A Blog by Jonathan Low


Mar 8, 2014

Why Is the American Internet So Slow?

Because American internet users don't care about speed? A hyper-caffeinated society addicted to convenience and access not caring about speed? Nah, that doesn't sound right.

Because speed doesnt really matter? Umm, that sounds pretty ridiculous given the growing size of global markets and the exponential growth of data availability and the need to analyze it.

So, what could the reason be. Could it be because the companies that provide access and traffic dont have to invest to make it faster?

But doesnt the capitalist market-based system foster competition that automatically drives enterprises to provide better service at a lower price or they will lose customers to their rivals? Well, yes, in theory, that would be true. Unless, those enterprises had effectively created an oligopoly that obviates the need to do anything customers want because those consumers have no competitive options. Want to switch from Comcast to AT&T? Be their guest. Just dont count on a lower bill or faster service for your (considerable) trouble.

The problem, as the following article explains, is that the cable and phone companies in the US that provide internet access have no incentive to invest to improve service. They are weakly regulated by the Federal Communication Commission, most of whose commissioners come from - you guessed it - the cable or phone companies or from the big law and lobbying firms in Washington that service them.

The cost of attempting to enter the market to provide internet access or service is simply too high in terms of actual, physical infrastructure cost, and that assumes that any potential entrant, no matter how well funded, would be willing to endure the decades of regulatory and legal challenges from the incumbents.

The internet providers do recognize that people want faster speeds, but in order to provide them, they are insisting that they be given the right to charge more for the privilege, effectively denying the concept of net neutrality as a right paid for by taxpayer investment, infrastructure support and regulatory oversight.

This situation is not likely to change. The concentration of political and financial power is too great. But nothing lasts forever so it is conceivable that faster, less expensive alternatives will emerge due to market demand and innovative enterprise in response to the extant inadequacies of the current system. JL

John Aziz reports in The Week:

The country that literally invented the internet is now behind Estonia in terms of download speeds
According to a recent study by Ookla Speedtest, the U.S. ranks a shocking 31st in the world in terms of average download speeds. The leaders in the world are Hong Kong at 72.49 Mbps and Singapore on 58.84 Mbps. And America? Averaging speeds of 20.77 Mbps, it falls behind countries like Estonia, Hungary, Slovakia, and Uruguay.
Its upload speeds are even worse. Globally, the U.S. ranks 42nd with an average upload speed of 6.31 Mbps, behind Lesotho, Belarus, Slovenia, and other countries you only hear mentioned on Jeopardy.
So how did America fall behind? How did the country that literally invented the internet — and the home to world-leading tech companies such as Apple, Microsoft, Netflix, Facebook, Google, and Cisco — fall behind so many others in download speeds?
Susan Crawford argues that "huge telecommunication companies" such as Comcast, Time Warner, Verizon, and AT&T have "divided up markets and put themselves in a position where they're subject to no competition."
How? The 1996 Telecommunications Act — which was meant to foster competition — allowed cable companies and telecoms companies to simply divide markets and merge their way to monopoly, allowing them to charge customers higher and higher prices without the kind of investment in internet infrastructure, especially in next-generation fiber optic connections, that is ongoing in other countries. Fiber optic connections offer a particularly compelling example. While expensive to build, they offer faster and smoother connections than traditional copper wire connections. But Verizon stopped building out fiber optic infrastructure in 2010 — citing high costs — just as other countries were getting to work.
We deregulated high-speed internet access 10 years ago and since then we've seen enormous consolidation and monopolies… Left to their own devices, companies that supply internet access will charge high prices, because they face neither competition nor oversight. [BBC]
If a market becomes a monopoly, there's often nothing whatever to force monopolists to invest in infrastructure or improve their service. Of course, in the few places where a new competitor like Google Fiber has appeared, telecoms companies have been spooked and forced to cut prices and improve service in response to the new competition. But that isn't happening everywhere. It's very expensive for a new competitor to come into a market, like telecommunications, that has very high barriers to entry. Laying copper wire or fiber optic cable is expensive, and if the incumbent companies won't grant new competitors access to their infrastructure, then the free market forces of competition don't work and infrastructure stagnates, even as consumer anger and desire for competition rises due to poor service.
Other countries have done more to ensure that the market is open to competition. A 2006 study comparing the American and South Korean broadband markets concluded:
[T]he South Korean market was able to grow rapidly due to fierce competition in the market, mostly facilitated by the Korean government's open access rule and policy choices more favorable to new entrants rather than to the incumbents. Furthermore, near monopoly control of the residential communications infrastructure by cable operators and telephone companies manifests itself as relatively high pricing and lower quality in the U.S. [Professor Richard Taylor and Eun-A Park via Academic.edu]
And the gap between the U.S. and Korea has only grown wider since then.
The idea of a regulated market being more conducive to competition may be alien to free market ideologues, but telecoms and internet is a real world example of deregulation leading to monopolization instead of competition in lots of markets.
The Obama administration is trying to undercut the whole mess by building new publicly-funded wireless networks to offer fast 4G internet across the U.S. Whether this public investment will really prove effective at bringing internet competition to monopolized markets — and nudging the highly profitable private companies like Time Warner and Comcast into improving their services — remains to be seen.
So, many — including Crawford and others — are now calling for stronger regulation of the existing market. At The New Yorker, John Cassidy argued last month:
What we need is a new competition policy that puts the interests of consumers first, seeks to replicate what other countries have done, and treats with extreme skepticism the arguments of monopoly incumbents such as Comcast and Time Warner Cable. [The New Yorker]
But he's skeptical we'll get it, noting that: "The new head of the Federal Communications Commission, Tom Wheeler, is a former lobbyist for two sets of vested interests: the cell-phone operators and, you guessed it, the cable companies."


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