Public option advanced telecommunications infrastructure is NOT market competition

This piece by Bloomberg Law repeats the common misconception that advanced telecommunications infrastructure owned by nonprofit consumer cooperatives and public sector entities equates to market competition with incumbent investor-owned providers. 

It’s wrong on two counts. First, advanced telecommunications infrastructure is by definition not a competitive market in which many sellers compete for the business of many buyers. It’s a natural monopoly because high-cost barriers to entry and first mover advantage keep out would be competitors.

Second, consumer cooperatives and public sector providers aren’t formed to gain market share from other sellers. They are created in response to sell side market failure because in a natural monopoly, there isn’t sufficient incentive for multiple sellers to enter the market and compete. That leaves buyers without options and at the mercy of monopoly providers. Government and cooperative owned networks are formed to provide a public option to remedy private market failure.

Why is properly framing government and consumer cooperative owned networks important? It’s very important from a public policy and regulatory perspective. Incumbent providers complain public option providers constitute “unfair competition” because they don’t have to reward investors and enjoy income tax exemptions. The playing field isn’t level, they complain. But it was never a level competitive playing field in the first place, rendering the incumbents’ position moot.

A "free market ethos" does not apply to advanced telecom infrastructure

Online school forces America to confront the digital divide: What went wrong over the years? How did the birthplace of the internet become a nation where broadband is unavailable to large chunks of the population, keeping students from taking part fully in modern education and their parents from taking advantage of the modern economy? Big investments have been made in the internet in the U.S., but not uniformly or with an eye to expanding connectivity as far as possible. It’s not a task that private industry cares to take on, nor is it one that the public sector can solve on its own—not in a country with such a strident free-market ethos. (Emphasis added)

This is a false dichotomy. Advanced telecommunications infrastructure tends toward natural monopoly and not a robust competitive market. As much as some would like it to be, high cost barriers to entry and first mover advantage don't permit that to be the case.

Push back on public option fiber based on fallacious argument utility infrastructure a competitive market

North Carolina considers loosening municipal broadband regulations: In May, Gov. Roy Cooper announced $9.8 million for broadband expansion to rural areas as part of a $35 million initiative to improve internet access across the entire state. Municipal broadband, however, has a troubled history in North Carolina and beyond.The bill cleared the North Carolina House State and Local Government Committee on Wednesday and will move to the chamber’s Finance Committee for a second vote, but industry officials are opposed. Spectrum’s senior director of government relations, Brian Gregory, said the increased competition from public entities would backfire.

“It’s especially troubling for us because our employees and our companies are going to be taxed to have competition against us, and that competition on top of that is also our regulator,” Gregory told WRAL, the NBC affiliate in Raleigh.

The thing is, advanced telecom infrastructure is NOT a competitive market. In fact, it's arguably a failed market because so many people who want better landline connections to their homes and small businesses and are willing to pay for them aren't able to buy them. Investor owned telephone and cable companies must also deal with inherent limitations on what they can invest in modernizing their infrastructures to fiber to the premise. Investors naturally push back when it comes to sacrificing profits and dividends to capital expenditures.

Both legacy incumbents and consumers are wrong about competition in landline delivered advanced telecom service

Legacy incumbent telephone and cable companies and consumer and public interest advocates describe advanced telecommunications landline infrastructure as a competitive market. The former argue that it’s robustly competitive, affording consumers plenty of choices particularly in dense, urban areas. The latter complain there’s little or no competition in most areas where it’s a market duopoly at best. The choice is between either a legacy telephone company or a cable company. Oftentimes there is no choice at all, with only one of the two -- or neither -- offering service.

They’re both off base. Telecommunications infrastructure like that of other utilities delivering electric power, natural gas, water and sewer service to homes and businesses is a natural monopoly. Its inherent microeconomics don’t allow for a competitive market, one that by definition has many sellers and buyers with relatively equal access to information on price and quality.

Telecommunications service is like other utilities because it provides essential, necessary services for modern life. Thus it will always have many buyers but not a lot of sellers. That’s because the costs of installing and maintaining its delivery infrastructure are so high they deter other providers from entering the space. Would be providers are also deterred because it's inherently difficult to lure away customers from a well established incumbent since consumers don’t frequently go shopping for a new utility provider like they might for furniture, clothing or personal electronics. Hence, for most utilities there is only one provider or as noted earlier, perhaps two for advanced landline telecommunications service.

Both sides nevertheless continue to delude themselves and attempt to convince others they are right. The legacy incumbent phone and cable companies do so because they want to keep policymakers and regulators off their backs. They contend landline delivered advanced telecommunications is a competitive industry and thus requires only “light touch” regulation to protect consumers since market forces will adequately do the job.

