Broadband subsidies break down barriers to competition and incumbents don’t like that

by Steve Blum • , ,

Broadband service uptake is primarily a function of cost – that’s the clear conclusion of three separate studies last year. When providers offer fast service at competitive prices, more people buy it. It’s not complicated. On the other hand, when monopoly providers control an area, service quality is low and prices are high – sometimes by any standard ($150 per month for 3 Mbps!) and always in comparison to costs in competitive areas.

Private capital pays for the vast majority of broadband infrastructure built in California. Mobile broadband, particularly, is a hotbed of both investment and competition – one leads to the other. Telephone and cable companies are rushing to extend fiber networks to dense, urban commercial districts and high potential residential areas. Where barriers to entry are low, competition drives service levels up and prices down.

Where barriers to entry are high, the choice is either accept whatever incumbent monopoly providers offer – usually not much for a lot of money – or lower those obstacles. So long as a monopoly (or its microeconomic sibling, duopoly) obtains in an area, the rational course of action for incumbents is to stop investing and start squeezing the maximum profit possible out of existing assets.

Subsidies for open access middle mile systems are a proven way of knocking down barriers – barriers that were originally erected by government sanctioned monopolies and nurtured by decades of active regulation that provided guaranteed rates of return on incumbent investments. It opens the door for new competitors, and provides an incentive – and the means – for incumbents to invest in system upgrades.