Archive for February, 2013

Is the U.S. Losing the Broadband Race? As It Turns Out, We Look a Lot Like Danica Patrick

Since the publication of Susan Crawford’s book on the  alleged failings of U.S. Internet policy, several mainstream outlets have DAYTONA BEACH, FL - FEBRUARY 24: Clint Bowyer,...run stories repeating her  mantra that Internet speeds are too slow, coverage is shoddy, there is a growing “digital divide” among rich and poor, and  broadband prices are too high.

Consider the barrage of “bad news” in just one week:

  • The Wall Street Journal reported that six percent of Americans “lack high-speed service” in a story provocatively titled “Gaps Persist in High-Speed Web Access”;
  • The Financial Times reported that the United States ranks 16th in Internet speeds, and that U.S. prices on a per-megabit-per-second basis (Mbps) are more than double those in Europe; and
  • Digital Trends ran an article touting Ms. Crawford’s policies titled “Admit It: U.S. Internet Service Sucks.”

Are things as gloomy as the naysayers claim? A close look at the facts suggests otherwise. (Yes, that is a link to Need for Speed, my new e-book on Internet policy from Brookings Press; if Bob Woodward can shamelessly promote his book in the Washington Post when reporting the origins of the sequester, surely I can do the same.)

Let’s start with connection speeds. According to Akamai, a global provider of Internet services, the United States ranked ninth in average connection speeds (7.7 Mbps) in the third quarter of 2012, and seventh in percent of Internet connections with speeds above 10 Mbps (18 percent). South Korea leads both categories (average speed of 14.7 Mbps, 52 percent above 10 Mbps). It’s a bit misleading to compare our speeds with those of the fastest country in the world; a seven-minute-per-mile runner looks shoddy compared to the fastest runner in the world. And like any average, our nationwide average speed combines fast connections with slow ones. For example, the average connection speed in eight states (mostly along the densely populated Northeast corridor) exceeds 9 Mbps; any of those states would rank third fastest in the world on Akamai’s list. It’s a bit of a stretch to say that we are the tortoise among rabbits; the United States is more like Danica Patrick, who finished eighth at Daytona on Sunday.

Moving on to coverage gaps. The empirical basis for the share of Americans without “high-speed service” is the FCC’s annual report on the state of broadband deployment. There are two important caveats to keep in mind when assessing these data: The FCC counts wireline connections only, and only those wireline connections that exceed 4 Mbps. Thus, a wireline connection of say 3 Mbps (such as DSL) would not be counted in the FCC’s tally, and a wireless connection of say 10 Mbps (such as 4G LTE) would also be ignored. As of 2011, the latest year for which the FCC has reliable data, only about 7 million U.S. households did not have broadband access; if wireless broadband technologies are counted, the number of households without access to broadband at the FCC’s minimum speed is in the range of 2 to 5 million. It is hyperbole to suggest that broadband operators have ignored large swaths of the country.

And what about that growing “digital divide”? Once again, the naysayers ignore speedy wireless connections to create the appearance of a problem. It is not surprising that wealthier people have greater access to the Internet; they likely have greater access to most goods in the U.S. economy. A 2012 Pew survey shows that the same percentage of white, black, and Hispanic adults (roughly 62 percent) go online wirelessly with a laptop or a cellphone; that slightly more blacks and Hispanics own a smartphone than do whites (49 versus 45 percent); and that twice as many blacks and Hispanics go online mostly using their cell phone compared to whites (38 versus 17 percent).

The third statistic may indicate that blacks and Hispanics lack wireline access relative to whites or that blacks and Hispanics simply have stronger preferences for wireless connections relative to whites; if the latter, there is no problem to be solved. And if income differences explain the differences in broadband choices, income-based subsidies are the logical policy instrument.

Broadband price comparisons. There is a lot of casual empiricism in this area. International price comparisons of a differentiated product such as Internet connectivity should be taken with a grain of salt because the quality of Internet service might not be comparable. Moreover, if you put a gun to a provider’s head (as regulators do in Europe), and require it to make its services available to resellers at incremental costs, you are going to get cheap service—and destroy investment incentives as a nasty byproduct. Citing “harsher rules that have sapped profitability,” Reuters reported that European telco stocks were trading at roughly 9.9 times earnings compared to 17.6 times for their U.S. peers.

In large swaths of this country, the incumbent cable operator faces a fiber-based telco offering triple-play packages. Unless you think that cable operators are colluding with the telcos—a position espoused by Ms. Crawford—Internet prices are less than monopoly levels where telco-based fiber is available. And help is on the way for the rest of us in the form of wireless 4G LTE offerings, satellite broadband connections, and further telco deployment.

This is not to say that market forces and a largely hands-off Internet policy have delivered the ideal state of competition. In a market with large fixed costs, when consumers are reluctant to switch providers, and when certain must-have video programming is controlled by the incumbent cable operator, we shouldn’t expect ten broadband providers in each zip code.

