When we consider questions related to Internet access policy (as I’ve been doing lately on this blog), it’s useful to have a sense of both the economics and historical trends in this key sector of the economy. In this post I’m going to provide some of this, using excerpts from a paper I wrote awhile back. Some of it may be a bit wonky, but I hope it will be useful for anyone wanting some additional background.
One of the key implications of this post’s analysis is that facilities-based wireline competition tends to be economically inefficient and, over time, wireline (and, to a somewhat lesser degree, wireless) access markets tend toward increasingly monopolistic industry structures (often referred to as “natural monopoly.”)
And even when there are already two wireline network operators in place (as in much of the U.S.), the same migration-to-monopoly economics are at work.
For example, AT&T and Verizon, the nation’s two largest telcos, have been experiencing accelerating customer losses in the markets in which they offer only DSL broadband (which account for roughly half of their holdings, if you include mainly-DSL markets recently sold off by Verizon). Yet, in spite of these accelerating competitive losses, they have decided not to upgrade these markets with fiber optics, which would allow them to compete much more effectively with cable.
The primary reasons for this are:
1) telco DSL networks are fundamentally inferior to cable networks in terms of broadband capabilities, but are expensive to upgrade to the kind of fiber optic-based network that can compete with cable (as Verizon’s is doing quite successfully in the areas where it has upgraded to a fiber-to-the-home network.)
2) the two giant telcos don’t see enough financial payback from upgrading their remaining DSL-only (or dial-up only) markets and, instead, are focusing mainly on wireless, where they are the ones with dominant market power, but which does not provide real competition for cable-delivered broadband (due to speed, reliability, price and other factors).
Thus, as Susan Crawford has pointed out, in much of the nation, high-speed Internet access is migrating to an unregulated “cable monopoly.”
If we’re serious about Internet policy, we need to understand and deal with this reality. Hopefully the following will help a little with that understanding: