Archives For broadband Internet service

As Thomas Sowell has noted many times, political debates often involve the use of words which if taken literally mean something very different than the connotations which are conveyed. Examples abound in the debate about broadband buildout. 

There is a general consensus on the need to subsidize aspects of broadband buildout to rural areas in order to close the digital divide. But this real need allows for strategic obfuscation of key terms in this debate by parties hoping to achieve political or competitive gain. 

“Access” and “high-speed broadband”

For instance, nearly everyone would agree that Internet policy should “promote access to high-speed broadband.” But how some academics and activists define “access” and “high-speed broadband” are much different than the average American would expect.

A commonsense definition of access is that consumers have the ability to buy broadband sufficient to meet their needs, considering the costs and benefits they face. In the context of the digital divide between rural and urban areas, the different options available to consumers in each area is a reflection of the very real costs and other challenges of providing service. In rural areas with low population density, it costs broadband providers considerably more per potential subscriber to build the infrastructure needed to provide service. At some point, depending on the technology, it is no longer profitable to build out to the next customer several miles down the road. The options and prices available to rural consumers reflects this unavoidable fact. Holding price constant, there is no doubt that many rural consumers would prefer higher speeds than are currently available to them. But this is not the real-world choice which presents itself. 

But access in this debate instead means the availability of the same broadband options regardless of where people live. Rather than being seen as a reflection of underlying economic realities, the fact that rural Americans do not have the same options available to them that urban Americans do is seen as a problem which calls out for a political solution. Thus, billions of dollars are spent in an attempt to “close the digital divide” by subsidizing broadband providers to build infrastructure to  rural areas. 

“High-speed broadband” similarly has a meaning in this debate significantly different from what many consumers, especially those lacking “high speed” service, expect. For consumers, fast enough is what allows them to use the Internet in the ways they desire. What is fast enough does change over time as more and more uses for the Internet become common. This is why the FCC has changed the technical definition of broadband multiple times over the years as usage patterns and bandwidth requirements change. Currently, the FCC uses 25Mbps down/3 Mbps up as the baseline for broadband.

However, for some, like Jonathan Sallet, this is thoroughly insufficient. In his Broadband for America’s Future: A Vision for the 2020s, he instead proposes “100 Mbps symmetrical service without usage limits.” The disconnect between consumer demand as measured in the marketplace in light of real trade-offs between cost and performance and this arbitrary number is not well-explained in this study. The assumption is simply that faster is better, and that the building of faster networks is a mere engineering issue once sufficiently funded and executed with enough political will.

But there is little evidence that consumers “need” faster Internet than the market is currently providing. In fact, one Wall Street Journal study suggests “typical U.S. households don’t use most of their bandwidth while streaming and get marginal gains from upgrading speeds.” Moreover, there is even less evidence that most consumers or businesses need anything close to upload speeds of 100 Mbps. For even intensive uses like high-resolution live streaming, recommended upload speeds still fall far short of 100 Mbps. 

“Competition” and “Overbuilding”

Similarly, no one objects to the importance of “competition in the broadband marketplace.” But what is meant by this term is subject to vastly different interpretations.

The number of competitors is not the same as the amount of competition. Competition is a process by which market participants discover the best way to serve consumers at lowest cost. Specific markets are often subject to competition not only from the firms which exist within those markets, but also from potential competitors who may enter the market any time potential profits reach a point high enough to justify the costs of entry. An important inference from this is that temporary monopolies, in the sense that one firm has a significant share of the market, is not in itself illegal under antitrust law, even if they are charging monopoly prices. Potential entry is as real in its effects as actual competitors in forcing incumbents to continue to innovate and provide value to consumers. 

However, many assume the best way to encourage competition in broadband buildout is to simply promote more competitors. A significant portion of Broadband for America’s Future emphasizes the importance of subsidizing new competition in order to increase buildout, increase quality, and bring down prices. In particular, Sallet emphasizes the benefits of municipal broadband, i.e. when local governments build and run their own networks. 

In fact, Sallet argues that fears of “overbuilding” are really just fears of competition by incumbent broadband ISPs:

Language here is important. There is a tendency to call the construction of new, competitive networks in a locality with an existing network “overbuilding”—as if it were an unnecessary thing, a useless piece of engineering. But what some call “overbuilding” should be called by a more familiar term: “Competition.” “Overbuilding” is an engineering concept; “competition” is an economic concept that helps consumers because it shifts the focus from counting broadband networks to counting the dollars that consumers save when they have competitive choices. The difference is fundamental—overbuilding asks whether the dollars spent to build another network are necessary for the delivery of a communications service; economics asks whether spending those dollars will lead to competition that allows consumers to spend less and get more. 

