Competition in the Broadband Internet Market

The Covid-19 Epidemic caused a massive adoption of virtual learning, work-from-home, streaming, and e-commerce. Availability of reliable internet service is a necessary condition for all these activities.

With this transformation seemingly permanent rather than temporal, policymakers, regulators, and consumers have focused significant attention on the internet industry. For example, President Biden included internet service as one of the industries in his Executive Order on Promoting Competition in the American Economy last July. The Executive Order indicates there are four issues of concern for internet service, including a lack of competition among broadband providers. In this environment, new merger and acquisition proposals among internet providers likely will face increased scrutiny. Recent research suggests that case-specific facts concerning the potential for entry, expansion, and technological improvements should be important considerations.

The Executive Order states that “[m]ore than 200 million U.S. residents live in an area with only one or two reliable highspeed internet providers, leading to prices as much as five times higher in these markets than in markets with more options.” Data available at the Federal Communication Commission (“FCC”) Broadband Map indicates that as of 2020, 40 percent of the U.S. population has access to only one high-speed internet provider and only 16 percent of the U.S. population has three or more high-speed internet providers available in their area. Additionally, in a study of the U.S. broadband industry, Kenneth Flamm and I find that there has been limited entry by new competitors into local broadband markets. For example, between 2014 and 2018, the average number of internet providers increased by 0.07 in urban census blocks and by 0.18 in rural census blocks. (See Flamm, Kenneth, and Pablo Varas. “Revising the Record: Six Stylized Economic Facts About Pre-Covid U.S. Residential Broadband Markets.” Journal of Information Policy 11.)

In this study, Kenneth Flamm and I also find that broadband service plan prices, after adjusting for quality, have not varied significantly over the previous fifteen years. However, there is substantial evidence of continuing quality improvement in broadband services across local U.S. markets, evidence that suggests that the primary dimension for residential broadband competition is not service plan price, but service plan quality (primarily download and upload speeds). We also note that internet providers may be highly motivated to introduce new, higher quality speed tiers as technology improves.

In additional recent research, Kenneth Flamm and I study quality competition in the U.S. broadband industry and empirically assess the relationship between service quality and competition. (Flamm, Kenneth and Pablo Varas, “Effects of Market Structure on Broadband Quality in Local U.S. Residential Service Markets,” working paper.) Specifically, we ask how does increased competition, measured as number of competing internet providers in a census block, affect quality of service, measured as the highest speed offered by legacy service providers in a census block.

Using broadband deployment data from the FCC containing information on residential internet services from 2014 through 2018, we analyze how the offered internet speed changes when there are changes in the number of competitors in a local market. Our analysis focuses on urban markets with only two available broadband internet providers (using cable or DSL technology) in 2014. We compare the maximum download speed offered by cable or DSL providers in markets which experienced entry or exit of providers to those which did not experience changes in the number of competitors during this time period.

The results from our regression analyses suggest that entry may lead to higher quality service. For example, moving from two to three cable or DSL broadband providers increases internet speed by about 60 Mbps (and is statistically significant). Similarly, a decrease in the number of cable and DSL competitors leads to a reduction of service speed. We also considered entry by providers using fiber technology. We find that the entry of one fiber provider does not have a significant impact on internet speed, but the entry of two fiber providers increases internet speed by almost 90 Mbps for cable and DSL services. However, we find that the entry of any number of fixed-wireless providers has a negligible impact on the internet speeds offered by providers using cable or DSL technologies.

Our analysis highlights that service expansion (entry into new markets) may lead to higher quality service by increasing the internet speed. Our findings suggest that regulators should consider, in addition to other factors, whether a given merger of broadband internet providers would result in service expansion by the merging parties, and whether the merger may accelerate service improvements and technology investments by the merging parties.

A review of past mergers also may provide guidance on whether certain conditions, such as expansion or technology investment conditions, were sufficient for maintaining or improving internet service to consumers. For example, a review of Charter Communications’ (“Charter”) acquisition of Time Warner Cable (“TWC”) and Brighthouse Networks (“BHN”) may be illustrative. In the Charter/TWC/BHN merger, the FCC and Department of Justice (“DOJ”) imposed a residential build-out condition: the merged entity would have to deploy and offer internet service to two million new residential customers within five years after closing. Additionally, the combined Charter/TWC/BHN was required to make available an affordable, low-price standalone broadband service to certain low-income consumers in its service areas. A retrospective review could analyze the number of new residential locations where Charter is offering internet service and the download speed of those services.

Given the significant public attention on the provision of internet services, new merger and acquisition proposals among internet providers likely will face increased scrutiny. Our recent research suggests that the potential for entry, expansion, and technological improvements and investments should be important considerations in any merger review.

Associate Director Dr. Pablo Varas has conducted economic analyses in a wide range of industries, including broadband internet services. This article is based on two papers co-authored with Kenneth Flamm.