Shocks to the Broadband Ecosystem: Implications for Competition and Market Structure

Abstract

For decades, economists have encouraged regulators to implement more efficient telephone pricing policies in order to eliminate the pervasive cross-subsidies from usage-based services to basic connections. Slowly, and reluctantly, regulators have moved in this direction. The most recent significant reform was implemented by the Federal In this POLICY BULLETIN, we evaluate the consequences to broadband service providers (“BSPs”) from the tremendous innovation in Internet applications and devices. Our findings reveal that as consumers continue to flock to network agnostic devices and over-the-top services, they are less wedded to any particular broadband service provider. The problem appears particularly acute for mobile wireless networks where much of the innovation is directed. As a result of this “commoditization” of broadband services, network operators are likely to intensify price competition with each other to the benefit of consumers. However, given the high fixed and sunk costs required to build and operate broadband networks, increasing the intensity of price competition could also result in lower profit margins, thus potentially shrinking the equilibrium number of firms that could profitably serve the market. This possible result is of interest for policymakers because it could mean that in an inter-related broadband ecosystem, prices fall even as markets become more concentrated. These complex responses also suggest that if the ecosystem analogy is appropriate for the broadband marketplace, then public policy must contemplate the full and wide-ranging effects of structural changes across the entire ecosystem, particularly if such changes are driven, in part or whole, by regulatory intervention. A disturbance to one part of an ecosystem, whether of natural or of contrived origins, inevitably flows to other parts of the system and may, in some cases, threaten the overall health and sustainability of the broadband sector. Understanding, and perhaps quantifying, the flow of costs and benefits across the ecosystem is essential to sound policymaking.