Broadband infrastructure in the US has evolved along its own path, owing in large part to the size of the country and consumers’ enthusiastic embrace of cable TV in the decades immediately preceding the advent of the internet. CSPs in Europe typically “compete” through a services-based competition model over “unbundled local loops” – wires owned by one operator and leased to others – which reduces total infrastructure costs (especially for new entrants) but relies on centralized price setting and a high degree of permanent regulatory involvement. Other markets, such as Australia and Singapore, have nationalized broadband networks run by governments. The US developed along a path of infrastructure-based competition. Cable provided a second line into almost every US home, a line well suited to digital traffic. Competition now takes place among operators, cable companies and to some extent satellite providers. More recently, mobile broadband providers and, in some communities, new fibre entrants such as electric utilities, have joined the battle, especially over the last-mile connections that serve places of business and homes.

How Deep, How Fast, How Costly?

Despite robust consumer and business internet use, some observers have voiced concern that the penetration and speed of US broadband infrastructure are not what they should or could be. They point out that although the US leads many markets in terms of the health of its digital infrastructure, it trails such digital leaders as Japan and South Korea, and it has a discernible urban-rural divide. These observers argue that the infrastructure-based competition model is inferior to a service-based competition model, and that if cable broadband becomes a more pervasive technology, there may be less incentive, theoretically at least, for CSPs (and others) to invest and innovate. The concern is not so much that smaller countries will supplant the US as a leader in digital services, but that the rapid pace of innovation and advancement that has characterized the US digital economy for years will slow as market leaders face falling competitive pressure.

The US does trail some countries in internet penetration and others in speed. US broadband penetration currently approaches 78% of the population, behind countries like Korea and France.⁴² Cable currently has a 57% market share and continues to grow while its principal competition, fixed operator DSL service with its 34% share, has been on the decline. Fibre-to-the-household (FTTH) access, also principally a fixed operator-offered product in most markets, is growing faster than cable, but is subscribed to by only about 7 million homes, even though the infrastructure investment has been made to serve more than twice this number.⁴³

Average peak (37.0 Mbps) and average mean (9.8 Mbps) connection speeds in the US rank high, but are slower than in some other markets.⁴⁴ Some global rankings place the US among the top 10 countries; others only among the top 30.⁴⁵ Akamai ranks the US seventh in terms of average connection speed and eighth in high-speed broadband (more than 10 Mbps) connectivity, behind both global leaders and several smaller markets in each instance. Speedtest.net ranks the US 34th in terms of average measured speed.^{46 47} (See Figure 13.)

Figure 13: Overview of Fixed Internet Performance by Country

 

Source: Akamai State of the Internet Report, Cisco VNI, EIU, OECD, US Telecom, BCG analysis

Price criteria are complicated to compare, due to the wide variety of connection speeds and service packages offered by CSPs around the world, but there is some evidence that the US is more expensive than other markets, particularly for very high-speed broadband.⁴⁸ One reason is that the US is a geographically large and diffuse country with wide variations in population density. Some critics also argue that higher prices are evidence of the competitive model not providing adequate levels of competition in infrastructure. The extent to which broadband pricing in the US is a problem can be debated – on the one hand, higher prices might limit adoption (though adoption remains relatively high), while on the other, they can fund investments in next generation technologies. (See Figure 14.)

Figure 14: US Fixed Broadband Often More Expensive, Especially for Higher Speeds

 

Note: Data shown is for internet-only offers; select cities did not have offers at 10Mbps – lowest price offer shown Source: New America Foundation, BCG analysis

The argument advanced by many CSPs and others is that the competitive market is working just as it should and that the US remains a world leader in digital investment and innovation. Analysts in other countries, including the EU, point to the US market and regulatory environment for infrastructure investment as models for other nations to consider. Proponents of this view cite high levels of investment in US infrastructure, the competitive rates of penetration, performance and use of broadband, and the continuing growth of the world’s leading digital service sector as evidence of the competitive market’s success.⁴⁹ US operators spent $36 billion on fixed-line infrastructure in 2013, or $299 per household, according to Ovum – higher than any other major country worldwide. More than 60% of this investment was made by telecom operators.⁵⁰ (See Figure 15.)

Figure 15: US Fixed CSPs Have Higher Capex per Household 

 

Note: Data represents total CSP Capex divided by total number of households subscribing to broadband; includes all fixed telecommunications spend – fixed telecoms and cable operators Source: Ovum, EIU, BCG analysis

There is a related debate among experts over how much digital speed is really required. One side believes that download speeds of 50 Mbps are more than adequate to support current and projected needs, including the advent of next-generation 4K HD video content. The other side argues that usage expands to fill the available bandwidth, that there will always be consumers and businesses that will make use of faster access (and are willing to pay for it), and that history demonstrates the impossibility of accurately projecting future needs. This debate will doubtless rage on, but proponents of the competitive market can agree that high penetration rates indicate that consumers find value in the quality of broadband access and are willing to pay for faster connections to more content, and better services.

