Competition

One of the major frustrations of people across the United States is a lack of competition among phone and cable companies. Comcast is the sole cable company in St. Paul. We'll deal with Qwest and phone competition below. But first, on cable.

Unless St. Paul builds a community fiber network, we will not see actual competition. Though many consumers can choose among satellite options as well for television, some cannot subscribe due to location or restrictions where they live. Moreover, as broadband becomes increasingly crucial to modern life, satellite companies cannot compete with cable companies on Internet speeds. Additionally, satellite providers do not support the community with franchise fees to support PEG programming - meaning it is in our interest to make sure the cable market locally can offer better services than satellite companies.

Competition in the cable sector will have to come from one of two models: competition using shared infrastructure or separate. In other words, there will be a fiber or cable infrastructure that multiple companies share (both on the same wires) or each company would have to build its own, distinct network.

Let's take the distinct network approach first. This is the status quo approach because current law allows the cable company to decide whether it will share its network with competitors rather than forcing them to wholesale access at fair rates to competitors. These policies are set nationally and unlikely to change.

The result is that cable companies mostly choose not to share their networks with competitors. The choose a monopolistic model as it offers higher revenues that allows them to maximize shareholder value. Some argue that this model encourages companies to invest more in their infrastructure, but that point is debated because many communities are stuck with a monopoly and a significant lack of network investment. When consumers have no other options, companies have maximized profits by refusing to upgrade the network.

Other companies are free to "overbuild," or build a competing network through the city's rights of way (after obtaining a franchise from the city; cities are not permitted to grant exclusive franchises to a single company). There is nothing stopping Charter Cable from building a network in St. Paul to compete with Comcast, theoretically. However, it rarely happens in the U.S. It may be the result of a "gentleman's agreement" between major cable companies to avoid each others' turf, or it may be simple economics (probably both).

The problem with this model is that overbuilding is tremendously difficult. Building a network has extensive upfront costs that take years to pay off. In a city like St. Paul, building a new network from scratch may cost between $200 and $300 million. In most communities, a company needs at least a 30% take rate in order to break even. When overbuilding, the incumbent provider (in St. Paul, this is Comcast) has all the advantages.

Incumbent providers already have the majority of customers and can lower prices temporarily to ensure few will switch to the overbuilder. Though government regulations are often blamed for discouraging competition, the truth is that the economics make overbuilding hard - especially when investors demand a quick return on investment.

The 30% take rate minimum means most markets would support, under ideal circumstances, no more than three competitors. Though three would be a dramatic improvement over one, it is hardly a robust marketplace. Even if the market would support more competitors, it would be increasingly inefficient as each network owner would string its own cable on the telephone poles across the city, recreating the conditions 100 years ago when cities were overrun with poles carrying cables from many competing companies.

Modern regulations, encouraging companies to compete on their own infrastructure doom us to monopolies and duopolies. The alternative is competition on shared infrastructure - which is a superior solution considering the problems noted above.

The problem with shared infrastructure is that a profit maximizer prefers to lock customers into their own services. The network owner must therefore either be forced to open the network to competitors (an option the U.S. is unlikely to embrace) or choose to do it by putting community interest ahead of profits.

Companies like Comcast and Qwest are required by law to put shareholder interests before the interests of St. Paul. So they are not going to open their infrastructure by choice. But the community can build a network and open it to all manner of competitors. This would greatly increase the pool of competitors because each service provider would no longer have to raise the funds to build a network across the city and could make a profit with fewer subscribers.

Competition and Qwest

Qwest is the dominant phone company in St. Paul, but has been required to allow other companies access to its network. However, Qwest has been arguing for increased freedom to charge those companies more, which will give Qwest more of an advantage in selling services locally.

Thus, we do see limited competition in the phone sector currently, but deregulation on the federal level is lessening opportunities to increase competition.

A Community Fiber Network could greatly increase competition and greatly increase the range of services and broadband speeds available in St. Paul. And we would no longer be dependent on federal policy to ensure competition locally. When we own the wires, we make the rules and can wholesale access to multiple service providers on an equal basis.

To be clear, a Community Fiber Network would exist in addition to the Comcast and Qwest systems. St. Paul citizens and businesses would have additional choices with a new network, not fewer.

Those residents satisfied with their existing services would not have to switch to the Community Fiber Network though they would likely benefit from reduced rates as a result of the newly competitive environment.