Sallet makes two rhetorical moves here to make his argument. 

The first is redefining “overbuilding,” which refers to literally building a new network on top of (that is, “over”) previously built architecture, as a ploy by ISPs to avoid competition. But this is truly Orwellian. When a new entrant can build over an incumbent and take advantage of the first-mover’s investments to enter at a lower cost, a failure to compensate the first-mover is free riding. If the government compels such free riding, it reduces incentives for firms to make the initial investment to build the infrastructure.

The second is defining competition as the number of competitors, even if those competitors need to be subsidized by the government in order to enter the marketplace.  

But there is no way to determine the “right” number of competitors in a given market in advance. In the real world, markets don’t match blackboard descriptions of perfect competition. In fact, there are sometimes high fixed costs which limit the number of firms which will likely exist in a competitive market. In some markets, known as natural monopolies, high infrastructural costs and other barriers to entry relative to the size of the market lead to a situation where it is cheaper for a monopoly to provide a good or service than multiple firms in a market. But it is important to note that only firms operating under market pressures can assess the viability of competition. This is why there is a significant risk in government subsidizing entry. 

Competition drives sustained investment in the capital-intensive architecture of broadband networks, which suggests that ISPs are not natural monopolies. If they were, then having a monopoly provider regulated by the government to ensure the public interest, or government-run broadband companies, may make sense. In fact, Sallet denies ISPs are natural monopolies, stating that “the history of telecommunications regulation in the United States suggests that monopolies were a result of policy choices, not mandated by any iron law of economics” and “it would be odd for public policy to treat the creation of a monopoly as a success.” 

As noted by economist George Ford in his study, The Impact of Government-Owned Broadband Networks on Private Investment and Consumer Welfare, unlike the threat of entry which often causes incumbents to act competitively even in the absence of competitors, the threat of subsidized entry reduces incentives for private entities to invest in those markets altogether. This includes both the incentive to build the network and update it. Subsidized entry may, in fact, tip the scales from competition that promotes consumer welfare to that which could harm it. If the market only profitably sustains one or two competitors, adding another through municipal broadband or subsidizing a new entrant may reduce the profitability of the incumbent(s) and eventually lead to exit. When this happens, only the government-run or subsidized network may survive because the subsidized entrant is shielded from the market test of profit-and-loss.

The “Donut Hole” Problem

The term “donut hole” is a final example to consider of how words can be used to confuse rather than enlighten in this debate.

There is broad agreement that to generate the positive externalities from universal service, there needs to be subsidies for buildout to high-cost rural areas. However, this seeming agreement masks vastly different approaches. 

For instance, some critics of the current subsidy approach have identified a phenomenon where the city center has multiple competitive ISPs and government policy extends subsidies to ISPs to build out broadband coverage into rural areas, but there is relatively paltry Internet services in between due to a lack of private or public investment. They describe this as a “donut hole” because the “unserved” rural areas receive subsidies while “underserved” outlying parts immediately surrounding town centers receive nothing under current policy.

Conceptually, this is not a donut hole. It is actually more like a target or bullseye, where the city center is served by private investment and the rural areas receive subsidies to be served. 

Indeed, there is a different use of the term donut hole, which describes how public investment in city centers can create a donut hole of funding needed to support rural build-out. Most Internet providers rely on profits from providing lower-cost service to higher-population areas (like city centers) to cross-subsidize the higher cost of providing service in outlying and rural areas. But municipal providers generally only provide municipal service — they only provide lower-cost service. This hits the carriers that serve higher-cost areas with a double whammy. First, every customer that municipal providers take from private carriers cuts the revenue that those carriers rely on to provide service elsewhere. Second, and even more problematic, because the municipal providers have lower costs (because they tend not to serve the higher-cost outlying areas), they can offer lower prices for service. This “competition” exerts downward pressure on the private firms’ prices, further reducing revenue across their entire in-town customer base. 

This version of the “donut hole,” in which the revenues that private firms rely on from the city center to support the costs of providing service to outlying areas has two simultaneous effects. First, it directly reduces the funding available to serve more rural areas. And, second, it increases the average cost of providing service across its network (because it is no longer recovering as much of its costs from the lower-cost city core), which increases the prices that need to be charged to rural users in order to justify offering service at all.

Conclusion

Overcoming the problem of the rural digital divide starts with understanding why it exists. It is simply more expensive to build networks in areas with low population density. If universal service is the goal, subsidies, whether explicit subsidies from government or implicit cross-subsidies by broadband companies, are necessary to build out to these areas. But obfuscations about increasing “access to high-speed broadband” by promoting “competition” shouldn’t control the debate.

