Two Great Enterprise Captains Complain About Cable

A blog about business and economics.
Sept. 20 2012 10:40 AM

The Enterprise's Two Greatest Captains Discuss the Problem of Utility Monopolies

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In the future, replicator technology and the unlimited clean energy provided by dilithium crystals will render capitalism as we know it obsolete—ushering in a bold new future of abundance and socialism. 

And it's a good thing too, because as Patrick Stewart and William Shatner were both discussing on Twitter recently free market competition has some serious problems. In particular, there's an egregious problem around utility services. Card-carrying libertarian Tim Lee had a good post about this recently. The basic issue is that you never get real competition in these markets. The first guy to invest in the infrastructure bears huge fixed costs but now can engage in awesome monopoly pricing.

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Those nice fat profits should attract new entrants and new competition, but there are some problems.

One is simply that "tear up the streets and lay fiber optic cables" isn't really an option for a random entrepreneur. People don't like it when the streets are torn up to lay cables, so there's a permitting process and it's a whole big heavy lift. And once you do get permission and bear the costs of building out a parallel network it's hard to make money. Since the market is now competitive, the margins per customer are lower. And since the margin is now fragmented, the total number of customers is lower. If a third company wants to get in on the action the problem is even more severe. What's more, it's all terribly inefficient. To have five different cable companies serving a town, each house would need five different cable connections even though each household only uses at most one connection.

The typical outcome involves very little competition (one or two or if you're lucky three companies offering service) combined with massive infrastructure overcapacity.

This leads to high prices and low quality service compared to the world's leaders, and the low quality of service is especially noteworthy when it comes to things like customer service that aren't the core thing being sold. The countries that get better outcomes manage to have much better regulation, but effective regulation is hard to do.

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