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.