andrew yarrow is a former reporter for The New York Times.
Published June 17, 2021
Internet service is the same commodity in Wyoming as it is in Rhode Island or Paris or Tel Aviv. Then why are the costs of access so staggeringly different around the world, as well as within the United States?
Just a few statistics for starters. The average monthly bill for internet service in the United States is about $61, compared to $29 in Germany, $25 in Israel and $20 in South Korea. Factoring in quality — U.S. broadband is slower than in many countries — Americans pay four times as much as South Koreans and 40 percent more than users in France, Japan and Israel. Oddly, the price variations are even greater within the U.S.: a ranch hand in Wyoming pays 12 times as much as a yacht owner (or anyone else) for service in Rhode Island. And these numbers exclude the even-more-exorbitant costs of accessing the net on smartphones.
One consequence is not surprising: millions of Americans cannot afford the internet, even though connectivity has become almost as essential power and water. Nearly one in five U.S. households living on less than $30,000 is not online, and half of non-broadband users say that expense prevents them from subscribing. Blacks and Hispanics are about 10 percentage points behind whites in rates of access.
Actually, the gap is even wider than these numbers suggest because almost half of all Americans do not use the internet at broadband speeds. Broadband is still flat-out unavailable in many rural areas — indeed, one-third of the area of Texas lacks connections.
This digital divide has been recognized as a problem for decades. But the flip side — the broader problem that the price of internet service in the U.S. is the highest among developed countries — has gained little attention except perhaps by Americans who have lived in Western Europe or East Asia.
Exact comparisons are difficult since packages differ and the quality of connections, measured in megabits per second (Mbps), vary. But no matter how one slices and dices the data, the conclusion is pretty straightforward. The average U.S. price is 43 cents per Mbps, compared to 31 cents in Germany and 26 cents in Japan. And countries including Korea, France and Sweden that have made access a public priority in the past, get an even bigger bang for a won/euro/kroner.
Actually, the internet service providers get you coming and going. Installation and activation fees average $80 in America, while they run to just $20 in London and Seoul and are included in the price of service in Paris.
Translating state differences from average monthly bills to rates per Mpbs doesn’t change the picture. Californians pay an average of 4 cents per Mbps and New Yorkers about 10 cents for fiber-optic service (generally the gold standard for quality). The comparable figures for Maryland and Massachusetts are 55 cents per Mbps, rising to $1.20 in Arizona and $2 in New Hampshire. At the other end of the pecking order, turtle-slow DSL service carried by copper telephone landlines runs an average of $2.40 in North Carolina.
Econ 101 tells us that prices will be determined by a combination of demand and the cost of supplying service. So it makes sense that prices for broadband are higher in rural areas where it is expensive to string miles of fiber-optic or even older coaxial cables to serve relatively few subscribers. But why is high-density Delaware much more expensive than low-density Kansas or high-density Chicago much costlier than high-density Tel Aviv?
The sheer scale of these differences would not be tolerated for most other goods: as noted (again) in Econ 101, the “law of one price” dictates that prices across distances for the same good will tend to converge. But the internet is a law unto its own. Paying for the internet is like paying 80 cents for a candy bar in California that sells for $40 in New Hampshire or $12 for a cocktail in Seoul that would set you back $43 in Los Angeles.
The Puzzle Solved with One Word
So again, we ask why. The biggest reason comes down to lack of competition. Nearly two out of five U.S. households live in areas with only one or two internet service providers (ISPs) and 70 million Americans have only one choice. Contrast that with France where everybody has a choice of at least four ISPs (and Parisians have 29!), or the UK where most people have a choice among six.
With four major ISPs, New York and Los Angeles have relatively competitive markets (and relatively low internet prices). But many U.S. cities with two ISPs really offer only one adequate option since the other is much slower DSL technology.
When asked about high and rising prices, ISPs fall back on the trope that they are providing ever-higher speeds and “improved performance.” This may be true, at least in competitive U.S. markets. But it doesn’t explain why better service costs so much less in the rest of the affluent world.
This multibillion-dollar mess is a case study in the failings of interest group-burdened market capitalism.