Instead, there needs to be a nuanced understanding of how government-subsidized entry into the broadband marketplace can discourage private investment and grow the size of the “donut hole,” thereby leading to demand for even greater subsidies. Policymakers should avoid exacerbating the digital divide by prioritizing subsidized competition over market processes.

On February 13 an administrative law judge (ALJ) at the California Public Utility Commission (CPUC) issued a proposed decision regarding the Comcast/Time Warner Cable (TWC) merger. The proposed decision recommends that the CPUC approve the merger with conditions.

It’s laudable that the ALJ acknowledges at least some of the competitive merits of the proposed deal. But the set of conditions that the proposed decision would impose on the combined company in order to complete the merger represents a remarkable set of unauthorized regulations that are both inappropriate for the deal and at odds with California’s legislated approach to regulation of the Internet.

According to the proposed decision, every condition it imposes is aimed at mitigating a presumed harm arising from the merger:

The Applicants must meet the conditions adopted herein in order to provide reasonable assurance that the proposed transaction will be in the public interest in accordance with Pub. Util. Code § 854(a) and (c).… We only adopt conditions which mitigate an effect of the merger in order to satisfy the public interest requirements of § 854.

By any reasonable interpretation, this would mean that the CPUC can adopt only those conditions that address specific public interest concerns arising from the deal itself. But most of the conditions in the proposed decision fail this basic test and seem designed to address broader social policy issues that have nothing to do with the alleged competitive effects of the deal.

Instead, without undertaking an analysis of the merger’s competitive effects, the proposed decision effectively accepts that the merger serves the public interest, while also simply accepting the assertions of the merger’s opponents that it doesn’t. In the name of squaring that circle, the proposed decision seeks to permit the merger to proceed, but then seeks to force the post-merger company to conform to the merger’s critics’ rather arbitrary view of their preferred market structure for the provision of cable broadband services in California.

For something — say, a merger — to be in the public interest, it need not further every conceivable public interest goal. This is a perversion of the standard, and it turns “public interest” into an unconstrained license to impose a regulatory wish-list on particular actors, outside of the scope of usual regulatory processes.

While a few people may have no problem with the proposed decision’s expansive vision of Internet access regulation, California governor Jerry Brown and the overwhelming majority of the California state legislature cannot be counted among the supporters of this approach.

In 2012 the state legislature passed by an overwhelming margin — and Governor Brown signed — SB 1161 (codified as Section 710 of the California Public Utilities Code), which expressly prohibits the CPUC from regulating broadband:

The commission shall not exercise regulatory jurisdiction or control over Voice over Internet Protocol and Internet Protocol enabled services except as required or expressly delegated by federal law or expressly directed to do so by statute or as set forth in [certain enumerated exceptions].”

The message is clear: The CPUC should not try to bypass clear state law and all institutional safeguards by misusing the merger clearance process.

While bipartisan majorities in the state house, supported by a Democratic governor, have stopped the CPUC from imposing new regulations on Internet and VoIP services through SB 1161, the proposed decision seeks to impose regulations through merger conditions that go far beyond anything permitted by this state law.

For instance, the proposed decision seeks to impose arbitrary retail price controls on broadband access:

Comcast shall offer to all customers of the merged companies, for a period of five years following the effective date of the parent company merger, the opportunity to purchase stand-alone broadband Internet service at a price not to exceed the price charged by Time Warner for providing that service to its customers, and at speeds, prices, and terms, at least comparable to that offered by Time Warner prior to the merger’s closing.

And the proposed decision seeks to mandate market structure in other insidious ways, as well, mandating specific broadband speeds, requiring a break-neck geographic expansion of Comcast’s service area, and dictating installation and service times, among other things — all without regard to the actual plausibility (or cost) of implementing such requirements.

But the problem is even more acute. Not only does the proposed decision seek to regulate Internet access issues irrelevant to the merger, it also proposes to impose conditions that would actually undermine competition.

The proposed decision would impose the following conditions on Comcast’s business VoIP and business Internet services:

Comcast shall offer Time Warner’s Business Calling Plan with Stand Alone Internet Access to interested CLECs throughout the combined service territories of the merging companies for a period of five years from the effective date of the parent company merger at existing prices, terms and conditions.

Comcast shall offer Time Warner’s Carrier Ethernet Last Mile Access product to interested CLECs throughout the combined service territories of the merging companies for a period of five years from the effective date of the parent company at the same prices, terms and conditions as offered by Time Warner prior to the merger.

