Broadband

Too Big to be Left Unnoticed: America’s Uncompetitive Broadband Market

Voiced by Amazon Polly

Annual Tech, Media, & Telecom Competition Conference

The Capitol Forum

Jon Sallet
          Sallet

Good Morning.

Thank you to The Capitol Forum and to Teddy Downey for the chance to appear here today. Teddy and his team have made The Capitol Forum into an indispensable source for analysis especially by digging into issues that might otherwise go unnoticed. 

That’s really my theme today – what is going unnoticed. Simply put, we should pay more attention to the lack of competition in the provision of fixed broadband to homes and small businesses.

As a general matter, we can expect people with only one choice to pay monopoly prices, and people with only two to pay the higher prices typically charged by duopolies. People with three or more choices typically pay less. Clearly, people who can barely afford to pay a competitive price, say, low-income Americans, are particularly vulnerable to artificially high prices. Some may be disconnected entirely if prices are above competitive levels.

Remember we’re talking about millions and millions of American households, so any effects from limited competition spread far and wide.

We’re in a time when there’s a lot of discussion of growing market concentration and the importance of competition. There may be more discussion of antitrust in next year’s election than in any since 1912.

But separate from antitrust, public policy can promote competition.

Here’s an example. Once upon a time, phone numbers belonged to telephone companies. If you switched companies, you had to change your phone number – and that was an inconvenience that kept people from shopping for the best deal.

Congress made a simple change – it mandated that the phone numbers belonged to consumers so that when you changed telephone providers, you could take your number with you. That was a tremendously powerful, pro-competitive policy. It went beyond antitrust. It didn’t ask whether phone companies had done anything wrong. It simply asked whether consumers in the long run would be better off.

That story builds out the three principles I’d like to discuss today:

  1. Fixed-broadband competition is very, very limited. That’s a problem for consumers and for their communities.
  2. Pro-competition policies can tackle that problem by stimulating competition that delivers competitive benefits to consumers – more savings, more quality, more innovation.
  3. The correct way to think about greater competition is not to ask simply what is most profitable for any one company; it is to ask what best serves consumers.

In October, the Benton Institute for Broadband & Society published a report, Broadband for America’s Future: A Vision for the 2020s. In our report, we discuss four building blocks of broadband policy:

  • Deployment of networks where broadband does not exist;
  • Competition that increases choices and spurs lower prices and better-quality service;
  • Affordability and Adoption for those who lack the means or the skills to use broadband; and
  • Community Anchor Institutions, such as schools and libraries, that need to increasingly serve their users wherever those users are.

We have chapters that discuss each of those four topics. Today, let’s talk about competition.

Leading scholars are telling us that market concentration has grown, and they suggest a direct link to the rise in income inequality. In his new book, The Antitrust Paradigm, Professor Jonathan Baker says that “[t]he exercise of market power likely contributes to economy-wide inequality because the returns from market power go disproportionately to the wealthy.”

Fixed-broadband competition is quite limited, even by the Federal Communications Commission’s structurally over-optimistic analysis.

The FCC’s most recent figures show that at a typical speed of 100 Mbps download and 10 Mbps upload, about 11% of American households have no access (that’s the deployment problem); about 35% are in a monopoly market with only one provider and about the same percentage, 37% are in a duopoly, where there are only two providers. In other words, over 70% have either no choice or only one choice.

Professor Thomas Philippon in his new book says that broadband prices in the United States were the highest in the world in 2017 among developed nations.  According to an OECD study the same year, the United States was the second most expensive.

The Wall Street Journal ran a story over the summer suggesting that the trend among broadband providers is to “push consumers toward premium internet tiers” which boosts profits. The Wall Street Journal says: ‘It is getting harder for customers to find cheaper, lower-tier speed plans.”

These are competition problems and competition problems are best cured by more competition.