Travelling the Last Mile

There are few new sources of competition in the last mile in the US generally, but a small number of projects are producing more competitive access on a local basis. These undertakings are small (although some have big backers) and geographically dispersed, and the extent of their impact nationally remains to be seen.

One of the more publicized is in Chattanooga, Tennessee, where the publicly owned electricity supplier EPB has wired 56,000 residential and commercial customers with high-speed fibre-optic access.⁵¹ Google has mounted well-publicized FTTH initiatives in Kansas City, Provo, Utah, and Austin, Texas, where it will go head-to-head with AT&T, among others. Both companies plan to offer Austin homeowners speeds of 1 gigabit per second in 2014, the same speed enjoyed in Chattanooga. Google currently charges Kansas City customers $70 a month for high-speed fibre service. Typical cable or DSL service in the US costs less – but not enormously less – for much lower speeds.⁵² Google is considering expanding its fibre service to up to nine additional metropolitan areas.

Padmasree Warrior, Chief Technology and Strategy Officer, Cisco, U.S.A., leads breakout discussion on infrastructure innovation at the World Economic Forum Annual Meeting 2014.

High-speed FTTH access is underway in more than 25 North American municipalities ranging in size from Chicago (where selected neighbourhoods are being wired) to Orono, Maine.⁵³ Many of these undertakings are experiments or in the early stages, but a host of start-up “gigabit providers” – companies, government agencies and non-profit institutions – are pursuing various models. Like EPB in Chattanooga, many involve publicly owned municipal electricity authorities. Some are community-based, others have broader ambitions. One such undertaking is Gig.U, the University Community Next Generation Innovation Project, a collaborative effort that seeks to bring gigabit-speed internet connections to some 30 partner universities and their surrounding communities.

Other players are also active. Australia’s Macquarie Capital, which has an extensive international track record in infrastructure investment, has entered the US digital market with an innovative partnership agreement with the Utah Telecommunications Open Infrastructure Agency to build out a fibre network connecting homes and businesses in 11 cities.⁵⁴ 

This kind of local competition is still very much in the experimental stage, but to the extent that the consumer response is favourable – which so far it appears to be – more of such experiments are to be encouraged.

Beyond the last mile, the market also continues to attract investments by new players. In addition to the investments being made by CSPs, major digital service companies, such as Google, Amazon, Facebook and Microsoft, are busily assembling IP backbone networks for their own use. These private networks incorporate fibre-optic links leased from CSPs and interconnect with last-mile networks. They are spurred by the growing data transmission needs of their owners’ cloud-based businesses and the desire of these companies to control their own data destinies. Their infrastructure programmes are global in scale. According to a report in the Wall Street Journal in December 2013, Google now controls an international fibre-optic network extending over 100,000 miles, more than twice the size of some operators’ networks.⁵⁵

As discussed in Chapter 4, the shifting IP interconnection playing field is likely to lead to more experimentation in speed and pricing models.

Two Priorities

Some policy advocates argue that the US needs to replace private sector-funded networks with a nationalized infrastructure that can serve all of its varied digital needs – including, importantly, future developments with unknown infrastructure impacts. The lack of consumer outcry over current circumstances, however, combined with current US political realities and the prospect of massive public expense, make such a change in course theoretical at best.

The most realistic path forward in the US is two-fold. First, policy-makers should encourage the innovations taking place in local markets to heighten competition and investment among infrastructure competitors in the last mile, including the involvement of new sources of capital such as infrastructure funds. While some experts question how much they need, US consumers like speed. Anecdotal evidence to date indicates that when a new player introduces faster service, or faster or better service at a lower price, others feel obliged to follow.

Consumers benefit from the removal of regulatory and other barriers to new infrastructure models. The US FCC estimates, for example, that permitting and accessing infrastructure in public rights of way (such as utility poles) amounts to 20% of the total deployment cost.⁵⁶ Communities should ensure that companies can get access to poles and other existing infrastructure in rights of way at reasonable prices, make available data about where existing infrastructure is, and provide for fast permitting processes. In addition, 19 US states currently restrict or prohibit municipalities from investing in digital infrastructure. Relaxation of such restrictions – especially in areas where limited high-speed infrastructure has been built or where competition is limited – removes a prohibitive barrier to investment. In general, these innovations can spark private innovation. However, it is also important to ensure that municipal investments do not lead to excessive distortion of competition that reduces the incentives of private operators to invest.

Second, policy-makers should encourage investments in next generation technologies, including high-capacity IP networks and other advances such as software-defined networking and network functions virtualization technologies. Deployment of new platforms depends in part on demonstrating to consumers and investors alike that the installation of new technologies and the retirement of legacy platforms will improve the customer experience and value. Part of this effort is a top-to-bottom review of current regulations, which were established to guide the 20th century public switched telephone networks, and an evaluation of what regulations are appropriate for the 21st century IP networks (including wired, wireless, cable and satellite). Such a review should also take into account the contemporary competitive environment for services on these new networks. The regulatory review process should recognize, however, that while the US is a single market, it is a highly varied one with significant local differences, and specific steps will need to vary by geography, with some level of flexibility required, particularly to account for the different needs in rural and urban environments.