Comparative Broadband Ideas

May 08, 2006 | Inside: Regulation & Policies

The primary reason that Japan and Korea do so much better than the U.S. on any measurement of broadband (availability, penetration, price, speed) is that there is fierce competition in the market for broadband internet access in these countries.

That’s pretty simple.

How do you increase competition in the U.S. for broadband access? Right now, we have giants fighting with each other—cable and telephone companies. Small numbers of these companies control 80%-90% of the market for broadband access. After the BellSouth merger, AT&T, Verizon, and Comcast alone will control 49% of the market. This competition couldn’t be described as disruptive in any way—in fact, there seems to be a tacit agreement among these Shamus and Godzillas not to provide unfettered (unprioritized) internet access. In Japan, the incumbent controls only about a third of the DSL market—two-thirds of the market is made up of new entrants.

There are three routes towards increasing competition in broadband access: (1) “local loop unbundling,” which means requiring the incumbent to physically open its facilities to new entrants, who then find new ways to provide services to end-customers; (2) “wholesale access,” which means requiring the incumbent to sell a wholesale broadband access product to all comers; and (3) encouraging other kinds of broadband access ("facilities-based competition"), which means helping new entrants have their own networks without having to deal with the incumbents at all.

Let’s look at these routes.

Facilities-based competition would be desirable here in the U.S., but the up-front costs are enormous. Even MSN/Google/Yahoo! would have to join up together in order to make this happen, and doing so admittedly wouldn’t be playing to their strengths as companies. Plus, while you’re waiting for the mystical additional modality to arise (wider wireless, for example), customers may have already made their choices and tied their identities to some vertically-integrated telco behemoth—so the switching costs will be very high.

Wholesale access sounds facially attractive (give the incumbent the dignity of control over its own facilities!) but it turns out to lead to astounding game-playing by the incumbents. The U.K. has adopted this approach to BT, and found [PDF] (a while ago, in 2004—things may have changed) that BT wasn’t really giving equal access to its competitors:

Without regulation to ensure equality of access, the incumbent has an incentive to provide this link [last mile access to customers] on inferior terms compared with the service it provides to its own retail activities, disadvantaging its competitors in the retail market. In the UK this is particularly so because price controls on wholesale access to BT’s network limit the returns BT can make at the wholesale level. As such, BT has few incentives to respond to the demands of other wholesale customers, and strong incentives to undermine competition at the retail level by restricting the ability of retail operators to compete on a fair basis.

Allowing the incumbent to package wholesale access doesn’t necessarily lead to increased competition.

Unbundling is the hardest of all, but perhaps the only route likely to be effective. Both Japan and Korea have taken this approach, using fierce regulatory mandates, and competition has erupted there (prices have gone down, speeds are 100mbps).

The U.S. 1996 Act tried mandating unbundled “network elements” for sale to competitive carriers, and it’s fair to say that the Baby Bells were quite successful at making this regime a nightmare for all concerned. Through a variety of steps, unbundling obligations in broadband markets in the U.S. have been eliminated.

So what’s the answer? Governmental willingness to get involved to improve broadband infrastructure—that’s what’s needed, in the absence of non-incumbent modes of getting broadband access. A simpler, stronger way of mandating unbundling will be key.

But the first point, the most important point, is that ferocity of competition is predictive of a better broadband picture. The policies we have now won’t get us there. We have something to learn from Japan and Korea on these points.

It’s not easy: you have to find a way to give the incumbent enough of a return on its last-mile investments so that maintenance/upgrading continues, and you have to find a way to make that price low enough so that new market entrants are willing to take the plunge. Right now, we’re focusing only on one side of the equation—the investment side—and not enough on the new market entrant side. We’re falling farther and farther behind as a result.

Book recommendation: Global Broadband Battles, Martin Fransman, ed.

This has been a featured post from Susan Crawford, Assistant Professor of Law. To visit the weblog maintained by Susan Crawford click here.

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