Why? Because consumers win when individual companies are forced to compete harder to get and keep customers and when the addition of more competitors makes it harder for existing companies to accommodate each other.

Let me emphasis that last point. Consider the Justice Department view that the T-Mobile/Sprint merger would lead to anti-competitive outcomes (putting aside the remedy issue for the moment). In the mobile broadband market, the DOJ believed that the movement from four to three competitors would harm consumers in part because that change would make it easier for the remaining providers “to coordinate their pricing, promotions, and service offerings”.

What makes coordination in a highly-concentrated market difficult is the presence of a maverick –  a new entrant that has different incentives, that can provide better prices and quality to consumers and isn’t as likely to cooperate with the incumbents.

In other words, a company that wants to take on the existing providers.

Mavericks can take different forms.

They might use pre-existing fiber as a starting point to reduce entrance and deployment costs.

Or they might use the experience and assets from one line of business – like electricity – to realize economies of scope by providing broadband.

Or they might be member-owned non-profits like rural electric cooperatives that have a different economic calculus.

Or they might be using fixed wireless to reach homes using a different technology with a different cost structure that brings additional choice to the marketplace.

Or they might be government supported.

Consider Alexandria, Virginia, where there is only one high-speed, fixed-broadband provider. That’s a problem. As Alexandria Mayor Justin Wilson explains, broadband is now “basic infrastructure” and lack of competition leads, he believes, to an inferior product. Moreover, small-business owners say that lack of broadband competition limits investment and makes Alexandria a less attractive location for businesses. One small-business owner, whose business requires the transfer of large data files, told Mayor Wilson that he sends his employees who live in other places home to send and receive files where their broadband is better.

After confirming that the local telecommunications company would not be expanding its fiber footprint, this November, the City of Alexandria issued an invitation to bid for the construction of a municipal fiber network.

The idea is to build a fiber backbone that brings broadband to public institutions – including public safety, schools, and libraries – but that will also lease capacity to private companies wanting to serve residential and small-business customers. That’s an important strategy because the network is, in effect, dual-use: providing immediate value for community institutions and longer-term possibilities for residential service.

As Mayor Wilson explains, just serving the government buildings with municipal fiber makes financial sense; the ability to serve residential and small-business customers is a bonus.

Academic research tells us that more broadband competition matters: pushing rivals to up their game, saving money for consumers, increasing the quality of service.

On-the-ground experience tells the same story. For example, when Longmont, Colorado, started a municipal broadband service, the incumbent broadband provider lowered prices in Longmont, but not in neighboring communities. And the difference in the prices was substantial – $70/month for a 1 Gbps service in Longmont but $110-$120/month in the surrounding areas for the same service. That’s an increase of more than 50%.

Competitive networks have traditionally been called overbuilders. For example, the Commonwealth of Massachusetts defined “overbuild” to describe what happens “[w]hen a competing cable operator builds a cable network system in an area already serviced by a cable operator.” In other words, when a new company shows up to compete.

But now we hear that “overbuilding” is a bad and wasteful thing.

What some call “overbuilding” should be called by a more familiar term: “Competition.”

Using the term “overbuilding” to criticize governmental efforts does not provide a basis for careful decision-making.

For example, some people think that there are rural areas of the country that can support only one provider. That’s called a natural monopoly and for long stretches of the 20th Century, it was the justification for the monopoly Bell system.

But that argument doesn’t rest on the use of the label “overbuilder;” rather it proposes a competition analysis – namely that there’s only enough consumer demand to keep one company in business. That might be right or wrong but my point is that the analysis requires a competition inquiry; an answer can’t be reached simply by calling something overbuilding.

The label of “overbuilding” is no substitute for competition analysis.

We believe there are circumstance where public monies should support competitive deployment.

Consider “broadband blind spots,” places where existing government efforts don’t even see a problem.

