Tuesday, June 26, 2007

Net neutrality, con't (Part 1): the broadband market

Thanks to all who read my initial posting on network neutrality, and especially to those folks who took the time to leave comments. While I don’t have the personal bandwidth (ouch) to respond to each and every posting while also taking care of my “day job” here at Google, I will check back periodically and offer follow-up reactions.

I believe it is important for companies like Google to establish a place of meaningful dialogue with the general public, and to open our policy advocacy role to outside analysis -- and yes, criticism. I also welcome your thoughts on other telecommunications and media policy issues of interest to you (my own current favorite topic is the FCC’s ongoing consideration of rules governing the upcoming 700 MHz auction). And I urge folks to take their views to the places where they ultimately count: the well-trod halls of the FCC and the U.S. Congress.

Today, I'll offer some thoughts on one of the key issues raised in some of the comments on my net neutrality post: the broadband market. Later this week I'll address two other issues you asked questions about: type-based traffic differentiation, and payment for bandwidth.

Market analysis

Scott Cleland asked whether the search market is as highly concentrated as the broadband market, and thus deserves network neutrality regulation as well. Scott asked me the same question at an EDUCAUSE policy conference last month, but I’m happy to repeat my response and elaborate here.

I’m certainly no economist, but I do try to keep up on the latest thinking about how markets function. The available evidence demonstrates that the U.S. consumer broadband market is highly concentrated, with extensive barriers to entry, high consumer switching costs, and no near-term competition. By stark contrast, the search market is robustly competitive, with numerous major players, new near-term competition, no significant barriers to entry, and zero user switching costs.

  • First, the broadband market suffers from a pronounced and intractable lack of competition. At best, consumers have a choice today between a telephone company and a cable company. The Congressional Research Service has described the current market as a “broadband duopoly,” where telephone and cable companies face little real competition. The FCC’s own skewed July 2006 figures still showed an overwhelmingly concentrated broadband market, with telephone companies and cable companies controlling access to 99.6 percent of all U.S. consumers. The share of alternative broadband platforms also has been decreasing steadily over time, from a less-than-impressive 2.9 percent in 1999 to an anemic 0.4 percent today. The GAO further found that only about 28 percent of all US households subscribed to broadband service in 2005, and noted that DSL and cable modem service together constitute the only broadband technologies actually available to consumers.

    By comparison, the market for search engines in the United States is highly competitive. Stats from comScore and other market analysis firms show that Google has only about half of the overall U.S. search market. Indeed, Google competes every day with large, well-funded companies like Yahoo, Microsoft, AOL, and Ask.com. Aggregator search services such as dogpile.com also flourish, along with dozens of other popular search-based services in the U.S. alone. In short, the U.S search market is anything but concentrated.

  • Second, while emerging technologies may eventually enable viable competitors, such channels currently do not compete in terms of speed, price, availability, or technological maturity. In fact, each of the supposed technology alternatives –- such as broadband over powerline (BPL), satellite internet, and 3G wireless -- provide no real competitive option. In particular, 3G wireless fails the test because, among other drawbacks: (1) most services do not qualify as “high speed” under the FCC’s current definitions; (2) data plan prices typically are at least double what consumers pay for cable or DSL service; (3) wireless providers block many common Internet applications and services, foreclose outside network attachments, and reserve the right to terminate service arbitrarily for using “non-conforming” services; (4) few consumers have substituted wireless broadband service for wireline broadband service; and (5) the FCC’s figures include all owners of 3G phones, whether or not they have purchased or used them for Internet access. Perhaps most significantly, the largest national wireless high speed Internet providers represent two incumbents from the wireline market and two longstanding telecommunications provider. The appropriate way to add up the available consumer options is not by simply counting individual broadband technology platforms, but rather independent platforms.

    By contrast, the search market is dynamic and expanding all the time. Not only do we seen a raft of new entrants in the text-based search market, but also nascent services such as video search, image search, news search, and other specialized search functions. No company can afford to rest on its laurels in this ongoing race for faster and better search functionality.
  • Third, considerable and insurmountable barriers to entry also limit the possibility of new competition. To build and operate a nationwide broadband system capable of competing head-on with the incumbents, would-be market entrants must (among other things) pour tens of billions of dollars into constructing local, regional, and national communications infrastructure, pay for backhaul, access rights of way, and interconnect with hundreds of other U.S. carriers. On top of that enormous investment, the market entrant then must create a commercially viable service offering, complete with retail sales outlets, technical and customer support, and advertising.

