT&T.
  • There was a vigorous CLEC market starting to grow led by companies like MCI.
  • There were probably a hundred different medium-sized regional cable companies.
  • There were not as many cellular companies due to the limited licenses granted for spectrum, but there was still strong regional competition from smaller cellular companies.
  • There were dozens of thriving manufacturers of telecom electronics.
  • In 1990 we had vigorous regulation, and at the state level there was still a lot of telecom rate regulation.

In just thirty years that picture changed. Most of the Baby Bells came back together under the AT&T umbrella. Comcast and Charter went on wild buying sprees and consolidated most of the medium-sized cable companies. Telcos purchased and neutered their competition, like the purchase of MCI by Verizon. Comcast and AT&T went on to merge with giant content providers to further consolidate the industry supply chain.

Telecom regulation has been all but killed in the country. This is almost entirely at the bidding of lobbyists. The current FCC went so far as to write themselves out of regulating broadband. All of these events resulted in US broadband that now costs twice as much as the rest of the industrialized world.

Meanwhile, Europe took the opposite approach. In 1990, regulation in Europe was local to each country and concentrated on protecting local industries in each country – and that led to high prices. However, after the creation of the European Union in 1993, regulators adopted the philosophy of promoting competition in every major industry. From that point forward, European regulators made it extremely difficult for competing corporations to merge. Regulators took special care to protect new market entrants to give them a chance to grow and thrive.

The regulatory policies in the US and Europe have completely flipped since 1990. The US was pro-competition in the 90s, as well-evidenced by the Telecommunications Act of 1996. Today’s FCC is working hard to eliminate regulation. European regulators now put competition first when making decisions.

It’s never too late for the US to swing back to being more competitive. However, for now, the monopolies are winning, and it will be hard to break their hold on politicians and regulators. But this is something we’ve seen before. At the turn of the nineteenth century, big corporations had a stranglehold on the US. Monopolies inevitably abuse their market power and eventually there is enough public backlash to push the government to re-regulate industries.

Congress Supporting Comcast Data Caps?

Poor-customer-satisfaction-272x300There is currently a bill in the House, HR-2666, that will do two primary things – stop the FCC from regulating broadband rates and exempt smaller ISPs from some of the reporting requirements from the net neutrality law.

For the life of me I can’t understand why nobody in the press sees this as a bill that would stop the FCC from regulating data caps like the one that Comcast is currently trialing. The Comcast data caps are massively unpopular and there have already been nearly 10,000 complaints about the data caps at the FCC even though the trials are only in a few markets. Since most people aren’t going to go to the trouble to officially complain, there are undoubtedly a whole lot more people unhappy with Comcast’s data caps.

And they should be. The data caps are being peddled by Comcast as a fairness issue when they are just a blatant price increase. I actually would be a little less incensed about what Comcast is doing if along with raising rates for large data users they also lowered the rates for smaller users. That would be rate rebalancing and could be argued as something fair. But since rates can only be increased this just means a lot more revenue for Comcast with practically zero additional costs to justify it.

I guess it’s not surprising that Congress would support the large ISPs over people since that seems to be the trend these days. This bill would also stop any action at the FCC against the very unpopular data caps on cellular data. While there is no guarantee that this becomes law, this seems to have bilateral support, so there is a good chance this could become law.

As also seems typical these days, the bill bundles something distasteful with something that few people are  against. The bill will excuse small ISPs from complying with the detailed customer notice requirements which are intended to tell people the truth about their broadband connections.

If you are a small carrier and have a good network you should not be afraid of this requirement, and in fact you ought to comply to point out the difference between you and your competitors. I certainly will be advising companies to comply with this requirement even if this law excuses them. If you have a good network and offer an honest broadband product you ought to crow about it in every way imaginable.

Interestingly, some of the small companies complaining about the notice regulations are WISPs, or wireless ISPs. While there are many very good WISPs, I also get reports from rural communities of WISPs who lie badly about broadband speeds. If I was a rural customer and a WISP was my only option, I don’t know that I would be happy that Congress wants to give them an out from telling me the truth.

And the bill is not only about data caps. All of the big cable companies have made announcements over the last year or two that they now consider themselves as ISPs rather than cable companies. Since they are almost all publicly traded firms they are under tremendous pressure to keep increasing revenues and margins year after year. The only way they are going to be able to do that is to start regularly raising broadband rates in the same manner that they have historically raised cable rates. This bill will give them permission to raise rates as much as they like and and I think we can expect broadband to be much more expensive in the future.

