A Snapshot Of Internet Service Provider Competition in the U.S.

Posted under: Internet

One of the primary benefits of living in an economy and society as developed as that of the United States is choice. A vast array of firms provide a wide range of products and services, and for nearly every type of product or service you can imagine, there are several companies all competing for your dollars and loyalty.

However, while this competition is good, it's difficult to maintain in some industries, especially when there is a lot of overhead or a lot of money is needed to get started. A perfect example: internet service.

The physical and technical infrastructure needed to provide internet access to the people of a nation as large as the United States is immense, making this market a rather exclusive one. But in the case of the internet, a utility we need and depend on in modern life, this exclusivity is worrisome. It creates an opportunity for unchecked price rises and slowing progress that prevents people from accessing or affording the connections they need.

Many people complain about there not being enough competition in the internet service industry, but they do so because of their personal experience. We launched this study because we wanted to look a bit more at the problem to see:

a) Just how bad it really is

b) What trends, if any, exist

Below you can find the full details of our study as well as the results.

The Importance of Competition

Competition is so important because it helps prevent monopolies (situations in which one company owns the entire market or owns enough of it where it wields unequal power within it, just like the board game).

Monopolies hurt consumers because, in the absence of competition from other firms, they control the market. In turn, these companies have considerably less incentive to innovate, and they also have complete control over the prices they charge; no one is there to undercut them, so they can charge as much as they want.

In most cases, if a monopoly emerges and one or both of these negative consequences also occurs, consumers respond by ceasing to purchase whatever product or service is being offered by the monopoly, leading to either the company's failure or a change in its behavior.

However, in some instances, mainly those in which the product is considered a necessity, consumers would have no protection against such practices. Faced with no other choice, they'd be forced to buy what would either be an increasingly inferior or expensive product or service.

Preventing Monopolies

Monopolies can occur when companies merge, or when they're operating in a market with a high barrier of entry, meaning one in which it's expensive and/or difficult to start a business and compete on the open market.

In both examples, the government has been charged to step in to limit the damage the monopoly causes. It does this in several ways.

First, all mergers and acquisitions must receive approval from the Federal Trade Commission (FTC), and those that would too severely limit competition are, in theory, rejected.

For industries where competition is low due to entry barriers, the government will often respond by allowing the company to operate as a monopoly while subjecting it to strict regulation, so it does not succumb to the pitfalls of operating all alone in the market.

In the United States, this is how most utilities work. Ever notice how there is only one electric, gas, and water company in your area? This is because - due to the expense of laying the pipes, wires, cables, etc. - these companies operate as regulated monopolies.

Another reason for doing this is that having too many firms competing with one another would be a mess (imagine if there were five electric companies, each with its own set of wires?)

What's the Deal with ISPs?

Given that internet service in today's time is all but essential and that the infrastructure needed to compete in the ISP market is expensive, many think that internet companies should also be treated like utilities.

However, the ISPs, and up until now, the federal government, do not agree. They have stated there is enough competition in the industry that the government does not need to regulate it as if it were providing a utility.

But we're willing to wager that most of you reading this live or have lived in an area where there is one maybe two internet service providers from which you can choose that offer connection speeds up to modern standards (50 Mbps and up).

As you can see, this is starting to get political, for the decision as to whether or not you're operating as a monopoly (or in an insufficiently competitive market) does not rest with consumers but rather with federal regulators. Many regulators have close ties to the people running these telecommunications companies (often because of the millions of dollars this industry spends each year on lobbying).

Interestingly, when it comes to other things, such as expanding networks to connect hard-to-reach customers, ISPs typically want to be treated as utilities. They want government subsidies and special contract agreements, exposing an interesting double standard in this debate.

Given this disparity between anecdotal complaints about the lack of competition in the ISP market and the claims being made by industry leaders and regulators, we set out to monitor the state of ISP competition in the United States and find out if these markets really are competitive:

How We Conducted Our Study

To fully understand how competitive the broadband market is, we started by taking a snapshot of the nation. The folks at Boring Deals, though, already did a pretty good job of this. Here's what they found:

Internet Competition Across The U.S.

At first glance, these numbers don't seem too bad, but two things jumped out:

1. Only 62 percent of America has access to what is considered a competitive market (having just two choices does not typically qualify as competition and is often referred to as a duopoly, which can have similar though not as dramatic effects as a monopoly.)

2. More than a third of the nation operates in either in a market dominated by a monopoly or duopoly

What Internet Choices do We Have?

Not only is it necessary to have an internet connection in today's world, but it's equally necessary to have a fast one.

We put tremendous strains on our home networks by streaming movies and television, video chatting, sharing files, talking with friends and family, etc. Not having a reliably fast internet connection can, at times, be as bad as not having a connection at all.

This is an important consideration when looking at internet competition. While a particular city or region may have multiple options, if those options aren't providing the same service level, they're not truly competing with one another, and the consumer will suffer.

