This is the second in a series of three posts looking at the lessons for the United States from broadband deployment in other countries. Read the first installment here.
Broadband is cheaper in many other countries than in the United States.
“You have a pretty uncompetitive market by European standards,” said Tim Johnson, the chief analyst at Point-Topic, a London consulting firm.
Other countries have lower costs for the same reasons their DSL service is faster. Dense urban areas reduce some of the cost of building networks. In addition, governments in some countries subsidized fiber networks.
But the big difference between the United States and most other countries is competition.
“Now hold on there,” you might say to me. Since I wrote that many countries don’t have cable systems and the bulk of broadband is run by way of DSL through existing phone wires, how can there be competition? Aren’t those owned by monopoly phone companies?
True enough. But most big countries have devised a system to create competition by forcing the phone companies to share their lines and facilities with rival Internet providers.
Not surprisingly, the phone companies hate this idea, often called unbundling, and tend to drag their feet when it is introduced. So it requires rather diligent regulators to force the telcos to play fair. And the effect of this scheme depends a lot on details of what equipment is shared and at what prices.
Britain has gone the furthest, forcing BT Group to split off a unit that operates the actual network and sells to various voice and Internet providers, including its own telephone service, on an equal basis.
The United States was early with this sort of approach, requiring telephone companies to allow rival Internet service providers to sell DSL service using their networks. The way these rules were written, however, meant the wholesale cost was so high that providers like AOL and Earthlink couldn’t offer a better deal than the telcos themselves.
And the plan was largely abandoned in 2003 by the Federal Communications Commission on the theory that the country is better served by encouraging competition for Internet service between cable companies and phone companies.
The commission has a point that there is something rather forced and artificial about creating competition to resell what is essentially the same service. It’s like a supermarket that sells six different brands of peanut butter, all made with the same recipe in the same factory. Sometimes broadband providers try to create unusual price bundles or nice add-on features, and in some countries they use different underlying networks. But Internet providers that share the same line to their customers’ home will very often be more the same than different.
Unbundling can be seen as a slightly disguised form of price regulation. Profits dropped. Many of the new entrants have found it difficult to build sustainable businesses, while margins for the incumbent phone companies have been squeezed as well.
It’s not exactly clear, however, that this approach is in the public’s long-term interest. Phone companies have less incentive to invest and upgrade their networks if they are going to be forced to share their networks.
Some argue that this is the main reason that there is little investment in bringing fiber to homes in Europe. “Investing in fiber is a huge risk,” Kalyan Dasgupta, a London-based consultant with LECG, wrote me in an e-mail, “and the prospect of taking that risk alone, but having to ’share’ the rewards with other players, is not a prospect that most rational businesses would consider.”
Britain, which has been the biggest proponent of line sharing, has decided to deregulate the wholesale price BT can charge for fiber, so long as it doesn’t favor its own brand of Internet service.
Japan faced a similar problem after several years where regulation forced NTT, the incumbent phone company, to sell access to its lines to rival Internet providers at low prices. In order to get NTT to invest in a faster network, the government set a much more attractive price for sharing access to its new fiber lines.
Restoring some form of line sharing is one of the biggest issues facing the F.C.C. Without it, or some other way to increase competition, the oligopolistic nature of the market in the United States may well keep broadband prices well above the rates for similar service in the rest of the world. At the same time, the commission is looking to expand broadband access to rural areas and speed the deployment of higher speeds, so it may not want to slash telco profits if it will also slow investment.
