Still Random After All These Years

In this podcast, Dr. George Ford and Larry Spiwak of the Phoenix Center discuss the 2020 edition of OTI’s Cost of Connectivity report. They don’t like it.

For several years, the Open Technology Institute has released occasional updates to its Cost of Connectivity series, reports assessing broadband prices. The OTI methodology is quite quirky, so CoC essentially is a trigger for much better analysis from Phoenix Center for Advanced Legal and Economic Public Policy Studies economist Dr. George Ford and others.

When I say quirky, I mean OTI commits just about every statistical, analytical, and empirical error imaginable in one compact, 70 page denunciation of American broadband. The report always finds that the US suffers from an ongoing broadband affordability crisis that can only be remedied by a multipronged approach:

First, the government must collect better data about internet prices and availability. Second, consumers need greater transparency to understand the total costs they can expect to pay for internet service. Third, the Lifeline program and other low-income discount programs should be expanded to help low-income households access more affordable internet access. Fourth, Congress should legalize municipal networks that offer lower prices and faster speeds. Fifth, the government should protect consumers from landlord-tenant scams and digital redlining. Lastly, the government should strengthen antitrust enforcement to promote competition and lower prices.

In recommending everything but the one real thing that might reduce the cost of broadband service – better broadband technology – OTI effectively admits to not examining the question of broadband pricing in a meaningful way.

I’ve always suspected the CoC was intended to be clickbait, but this year even the media is leaving it alone; press mentions are limited to hardcore municipal broadband advocates Benton Institute and  Community Networks.

Ford’s Questions

Dr. Ford’s analysis is organized around five issues:

1. What the “Law of One Price” is and what it says about expected price differences within a market.

The Law of One Price teaches that prices for comparable services in a given market will reach equilibrium. This is almost common sense because high prices will encourage consumers to switch carriers and lower-than cost prices will drive firms out of business. This law is a clue to look for factors that effect quality of service and hidden costs such as transfers from other services.

2. Data problems with the OTI Report.

OTI’s data is notably unreliable: costs are taken out of advertisements, with no regard for taxes or subsidies. The shenanigans that can be played by a municipal utility provider operated a monopoly electric service as well as a non-monopoly broadband service are manifold, ranging from pole attachment rents to hidden cost transfers between monopoly and non-monopoly services.

3. An estimate of the difference in average prices between municipal and private broadband providers after bad data is filtered out.

Adjusting for service quality, OTI’s own figures show that US and European providers charge essentially the same rate for comparable speed tiers. While the markets are different, this is the result any reasonable analyst would anticipate.

4. Issues with the price-per-megabit index used in the OTI Report.

While there is a relationship between speeds and prices, it’s not linear.  A gigabit service has more value than a 10 Mbps service, but the gigabit service is neither 100 times more valuable nor 100 times more costly to provide. Gauging prices per megabit on the assumption of linearity is simply lazy.

5. The anticompetitive and predatory nature of municipal broadband.

While municipalities can be saviors in markets without commercial providers, municipal overbuilders are tempted to behave in predatory ways. Such networks don’t get built without political support, and politicians invested in their success need success stories regardless of other factors.

Anticompetitive Effects

One of the more nefarious effects of muni overbuilder networks is showing up in the ordinances cities are drafting regarding the placement of small cells. Municipal broadband overbuilders such as Chattanooga Tennessee, Longmont Colorado, and Fort Collins Colorado are in the curious position of acting as both marketplace regulators and market participants.

Hence, their municipal codes regarding siting of small cells and access to utility-owned light standards directly affect competitors to their broadband business. So they’re naturally tempted to use this ambiguous position to protect their investments.

This shows up in requirements to space small cells too far apart to enable high-speed 5G connections to homes and to charge high rents for access to utility poles and light standards for all broadband competitors. Check the last part of the podcast for a discussion of the problems this dual role creates.

Further Reading

Check the new paper for the Federal Communications Law Journal by the Phoenix Center scholars, “The Law and Economics of Municipal Broadband”. It expands on the issues discussed in the last part of the podcast.