A Competitive Analysis of the Market for Internet Access

Table 2 - Access Speeds

To properly evaluate the merits of the forced-access debate, it is necessary to define the relevant economic market for Internet service. This conceptual exercise provides a useful short-run perspective of current competitive conditions as firms compete to develop new technologies to better serve consumers. It also provides a prospective of what future competitive trends might unfold, especially in a market shaped by dynamic technological changes such as those in the Internet access market.

Wireless firms offer broadband Internet access service via satellite transmission, while the terrestrial firms offer access service using a series of dishes that are geographically dispersed.


Demand Exists for Both Narrowband and Broadband Internet Access

The typical consumer accesses the Internet through either a wireline or wireless connection from his computer to a "portal" provided by an ISP.10 Once the consumer makes a connection, he can access millions and millions of different Web sites. According to the FCC, 65 percent of users today still use older, narrowband technology to access the Internet.11 In this situation, the typical consumer makes a connection to an ISP over a telephone line using an analog modem. Telephone modem speeds generally vary between 28.8 to 56 kilobytes per second (Kbps). By contrast, the new cable broadband technology allows consumers to access the Internet over a hybrid fiber-optic and coaxial cable (HFC) line using a cable modem, which is capable of speeds up to 100 times faster than analog modem connections.12 The FCC estimates, however, that the percentage of users using narrowband technology will decline over the next several years. Nevertheless, since narrowband and broadband technology both have advantages and disadvantages, it is unlikely that cable broadband will completely displace narrowband in the marketplace.


Advantages and Disadvantages of Narrowband Internet Access

Narrowband technology has several important advantages over broadband technology. First, it is widely available to consumers who have access to a telephone line and who have a computer equipped with a modem. According to the FCC, 94 percent of all households have telephone service.13

Second, consumers do not share the telephone line's bandwidth with other users when accessing the Internet. An ordinary telephone line is a dedicated line, which means it can only be used by one person and for one service at any given time. So, for example, if the user is accessing the Internet, he cannot also make a telephone call at that time. Broadband access is different, as will be explained shortly.

Third, telephone modems are standardized and come installed in many computers sold today. Standardization provides for easy access since no single ISP has proprietary control over modem technology. Moreover, standardization allows ISPs to compete in terms of the other services they offer.

Finally, when compared to cable broadband access prices, narrowband access is relatively inexpensive. Cable broadband access typically costs around $29.95 to $62.95 per month, whereas narrowband access costs are generally much lower (not including telephone charge).14 Nevertheless, in those areas where broadband access competes directly against narrowband, prices for broadband access have fallen to become competitive with narrowband. However, one would not expect prices to be the same since these technologies are not identical and the services provided are not perfect substitutes.

The slow speed of narrowband access is its biggest disadvantage. Table 2, next page, illustrates how long it takes to transfer a 10-megabyte file with different types of Internet connections.15 For example, it takes 24 minutes using a 56-Kbps modem over a telephone line (narrowband technology) compared to 20 seconds using a 4-megabits per second (Mbps) cable modem over a cable line (broadband technology). For this reason, it is likely that the prices for the two technologies will not be equal and that some consumers will continue to prefer to use narrowband despite its disadvantage in speed. Moreover, since it is likely some users will not need the speed associated with broadband, these two technologies are likely to co-exist in the marketplace with each catering to a niche group of consumers.


Advantages and Disadvantages of Cable Broadband Internet Access

As mentioned, broadband's biggest advantage is its superior access speed. According to policy analyst David Kopel, estimated cable modem speeds range from 1.2 Mbps to 27 Mbps for downstream transmission (i.e., from the Internet to the consumer) and from 28.8 Kbps to 10 Mbps for upstream transmission (i.e., from the consumer to the Internet).16

Broadband's other main advantage over narrowband is that its Internet connection is always live. Unlike narrowband technology, it is unnecessary to dial up to make a connection every time you wish to access the Internet. Once consumers subscribe to broadband service and the ISP activates the service, they are always connected. Nonetheless, despite these two very important advantages, broadband has several significant disadvantages.

The first disadvantage of broadband is the cost. Broadband is generally more expensive, although its price is becoming more competitive with narrowband access service. The second is its bandwidth capacity. With the current technology, bandwidth capacity must be shared with other cable broadband users in the same service area.17 So if there are no other consumers using the bandwidth, then a single user has full access to the broadband's capacity and can enjoy the high speed of transmission. However, if other consumers are connected to the Internet, then all users must share the capacity, and the speed of transmission slows because of congestion. It is for this reason that cable firms and their affiliated ISPs limit consumers to 10 minutes of streaming video. Thus, although broadband access currently provided by cable firms is faster and the connection is always "live," the disadvantage of shared bandwidth capacity and congestion are likely to prevent it from becoming the only technology to survive in the telecommunications marketplace.18


ISPs, Cable Firms, Telephone Companies, and Others Compete to Supply Internet Access

Two groups of companies form the major suppliers of narrowband and broadband Internet access service. The major suppliers of narrowband access are independent ISPs, who offer service to consumers over ordinary telephone lines. Although it is difficult to determine the exact number of ISPs, Kopel estimates there are over 5,000 ISPs in the United States today.19 And although a consumer in any given location will not have access to all 5,000 service providers, consumers still choose from a number of service providers.