    By contrast, barriers to entry in the search market are quite low. Even though established search engines from Yahoo, Infoseek, MSN, Altavista, and many others had a considerable head start in the late 1990s, Google showed how a good idea hatched on a neutral and open Internet can change the industry in a few short years. Of course, any individual or company with an algorithm, and a means of accessing the Internet, can pave their own way into the burgeoning search engine market.
  • Fourth and finally, even assuming the ability to choose another broadband provider in a particular area, consumers endure considerable switching costs. Providers typically bind their customers with multi-year contracts (sometimes termed “stickiness”), bolstered by substantial early termination penalties. The prevalence of bundling together different services also helps providers reduce “churn,” where there are competing offerings. Equipment costs, truck rolls, and even legacy email accounts all create disincentives for consumers to move to another broadband service provider.

    By contrast, it is the user of search engines that possesses all the power. If an end user decides he or she no longer likes a preferred search engine, the time and cost to change search engines is zero. Changing search engine preferences – as with many other Web-based businesses -- is literally just a mouse click away. As a result, stickiness is not a common feature of Web-based entities.

Together, these salient factors -- excessive market concentration, no viable competitors, considerable consumer switching costs, and substantial barriers to entry -- should lead policymakers to conclude that there is a major competition problem in the broadband market. No such problems exist in the search market.

I'll have more to say later this week about some of the other issues you've raised. In the meantime, what do you think?


David said...

A couple of points:

I just ordered DSL service for my Mom's apartment: the best service she could get is 6 Mb download. Meanwhile, I see today that there's a report out today (http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9025726&intsrc=hm_list) that says that people in Japan average ten TIMES that, and people in South Korea, France and Canada all average better than the best I could get. To me that certainly shows something's wrong.

Regarding wireless/3G service, where I am it's pretty poor. The 3G service is pretty unreliable - in many places 3G just doesn't work, and in other places my cell phone gets 3G, but my computer doesn't! (with the cell phone and the wireless card literally sitting next to each other).

Now, I don't live in a tech hotbed, so that may have something to do with it, but as far as I'm concerned broadband here is pretty poor.

Joseph said...
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Joseph said...

This is a great analysis, however I feel it leaves out a large reason as to why people initially choose search engines, and stay with them: the peripheral features. Taking Google as an example, through the iGoogle gateway you can have personalized news, horoscopes, jokes, and a growing list of third party addons. Furthermore, there is Gmail, Google Docs, the Calendar, and even a personal Google website. This doesn’t even take into account any friends you chat with or share calendars, documents, etc. The switching costs associated with all of this are immense when taken together. Now, you could use Yahoo’s search while using all of Google’s additional products, but the average user has little incentive in the form of greater search results to bother navigating outside of Google’s garden.

Now, I still feel that there is a significant level of competition in the search engine market, especially if you compare it to broadband market. However, I’d be intrigued to see potential information about how many users, once established within Google’s grid of products, use alternative search engines.

Pumpkin said...

A podcast of the EDUCAUSE Policy Conference session referred to in this posting can be found here:

Andrew MacRae said...

I disagree that stickiness and switching costs are not significant in the search engine industry. The most successful search engine companies bundle their products with e-mail and other services (blogger, google maps, etc.) If nothing else it constantly brands the consumer's internet experience (not a bad business plan).

Anyway, I think this is a great way for you to communicate more with the public.

I Love Broadband over PowerLine said...

We need new alternative that could offer HIGH SPEED SYMMETRICAL UPLOAD/DOWNLOAD internet access that will support the current need of IP-TV and Video-phone users. Web access that does not have have a "lag" in sending and receiving large web data- video and voice !!!

The time is now, not later or tomorrow !!!

Dale Sundstrom said...

A huge difference between wireless broadband and search that was not mentioned here is that wireless broadband is built upon the public airwaves.

Full open access is appropriate for new airwave allocations because there is no public benefit from allowing exclusive or restrictive uses; while open access offers great benefits. These benefits could include increased business activity and tax revenue. A recent Business Week article explains how it has sparked great innovation and competition in France.

Restrictive uses might increase the perceived value of the licenses to incumbent providers, but is a great disservice to the public.

porlermc said...

The 28% number from 2005 you quote seems a little disingenuous. The Pew Internet & American Life Project has reported that 47% of Americans had broadband connections at home as of early 2007.

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docsharp01 said...

Good article and comments about net neutrality and the broadband market. satellite internet access is the future of broadband internet technology.