In a recent report entitled The Cost of Connectivity, the New America Foundation (“New America”) attempts to compare the prices of “triple play” offerings of video, phone, and Internet services across 22 cities worldwide to show that “that U.S. consumers in major cities tend to pay higher prices for slower speeds compared to consumers abroad.” Unfortunately, when it comes to measuring and comparing prices, New America has a demonstrated penchant for careless work. Upon inspection, New America’s new study appears to be unexceptional in that regard—the empirics are sloppy and the conclusions are unsupported. In fact, New America presents evidence which force conclusions that directly contradict those found in their report. Specifically, the data indicate that (a) currently observed broadband prices in the U.S. are consistent with competitive outcomes; and (b) an increase in government involvement, up to and including owning and operating a network, is not going to bring significantly lower prices for broadband services in America.
The New America study looks at broadband pricing in Bristol (Virginia), Chattanooga (Tennessee), Lafayette (Louisiana), Los Angeles, New York, San Francisco and Washington, D.C., and then compares the prices in these U.S. cities to some measure of “price” in places such as Amsterdam, Berlin, Prague, Seoul, and others. As noted above, the New America report concludes “that U.S. consumers in major cities tend to pay higher prices for slower speeds compared to consumers abroad” and, as a result, “add[s] weight to a growing body of evidence that suggests that the U.S. is lagging behind many of its international counterparts….” According to New America, this “lag” results directly from the fact that most of our international counterparts “have higher levels of competition and, in turn, offer lower prices and faster Internet service.” Naturally, to solve the alleged “higher prices” problem, New America concludes that policymakers need to “increase competition and encourage more affordable high-speed Internet in the U.S.”
Promoting competition to reduce prices is the report’s key policy recommendation, so you might think that New America would provide a detailed analysis of the relationship between competition and prices. Yet, New America provides no evidence to support its assertion that other countries have “more competition,” or that competition bears any relationship to price. (New America’s earlier work on mobile pricing contained the same flaw.) In fact, the U.S. is recognized as one of the most competitive broadband markets among advanced economies, ranking 3rd in intermodal competition in the OECD. Given New America’s high regard for OECD rankings, this omission is particularly ironic.
With respect to the quantification of prices, even a cursory review of the data implies that New America’s work is again careless. Take, for example, New America’s price for Riga, Latvia (the city with purportedly the lowest price for a “triple play” bundle). According to New America, the listed price for a triple-play bundle in Riga is $25.43 (converted to U.S. dollars based on Purchasing Power Parity). Apparently, the authors of the study were unfazed by the fact that in this bundle the basic telephone service costs only $2.80 per month. Such a low price looks a little funny to me, and if you look further at the Balticom website (the provider offering this service), you’ll find that there are some hefty usage fees for telephone service. Call a mobile phone, for example, and it looks like you’ll be dishing out about $0.37 per minute. That’s pricey; especially considering the average income of a Latvian is about 28% of that of an American (based on relative GDP per capita). Also, included in Balticom’s triple-play bundle is only 60 video channels, which hardly compares to the hundreds of channels the typical U.S. subscriber receives. (Note also that Comcast pays nearly $30 per subscriber-month in programming costs alone, which obviously excludes the possibility of charging $24.43 per month for a triple-play bundle). Even ignoring differences in the “quality” of the bundle, as a percent of income (GDP per capita), a triple-play bundle price of about $91 (=25.43/0.28) in the U.S. is equivalent to the $25.43 price in Latvia. Looking at New America’s table, you’ll see that’s about exactly the price for U.S. carriers offering comparable download/upload speeds (but an overwhelmingly superior television service and no-usage fees on telephone calls). So, if you want to pay $25.43 for your triple-play bundle, you can move to Latvia, get paid about a quarter of your current income, lose 300 to 400 channels of video, and make no telephone calls. I’ll stay here, thank you.
(As discussed in a recent blog, for those interested in a careful analysis of international broadband pricing, I recommend a recent study by the Information Technology and Information Foundation.)
With that settled, let’s move on to a more significant point regarding broadband pricing. The New America study concludes that what’s lacking in the U.S. is competition, and this lack of competition leads to high prices. Yet, New America’s own data rejects this thesis.
Specifically, New America includes in their sample of U.S. cities the prices of government-owned and operated service providers offering triple-play services (in Lafayette and Chattanooga). New America lists the triple-play price for the municipal broadband provider in Lafayette as $103.89 per month, and for Chattanooga as $129.51 per month. However, the prices offered by municipal networks are roughly equivalent to those offered by the private sector in those markets and others (with the bulk of prices in the $80-$110 range). In Chattanooga, for example, Comcast offers its triple-play bundle at $99.99 per month, which is the same price it offers in Washington, D.C. If it’s true (as is claimed) that the municipal providers offer services at the “lowest reasonable cost,” then we can be somewhat confident that the private sector firms are also offering services at the lowest reasonable cost, and, loosely speaking, “the lowest reasonable cost” is the “competitive price.” Thus, the competitive price for a triple-play bundle in the U.S. isn’t $24.43, but more like $100 plus (for the type of service offered by the typical triple-play provider today). Plainly, a third wire to the home, even if owned and operated by the government, is not going to lead to radically lower prices for broadband services. (Nor will broadband subsidies, since such subsidies merely shift the costs from one set of customers to another.)
While the New America study aims to invoke an emotional response to a fabricated broadband “crisis,” the evidence they present actually suggests the following. First, New America’s evidence suggests that currently observed broadband prices in the U.S. (at least, in the form of a triple-play bundle) are consistent with competitive outcomes (i.e., the lowest reasonable prices). Second, an increase in government involvement, up to and including owning and operating a network, is not going to bring significantly lower prices for broadband services in America.