The major suppliers of broadband access are cable firms, local telephone companies, and, to a lesser extent, large specialized telecommunications firms. The larger cable firms are vertically integrated, which means they offer consumers both a physical connection and access to their affiliated ISP's portal.20 A customer in this situation purchases a bundle of services from the cable firm.

Telephone companies have begun recently to deploy digital subscriber lines (DSLs), which offer consumers a competitive alternative to broadband access provided by cable firms. This DSL technology offers consumers many advantages over the broadband access service provided by cable firms. The first advantage is that subscription prices are generally lower than cable broadband access. The second advantage is that consumers can easily install the telephone modem, whereas cable firms must install cable modems for their customers.21 The third advantage is that DSL technology allows consumers to simultaneously access the Internet and to make telephone calls, which is unlike some cable broadband access services. Many experts predict, however, that new cable broadband technology will eventually offer users Internet access and telephone service, which partly explains why telephone companies were quick to deploy DSL.

Perhaps the most important advantage DSL technology offers is that a consumer does not share its bandwidth with other users. This avoids the congestion problem associated with cable broadband technology and allows the user to enjoy the full benefits of this technology; that is, increased access speed (when compared to the narrowband technology). Nevertheless, with all these advantages, DSL is not likely to dominate the market because the current technology can be used only within a certain radius of the telephone company's central office.22 Although this feature limits how widely DSL can be deployed to compete against cable broadband access, it does not eliminate this technology entirely as a competitive alternative in the marketplace.

A third group of broadband access suppliers has emerged in the market and has had success in offering access service to select customers. A recent Wall Street Journal article reported that three firms—Covad Communication Group, Inc.; NorthPoint Communications Group, Inc.; and Rhythms NetConnections, Inc.—are selling DSL broadband access to residential and business consumers in select areas.23 Each company has combined its expertise in other telecommunications markets and in regulatory matters to take advantage of the interconnection requirement of the 1996 Telecommunications Act to offer broadband access service in competition with the local telephone company and cable firm.

One other group of broadband access suppliers is the wireless and terrestrial service providers. The wireless firms offer broadband Internet access service via satellite transmission, while the terrestrial firms offer access service using a series of dishes that are geographically dispersed. Each offers certain advantages over the broadband wireline technologies mentioned above. For example, subscription prices are competitive and satellite modems are easy to install. If the user is interested in only one-way transmission, then it is not necessary to use a telephone or cable line.

Wireless technology, however, has certain disadvantages also. First, bad weather can and does interfere with transmission signals. Second, current technology does not permit unlimited usage because of bandwidth capacity. Third, if the user wants two-way transmission capability, he must use a telephone line. Nevertheless, as this technology develops further it is likely that it, too, will survive in the marketplace.

Many believe electric utilities will be a competitor in the near term and there are plausible reasons for this occurring. First, electric utilities have the infrastructure necessary to compete in this market: Most homes have electricity and thus have a line connected to a distribution grid operated by the local power company. Second, local utilities already have the expertise in operating a business that provides a service to consumers connected to some type of network, and it is quite reasonable that these companies could upgrade their facilities to provide Internet access and electric power to their current customers. Third, given that many states are moving toward making electric power distribution more competitive, these firms may find it profitable to diversify into other markets in which their facilities can also be used to provide Internet access services.


Conclusion: The Market for Internet Access is Competitive

The competitive market for Internet access is currently comprised of narrowband and broadband technology. This distinction is arbitrarily determined by the technological speed of access. The various technologies discussed above and their associated suppliers all have certain advantages and disadvantages that are likely to change over time. Because consumers are diverse and have many reasons for accessing the Internet (e.g., from sending simple e-mail messages to downloading full-length movies), no single technology is likely to dominate the other technologies. Instead, these technologies will continue to improve in terms of speed of access, bandwidth capacity, minimization or elimination of congestion, and so on. Furthermore, since the competitive difference from the consumers' perspective appears to be primarily price and speed of access, the potential for one technology to monopolize the market for access because of network externalities is not an issue. There are different ways a consumer can connect to the Internet and the advantages specific to each technology are in no way affected by the number of users connected by a particular technology.

A second reason why the market for Internet access will remain competitive is the relative ease of new market entry for service providers. Entry is easy since no single provider has proprietary ownership of a specific technology. In this regard, connecting to the Internet has always been a matter of choosing a particular technology, and the choices are increasing every day. Entry, however, does entail some "sunk," or unavoidable, costs and therefore it is relatively risky from a firm's perspective. Consequently, potential investors must anticipate earning at least a competitive return on their investment once they have committed resources to entering a particular market or upgrading their facilities to provide a new service. Even so, new entry is the predicted economic response to potential profit opportunities. It is precisely this potential to earn profits that encourages firms to undertake risky investments in new technologies in the first place. The predicted impact is to increase the supply of Internet access, which will lower the quality-adjusted price for access service and expand service in the marketplace. Moreover, potential profit spurs new innovation which also improves consumer welfare. Thus, it should be no surprise that suppliers of the different access technologies are busy trying to find new ways to improve their technology in order to better serve their customers.