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.

The Expanding Arm of Regulation

Black phoneOne would be expecting the regulation of telcos in this country to be decreasing. For the most part the various state regulatory commissions regulate two things – telephone service (and related TDM based data service) and companies that own physical networks. But residential landlines usage has been dropping drastically over the last five years and is now under 50% in some states (something I will talk about in Monday’s blog).

States generally have regulated a few different areas having to do with telephone service. Years ago they regulated prices for both residential and business telephone products. But business telephony has generally been competitive for over a decade and most commissions stopped regulating business services. Most states still regulate the price of a residential landline although some have given up on that as well. States have given up on regulating long distance rates as well. States have regulated customer service policies such as how a company can disconnect a non-paying customer. States still actively regulate 911 services and other safety-related issues.

But the amount of regulation of telephone service has decreased drastically. With business services deregulated or detariffed and with residential landlines disappearing quickly, it seems like there is little left to regulate. Further, there are whole new ways of delivering voice services using IP, and most states do not regulate VoIP providers, except maybe in areas like 911.

States still are involved in regulating physical networks. For physical networks states regulate things like pole attachments and rights-of-ways. And states are the arbiter of disputes between carriers. States don’t specifically regulate interconnection agreements, but they are often called on to settle disputes between carriers on these issues.

Overall would expect the activity at state commissions to have decreased. But from what I can tell it has not. States seem to be holding more hearings and opening dockets to regulate those areas that are still under control. I once said that I thought that with all of the changes in the industry that state commissions might largely fade away from the telco world from lack of things to regulate. But a wiser friend reminded me that regulators will regulate and that they will find ways to justify their existence.

Today I actually see several areas where commissions are expanding their regulatory reach. For example, the California Public Service Commission just issued a certificate of public convenience and necessity (CPNC) to Schat Communications. Schat is a classic ISP, and to any extent that they offer telephone service it’s through VoIP. Schat has never needed a license from the state to operate before (like most ISPs and WISPs).

But California has established the California Advanced Services Fund (CASF) which is providing some funding to companies who will build last mile in very rural areas. Schat and a number of other ISPs have found themselves having to become regulated in order to apply for these funds. Once they have a CPNC they are regulated in California in the same manner as other telephone companies.

And the same thing is happening elsewhere. The FCC rules for getting funding from the various programs that are part of the Connect America Fund (formerly the USF Fund) must obtain status as an Eligible Telecommunications Carrier (ETC). This was a certification that telephone companies have always needed to get federal USF funds, and now the FCC has extended that requirement to anybody who wants funding from the CAF to build or extend last mile facilities. In most states a carrier has to be certified (meaning regulated) in order for the state to grant them ETC status.

While we have less and less historic telephony happening we are seeing a new wave of companies being required to become certified as telephone companies. I think my friend was right and regulators will regulate.

It’s Still a Regulated World

It seems like every few weeks I have a conversation with a carrier and in the course of conversation I find out that they are not in compliance with some regulation or another. It seems like a lot of companies that sell VoIP services, in particular, think that somehow that makes them immune from regulation.

But regulation has not gone away. If you bill an end-user customer for a voice, data or video product then there are regulations that you have to comply with. If you are an ISP for other entities, even if those entities are large, you are subject to some regulation. The only category of carrier that might not be subject to regulation is what I call a carrier’s carrier, and who only serves other carriers as customers. And in some states even they are subject to regulation.

It matters that you follow the rules. It seems like regulators at both the state and the federal level are getting surly about offenders and there some big fines being handed down to carriers who ignore regulation. I think the cost of compliance is cheaper than the cost of getting caught.

Here is a sample of the kinds of federal regulations that we see carriers ignoring. There are other state requirements that are also being ignored:

  • CALEA. There are significant obligations to be read to immediately give access of your customer’s voice and data records to law enforcement. You must have a manual filed that describes the processes.
  • CPNI / Privacy. You must have a manual and processes describing how you will protect your customers’ privacy.
  • Red Flag. You must have a manual and processes in place to demonstrate how you will protect your customers from identity theft.
  • Net Neutrality. There is very specific information about your company, your products, your network and your technology that you must inform customers about.
  • 21st Century Communications Video Accessibility Act. You must file a plan on how you will help disabled customers get access to voice, video and data products.
  • Universal Service Contributions. We find carriers that should be contributing to the USF fund who are not. The fines for getting caught for this can be huge.

I told my readers that I wasn’t going to write too many blog entries that are direct sales pitches for CCG services. I will admit that many of my blogs hint at the services we offer, but the main intentions of these blogs is to discuss issues for carriers that I think they will find to be useful. But in many cases CCG is able to help clients with a lot of the topics discussed in my blog.

CCG has three regulatory products that make it easy for anybody to stay in compliance with the rules. We have many clients who use CCG as their regulatory arm and many have said that it’s far cheaper to use us than to do it themselves. Here are the three products you ought to consider if you want to hand make sure that you are in compliance with the regulatory side of the business.

Regulatory Assessment. We will do a one-time assessment of your business and tell you every regulation that we think applies to you. Why guess if you are in compliance. For a modest fee we will make a list.

Regulatory Compliance Monitoring Service. In this service we develop a calendar for your company and we remind you of every regulatory deadline you must meet during the year.

Regulatory Compliance Filing Service. If you want it, we can create all of the needed paperwork and manuals, fill out the quarterly and annual forms and file everything for you. We think we have some of the best prices in the market for this kind of work.

If you want help to get into regulatory compliance or stay incompliance, give Terri Firestein of CCG a call at (301) 788-6889. We can help you take regulatory worries off your plate.