Market Failure in Broadband?

Published October 1, 2005

“Market failure” is one of the tiresome litanies we hear from those who wish to impose higher taxes on consumers and increased regulation on businesses. Lately it has become the rallying cry of enthusiasts of municipal broadband, the dubious notion that cities and municipalities ought to compete with telephone, cable, wireless, and satellite companies to provide us with communications services.

Andrew Rasiej, who is running for New York City Public Advocate, blogged August 18 on, “There is marketplace failure in New York City.” He’s calling for using city tax dollars to give everyone cheap wireless broadband.

Has the market really failed to meet growing demand for broadband services? It’s difficult to find evidence of such failure. The U.S. leads the world in total wireline broadband connections with 33.9 million as of year-end 2004, according to Point Topic, a U.K. research firm that tracks broadband deployment globally. The U.S. accounts for 22.5 percent of total broadband lines in use in the world today.

As of April 2005, fiber-to-the-premises (FTTP) systems passed 1.6 million homes, an eight-fold increase over the preceding12 months, according to Render Vanderslice Associates. The firm also found the number of towns, new developments, and subdivisions that have FTTP has grown 83 percent since October 2004. Wayport, the largest Wi-Fi hotspot provider in the U.S., says it adds 100 to 150 hotspots per week, serves more than 10,000 locations, and has seen a 94 percent growth in customer connections between June 2004 and June 2005.

Can a market that is “failing” really grow so fast?

Another indicator of the market’s health is falling prices. DSL is available from SBC and Verizon for as little as $20 a month. Verizon Wireless is offering $29-a-month specials on cellular-based wireless Internet services. Google may have plans to build a nationwide network of free Wi-Fi sites.

Naysayers trot out a report that places the U.S. either 12th or 16th in the world in per-capita broadband penetration. This is an aggregate number for the entire country, and the U.S. of course is much bigger and less densely populated than European countries. That means it is more expensive to string fiber optic lines in the U.S., and then more difficult to come up with a value proposition consumers will pay for. The Federal Communications Commission says areas of the U.S. with population densities similar to those in Europe have higher, not lower, rates of broadband penetration.

One thing is clear: Cities that are talking about launching municipal Wi-Fi networks, like Chicago, New York, Philadelphia, and San Francisco, are far from broadband-deprived. Something other than unmet consumer demand is driving the municipalization fad.

Well-meaning city planners are getting caught up in the phantom menace of “market failure.” They are being sold on funding costly fiber-to-the-home systems (at $3,500 per home) or cumbersome and quickly obsolete Wi-Fi networks (at $150,000 per square mile) in the mistaken belief that cable TV and telephone companies target only the most affluent parts of the biggest cities. But with their attention focused on beating current broadband price points, municipal projects will be mowed down by a new broadband express train coming from the opposite direction.

There is every reason to believe we are about to see a burst of industry dynamism that will do more to drive cheap, universal broadband to consumers than any government planner could dream of. As the Wall Street Journal reported August 29, the U.S. high-tech industry, led by Intel, Microsoft, Apple, Yahoo! and Google, has become more lively, competitive, and disruptive than it has been in years. Those companies have deep pockets and reputations for innovation. They drive development of the processing power, software, and applications that continue to make broadband more attractive by boosting its value proposition.

The facts about the U.S. broadband market, and the diverse supply chain that feeds it, belie the dour picture painted by advocates of municipal broadband. There is no broadband market failure. The U.S. is not falling behind the rest of the world in broadband use. There is no paucity of innovation.

The future of broadband in America is in the hands of private entrepreneurs and investors, exactly where it ought to be, and where it should stay. The future is bright, but only if we can resist the calls by a vocal minority who want governments to mess it up.

Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute and managing editor of IT&T News.