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Wednesday, September 13, 2006

The Magic Number of Competitors
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RCN, which provides competition for cable, Internet and phone services for many communities (but unfortunately never where I lived) may be on its last legs. I remember hearing this before a few years ago when they ended their partnership with Pepco but they hung on then. Competition is good for consumers, most anyone would agree. And we all want to see more competitors. But RCN -- which offered the triple play, the Holy Grail of modern communications competition -- apparently found it hard to compete. Was it the lack of incumbency advantage? Being the new market entrant in services where customer churn is low? A lack of access to much-needed capital, critical in an industry where so much infrastructure must be built? I don't know, but I'd be keen to read a study of it at some point.

We keep hearing that we need more competitors in broadband, and until that time comes we should impose prophylactic restrictions on those services. That argument ignores the fact that businesses view regulations as a cost, so you've just increased the cost of entering the market. But maybe the market is already telling us how many triple play providers we need, and maybe in many markets it is two.

There's certainly precedent for a fiercely competitive market with only two competitors. Airplanes are one. Boeing and Airbus are essentially the market for passenger jets, and the US maintains that Airbus has only remained competitive through European subsidies. (I'm sure Boeing has gotten some assistance through tax law or other means by the US government as well.) Anyone who reads news articles on these companies know how they're constantly trying to anticipate the needs of their customers (airlines). One rises in market share, then the other does; right now Boeing is on the rise because years ago it banked on a short-hop plane that was fuel-efficient, and that's selling far better than Boeing's new plane, which is nearly the length of Egypt's Great Sphinx.

Of course, even while there are markets in the US with only two broadband providers, there are far more than two companies providing broadband in the US. In that sense we've improved on the airplane market. But both industries require huge capital expenditures before a single customer is obtained, and both require major guesswork well into the future as to what the market will look like. Personally, I'm not sure I'd want to enter either of those markets.

I hope RCN sticks around. I hope future WiMax providers like Sprint Nextel and Clearwire bring more broadband to the home. I hope FIOS and other services continue to grow the multichannel video and broadband markets. But we have to remind ourselves that what we want in the broadband market is competition. The market decides that; let's not take it upon ourselves to decree the magic number of providers that equals competition in broadband or in triple play services.

posted by Patrick Ross @ 4:29 PM | Cable , Economics , Net Neutrality

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