“Competition, competition, competition”, chanted Federal Communications Commission chairman Tom Wheeler during remarks before the Mid-Atlantic Venture Association, a trade group of venture capitalists. Mr. Wheeler stuck to the usual theme of competition in broadband access, an open internet, and the availability of spectrum.
Mr. Wheeler, a former venture capitalist, reminded the audience that as the chief executive officer of the federal government’s “network agency”, he was also responsible for optimizing the public’s interest in public safety, competition, and consumer choice. What would have been more helpful is if Mr. Wheeler adequately fleshed out how the FCC intended to create a competitive market place for broadband access networks.
Just based on the definition of competition I don’t see how the FCC can introduce more competition in either market short of literally determining which and how many players can participate as producers and how many citizens can participate as consumers. In addition, given the dynamism of the broadband access market, I don’t see why the FCC should be concerned about intervening in markets in order to bring about competition in the first place.
Michelle Connolly and James E. Prieger analyzed broadband market data from the FCC and determined that for the period 2005-2008 there was a tremendous amount of simultaneous entry into and exit out of the broadband markets. On the national level, broadband market entry rates were between 14% and 19%, rates that are greater than many other industries. When you account for exit rates at the national level, net rate of entry was determined as approximately 3.1% per year.
When the broadband access market is shrunk down to local levels including zip codes, entry rates increase. Another dynamic, according to the findings of Connolly and Prieger, is the size of new entrants and firms that survive market entry. They tend to be the larger firms on average and enter new markets via different tiers or packages of service. The authors also found that entry and exit activity lessened with the maturity of a market.
When I consider barriers to market entry faced by broadband access providers, I’m not surprised that larger firms contribute significantly to entrance into and viability in a market. Progressive proponents of competition tend to delete from the discussion economic and regulatory impediments to market entry. New entrants have to consider sizes of local markets and average income in an area. Education and age profile also impact broadband access service penetration, according to Connolly and Prieger. Population density and topography impact deployment of services in rural areas. Also, in my experience, franchising requirements, such as rights-of-way fees or access channel requirements for broadband operators that provide cable create a barrier to entry for smaller, less financially able companies.
There is also research that describes how competition can be delayed where potential entrants into a vacant market may think twice about entry if they have determined that the market will become contestable due to potential of growing demand. In other words, according to analysis by Mo Xiao and Peter Orazem, a potential entrant may look for a market where demand is not as high, creating a monopoly or entering an oligopoly that keeps out other entrants. It may not be worth the expenditure of profits to fight off new entrants into a vacant, high demand market first the first few market entrants.
What kind of policies should the FCC create to increase the number of broadband access provider entrants into a market where smaller companies may not have the scale or financial wherewithal to stay in a market? Will the FCC continue to subsidize these firms? If so, what type of support will the FCC give to the consumer? Demand has to want supply.
And where potential entrants are thinking twice about dipping their toes into a contestable market because of the fear of profit erosion in a relatively near future, will the FCC pursue a policy of subsidizing potential lost profit resulting from the very competition the “network agency” espouses?
Only by honestly grasping the reality that having three or four competitors in a market is not a bad thing will the FCC be able to get off of the competition rant and focus on more important issues such as spectrum allocation and ensuring that section 706 is the only basis for any regulation of broadband access.