Where Subsidies Fit In
Since the big ISPs — Comcast, Verizon, Charter and AT&T — have little economic incentive to serve rural communities, it is left to local governments and smaller, hungrier ISPs to fill the gap. However, small providers aren’t cheap: former FCC Chair Tom Wheeler recalled meeting a rural ISP executive who told him that his company charged so much simply “because I can.” To make matters worse, about two dozen states restrict local governments from providing broadband themselves — that would be socialism. And even in cities with a modicum of competition, ISPs aren’t necessarily motivated to serve high-cost customers. Major providers have been accused of “digital redlining” (i.e., cherry-picking the most profitable customers) in Cleveland, Detroit and Dallas and, in the process, discriminating against the poor.
It wasn’t always this way. In the 1990s, at the dawn of the digital age, the United States had a more competitive telecom market than Europe. But Thomas Phillippon, an economist at New York University and author of The Great Reversal: How America Gave Up on Free Markets, points out that “in the U.S., they essentially stopped enforcing pro-competition policies.” The 1996 Telecommunications Act allowed industry consolidation, and many regulations effectively serve as moats blocking entry for new ISPs.
Much earlier, the 1934 Communications Act had aimed to ensure that all Americans could get telephone connections. But in 1997 — before the internet became so vital to ordinary households — the FCC ruled that efforts to ensure telecom access would remain limited to phone service.
What followed that myopic decision is history. As Gigi Sohn, a fellow at the Georgetown Institute for Technology & Law Policy, said last year: “There’s been this notion that somehow broadband service is something that we should leave to the marketplace, and it’s a colossal failure.”
It’s not that these problems have eluded notice by policymakers. Rather, the effects of industry lobbying, free-market fundamentalism and congressional stalemate have largely stymied efforts to intervene. Indeed, this multibillion-dollar mess is a case study in the failings of interest group-burdened market capitalism.
Help is on the way … sort of. Currently, the federal government spends about $9 billion annually to help build broadband infrastructure and reduce some consumers’ costs through programs funded mostly through fees tacked onto other customers’ monthly bills. This is provided through the FCC’s Connect America Fund and Universal Service Fund and the Department of Agriculture’s Rural Utilities Service. And it includes the E-rate program to help schools get high-speed internet and Lifeline, a Reagan-era program to subsidize phone service for low-income Americans that was amended during the Obama years to provide similar aid for broadband.
Note that these are not taxes on ISPs; they’re “cross-subsidies” from one set of internet and phone users to others. But the U.S. Treasury is beginning to be involved. In February, an “emergency” $3.2 billion was made available under December’s Covid-19 relief package to temporarily cut internet bills by up to $50 for the poor, unemployed and ill. Moreover, some cities like Chattanooga have been successful in expanding access and cutting consumers’ costs. Using a combination of federal money under the 2009 stimulus and after beating back a lawsuit by Comcast seeking to stop the project, the city built a high-speed network that has generated about $2.7 billion in economic benefits and some 9,500 jobs.
Wheeler, the former FCC chair, estimated that it would cost about $80 billion to bring affordable broadband to all Americans. CAF funds could be used to build infrastructure for hard-to-serve areas with the fund administrator soliciting bids from ISPs to select the carrier that would accept the lowest subsidy. Eligibility for household subsidies could vary by location and average cost in Mbps. And oversight could be devolved from Washington to state public utility commissions.
Meanwhile, if President Biden has his way, physical coverage to broadband will approach 100 percent sooner rather than later. The administration’s giant infrastructure bill includes $100 billion to build out broadband and support networks operated by cooperatives and by local governments like Chattanooga’s.
• • •
Not to rain on President Biden’s parade here, but it will take more than federal largesse or cross-subsidies to bring the average monthly cost of internet service in the United States to within shouting range of European and Asian markets. Unlike us, the Europeans and East Asians understood that anti-monopoly laws — and direct regulation where competition fails — were needed before the incumbent industry grew sufficiently muscular to block intervention.
American capitalism has reached the point where almost everybody who’s paying attention understands that a combination of economically unjustified market concentration and big-money politics have left us compromised. Getting out of the trap would be very, very difficult — but that’s a story for another time.