The Federal Communications Commission (FCC) defines broadband internet as any connection that exceeds 25 Mbps download speed, and 3 Mbps upload speed. Still, more and more people are finding they need upwards of 50 or even 100 Mbps to use the internet how they are accustomed to and want to.

As a result, it's essential to focus on broadband internet competition when looking at internet competition.

For us, this meant looking at primarily cable and fiber optic internet providers.

Direct Service Line (DSL) internet, operated through the phone company, can provide speeds that meet or exceed this definition of broadband, but many do not. The service is highly dependent on where you live relative to the ISP's service hub.

Nevertheless, the presence of a quality DSL company in an area can help contribute to competition by providing consumers who have fewer needs the chance to get a less sophisticated product and save some money.

Because of this, we gave priority to the number of cable and fiber optic providers in an area, but we also paid attention to DSL providers and allowed them to create a competitive market when there were multiple companies already in the area.

In general, we consider a market where at least three ISPs (two cable/fiber optic and 1 DSL) competitive. If there are just two options, then markets were only considered competitive if those two options were cable/fiber optic.

When there were just one cable company and one DSL company, we did not consider it sufficient competition since the two products are quite different, meaning each is effectively operating on their own in their respective markets.

In all cases, we excluded satellite internet and direct wireless connections, since they are either too unreliable or do not consistently provide service we would consider to be broadband.

What Cities to Study?

Once we made this distinction between the types of internet we would be focusing on and including in our study, we needed to decide which cities to study.

Since our snapshot of the entire nation revealed that competition was low across the board, we wanted to look at how things were playing out in each state. But we also wanted to understand what was happening within each one of the states, primarily to try and answer the question: which cities have the most competitive markets and which have the least?

We selected the city that is the county seat from the largest and smallest county in each state. The county seat is simply the county's administrative hub and often its most populous and important population center.

We did this primarily to test the hypothesis that smaller, rural, and more secluded cities would have less competition than their larger counterparts.

Comparing the county seats from the largest and smallest counties provided us with a few key insights:

  • It provided us with a much better snapshot of the state of competition than the one we would have gotten by looking at just the largest and smallest cities in each state. The smallest city in a state is bound to have way less infrastructure. However, the county seat of the smallest county, while still rural and remote, is a center for commerce and population, meaning the service available there should represent what most rural residents have access to in that state.
  • Not all of the county seats in the largest counties are the states' largest cities. The same applies for the smallest counties, meaning we are not always comparing such dramatic extremes while also getting a look at internet competition in cities that are somewhat lesser-known.
  • Looking at the differences between competition between the two cities from one state helps us better understand the extent of the digital divide in that state.

Coverage

One last thing to note is that we only included an ISP as an option in a city when its coverage rate was at least 50 percent. It's our feeling that if at least half the area residents can't access a particular service, it is not a viable option, meaning its presence does not turn that market into a competitive one.

An argument could be made for making this threshold even higher, but we felt that by using 50 percent, we were still providing an accurate reflection of the market in each city.

The State of Internet Competition in 100 Cities Around the United States

Now that you understand our methodology and approach, it's time to look at the data. Here are the results from the 50 cities that serve as the county seat in their state's largest county:

Competition Amongst the Most Populated County Seats

Competition Amongst the Most Populated County Seats.

This quick glance at the numbers shows us one thing: internet competition in the United States still isn't very good. Among the fifty cities we looked at here, just 46 percent (23 in total) have at least three choices regarding internet service providers.

Some other things to consider include:

  • Just 17 of the 50 cities we looked at had at least two cable providers to choose from, meaning that when it comes to broadband internet, 27 cities had just one choice
  • For broadband internet, two cities - Minneapolis, Minnesota and Sioux Falls, South Dakota, didn't have any at all.
  • Sioux Falls - the county seat of Minnehaha County, South Dakota, has neither a cable nor DSL provider in the area, only satellite. With a population of approximately 181,000, this is somewhat surprising.
  • Of the 22 cities with two providers to choose from, just seven have both cable and fiber optic. This means 15 of those cities are operating in a failed duopoly (the situation we explained earlier in which the consumer has two choices that are not equal.)
  • Five of the six cities where there is just one provider get access to cable or fiber optic internet.

Top Ten Cities for Competition of the Largest County Seats

Here's a snapshot of the ten cities that came in at the top of this list:

Top 10 Cities For Competition of the Largest County Seats

Except for Birmingham, Providence, and Montgomery, all of the cities on this list are in the top ten in terms of population.

However, both Providence and Montgomery are located in two of the most densely populated states in the country, meaning that although the cities are small on their own, a dense urban area provides ISPs with an incentive to invest in the infrastructure needed for there to be multiple companies competing in the market.

In this sense, Birmingham remains the only real outlier in this set of ten.