But the proposed decision fails to recognize that Comcast is an also-ran in the business service market. Last year it served a small fraction of the business customers served by AT&T and Verizon, who have long dominated the business services market:

According to a Sept. 2011 ComScore survey, AT&T and Verizon had the largest market shares of all business services ISPs. AT&T held 20% of market share and Verizon held 12%. Comcast ranked 6th, with 5% of market share.

The proposed conditions would hamstring the upstart challenger Comcast by removing both product and pricing flexibility for five years – an eternity in rapidly evolving technology markets. That’s a sure-fire way to minimize competition, not promote it.

The proposed decision reiterates several times its concern that the combined Comcast/Time Warner Cable will serve more than 80% of California households, and “reduce[] the possibilities for content providers to reach the California broadband market.” The alleged concern is that the combined company could exercise anticompetitive market power — imposing artificially high fees for carrying content or degrading service of unaffiliated content and services.

The problem is Comcast and TWC don’t compete anywhere in California today, and they face competition from other providers everywhere they operate. As the decision matter-of-factly states:

Comcast and Time Warner do not compete with one another… [and] Comcast and Time Warner compete with other providers of Internet access services in their respective service territories.

As a result, the merger will actually have no effect on the number of competitive choices in the state; the increase in the statewide market share as a result of the deal is irrelevant. And so these purported competition concerns can’t be the basis for any conditions, let alone the sweeping ones set out in the proposed decision.

The stated concern about content providers finding it difficult to reach Californians is a red herring: the post-merger Comcast geographic footprint will be exactly the same as the combined, pre-merger Comcast/TWC/Charter footprint. Content providers will be able to access just as many Californians (and with greater speeds) as before the merger.

True, content providers that just want to reach some number of random Californians may have to reach more of them through Comcast than they would have before the merger. But what content provider just wants to reach some number of Californians in the first place? Moreover, this fundamentally misstates the way the Internet works: it is users who reach the content they prefer; not the other way around. And, once again, for literally every consumer in the state, the number of available options for doing so won’t change one iota following the merger.

Nothing shows more clearly how the proposed decision has strayed from responding to merger concerns to addressing broader social policy issues than the conditions aimed at expanding low-price broadband offerings for underserved households. Among other things, the proposed conditions dramatically increase the size and scope of Comcast’s Internet Essentials program, converting this laudable effort from a targeted program (that uses a host of tools to connect families where a child is eligible for the National School Lunch Program to the Internet) into one that must serve all low-income adults.

Putting aside the damage this would do to the core Internet Essentials’ mission of connecting school age children by diverting resources from the program’s central purpose, it is manifestly outside the scope of the CPUC’s review. Nothing in the deal affects the number of adults (or children, for that matter) in California without broadband.

It’s possible, of course, that Comcast might implement something like an expanded Internet Essentials program without any prodding; after all, companies implement (and expand) such programs all the time. But why on earth should regulators be able to define such an obligation arbitrarily, and to impose it on whatever ISP happens to be asking for a license transfer? That arbitrariness creates precisely the sort of business uncertainty that SB 1161 was meant to prevent.

The same thing applies to the proposed decision’s requirement regarding school and library broadband connectivity:

Comcast shall connect and/or upgrade Internet infrastructure for K-12 schools and public libraries in unserved and underserved areas in Comcast’s combined California service territory so that it is providing high speed Internet to at least the same proportion of K-12 schools and public libraries in such unserved and underserved areas as it provides to the households in its service territory.

No doubt improving school and library infrastructure is a noble goal — and there’s even a large federal subsidy program (E-Rate) devoted to it. But insisting that Comcast do so — and do so to an extent unsupported by the underlying federal subsidy program already connecting such institutions, and in contravention of existing provider contracts with schools — as a condition of the merger is simple extortion.

The CPUC is treating the proposed merger like a free-for-all, imposing in the name of the “public interest” a set of conditions that it would never be permitted to impose absent the gun-to-the-head of merger approval. Moreover, it seeks to remake California’s broadband access landscape in a fashion that would likely never materialize in the natural course of competition: If the merger doesn’t go through, none of the conditions in the proposed decision and alleged to be necessary to protect the public interest will exist.

Far from trying to ensure that Comcast’s merger with TWC doesn’t erode competitive forces to the detriment of the public, the proposed decision is trying to micromanage the market, simply asserting that the public interest demands imposition of it’s subjective and arbitrary laundry list of preferred items. This isn’t sensible regulation, it isn’t compliant with state law, and it doesn’t serve the people of California.