In a free economy companies are generally allowed to charge whatever they want and the market is supposed to punish the greedy ones. The problem with broadband is that there are too many markets in the country where a given broadband provider has a virtual monopoly. Cable companies have mostly won the speed war, and in most markets their only competitor is much slower DSL that is being sold at low prices to those willing to accept slow speeds for low rates. For most households the cable company is the only broadband alternative – and that makes them a monopoly.

The FCC is supposed to regulate monopoly abuse in the telecom world. They have eased up on regulations of telephone service as it became more competitive. But we are in the opposite situation with broadband with the cable monopoly currently growing stronger day by day.

I am certainly going to complain to my own representatives about this bill, but if this is going to be stopped, then a whole lot of people need to be yelling in a hurry. I can sense that the big ISPs want to get this enacted before people figure out what this bill does. And Comcast surely would like this passed before they introduce their very unpopular data caps everywhere – because then the outcry might be too great to get it passed. But hopefully the red flag can be raised before it’s too late to do anything about this. This is the day I wish my blog had 100,000 readers!

Why Regulate Broadband?

FCC_New_LogoOften lost in the discussion of how much the big ISPs in the country hate Title II regulation of broadband is the more general discussion of whether the broadband market ought to be regulated. When I first entered the industry telephone service was heavily regulated in almost every manner imaginable, and this was due to the gigantic monopoly power of AT&T at the time. Over the years various parts of the telephone industry have become lesser regulated or even deregulated. And somehow during this process we seem to have gotten used to the idea that communications services are best when deregulated.

But I want to step back to a general discussion about regulation in general. Governments tend to regulate industries for several different reasons. For example, there is generally regulation of the financial industry because failures of large banks can devastate the rest of the economy. We also regulate businesses that can harm people, and so we do things like inspect food or have rules about transporting dangerous chemicals.

And finally, we regulate companies that provide services that most people need and for which a given provider can hold huge power over customers by nature of being a monopoly. This is why we regulate electric and water companies – because they tend to be natural monopolies in a given market. And it’s why we used to regulate Ma Bell.

When broadband first became a product there was no discussion of regulating it because it didn’t appear at the time that there were going to be monopoly providers. In the dial-up days there were all sorts of new companies like AOL and Compuserve entering the market. And then along came faster broadband and the cable companies and the telcos launched new and faster broadband products at almost the same time. It looked like there would be vigorous competition between DSL and cable modems.

But in the few decades since then it’s become obvious that cable modems have won that battle. Cable companies are growing to the point in many markets of having a virtual monopoly since the DSL products are too slow to keep pace. Every quarter when broadband customers are announced by all of the big companies it’s obvious that there are still people flocking from DSL to cable modems. It’s been clear for some time that broadband, which has largely been a duopoly market, is trending towards monopoly as DSL fades.

The other test that regulators use when considering regulation is if there is any effective substitute for the monopoly products or services. Cable companies argue that cellular wireless data and fiber are both effective substitutes for cable modem. But are they really?

I’ve written a number of times about how lousy cellular wireless is as a competitor to landline broadband. While there are certainly people who are satisfied with only a cellular data connection, the bandwidth and pricing of cellular data make it a poor second cousin to landline data, and most cellphone users seek out WiFi rather than rely solely on cellular data. And while there is talk about going to 5G and gigabit wireless networks, this talk is still almost all hype.

There are certainly markets where fiber is a good competitor for cable modems. But the other day I looked at the list of the 200 largest cities in the country and the majority of cities on that list do not have fiber and are not on anybody’s list to bring fiber. And even where there is some fiber there are no large markets where there is fiber everywhere in a city – ask all of the eastern cities how they feel about how Verizon built FiOS to only parts of their cities. Further, the cable companies are all implementing DOCSIS 3.1 which is going to give cable systems the ability to keep up with fiber speeds for the next decade.

And even where somebody builds fiber, at best we end up in a duopoly situation. When you look at where Google has brought fiber it looks to me like most of the competition is with data speeds and not with prices. If anything, the average price paid for broadband is higher where Google has built fiber.

It’s obvious that Comcast doesn’t think there is any effective competition as witnessed by their trial with data caps, which everybody expects to go nationwide soon. Their data caps are going to mean a big rate increase for a lot of customers, something that could never happen in a competitive market.

So, when looked at from a regulatory perspective, the broadband market is ripe for regulation. In fact, it probably should have been regulated much sooner. I see nothing on the horizon that is going to improve broadband choice for the vast majority of Americans and I hope the FCC can find a way to put some teeth in the way they regulate broadband.