[cvet]

I love the ideal, but the reality is that a lot of people are getting a half-assed effort from one company that has no economic incentive to improve. Even the threat of governments coming in can provide some of that incentive to make service better. Add to this that the cities that have created their own broadband networks have done it extremely well, and it's hard to make abstract private/public arguments.

In Chattanooga, TN: Public: 1 gigabit, $70 a month; Comcast: 25 mbps, $45 a month (I just looked it up for a zip code in the city)

25 mbps / 1 gbps = 0.025

Assuming linear scaling: 1gbps at Comcast would cost $1800/mo. Holy shit.

This is exactly what economic theory predicts will happen in the absence of competition. What's often ignored is the efficacy of the government getting stuff done is largely dependent on the competency of the officials. But if you have good officials, the government solution to the high speed problem is a fantastic one.

[rayiner]

Chattanooga isn't a very good example. The Internet is cheap because the city already had a fiber network around for the power lines. There is no way that $70 is actually paying for capital costs.

Look at the various information floating around about Verizon's ROI on FiOS. There is a lot of speculation that they don't even break even on the average deployment unless the customer buys the bundled video services.

[gonzo]

> There is no way that $70 is actually paying for capital costs.

Then why are AT&T, Grande and Google fiber are all priced at $65/mo for 1Gbps/1Gbps FTTx?

[rayiner]

I don't know about Grande, but ATT is mostly building out FTTN rather than FTTP. They also bundle television service. Nobody knows the profit story behind Google fiber. Google gets very aggressive regulatory concessions in terms of only agreeing to serve neighborhoods with sufficient demonstrated interest. A huge part of the cost of fiber deployment is having to build out to neighborhoods where enough people won't subscribe. Also, they have the advertising tie in with Google services.

[toomuchtodo]

> Google gets very aggressive regulatory concessions in terms of only agreeing to serve neighborhoods with sufficient demonstrated interest.

So you're saying $70/month can cover capital costs, and its terribly inefficient regulation that's causing excessive costs; and that Google is able to sidestep that costly regulation, whereas Comcast and other incumbents can't.

No one begs Comcast or Time Warner to come service their community like what occurred with Google Fiber. I think that's pretty damn telling.

[rayiner]

Nobody knows whether $70/month covers capital costs. Google has been totally tight-lipped about the financials of Google Fiber. All we know is that $70 + value of tie-in from more use of Google services + the political value of shaming incumbents + unprecedented regulatory concessions makes Google Fiber worth the company's while in a small number of cities.

We have more insight into Verizon's financials: http://bits.blogs.nytimes.com/2008/08/19/a-bear-speaks-why-v.... This article estimates that Verizon will ultimately lose money on FiOS. Indeed, if anything the estimates in the article, written in 2010, are a bit more optimistic than what turned out to happen. Verizon really struggled with uptake, which have only touched the 40% assumed in the article this year. That means the interest and marketing costs in the calculation are probably too low.

The numbers also explain why the company is reluctant to expand the service:

> Through 2010 the company will pay an average of $817 to run the fiber past the 19 million homes, on poles or under the ground. It will also incur $172 per home passed in other costs related to the video infrastructure.

It costs $1,000 to run the fiber past each home. The uptake rate is crucial--if only 10% of people in a neighborhood actually subscribe, then the cost just to run wires past the house is $10,000 for each subscriber. If 50% subscribe, that cost drops to $2,000 per subscriber. Verizon has thus resisted expanding to cities like Baltimore, where only a small sliver of the city really has customers who can afford $70/month for fiber. Google gets around this by only building out to neighborhoods where enough people sign-up to subscribe. Indeed, before they had to change their procedure in Kansas City due to marketing backlash, their sign-up process left most of the poor neighborhoods in the city without fiber.

You can call these build-out requirements inefficient regulation, and they are, but they're unavoidable in U.S. cities, whose political structures are dominated by those representing lower-income people.

[baddox]

I don't know the financials of Chattanooga's system, but if they're losing money (when you don't count tax revenue) the price comparison isn't very useful from an economic standpoint, at least without introducing another argument like that wealthier people ought to subsidize Internet access for poorer people.

> This is exactly what economic theory predicts will happen in the absence of competition.

Well, I would expect competition to emerge in the absence of competition, if the existing firm is charging so much that competition can be profitable (and if competition isn't prohibited by force). It's true that in an actual natural monopoly (which, remember, I think is rare for Internet access) the monopoly firm has notable market power (the ability to set prices higher than marginal cost). But that market power is not unlimited, and the government solution to a natural monopoly requires the government to be both able and willing to produce at a favorable marginal cost and set prices accordingly.

> What's often ignored is the efficacy of the government getting stuff done is largely dependent on the competency of the officials. But if you have good officials, the government solution to the high speed problem is a fantastic one.

Certainly true. That would be one of the "inputs" I mentioned in my previous comment. Of course, "good officials" probably doesn't mean much more than "true Scotsman."

[cvet]

Good points—the only thing I'd say is that we're talking about a really capital intensive industry where the incumbent may be able to drop prices to compete with a newcomer. Example: If company B comes to a town where company A is already operating, company A can just offer new subscribers the same terms as B, making it hard for B to compete. If B can anticipate A's action (not that hard in this case, because I can do it after a couple of beers) then B may choose not to invest because B's road to a profit requires producing at a lower marginal cost than A and undercutting A's prices. They actually have to pull subscribers away from A. If A is already producing at a low marginal cost but overcharging, then A has the flexibility to fight a price war (and potentially win).

Ha maybe I'm banking too much on those competent government officials. The variance in quality is certainly high.

[baddox]

Regarding your example of companies A and B, I think one obvious solution is service contracts.