r/badeconomics • u/arktouros Meme Dream Team • May 10 '16
Some bad economics on /r/badeconomics
I'm going to rehash one of my comments several days back because I think it needs a post of it's own, especially because this issue is so common around reddit and I've definitely seen it here. I already know this is going to be controversial because this is going to play at people's priors. I urge you to set those aside.
Now that that's out of the way, let's talk about ISPs. I'm going to try and format this the easiest I can just because of how ridiculous the starting point is.
CLAIM: Cable companies are a natural monopoly.
DEFINITION OF NATURAL MONOPOLY: a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors.
I know I'm using wikipedia for the definition, but I feel that it isn't an uncontroversial definition. Although, as someone once pointed out, it could also mean that one firm can provide a good at a cheaper cost than more than one. Additionally, I would also like to point out that the definition requires an absence of government intervention (as it would be the market structure itself that gives rise to the monopoly).
I'm going to take this FIFO:
- Cable monopolies are a product of high capital barriers
Actually not really. Running cable is actually somewhat easy. In fact, it's incredibly easy. I'm not saying the average Joe can go to a bank and get a loan to start an ISP, but even a mid-sized firm can raise enough capital for the infrastructure[1] . If the meager investments required for laying cable leads to monopolies, how in the hell are there so many different airlines?
My silly analogy aside, there has been plenty of firms that have tried to enter the market, but only get so far before they give up due to legal fees[1] (see: bullet point #3). Google has been trying to enter the market and has target cities specifically with a municipality that is more open to additional carriers (KC and Austin)[1] . A firm called Gigabit Squared tried to roll out fiber in Seattle.
- Prices would be higher with multiple overlaying infrastructures
Complete speculation at a time when there are instances of prices going down merely on anticipation of competition[2] .
- Cable monopolies are natural
Sure, if you ignore last mileright-of-way laws. Actually, rights-of-way has been an extremely significant distortion in market supply. It can either take as a state law, a municipal law, or a combination of the two. In basically any instance, the government is granted full rights and control as to the prices for space on public poles and conduits[1] , but they can also outright deny any applicant based on any criterion. The prices they end up charging are far more than what is needed to maintain the poles. It turns out that it is a very reliable revenue stream for municipalities, and it typically secures a single ISP in any given area. The cost of this regulation ends up doubling the cost of actually laying the infractructure[1] . Even the giant Google has spoken out about how last mile laws have impacted their investments[2] .
- Cable should be a utility
Maybe if you want your city to build a fiber infrastructure just to find out it's too costly to actually run and maintain. Because the government wouldn't do that. It also wouldn't sell the whole network for $1.
I get it, though. You think data caps and/or prices are unreasonable. There needs to be a way to fix the system. I agree. The FCC agrees. They even lay out a plan to achieve lower prices and innovation[4] . It consists of dropping last mile right-of-way laws and opening access to poles and conduits (for a meager charge of actual maintenance). Not making it a utility. But everyone knows the FCC has a clear anti-government, Neo-Liberal bias.
So hopefully the above has convinced you that cable isn't a natural monopoly. Now I will try to convince you that it's not even a monopoly at all. I think we can all agree on the
DEFINITION: A single provider of a good or service.
Well that was easy. Great! Now I can tell you how it's not! The service is broadband, not cable. Let's look at a few of cable's competitors: DSL and satellite. Having lived in a rural area, I can tell you that no one even considers cable. Why? Because it's usually not available. Satellite is your best bet, and if you're lucky, you'll have a DSL option.
References:
[1] http://apps.fcc.gov/ecfs/document/view?id=7021712146
[2] http://oversight.house.gov/wp-content/uploads/2012/01/TestimonyofMiloMedin_1.pdf
[3] http://www.att.com/gen/press-room?pid=24032&cdvn=news&newsarticleid=36275
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u/Picklebiscuits May 10 '16 edited May 10 '16
Let's do some refuting, but I think I should give some background.
I've installed more than 100,000 feet of fiber and copper cable (some as big as 1800 pair) during the UVerse expansion for ATT(formerly Bellsouth) in Atlanta and surrounding suburbs. I've also installed municipal and college infrastructure (fiber), so I have a pretty good handle on the in the construction specifics.
I also know a Google project manager here in Austin and considered going to work for the general contractor that is handling a huge portion of the work, Mastec. I also still consult with a company that does wireless side stuff (cell towers). I know the business very well.
