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Cable winning broadband wars, but is competition at risk?

Feb. 18, 2011

WASHINGTON, D.C. — People love to hate the cable guy, but when it comes to delivering the best value, high-speed Internet connections in the Washington, D.C., region, he’s the man to see.

Comcast Corp. costs about $2 per month more for its service on average than rival Verizon Communications Inc., but it charges about half as much per megabit, per second of data, according to an analysis by the Investigative Reporting Workshop at American University.

The connection speed advantage that cable companies have over traditional telecommunications providers —which still rely largely on aging digital subscriber line (DSL) technology — is significant enough to raise questions about whether the high-speed Internet market will devolve from a telecom- and cable-dominated duopoly to a cable monopoly.

Increasingly, broadband customers are looking for faster connection speeds when shopping for Internet service so they can watch movies, television shows and video clips online without waiting hours for files to download.

The market

The two biggest broadband providers in the Washington, D.C., region are Comcast Corp. and Verizon Communications Inc.

Connection speeds are determined by how fast a piece of data travels over the Internet. To measure broadband value, a commonly accepted method is to determine both the speed of the connection and the monthly cost of service. Price divided by speed equals average cost per megabit, per second (Mbps).

In a nutshell, Mbps measures how much customers are getting for their broadband dollar. Some providers may charge less per month than others, but offer slower speeds. Some may charge more, but offer faster speeds.

Comcast, according to an average of 1,254 surveys, charged customers $5.76 per Mbps. Verizon, according to 1,744 surveys, charged $12.34 per Mbps—more than twice as much. The data show that Verizon charged $50.86 per month on average, compared with $52.68 for Comcast.

The median, or midpoint price, for Verizon is lower, at $5.13 per Mbps, as is Comcast’s at $2.84.

Verizon trailed badly despite the continuing rollout of its fiber-optic FiOS service, which is as fast as or faster than most cable connections. 

But FiOS isn’t available everywhere. It is impossible to say how many survey results were from FiOS users. The company does not release regional subscriber numbers.

A written statement from Verizon spokesman Ed McFadden was critical of the report, faulting it for not separating Verizon’s DSL and FiOS services. The Workshop’s request for a breakdown of FiOS customers in the region was ignored. 

The study analyzed surveys from people who subscribed to a stand-alone broadband service and excluded those who may also receive television and telephone service from the same provider.

Verizon criticized that decision, noting that bundled services “provide consumers with greater values in pricing.”

Lucky to have two to choose from

The data for this study were supplied by network diagnostics firm Ookla, which is one of two providers of connection speed tests featured on the Federal Communications Commission’s website, www.broadband.gov/qualitytest. Ookla has conducted more than 2 billion speed tests worldwide, according to the company.

The surveys were collected between April of 2010 and January 2011. The Workshop analyzed 4,294 records of customer speed tests and surveys in and around the Washington, D.C., metropolitan statistical area, a region with a population of about 5.4 million.

Respondents were people who tested their connection speeds and answered questions about how much they pay, what their advertised speeds are and where they live.

The FCC’s year-old National Broadband Plan states that 96 percent of the population has “at most” two wireline broadband providers to choose from. At one time, cable and telephone companies offered similar service. But advances in cable technology have created a speed gap.

By 2009, the mean advertised cable speed was about 2.5 times as fast as DSL, according to the plan. Further cable upgrades are likely to “continue or accelerate the trend where offers to end-users of DSL cannot keep pace,” the report reads.

So are we headed for a monopoly?

“It’s extremely likely that that’s what will happen,” said Susan Crawford, former special assistant to President Obama for science, technology and innovation policy. “The speeds you’ll need to do any kind of real-time video conferencing or watch high-definition video, you’ll only have one choice. And that’s the cable company.”

Not so fast …

Whether or not a monopoly develops depends on consumer demand and the future of the Internet.

“If typical users require high speeds and only one provider can offer those speeds and expected returns to telephone companies do not justify fiber upgrades, then users may face higher prices, fewer choices and less innovation,” reads the broadband plan.

Blair Levin oversaw the creation of the plan. A former telecommunications industry analyst and one-time chief of staff to former FCC Chairman Reed Hundt, Levin says the potential for a cable monopoly isn’t great, despite the bleak forecast painted in his national plan.

“Potential is very different than certainty or even probability,” he said. “To believe that cable will have a monopoly requires believing a number of things about the future that I don’t believe, in aggregate, are likely.”

Crawford sees the potential for a two-tiered Internet—one service for low-income people and another service for those who are well off.

AT&T Inc. and Verizon, recognizing that their DSL service would be left in the dust by the cable industry, years ago began investing billions in fiber-optic lines—AT&T with U-Verse and Verizon with its FiOS effort. 

Verizon has hit the brakes on any future FiOS expansion, a fact made clear to Alexandria, Va., officials. 

The company has “sufficient franchises in Virginia and nationally” to reach its goal of spending $23 billion on FiOS and “passing” 18 million homes, Verizon Virginia President Robert W. Woltz Jr. wrote in a March 2010 letter to the city.

No FiOS for Alexandria

“As a result we will not be able to add the city of Alexandria to our existing portfolio…” the letter continued.

The company reported about 4.1 million FiOS Internet subscribers at the end of 2010. AT&T’s U-Verse service, which also uses fiber-optic technology, had 3.3 million subscribers through the end of 2010, according to the company.

Meanwhile, Verizon Wireless—which is 45 percent owned by British telecom giant Vodafone Group Plc—accounts for 61 percent of Verizon’s revenue. Wireless revenue increased from $60 billion in 2009 to $63 billion in 2010. At 94.1 million customers, Verizon Wireless is the largest wireless provider in the country.

“DSL definitely doesn’t cut it,” said Ookla co-founder Doug Suttles. AT&T and Verizon “tried to lay fiber and compete that way, but the cost is just so great. And they’re realizing over time, things are going to go wireless.”

Wireless data networks are improving but are still not as fast or as cheap as wireline broadband systems.

DSL providers appear to be staying competitive with cable by offering low prices.

In the District, for example, Verizon fares poorly when it comes to cost per megabit but does well when it comes to overall monthly cost.

 The company’s per Mbps cost was $23.13, nearly four times as much as Comcast’s $5.80. But Verizon’s monthly average cost was $39.47, compared with $51.28 for Comcast.

To test your connection speed, go to www.speedtest.net.

The Investigative Reporting Workshop is a professional journalism center in the School of Communication at American University. Funding for this report was provided by a grant from the John S. and James L. Knight Foundation.

ZIP code-level income information was provided by Esri, a company that specializes in geographic information systems and mapping.

Investigative Reporting Workshop researcher Mia Steinle contributed to this report.