Consumers believe the legacy providers have them over a barrel. They redline their neighborhoods and refuse to offer service on a par with that sold to nearby neighbors. Or they offer service, but with poor quality and reliability and exorbitantly priced. As they do with other services, the first inclination of consumers is to call for more competition. If telecommunications were a competitive retail market, they believe, then they could choose among a variety of providers clamoring for their business. The reality of course is far from that and complaints of shoddy customer service are rampant.

Both sides also mischaracterize public sector initiatives to build fiber optic infrastructure as market competition. Public sector entities aren’t out to compete for market share with incumbent legacy telephone and cable companies with the hope of driving them out of business as is the case with true market competition. They build advanced telecom infrastructure to facilitate economic development and achieve community goals.
 
Consumers want a competitive market for advanced telecommunications infrastructure, viewing it as a tonic for better quality service and value. It cannot and never will be a competitive market. The incumbent providers argue it's already a competitive market. It isn’t. It’s time to end the nonsense from both camps and their delusions of market competition in advanced landline telecommunications infrastructure and put ownership of it firmly in the public sector since it cannot function as a truly competitive market.

Competition isn't the answer for better premise telecom service

California lawmakers give cable utility perks, without utility obligations: Historically, there was a difference between telephone companies, which have been state regulated utilities for more than a century, and cable companies, which were originally franchised by local governments but managed to escape that oversight ten years ago. At least in California. Today, the differences are diminishingly small, particularly in urban and suburban markets where cable and telephone companies sell the same services and enjoy a comfortable, unregulated duopoly.

The distinguishing characteristics of a natural monopoly are high initial capital costs, usually related to infrastructure construction, and powerful economies of scale, both of which give the first mover in the market insurmountable advantages over would be competitors. In the old analog world, telephone and television service were completely different businesses, linked only by a common dependence on wireline networks. Now, both offer voice and video, and face competition in those segments from wireless providers. But they are also almost always the only wireline broadband option and wireless service is not a credible substitute, in either practical or microeconomic terms.

This is an excellent and much needed microeconomic description of the dominant privately owned telecommunications infrastructure that dominates in the United States that is all too often absent from the current policy discussion. Many ask why there isn’t competition in the telecommunications industry like exists in most consumer products and services. If it works there, then it must work in telecommunications also. More competition is the answer for better choice and consumer value, they conclude.

But as Steve Blum explains in his blog post, that reasoning is fatally flawed. More competition isn’t possible in a natural monopoly market where high cost barriers and the power of incumbency deter would be competitors. (Just ask Google how its flagging Google Fiber venture worked out) Telecommunications infrastructure will never be a robustly competitive market, defined as one with many sellers and buyers offering consumers many choices, enabling market forces that allow consumers to choose the best value and force out uncompetitive players.

When it comes to landline premise telecommunications service, most Americans can select from no more than two providers. And sadly for millions, none at all since the business model of vertically integrated investor owned providers must naturally redline and cherry pick among neighborhoods, creating winners and losers among consumers. As long as the nation relies on this broken model, it
will continue to lag when it comes to building the world class telecom infrastructure it needs to accommodate the explosion in digital communications.

Why market competition cannot remedy America’s lousy telecom service

Almost daily, the justifiable criticism of the lousy state of America’s telecommunications service includes the demand for more competition as the solution. Providing more competition – and specifically as fiber to the premise (FTTP) -- for indolent incumbent legacy telephone and cable companies in no hurry to modernize their aging and increasingly obsolete metallic infrastructures will provide superior service and value for consumers. Sound good in theory, but completely misguided.

Telecommunications is not and will never be a truly competitive market where consumers can select among many sellers. The economics simply don’t allow it because it costs too much to enter the market and the return on investment under the dominant, vertically integrated, subscription-based business model is too skimpy or too far in the future to attract would be competitors. If telecommunications were a truly competitive market, consumers no matter where they live would have multiple sellers and services from which to choose just as they do other consumer offerings. Cherry picking in a few select metro markets as we’ve seen with Google Fiber and AT&T’s “Gigaweasel” as fellow blogger Steve Blum dubs it is hardly robust market competition.

That’s a key distinction. Telecommunications is not a consumer market. It’s a natural monopoly market and the incumbents have established their place in it. And they vigorously defend that place. That’s not evil as Susan Crawford recently pointed out. The incumbents are merely doing what they must do to faithfully and diligently serve the interests of their shareholders no matter how smarmy, greedy or disingenuous it may appear at times. Shareholders come first, market demand second. And the interests of the demand side of the market can easily remain in second place in a natural monopoly market because there is and won’t be any pressure to offer more to maintain market share because market share is assured. The market will accept whatever it’s offered because it has no choice – and cannot have meaningful choice. That’s why consumers complain service sucks equally between legacy telcos and cable providers.

