Explaining the Price Gap

This is old news to those of you who read the other sources of broadband politics news on the new-fangled world wide computernet, but the esteemed Saul Hansell (a sometime reader of this blog) has released the second part of his analysis of American broadband, addressing the pricing issue. Broadband is cheaper in other countries due to subsidies and differences in demographics, but also because of unbundling, the practice of requiring carriers to offer wholesale access to their customers:

Unbundling can be seen as a slightly disguised form of price regulation. Profits dropped. Many of the new entrants have found it difficult to build sustainable businesses, while margins for the incumbent phone companies have been squeezed as well.

It’s not exactly clear, however, that this approach is in the public’s long-term interest. Phone companies have less incentive to invest and upgrade their networks if they are going to be forced to share their networks.

Some argue that this is the main reason that there is little investment in bringing fiber to homes in Europe. “Investing in fiber is a huge risk,” Kalyan Dasgupta, a London-based consultant with LECG, wrote me in an e-mail, “and the prospect of taking that risk alone, but having to ’share’ the rewards with other players, is not a prospect that most rational businesses would consider.”

Britain, which has been the biggest proponent of line sharing, has decided to deregulate the wholesale price BT can charge for fiber, so long as it doesn’t favor its own brand of Internet service.

Like any form of price control, unbundling produces short-term gains in access diversity at the expense of long-term investment. Adopting this approach ultimately requires the government to bear the cost of infrastructure improvements, as it ceases to be a rational use of investor dollars to build out enhancements that don’t produce substantial returns in a non-monopoly market. Many of the folks seeking net neutrality regard broadband as a utility, and this becomes a self-fulfilling prophecy. If we treat it that way, that’s that it becomes.

Just as our electric utility networks include less-efficient generating plants that belch excessive amounts of CO2 into the air because the regulators won’t approve rate hikes to pay replacement costs, so too will price-capping broadband stifle innovation in transport networks.

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2 thoughts on “Explaining the Price Gap”

  1. Other countries also have much less generous usage caps, especially in the UK and Australia. That’s unfortunately never factored in to the price comparisons.

  2. It is also worth noting that British Telecom was, and to a certain extent, still is a monopoly in the UK. Unbundling was a way to level the playing field. I don’t think price capping was the intention. What you talk about are more like side-effects, in my view anyway.

    The other question is whether it did anything to break the monopoly? Then, after you factor in the side effects, is it worth it? A customre in rural Scotland who is fed up dealing with BT may think that it is.

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