Broadband Competition is Hard

A blog about business and economics.
Aug. 1 2012 10:18 AM

Google Fiber: Why Meaningful Broadband Competition Is So Hard

In what I think is another great example of bad corporate governance advancing the public interest, Google is investing a fair amount of money in trying to bring its Google Fiber project to Kansas City, Mo., which would give the place something sorely lacking in the United States—real competition for broadband Internet and television services. Ryan Lawler for TechCrunch offers some reasons for skepticism that Google can succeed, but those mostly strike me as surmountable problems. The big problem Google will face here is the basic problem that anyone in this business will face—stringing wires all over the place works much better as a monopoly.

This is an industry where the cost of actually providing the service on an ongoing basic is pretty cheap, but the cost of building the network in the first place is very high. In a competitive market, the startup costs of building the network would be irrelevant. The network is a sunk cost, and a network operator should be willing to charge you a low price—anything high enough to cover the bills. That "competitive price" should be something resembling the low teaser rate that cable companies offer you today. But real-world cable companies don't operate in a competitive environment but instead charge the much higher "monopoly price," which is governed not by the cost of providing service but by the question of "what the market will bear." Since "the market" is made of heterogeneous households, cable companies engage in lots of wacky price discrimination strategies and to get a good deal you need to call up and threaten to cancel.

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The problem for a competitor coming in is that while you're incurring the high cost of building out your network, the incumbent can scramble to cut prices down to the competitive level. Anyone who phones up their existing broadband provider saying they want to switch will be offered a huge discount. The incumbent can start offering pre-emptive discounts to existing customers who sign long-term contracts.

This lowering of the price to the competitive level is good for consumers, but it means the new entrant isn't going to be able to earn a profitable return on his investment in network infrastructure. Which is precisely why companies don't invest in this. Which is why we, the citizens of Kansas City, are lucky that Google is controlled by its founders and this Google Fiber idea struck their fancy. But if Google is serious about investing money in building out better broadband, the sensible thing to do would be to just go whole-hog crazy and blow a huge chunk of its cash on hand in buying Time Warner Cable.

As a country, meanwhile, if we want better broadband we really need a different policy approach that doesn't rely on the implausible idea of the private sector building and maintaining multiple separate overlapping sets of fiber-optic cables.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.