This fall, I met a woman who lives in rural Virginia and who told me that she can only get 15/2 Mbps service. Under the requirements of the Department of Agriculture’s new ReConnect program, that’s too fast to get USDA support because it’s above 10/1 Mbps. But too slow to meet the FCC’s current definition of broadband.

Indeed, according to the FCC data, there are over 10 million Americans who have access to speeds from 10/1 up to, but not including, 25/3. (And another 16 million Americans who can get 25 but not 100 Mbps download speeds.)

Of course, the first priority of deployment funding is to build to areas that lack broadband. But policymakers can also act where competition would provide real benefits.

This is a mainstream idea. On November 7, 2019, Senators Shelly Moore Capito (R-WV) and Jacky Rosen (D-NV) introduced new legislation that would require all federal broadband programs to support 25/3 Mbps service – the FCC’s current definition of broadband.

Senators Capito and Rosen are scarcely alone in recognizing the importance of bringing real broadband to places that have internet-access service that is too slow for what communities and people need.

A number of state broadband funding programs – such as those in Colorado, Delaware, Georgia, Minnesota, New York, and Tennessee – recognize that communities lacking access to basic broadband at speeds of 25/3 Mbps also should be eligible for government efforts that fund network construction.

Some go further. Minnesota, for example, supports deployment in areas that lack access to 100/20 Mbps service, and a similar approach was taken in the LIFT America Act that was introduced in Congress earlier this year.  

Of course, if you have a monopoly business, it’s better for you if no one else enters the market. As one economist said in the 1930’s, “The best of all monopoly profits is a quiet life.”

But communities around the country have taken action – different kinds of action – to promote competition. Chattanooga, Tennessee, and Wilson, North Carolina, are well known. But there are more: from Westminster, Maryland, to South Bend, Indiana, to Fairlawn, Ohio, to Ammon, Idaho, to Centennial, Colorado, where the city built out a fiber backbone that is open for the use of existing and new broadband providers to reach local homes. A community leader told us that the local cable and telephone companies “are not pleased with Centennial’s move because they have to compete with everyone else.”

When is public support justified? In our report, we suggest that in considering expenditures, government should consider, among other factors:

  • the benefits to consumers of increased deployment and competition, and
  • the ability of network expansion to capture the advantages of network efficiencies in reaching these areas (and passing those savings along to consumers).

Our competition agenda cuts across each of the building blocks I mentioned earlier, deployment, affordability and adoption, and community anchor institutions.

Among our recommendations:

  • States should repeal and, if necessary, Congress should pre-empt current state laws that
    restrict municipalities and counties from experimenting with various ways of increasing broadband deployment.
  • When infrastructure, like roads, is constructed, fiber should be installed and made available to multiple providers.
  • More entities, including community-based institutions, should be allowed to provide Lifeline services to low-income families as Lifeline Broadband Providers.
  • Community anchor institutions should be empowered to act as launching pads for additional connectivity options to their surrounding communities.

Right now in America, fixed-broadband competition, especially at today’s speeds and performance characteristics, is very limited.

That’s a consumer issue. But it’s more than a consumer issue: the benefits from the use of High-Performance Broadband accrue to the broader economic and social benefit of America. Limited  broadband competition—without regard to its cause—therefore curbs the economic and social progress that broadband can help deliver.

So when we talk about market concentration and talk about the need to promote competition in the American economy, I hope we will include fixed broadband in the discussion.

Thank you.


For more on Broadband for America’s Future: A Vision for the 2020s, please sign up for updates.

Download a special Benton Report by Jonathan Sallet

Jonathan Sallet is a Benton Senior Fellow. He works to promote broadband access and deployment, to advance competition, including through antitrust, and to preserve and protect internet openness. He is the former-Federal Communications Commission General Counsel (2013-2016), and Deputy Assistant Attorney General for Litigation, Antitrust Division, US Department of Justice (2016-2017). ​

Ebook version of the Broadband study click below

http://online.fliphtml5.com/gnel/hjnv/