Why Internet Providers Don't Compete
23 December 2016
In the United States, most people have access to only one or two Internet Service Providers. Only 28% had access to three or more for speeds one might consider tolerable, and 9% for speeds one might consider “fast” as of 2014. Since that data was collected, some providers have merged with others so there are fewer options available. Mobile Internet is better, as most people have access to more than three providers for standard speeds.
The lack of options isn’t surprising. Unlike most other industries, building an Internet service provider (ISP) is prohibitively difficult. It requires large, expensive installations of equipment, and requires buying Internet service (to basically re-sell) from an existing service provider which could be a competitor. In addition, the initial costs are so high that a new service provider is unlikely to make money for several years after construction. New neighborhoods are generally built with only one cable provider in mind as well, which removes competition from the start. It isn’t impossible to create a new ISP, but it is far too difficult and expensive for most people to do it. Even Google is getting out of the fiber business after entering a few cities. Consider how difficult it would be to start a new electric company; starting a new ISP is similar.
In addition to the technical problems with adding competition to the ISP market, larger ISPs actively avoid competing. In 2016, Charter agreed to FCC rules intended to increase competition in order to buy Time Warner Cable and Brighthouse, then sued the FCC to overturn those rules. Also in 2016, Charter explained that they don’t compete with other cable companies because it would make it impossible to buy them. In 2008, Comcast even sued a city to block them from building their own local ISP. In an industry that is already extremely difficult to get started in, these practices make it almost impossible to start another option.
When service providers are forced to compete, their prices often drop substantially. When Google Fiber announced they would offer Internet service in Tennessee, for example, Comcast and AT&T suddenly began offering substantially lower prices and more products. AT&T cut prices for some of their products by as much as 40%. In Charlotte, Time Warner Cable made their products 6x faster when Google Fiber was expected to become available. Until there is competition, providers can offer any prices they want because there is no cheaper option. With how quickly ISPs are able to offer lower prices and better service when a competitor arrives, it’s clear that it’s possible to do better. Unfortunately, there’s no competitive push for improvements because competition is so rare.