The United States appears to being doing just fine in the broadband race; perhaps not in first place, but certainly deserving of a cameo on the next GoDaddy commercial. Any efforts to stimulate greater deployment should be targeted, and they should respect the incentives of broadband operators to continually upgrade their networks. The naysayers have misdiagnosed the state of broadband competition.

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With InBev Suit, Feds Fight To Keep Beer Cheap For Young Blue-Collar Men. Maybe That’s Not A Good Idea.

Last week, the Department of Justice sued to block the merger of Anheuser Busch InBEV (“ABI”) and Grupo Modelo (“Modelo”). The coming battle between the antitrust agency and the merging parties could raise several important issues for merger review, including the role of entrants (craft beer makers) and negative externalities (associated with consuming beer). 300px-AB_InBev_logo.svg_1

ABI, the maker of Bud, Bud Light, and Busch, already owns 35 percent of Modelo; the DOJ’s lawsuit seeks to keep ABI’s share right there. For those who haven’t carefully studied the back of their Mexican beer bottles, Modelo is the maker of popular Mexican imports such as Corona Extra, Corona Light, and Pacifico.

ABI’s “partial ownership” of Modelo is no small detail; it complicates the DOJ’s analysis relative to a garden-variety merger analysis. Writing in the Antitrust Law Journal, Salop and O’Brien explain that the “competitive effects of partial ownership depend critically on two separate and distinct elements: financial interest and corporate control.” Depending on those variables, partial mergers “can occur in ways that result in greater or lower harm to competition than a complete merger.” The implication of their finding is that a movement from a partial merger to a complete one could raise or lower prices.

The DOJ’s complaint doesn’t tell us much about the nature of ABI’s existing control over Modelo, except for noting that ABI’s annual report claims that ABI does not have “effective control” over Modelo. Despite this disclaimer and despite the “firewalls” designed to prevent ABI members of Modelo’s board learning about pricing information, it is possible that ABI exerts some influence over Modelo’s decision-making. Setting aside the degree of ABI’s control over Modelo’s prices, economic theory predicts that ABI’s financial interest in Modelo could affect ABI’s prices. The question is whether a full transfer of ownership would really make things worse.

The DOJ’s primary theory of harm is that the merger would facilitate coordinated pricing between ABI and MillerCoors, the second largest beer manufacturer in the United States. According to the complaint, ABI and MillerCoors have been forced to discount their prices to discourage consumers from “trading up” to Modelo brands; take away Modelo’s aggressive pricing and the industry leaders could better coordinate their price increases. Secondarily, the DOJ argues that the merger would permit ABI to unilaterally raise its prices without concern about customer defection to Modelo’s brands.

One bone of contention between the dueling antitrust experts will be the likely role of “craft beers” or microbrews in the coming years. To the extent that craft beers play a larger role in the near future—one estimate suggests that craft beers currently account for six percent of all sales but are growing at 13 percent—then a merger of two “low-end” labels is not as important for consumers. According to the Brewers Association, there were 2,000 U.S. breweries in operation by the end of 2012, and there are another 1,000 in the planning stage; the expansion of microbreweries suggests a “shift in the palate” of U.S. beer consumers toward craft beers. With this backdrop, the combination of two low-end brands might not generate much pricing power.

To be fair, ABI has some high-end labels, such as Stella Artois and Beck’s, and craft beers such as Goose Island and Shock Top. But these brands are drowned out in a sea of differentiated flavors, including popular brews such as Abita, Lagunitas, and Shiner. There is an exciting microbrew story in nearly every state—for example, you can’t visit the Blue Ridge region of Virginia without stopping at Devils’ Backbone (Roseland) or Blue Mountain Brewery (Afton).

The DOJ’s discussion of the proposed “relevant product market” is good reading. Apparently, ABI’s Bud Light Lime-a-Rita sits within the “premium plus” category. Where I come from, serving a margarita in an aluminum can is blasphemy. The agency asserts that all segments of the beer industry—from the “sub-premium” segment to “high-end”—compete in the same product market: Query whether sub-premium beers or even the “premium” segment are not constrained by the price of water, the closest available substitute. Craft beers are mentioned in passing only.

The key demographic for low-priced beer drinkers is blue-collar males in their 20s, who might shy away from the premium prices commanded by craft beers. Presumably, the DOJ’s lawsuit aims to protect these drinkers. Given the negative externalities associated with consuming alcohol, however, the movement to higher priced, heavier-tasting, craft beers that are not guzzled like Mad Dog might not be a bad thing. Which leads to one to wonder: Should the supply of beer be competitive or should we tolerate a little market power along with reduced levels of consumption?

If the DOJ has its way and blocks this merger—and if the agency is right about the likely price effects—then we will get more alcohol consumption relative to a world in which ABI owns 100 percent of Modelo. Be careful what you wish for.

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