Is Consumer Access the Most Competitive Segment of Broadband?

We’ve heard it time and time againââ?¬â??regulators must be on guard against the power of the telephone and cable “duopoly.” The rationale behind the call for network neutrality and mergers such as AT&T-BellSouth and the absorption of Adelphia into Comcast and Time Warner Cable, has been the claim that the broadband “last mile” is a monopoly. The Macon County Telegraph was among the latest to reflect this conventional, but incorrect, wisdom in an August 8 editorial (archive fee required) against the AT&T-BellSouth merger, writing that “The old AT&T behemoth will have returned, and quite frankly, there isn’t another company that can stand up to it.” A short “ConsumerGram” released by the American Consumer Institute may help turn that conventional wisdom on its ear. In an easily duplicated exercise, the ACI examined the financial data from the six major cable and phone companies (Comcast, Time Warner, Charter, AT&T, Verizon and BellSouth) and compared them to the five leading Internet software, applications and content aggegrators (Google, Microsoft, Yahoo, eBay and Amazon). The phone and cable companies have been seeking deregulation, and have been widely decried as greedy and monopolistic. The content and applications companies have been demanding more regulation, arguing that policies like network neutrality will “preserve” the open environment of the Internet. Diverse groups from to the Christian Coalition have bought in to thisââ?¬â??that the carriers are the Big Bad monopolists while the Googles and Amazons are, in the words of Larry Darby, former Chief of the FCC’s Common Carrier Bureau and a Senior Fellow for the ACI, “an assortment of garage-dwelling startups.” Guess which group emerged the strongest, and with the most to gain from a regulatory regime that would prevent carriers from creating any viable economic model to allocate the bandwidth these companies will consume. Bottom line, the whole idea that Google, Amazon and Yahoo are struggling shoestring operations that need a set of regulations to be “protected” like baby chicks in an incubator is laughable.

Unwary consumers might reasonably take away from NN advocates a sense that the legislative battle separates firms with little market power from dominant firms with overwhelming market shares. Not so! Popular myth notwithstanding, most links in the Internet value chain are dominated today by large firms with substantial market shares. ï The “search” market is dominated by Google with market share in the 46% to 50% range. Yahoo (circa 23%) and Microsoft (circa 11%) account for the most of the remainder. ï Microsoft dominates the operating and applications software market with substantial shares in most of its submarkets. ï eBay’s share of the online auction market has been estimated at 85%. ï PayPal (an eBay sub) and Checkout (a Google sub) are dominant providers of “e-Payment” services for domestic and international online commerce. ï The market for Internet access facilities is dominated by cable TV providers (53% or so) and telephone companies (41% or so), with satellites garnering about 3 million (6%). However, according to ISP-Planet, individual firms have much smaller national shares. Comcast has about 9%, AT&T has a bit over 7%, Verizon has nearly 6%, and Road Runner has over 5%, while BellSouth and Cox Cable each have about 3% shares of the national Internet Service Provider market. America Online is the leader with a 19% market share.

The full ConsumerGram, complete with a telling chart showing sales, return on capital, stock price to cash flow and market cap, can be found here.