AT&T miscasts telecom infrastructure as competitive market requiring level playing field

AT&T GigaPower Ready to RSVP | Light Reading: AT&T has been known for taking action, politically and in the courts, to fight municipalities that want to build and operate their own networks, but Harrison insisted her company does not oppose government-owned networks. "We only want to have a level playing field for all competitors, so everyone works by the same rules and regulations," she said. That means a municipality can't favor its own network when it comes to using public rights of way or issuing permits in a more timely fashion.

Translated, that means we (AT&T) want to control the rules on our terms, not the public's. That's an overreach on AT&T's part. The government and the private sector are not equal partners and cannot be because unlike a private company, the government is obligated to act in the public interest. If the government wants to provide telecommunications as a common carrier utility consistent with the U.S. Federal Communications Commission's Open Internet rules (and accordingly serve all properties unlike AT&T's rampant redlining and cherry picking), it can do so regardless of what AT&T or any other legacy incumbent desires.

Finally, AT&T as a monopoly market player knows better than to cast telecommunications infrastructure as a competitive market of many sellers where a level playing field is necessary to ensure fair competition. It is not.

Yet another think tank makes false "market competition" argument in defense of legacy incumbent telephone and cable companies

Don’t put bureaucrats in charge of broadband | Columns | richmondregister.com: State lawmakers instead should search for ways to eliminate barriers to additional investment by private ISPs instead of raiding their customer base, which threatens to drive them, the jobs they support and tax revenues they send to Frankfort out of the commonwealth altogether.

By ending KentuckyWired once and for all, the Bevin administration would accomplish what federal bureaucrats who want to dictate the Bluegrass State’s broadband policy can’t be trusted to do: protect the best interests of Kentucky taxpayers and consumers who pay the bills.

Jim Waters is president of the Bluegrass Institute, Kentucky’s free-market think tank. Reach him at jwaters@freedomkentucky.com. Read previously published columns at www.bipps.org.

Yet another think tank attempts to argue public sector investment -- even disregarding the fact that it's woefully insufficient -- is inappropriate for telecommunications infrastructure because telecommunications infrastructure is a competitive market. This is the falsity at the heart of the argument. It's not a competitive market because competitive markets by definition have many sellers and many buyers. Telecommunications infrastructure, however, is a natural monopoly or duopoly market because the high cost of building and maintaining it keep out potential new providers. That makes it like other high cost infrastructure such as roads and highways that are financed by the public and not private sector.

Mr. Waters is preying on economic ignorance to make a disingenuous argument and in so doing is rendering a great disservice at a time when the nation's telecommunications infrastructure is far behind where it should be in 2016 and for the future. He also employs a favored tactic of the dinosaur incumbents by focusing the discussion on "broadband speeds" in order to distract from the need to replace America's outdated metallic landline telecommunications infrastructure with modern fiber to the premise networks -- a thought trap that has ensnared most public policymakers and the mainstream and info tech media. It's time he and others stopped trying to postpone the future to protect last century's telephone and cable companies and allow technological progress to take its course into the 21st century.

Comcast's and AT&T's "unfair competition" complaints unfounded

Marion County cities call for broadband extension | Times Free Press: Telecommunications providers such as Comcast and AT&T have lined up solidly against allowing municipal providers to expand. They say it's unfair for government-owned services to compete against private industry.

Comcast and AT&T would have a valid complaint if telecommunications infrastructure was a competitive market. Their problem is it's not. It functions as a natural monopoly due to high cost barriers to entry that keep private competitors out. Natural monopolies lend themselves to direct government provision of services (such as as highways) or government granted franchises such as the old Bell Telephone system and local cable franchises. If AT&T and Comcast want to compete, they should get into the grocery, airline or automobile industries.

Advocates of municipal broadband face resistance over high-speed access | GazetteNet.com

Advocates of municipal broadband face resistance over high-speed access | GazetteNet.com: Foes, including private Internet service providers such as Comcast, AT&T and Time Warner Cable, have a different view. They say they are spending hundreds of millions of dollars upgrading infrastructure to give high-speed access to every American, and that government shouldn’t compete against private companies, which must pay taxes and make a profit.

The assertion regarding "upgrading infrastructure to give high-speed access to every American" is a false statement. These providers segment their markets and redline neighborhoods deemed less profitable and have no plans to serve them, all the while making promises they cannot stand behind. The reason they cannot is they are constrained by inpatient shareholder investment capital and short term business models inappropriate for high cost capital infrastructure that can require decades to produce a return on investment.

The claim that government is unfairly competing with private sector telecommunications providers is also false in a strict economic sense. Competitive markets are characterized by many buyers and sellers. In telecommunications infrastructure, there are many buyers and users but few sellers, making the market a natural monopoly or duopoly. When the public sector steps in to build and/or finance telecommunications infrastructure, it does so because this market environment combined with the previously mentioned business model limitations of investor-owned telephone and cable companies produces market failure on the sell side. That failure has left millions of Americans unable to order modern Internet landline-delivered services at their homes and small businesses.