Nash Hall Comcast Acting More and More Like A Monopolist Article 3

Summary: Comcast’s dominance in many U.S. broadband internet markets has resulted in an overall lack

of competition in these markets. The lack of competition has allowed the company to engage in price

discrimination by limiting the speed of its most popular service tier well below its current technical capability,

and charging much more for the higher speed tiers. This price discrimination allows Comcast to maximize its

profits, but in the process hurts consumers by severely limiting their ability to improve their internet speeds.

Analysis: This article examines the impact of a lack of competition (market control mechanism that

prevents a single buyer or seller from controlling market price) on the U.S. markets (mechanism that brings

buyers and sellers into contact) for broadband internet service (intangible items which provide utility for

humans) through Comcast’s monopolistic practice of price discrimination. Technological (practical application of

scientific knowledge) advancement often drives supply (ability or willingness to produce specific quantities of a

good at alternative prices in a given time period, ceteris paribus) in high tech markets like broadband internet or

smart phones because firms compete to develop and supply increasingly advanced goods or services at the

lowest prices possible. Furthermore, in a healthy, competitive market, the number of firms usually increases or

remains constant, and market equilibrium price (all buyers and sellers are satisfied with their respective

quantities and market price) is determined by the decisions of many buyers and producers. If broadband

internet service were a competitive high tech market, the improvements in broadband infrastructure over the

past decade should be shifting the supply curve (graph of supply schedule showing the quantity of a good that

sellers which to sell at each price) out, leading to increasing internet speeds offered at the market equilibrium

price. However, in many U.S. broadband markets, Comcast is the only supplier, and the supply function (shows

how much of a good will be produced according to input prices and other variables) shows that decreasing the

number of firms in a market places inward pressure on a market supply curve. Without any other firms

competing to offer improved internet service, Comcast effectively controls the pace and price at which

technological improvements (i.e. faster internet) become available to buyers, meaning it can (and does) limit the

normally strong outward pressure that technology places on high tech market supply curves.

The lack of competition and control over technological advance/internet speed allows Comcast to set an

artificial market supply and market equilibrium price which maximizes the net benefit (benefits remaining after

accounting for total costs) it gains from supplying internet service. Most consumers do not want to pay more

than $50 per month for internet, so Comcast limits the speed of its $50 service to less than a quarter of the

maximum speed its infrastructure can support, and offers its maximum speed at $115, knowing that some

consumers want the higher speed enough to pay the exorbitant price. To remain competitive in a market with

more firms, Comcast would need to offer its highest speed service at a lower price and a higher speed for its

lowest cost service. Instead, it charges artificially high $115 for its maximum speed and $50 for its artificially

slow speed, creating a $65 marginal benefit (additional benefit from adding one additional unit) between the

two service tiers that would not exist in a competitive market.

Nash Hall Comcast Acting More and More Like A Monopolist Article 3

http://www.washingtonpost.com/blogs/the-switch/wp/2013/10/01/these-charts-show-comcast-acting-more-and-more-like-a-monopolist/

In a recent article, I suggested that broadband speeds were stagnating in the United States. Comcast, the nation's leading broadband provider, begs to differ. And it has helpfully provided charts to illustrate the point.

The charts show that Comcast's service really has been getting faster. But there's a striking pattern to Comcast's upgrades: while every tier of Comcast service is faster than it was a decade ago, the rate of progress has been dramatically higher for customers who pay the most. Comcast's entry-level "Performance" tier has seen much slower speed increases in recent years than higher tiers.

That seems like a sign of declining competition at the high end of the broadband market. A decade ago, Comcast was competing directly with incumbent phone companies. Their DSL services offered speeds roughly comparable to cable, and they were beginning investments in next-generation fiber infrastructure. That gave cable companies a strong incentive to provide all of their customers with the fastest broadband they could manage.

Today, in contrast, Comcast is the undisputed speed king in many parts of the country. That has freed the cable giant to focus on maximizing its own profits, without worrying very much about improving the experience of the average customer.

A growing gap

In 2003, the typical Comcast broadband customer enjoyed a 3 Mbps broadband connection. That was a 50-fold improvement over the 56 kbps

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modem connections most customers had been using five years earlier. And it was also the fastest option Comcast offered to residential customers.

