Competition

This piece focuses on competition in terms of choice between multiple service providers. There is another page discussing the idea of a "level playing field" between the public and private sector.

One of the major frustrations of people across the United States is a lack of competition among phone and cable companies. Rural areas generally have no access to cable networks and therefore often only have one choice for high speed Internet connections. Private companies do not invest in low density areas because profits are slim or nonexistent due to the high cost of building a network.

Though many can choose among satellite options for television, some cannot subscribe due to location or restrictions where they live. Moreover, as broadband becomes increasingly crucial to modern life, satellite companies cannot compete with cable companies on Internet speeds or prices.

Additionally, satellite providers do not support the community with franchise fees to support PEG programming - meaning it is in our interest to make sure the cable market locally can offer better services than satellite companies.

Some falsely believe that local governments are to blame for the lack of competition among cable companies. Local governments may not issue an exclusive franchise to a cable company. The truth is that local governments do not want to be stuck with a monopolistic provider in their community. Unfortunately, as the rest of this page explains, these services are a natural monopoly, with very high barriers to entry.

When it comes to broadband, the fast options are fiber-to-the-home (FTTH) networks and some cable networks (both offer the "triple play" generally). In nearly all areas, DSL is too slow to be really considered a fast connection to the modern Internet. FTTH is rare unless you live in one of the affluent areas targeted by Verizon or you are lucky enough to live in the one of the communities where it is already available. Whether FTTH or cable, these networks are expensive to build. Wireless is generally slower and less reliable, so this discussion focuses entirely on wired networks.

Competition between wired networks will have to come from one of two formats: competition using shared infrastructure or separate. In other words, there will be a fiber or cable infrastructure that multiple companies share (both on the same wires) or each company would have to build its own, distinct network of wires that it will not share with competitors.

Let's take the distinct network approach first. This is the status quo approach because current law allows the cable company to decide whether it will share its wires with competitors rather than forcing the cable company to offer wholesale access at fair rates to competitors (called open access or unbundling). These policies are set nationally and unlikely to change.

The result is that cable companies mostly choose not to share their networks with competitors. They choose a monopolistic model because it offers higher revenues that allows them to maximize shareholder profits. Some argue that this model encourages companies to invest more in their infrastructure than if they shared it with competitors, but that point is highly debatable because many communities are left with a monopoly and a significant lack of network investment. When subscribers have no other options, companies have maximized profits by refusing to upgrade the network.

Other companies are free to "overbuild," or build a competing network through the city's rights of way (after obtaining a franchise from the city; cities are not permitted to grant exclusive franchises to a single company). There is no law stopping Charter Cable from building a network in St. Paul to compete with Comcast. However, it rarely happens in the U.S. It may be the result of a "gentleman's agreement" between major cable companies to avoid each others' turf, or it may be simple economics (probably both).

The problem with this model is that overbuilding is tremendously difficult. Building a network has extensive upfront costs that take years to pay off. In a city like St. Paul, building a new network from scratch may cost between $150 and $300 million. In most communities, a company needs at least a 30% take rate in order to break even. When overbuilding, the incumbent provider (in St. Paul, this is Comcast) has all the advantages.

Incumbent providers already have the majority of customers and can lower prices temporarily to ensure few will switch to the overbuilder. Though government regulations are often blamed for discouraging competition, the truth is that the economics make overbuilding hard - especially when investors demand a quick return on investment.

The 30% take rate minimum means most markets would support, under ideal circumstances, no more than three competitors. Though three would be a dramatic improvement over one, it is hardly a robust marketplace. Even if the market would support more competitors, it would be increasingly inefficient as each network owner would string its own cable on the telephone poles across the city, recreating the conditions 100 years ago when cities were overrun with poles carrying wires from many competing power companies.

Current regulations, encouraging companies to compete on their own infrastructure doom us to monopolies and duopolies. The alternative is competition on shared infrastructure - which is a superior solution considering the problems noted above.

The problem with shared infrastructure is that a profit maximizer prefers to lock customers into their own services. The network owner must therefore either be forced to open the network to competitors by government regulation (an option the U.S. is unlikely to embrace) or choose to do it by putting community interest ahead of profits.

Companies like AT&T and Comcast are required by law to put shareholder interests before the interests of any community. So they are not going to open their infrastructure by choice.

But the community can build a network and open it to all manner of competitors. This would greatly increase the pool of competitors because each service provider would no longer have to raise the funds to build a network across the city and could make a profit with fewer subscribers.

A community network would not shut down existing providers. It provides an additional choice to the community -- generally a much faster, more affordable, and more local option.