Tuesday, June 30, 2009

Broadband adoption and barriers to entry

Few may recall now, but early talk out of the Obama Administration hinted at a push for universal broadband access centered around billions of dollars in tax credits. This chart I found today, however, makes you wonder what all the fuss was about:

As you can see broadband access seems to be on a steady upswing -- it's not readily apparent why it was thought to be a problem. Perhaps that's why the initiative was apparently discarded.

But let's assume there in fact was a broadband deficiency, how would it make sense to go about correcting it? Given that demand is usually a function of price, the seeming best way would be to expand the number of broadband providers to make broadband cheaper. While tax credits may be one inducement to increase supply, such credits are also distortionary and may promote undesirable behavior that otherwise wouldn't take place (just as the mortgage interest deduction helped fuel the housing boom and subsequent crash).

A better way to promote the spread of broadband is through increased competition, which drives down prices and increases quality. Unfortunately we lack much competition in D.C. My house uses Comcast for the simple reason that it is the only game in town unless you want to use dial-up -- not a realistic option these days -- or a satellite. The only other cable/internet provider in D.C., RCN, is not avialable in my internet. I suspect the situation is similar in other cities.

There is hope, however, that competition may be on the way with the arrival of Verizon and its FiOS option, which reached a franchise agreement with the D.C. government late last year. Read this story and there are a few elements that may illustrate why competition has been so slow to come to Washington.

First off negotiation of the franchise agreement lasted nearly a year. One apparent reason is that Councilwoman Mary Cheh, chair of the Committee on Public Services and Consumer Affairs, "led efforts to bring FiOS to the District in a way that ensures access throughout the city rather than in select communities."

In other words, Cheh wanted to provide a good to voters that would improve her standing but may not have made economic sense for Verizon. As the article notes:
The first communities to receive access to Verizon FiOS service will be Barry Farm, Brightwood, Cleveland Park, Crestwood, Fort Stanton, Friendship Heights, Historic Anacostia, Petworth, Shepherd Park, Sheridan, Tenleytown, Van Ness and Woodley Park.
For those unfamiliar with the area, Anacostia, Petworth and Barry Farm are poor neighborhoods, and presumably less likely to subscribe to Verizon's services. My guess is that the decision to include these communities in the initial rollout was more of a political decision than an economic one.

Beyond the negotiation, however, consider some of the other regulatory hoops that Verizon had to jump through, including an 11 part application. Among the materials included in that application include this:
A demonstration of how Verizon will meet the cable-related needs and interests of District residents, including public, educational, and government access channel capacity and facilities and financial or capital contribution to an institutional network.
Some of Verizon's application may make sense. For example Verizon will have to do a fair amount of construction to install its network that will likely include the tearing up of sidewalks, roads and other public spaces that are appropriate to detail. But other aspects, including this part, are rather nonsensical. The test of whether Verizon will meet the "cable-related needs and interests of District residents" is quite simply whether they buy the product or not. The market, not the D.C. Countil, is the better arbiter of this.

Each regulatory step in the franchise agreement process serves as another barrier to Verizon and other providers entering the market and increasing competition. Those best positioned to shoulder the burden of such regulation tend to be established players, with startups sometimes lacking the necessary resources. To maximize competition and expand consumer choice the wisdom of these barriers should be re-examined. This applies not only to cable and internet, but the economy as a whole.

You can read a previous post on licensing here.

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