You are here

The Flawed Economics of Broadband Open Access in the U.S.

A post by a Google policy analyst yesterday attempted to make the economic case for open access in the U.S. and suggested reasons why American infrastructure providers should embrace a mandated open network model. This proposed theory warrants a strong practical rebuttal. This proposed case for the economics of open access does not hold up to close scrutiny, because it has fatal flaws in both logic and economics.


I.                   The fatal flaw in logic in the case for the economics of open access:


Since the post assumes broadband markets everywhere are basically the same, it concludes that the open access experience in some European countries is relevant and applicable to the U.S. situation. The fatal flaw in logic here is the core assumption that European and U.S. markets are factually analogous. They are not. They are substantially different factually and structurally as I will explain in detail.


First, the U.S. broadband market is the only market in the developed world where the “incumbent telecom companies” do not have a majority/dominant share of the broadband access market already. According to the latest FCC data “incumbent telecom companies” have a minority share of 38% of the U.S. broadband market. Unique in the developed world, U.S. cable is the broadband share leader with 48% of the broadband market per the FCC. This matters fundamentally because the open access economic case assumes the existence of, and pre-disposition to, monopoly market shares and monopoly economies of scale and scope to economically support a reseller model.


Second, the U.S. broadband market is the only market in the developing world where the incumbent telecom companies in total do not have the greatest national scale among broadband providers, and in total are not the only entities with national wire line scale and scope in their country. In the U.S., cable passes 92% of U.S. households per NCTA, and the telecom companies pass <85% per US Telecom. In another unique market structure circumstance, American telecom companies are not national-reach providers like in other developed countries. This means that American broadband companies have many times less the relative national scale and scope than their developed nation brethren do. Once again, this matters fundamentally because the open access economic case assumes the existence of, and pre-disposition to, monopoly market shares and monopoly economies of scale and scope to economically support a reseller model.


Third, the U.S. broadband market has more facilities-based, technology platform and business model competition than any other developed market in the world. The U.S. is the only developed country with a nationally-complete cable-broadband infrastructure in competition with the incumbent telecom companies. Moreover, no other developed country has four major wireless broadband competitors with national facilities-based footprints (Verizon, AT&T, Sprint, T-Mobile). No other developed nation has a strongly-funded fifth national wireless broadband/WiMax provider coming online like ClearWire. Yet again, this matters fundamentally because the open access economic case assumes the existence of, and pre-disposition to, monopoly market shares and monopoly economies of scale and scope to economically support a reseller model.


Fourth, the U.S. broadband market has more consumer-demand driven than any developed nation marketplace. Consequently, the U.S. is investing more than any developed nation in wireless broadband mobility. U.S. consumers strongly demand mobility and the facts prove it. According to the FCC, Americans have more wireless phones than wire line phones, use more wireless minutes than wire line minutes and are demanding wireless broadband more going forward in both relative and absolute terms over stationary broadband. Moreover, America’s uniquely responsive competitive system to consumer demand results in dramatically more value for American consumers than European consumers. According to FCC data, American consumers enjoy dramatically cheaper wireless rates and consequently use about four times more wireless minutes than European consumers. Thus, American consumers demand and get four times more value from wireless than European consumers do. Finally this matters, because the open access economic case assumes that a vibrant facilities-based competitive market does not or cannot exist, which the facts of the U.S. market clearly disprove. 


Simply, if the U.S. and European markets are not substantially analogous in terms of market structure, economies of scale, and competitiveness of the markets, it is illogical to conclude that open access economics in the U.S. would be the same as they are in some European countries.


II.                The fatal economic flaws in the case for the economics of open access:


The post  by Google’s policy analyst focuses most on the Dutch KPN example and quotes KPN’s CEO who candidly embraces monopoly economics. “If you allow all your competitors onto your network, all services will run on your network, and that results in the lowest cost possible per service.” [bold added] The fatal economic flaw here is that the open access economic case assumes one national provider with monopoly share and economies of scale and scope, when no major American broadband provider has anywhere near broadband monopoly share or monopoly economies of scale or scope.


First, in proposing to impose open access economics, it begs the question which American industry/technology the Government would designate as the ‘national champion’ that would be expected to, or authorized to, accumulate monopoly broadband share… in order to achieve the necessary open access monopoly economies of scale and scope… in order to provide the lowest possible service cost to resellers like KPN does?

  • Would it be the current U.S. broadband leader, cable, which has never had any open access regulations or obligations historically?
  • Or would it be the #2 provider, the “incumbent telecom companies” which have less than half of the necessary open access economics monopoly share, and economies of scale?
  • Or would it be one of the four current major wireless broadband providers with much smaller broadband market share than cable or telecom, so consumers demand for mobility could be met?

This matters fundamentally because one provider needs to enjoy monopoly market share and economies of scale for open access economics to have a chance to resemble some European markets.


Second, this proposed case raises several important unanswered questions.

  • If the analogy of European markets is not logical and hence does not hold, where is the evidence that the assumed monopoly economies of scale required by open access will generate superior overall benefits to the consumer than competition currently delivers?
  • How will a mandated open access policy that assumes and requires monopoly share and economics, provide consumers with diversity of choice in technologies, business models, and mobility options that they enjoy currently?
  • What would happen to the stranded infrastructure and the majority of consumers that found themselves not with the government’s designated monopoly open access broadband provider?
  • How would the tens of billions of dollars in now unnecessary sunk alternative infrastructure costs be factored into the overall cost-benefit assessment of the wisdom of imposing a monopoly open access policy on a competitive marketplace?


Third, if the government decided to impose open access economics, but did not designate a broadband technology/competitor to be the ‘national champion’ that would be the beneficiary of monopoly economics, the perverse effect would be to practically impose unworkable infrastructure economics on all the competitors in the marketplace, because none have the requisite monopoly economies of scale and scope necessary to make open access economics work.  

  • In the best case economics, cable or telecom providers would have less than half of the share and economies of scale or scope necessary to support workable open access economics.
  • In the case of the four major, facilities-based, wireless broadband providers, they would have only a small fraction of the monopoly scale and scope economies necessary to support open access resellers.


The economic reality of imposing monopoly open access economics on broadband competitors without monopoly scale would ensure that none of the existing broadband competitors could maintain their current viable economics or business model. Moreover, it would also prevent any return on investment on their expensive capital-intensive infrastructure, which in turn would end the current virtuous cycle and economic model which funds the upgrade of multiple broadband infrastructures to meet exploding demand for capacity. In addition to the real risk of discouraging the private infrastructure investment that funds 95% of the U.S. broadband/Internet infrastructure, the flawed economics of open access in a competitive market would logically put the U.S. taxpayer on the hook to make up for a going-forward private broadband investment shortfall of many tens of billions of dollars.   


In sum, the proposed theory of open access economic viability depends on the fatal flaw in logic that European countries with open access are analogous to the U.S., when the evidence proves they are not at all analogous. Moreover, the open access economic case has a fatal economic flaw as well. It assumes incorrectly, that competitors with competitive shares and economics, have, or could have, monopoly shares and economies of scale, which the evidence and logic also disproves.