Bottom Ten Cities for Competition of the Largest County Seats

Bottom 10 Cities For Competition of the Largest County Seats

Once again, the bottom of this list coincides with the bottom ten of the population ranking, with the exception of four cities. Manchester is just outside this limit, and Sioux Falls we've already identified as an interesting case.

Charlotte's situation is alarming and suggests that big cities are not immune to potentially unfair markets just because they are larger and can provide ISPs with a better return on their investment.

However, as we might expect, none of the cities on this list have true competition. Cheyenne, Burlington, and Fairfax have duopolies, but these are hardly ideal.

Competition Amongst the Least Populated County Seats

Competition Among the Least Populated County Seats

The results here are somewhat in line with what we were expecting, although they are slightly more dramatic. Just one of these fifty cities - Bristol, Rhode Island - which are all significantly smaller than the other 50 we studied, has a competitive market. A whopping sixty percent of them only have one or two choices, and 38 percent don't have any choices at all.

When we dig into the numbers a bit more, we will start to understand more about what this means, but here are a few more quick facts to know from these results:

  • Ten of the eleven cities with at least two providers to choose from have the option of choosing between different cable/fiber optic companies, which means there is at least some competition in that market.
  • Lusk, Wyoming is the only city on this list operating in a failed duopoly.
  • Bristol, Rhode Island, is the only city with multiple options for both cable/fiber optic and DSL.
  • Out of the twenty cities that just have one provider to choose from, all but two (Eutaw, Alabama, and St. Joseph, Louisiana) are connected to a broadband connection. These two cities must rely on DSL.
  • The average population for cities that don't have any cable/fiber optic or DSL options is just 582.
  • The average population for cities that have at least two options is 10,859.

Top Ten Cities for Competition of the Smallest County Seats

Top 10 Cities for Competition of the Smallest County Seats

The first four cities on this list are also the four largest cities of this batch of smaller urban areas. The first six cities are located in six of the most densely-populated states in the country, meaning they are probably benefiting from their proximity to other smaller but dense areas.

The one exception to this is Nantucket, Massachusetts, for it's an island. However, it's a wealthy vacation community, which might be why it gets so much attention from the ISPs despite its small size and seclusion.

Bottom Ten Cities for Competition of the Smallest County Seats

Bottom 10 Cities for Competition of the Smallest County Seats

Although significant as county seats, these tiny towns must rely on slower and/or less reliable connection types, mainly satellite.

What This All Means

It's perhaps not a surprise that these towns, which are some of the smallest in the country, don't have good internet options. But we must consider that while these towns are small, they are connected with other towns in the area to make up the rural fabric of America.

In total, around 20 percent of Americans - or one in five - live in rural areas. By accepting the market conditions in these areas, we deny one-fifth of Americans access to good broadband internet.

However, our study revealed much more than just the steep digital divide between urban and rural communities; it also demonstrated one irrefutable fact: internet competition in the United States is dismal.

Not even a majority of the nation's largest cities offer their residents more than two similar broadband services to choose from, and in many cases, there is just one choice.

This is not acceptable and something that needs to change. While the FTC does not think these companies are operating as monopolies or quasi-monopolies, it's precisely what is happening in many parts of the country.

Moving Forward

The state of these markets indicates a clear need for ISPs to be regulated as utilities. But before we jump on that policy train, let's take a moment to consider what we know.

For example, in many of the nation's larger cities, competition is quite strong. While some regulations may be needed, interfering in these markets might not make the most sense and may, in fact, stifle innovation.

Where action is needed is in smaller communities. Something needs to be done to either a) stimulate interest from ISPs so that more are willing to operate in rural areas, creating more competition; or b) treat ISPs operating in remote areas where competition is bound to be low as if they were utilities to ensure that all people have access to broadband.

This type of hybrid approach will allow for private industry to do what it does best - optimize and innovate - while also ensuring those living outside of densely populated areas (a segment that makes up a considerable portion of the country's population) have access to the internet service they need.

However, there are other things to consider.

For example, the income levels of those living in a particular area will also impact how much competition is out there. ISPs will be more reluctant to operate in more impoverished areas due to the perception that these people will not pay the prices they want to charge. Another study would be needed to grasp this aspect of the issue entirely.

Once again, a hybrid approach that allows ISPs to operate freely in competitive markets while regulating those doing business in more sensitive areas is likely what is needed to resolve this problem.

Conclusion

Our study has shed light on the sad state of competition in internet service markets around the United States. It confirms much of the anecdotal evidence we've been collecting that there simply isn't enough choice when it comes time to shop for an ISP, a problem most American consumers aren't used to and simply won't tolerate.

One reason for this is that people tend not to change providers, giving little incentive for ISPs to do the things they need to do to actively retain customers. So, become a more active, vigilant shopper, and advocate that those around you do the same. The more serious you become about changing or switching to a competitor, the more you will encourage the ISPs in your area to step up their game and improve the overall quality of the market.