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Why are telecommunication services a natural monopoly?

by woah 10y ago

hiou 10y ago
Ownership of the frequency bands. Maybe I was down voted because my comment was too brief. In the U.S. companies bid on and purchase wireless spectrum which they then own in perpetuity.
jjoonathan 10y ago
The same reason as any other utility (gas, power, water). It's expensive to run so many redundant lines to your house (or cell towers, etc) as to make collusion between providers prohibitively difficult. Installed infrastructure serves as a moat; the minimum viable competing product requires a massive investment that can't be done one piece at a time, since your competitor will just undercut you wherever you start to roll out. On top of this you would have to deal with standard anticompetitive market forces like economies of scale and relative bargaining power. If you can't get a half decent price from your provider (on account of being small or on account of pressure exerted on the backbone provider by your competitor), you start at a disadvantage that might be impossible to make up. Investors can give you a jump start, but then you've got the problem of providing them a better return than the incumbent, which itself is pretty efficient at funneling money to its shareholders. Even if you don't trust the theoretical hand-waving, the fact that the market is the way it is should provide all the proof you need (see: Google Fiber). The "problem" with utility markets is so thoroughly established by precedent that Adam Smith himself used them in Wealth of Nations as an example of an economic sector where markets don't automagically "do the right thing." There are a number of policy approaches to solving the problem, some of which are more "hands on" than others, but it's not a problem that goes away on its own. It's still vulnerable to technological disruption though! Microwave/mm-wave internet service, which has tiny infrastructure requirements by comparison, might be our salvation if it can be made good enough. That's a difficult problem, but maybe not so difficult as trying to get ISPs regulated as utilities. Google is right to focus their efforts on it.
- WorldMaker 10y ago
  With the respect to that last point, though, that's part of how in the 90s we've wound up in the (lack of) regulatory regime we're currently facing: at the time the regulations passed it looked like there might be enough competitor technologies for internet access that the technologies might effectively compete among themselves roughly enough to keep each other in check. Some of the competitor technologies didn't pan out (power line communications being a big one people talked about at the time, which never quite lead to broadband capabilities) and the rest of them were already "captured" to existing niches/hegemonies (the current big three: cable, phone line, cell tower) where providers were already well established due to predecessor technologies. We can keep hoping for a disruptive technology to wipe the slate clean and give us new players/niches, but infrastructure "disruption" on that sort of scale still tends to lend too much advantage to existing players in the infrastructure game: the natural place to add microwave beaming is between existing cell towers, the satellite internet providers too mostly get bought up by existing infrastructure companies like AT&T and Verizon to shore up portfolios and make FCC mandates that they at least pretend to offer broadband options in rural areas, etc. Beyond that, too, spectrum is finite and in spectrum auctions tends to favor existing players with war chests over disruptive newcomers. Outside of electromagnetic spectrum hopes, you are back to figuring out how to get physical wires from A to B and dealing with existing physical wire owners (the Google Fiber issues today). Something truly disruptive would be finding a way to do something crazy like IP over Quantum Teleportation and you can't exactly plan for when a breakthrough like that might (or might never) occur. All of which tl;dr is that technological disruption is more often than not a false hope we tend to use to avoid properly regulating today's technology (or more cynically: yesterday's ancient infrastructure fiefdoms) because it may need to compete with some future technology that never actually arrives.

Why are telecommunication services a natural monopoly?

by woah 10y ago

Why are telecommunication services a natural monopoly?

hiou 10y ago

Ownership of the frequency bands. Maybe I was down voted because my comment was too brief. In the U.S. companies bid on and purchase wireless spectrum which they then own in perpetuity.

jjoonathan 10y ago

The same reason as any other utility (gas, power, water). It's expensive to run so many redundant lines to your house (or cell towers, etc) as to make collusion between providers prohibitively difficult. Installed infrastructure serves as a moat; the minimum viable competing product requires a massive investment that can't be done one piece at a time, since your competitor will just undercut you wherever you start to roll out. On top of this you would have to deal with standard anticompetitive market forces like economies of scale and relative bargaining power. If you can't get a half decent price from your provider (on account of being small or on account of pressure exerted on the backbone provider by your competitor), you start at a disadvantage that might be impossible to make up. Investors can give you a jump start, but then you've got the problem of providing them a better return than the incumbent, which itself is pretty efficient at funneling money to its shareholders. Even if you don't trust the theoretical hand-waving, the fact that the market is the way it is should provide all the proof you need (see: Google Fiber). The "problem" with utility markets is so thoroughly established by precedent that Adam Smith himself used them in Wealth of Nations as an example of an economic sector where markets don't automagically "do the right thing." There are a number of policy approaches to solving the problem, some of which are more "hands on" than others, but it's not a problem that goes away on its own. It's still vulnerable to technological disruption though! Microwave/mm-wave internet service, which has tiny infrastructure requirements by comparison, might be our salvation if it can be made good enough. That's a difficult problem, but maybe not so difficult as trying to get ISPs regulated as utilities. Google is right to focus their efforts on it.

WorldMaker 10y ago
With the respect to that last point, though, that's part of how in the 90s we've wound up in the (lack of) regulatory regime we're currently facing: at the time the regulations passed it looked like there might be enough competitor technologies for internet access that the technologies might effectively compete among themselves roughly enough to keep each other in check. Some of the competitor technologies didn't pan out (power line communications being a big one people talked about at the time, which never quite lead to broadband capabilities) and the rest of them were already "captured" to existing niches/hegemonies (the current big three: cable, phone line, cell tower) where providers were already well established due to predecessor technologies. We can keep hoping for a disruptive technology to wipe the slate clean and give us new players/niches, but infrastructure "disruption" on that sort of scale still tends to lend too much advantage to existing players in the infrastructure game: the natural place to add microwave beaming is between existing cell towers, the satellite internet providers too mostly get bought up by existing infrastructure companies like AT&T and Verizon to shore up portfolios and make FCC mandates that they at least pretend to offer broadband options in rural areas, etc. Beyond that, too, spectrum is finite and in spectrum auctions tends to favor existing players with war chests over disruptive newcomers. Outside of electromagnetic spectrum hopes, you are back to figuring out how to get physical wires from A to B and dealing with existing physical wire owners (the Google Fiber issues today). Something truly disruptive would be finding a way to do something crazy like IP over Quantum Teleportation and you can't exactly plan for when a breakthrough like that might (or might never) occur. All of which tl;dr is that technological disruption is more often than not a false hope we tend to use to avoid properly regulating today's technology (or more cynically: yesterday's ancient infrastructure fiefdoms) because it may need to compete with some future technology that never actually arrives.