(Comcast)

Comcast doubled speeds to 6 Mbps in 2005. That same year, Comcast introduced a "Blast" tier. For an extra $10 per month, you could get a blazing-fast 8 Mbps connection. In 2008, the standard package (dubbed "Performance") doubled again to 12 Mbps while the "Blast" tier speed doubled to 16 Mbps:

Nash Hall Comcast Acting More and More Like A Monopolist Article 3

(Comcast)

The last five years have seen an extreme divergence between Comcast's low-end and high-end speeds. Today, Comcast's Performance tier gives you a 20 Mbps connection, only 66 percent higher than the 2008 speed. The Blast tier is 50 Mbps, more than three times the 2008 speed. And Comcast has introduced a new top tier that is 505 Mbps. That's more than 30 times the fastest speed offered to residential customers in 2008.

Nash Hall Comcast Acting More and More Like A Monopolist Article 3

(Comcast)

In other words, Comcast has been rapidly improving its network, but those improvements largely haven't trickled down to the service tier most customers subscribe to.

Comcast says its fastest speed tier, the 505 Mbps one, requires Comcast to install special "commercial grade equipment" at the customer's premises. So it makes sense that the company would charge a premium price—$399 per month—for it.

But Comcast's next-fastest tier, clocking in at 105 Mbps, runs on the same infrastructure as the slower 50 Mbps and 20 Mbps tiers. There's no technical reason Comcast couldn't provide 105 Mbps service to

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everyone currently subscribing to the cheaper 50 Mbps and 20 Mbps tiers.

Comcast charges $115 per month for 105 Mbps of connectivity. That would have been a good deal five years ago, but it's underwhelming today. For example, Google charges customers of its fiber network in Kansas City $70 for a connection that's almost 10 times as fast. Chattanooga's municipal fiber network doesn't enjoy Google's deep pockets, but it also to offers gigabit connectivity for $70 per month.

Less competition, more discrimination

Comcast is engaging in what economists call price discrimination. Different customers are willing to pay dramatically different amounts for broadband connectivity. So offering different tiers of service, with dramatically different speeds, helps to maximize Comcast's profits.

Comcast knows the majority of its customers are not going to pay much more than $50 per month for broadband service no matter how fast it is. So upgrading its Performance tier wouldn't earn Comcast much more revenue than it's already getting. At the same time, keeping the Performance tier at a pokey 20 Mbps makes Comcast's higher tiers more attractive in comparison.

Comcast says it's simply offering its customers more choices. "We offer a range of different products and speeds to meet very different customer needs," a Comcast spokesman tells me. "We want to give customers many different choices because not all customer are the same."

That's true as far as it goes. But the hallmark of competitive technology markets is that consumers are routinely given more than they think they need. Even entry-level smartphones today are dramatically more

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powerful than the best cell phones of a few years ago. Competition forces companies like Apple and Samsung to produce the most powerful phones they can build without worrying about whether customers "need" the faster speeds.

In other words, Comcast's strategy only works because Comcast faces limited competition in many markets. If Comcast had more competitors, they would pressure Comcast to cut the price of its highest speed tiers and raise the speed of its cheapest offerings.

We can see a exactly that dynamic playing out in Austin, where AT&T justannounced plans to upgrade its network to 300 Mbps in response to Google's own plans for a fiber optic network there. We don't know how much either AT&T or Google will charge for this new, faster service. But if the experience of Kansas City and Chattanooga is any indication, competition should give consumers a lot more bits for the buck than Comcast currently offers to its customers.

Comcast insists that it faces plenty of competition, pointing to satellite services and to recent investments by AT&T and Verizon in their networks. But satellite tops out at 12 Mbps, slower than Comcast's Performance tier. And while AT&T and Verizon have upgraded some neighborhoods to faster fiber-based networks, many others are still stuck with ancient copper lines.

In those neighborhoods, the local cable incumbent is the only firm that can offer speeds higher than about 20 Mbps. As a result, consumers are not getting the fastest speeds technically possible. Instead, the options are designed to maximize the cable company's bottom line. Which leads to most customers getting speeds far behind the state of the art.