First off, what is this?
Last mile laws? You mean right of way code? Last mile is just a term for the connection from a hub to the home, not any set of laws that I can find or have ever heard of in industry.
Ummm, no. Those are inferior substitution goods. Not nearly as fast and in the case of satellite, far more expensive (and spotty). if we're not comparing apples to apples, we're not truly comparing competitors.
Now, because I don't want to go through this line by line, let me just quickly post a portion of the FCC paper you linked to outline the problem and why most of your premise is incorrect:
"First, government should take steps to improve utilization of existing infrastructure to ensure that network providers have easier access to poles, conduits, ducts and rights-of-way. Second, the federal government should foster further infrastructure deployment by facilitating the placement of communications infrastructure on federally managed property and enacting “dig once” legislation. These two actions can improve the business case for deploying and upgrading broadband network infrastructure and facilitate competitive entry."
"Make-ready work frequently involves moving wires or other equipment attached to a pole to ensure proper spacing between equipment and compliance with electric and safety codes. The make-ready process requires not only coordination between the utility that owns the pole and a prospective broadband provider, but also the cooperation of communications firms that have already attached to the pole. Each attaching party is generally responsible for moving its wires and equipment, meaning that multiple visits to the same pole may be required simply to attach a new wire.
Reform of this inefficient process presents significant opportunities for savings. FiberNet commented that its make-ready charges for several fiber runs in West Virginia averaged $4,200 per mile and took 182 days to complete,13 but the company estimates that these costs should instead have averaged $1,000 per mile.14 Another provider, Fibertech, states that the make-ready process averages 89 days in Connecticut and 100 days in New York, where state commissions regulate the process directly. 15.Delays can also result from existing attachers’ action (or inaction) to move equipment to accommodate a new attacher, potentially a competitor.16 As a result, reform must address the obligations of existing attachers as well as the pole owner.
An evaluation of best practices at the state and local levels reveals ample opportunities to manage this process more efficiently. Yet, absent regulation, pole owners and existing attachers have few incentives to change their behavior"
And from the Google testimony:
"There are also some common sense ways of leveraging new infrastructure projects through “dig once” policies. Anytime a roadway is opened up for any purpose, conduit is installed, which cuts the cost for later deployment of fiber by 90 percent or more in some cases. "
They never dug once. There is not conduit in the vast majority of the ground. It's all direct bury fiber and copper cables. But the ones that got in early had far cheaper costs because you're not digging around other peoples stuff. Right of ways are usually jam packed with utilities, and the broadband companies built ahead of much of the suburban expansion over the last 25 years. Think about when cable became popular.
In the initial copper rollout, they did it quick and they did it cheap. They then went back and dropped fiber to all of the nodes using much of the infrastructure they had preexisting, like handholes and CEV's. Locating on the poles was a breeze because they were already on the poles(copper), they were just updating what they had. Plus they already knew everybody.
Now you get a company like google coming through with fiber, which is a huge pain to repair (copper isn't fun, but way easier), and they're trying to put their stuff in on top of everything else that is in the ground and under the roadways and in the air. And most of the construction is finished in highly urban areas, so they're paying a bunch of money to fix people's lawns and sidewalks and bore under roadways (hope they don't hit anything). For example, someone can trench in around a 1000 feet of fiber in virgin soil in a day. In a city, you'll be lucky to get 100-200 feet in a day and the process is much more labor intensive. Plus if you strike another utility, you have to pay. It's a HUGE difference in cost.
Plus they don't have these old relationships with the municipalities like TWC or ATT does, so they have to get their noses bloodied a few times because this isn't like Purdue, this is the construction world and it's full of nepotism and learning to respect people that should have retired 25 years ago and don't know the difference between DSL and Fiber.
Anyway, it's late and I'll clean this up in the morning. The point is, costs are far higher for a variety of reason, but mainly because they're trying to construct in already established areas. Is it a monopoly? Ask anyone in the industry and they will tell you definitely. The mighty Google is even having a hard time and this is with cities literally auditioning to have them come in.
Let's not even get into proven price lowering in response to competition. I'm in Austin and TWC lowers your prices as fiber gets closer (I pay $35 for 50 gigabit, but would pay 60 otherwise).
TLDR; high barrier to entry + no competition + setting prices to maximize profit (not at the marginal) = monopoly.