Broadband Race. A Case Study on the Status of Connectivity in the United States

Thèse de Master , 2015 , 83 Pages

Gestion d'entreprise - Divers

The purpose of this paper is to present a clear and complete image of the current status of wireline broadband connectivity in the United States.

By reviewing the existing literature, this paper gathers the necessary data to capture an image of the US wireline broadband industry and its market structure. The study also examines the relevant academic concepts and theories that could provide an explanation for the higher broadband prices and lower broadband speeds in the country.

A customized research methodology is used to carry out the research project. Primary research in the form of a consumer survey is used to specifically address the research questions by collecting the relevant primary data. Secondary research is conducted to collect and synthesize data produced by others to grasp the realities of the U.S. broadband industry and its business environment.

The focus of the primary research is to verify the industry and market structure by viewing it from the consumers’ point of view and to investigate the immediate impacts of higher prices and lower speeds on consumers. The secondary research is carried out to analyze and discuss the underlying causes for the current low level of competition within the industry.

This study finds that two strategic groups – namely Telco and CATV, currently dominate the US broadband industry classifying it as a highly concentrated oligopoly. Nevertheless, the broadband competition in the United States has a duopoly nature since each customer has at most access to two access providers – typically one in each dominant strategic group.

The current level of internal rivalry in the industry is low. This is due to the fact that firms with “spheres of influence” meet each other in multiple geographic markets simultaneously, which leads to the phenomenon of “mutual forbearance”. Mutual forbearance can result in lower intensity of competition, higher prices, and lower data transfer speeds.

Furthermore, high levels of natural and strategic entry barriers makes entry to the industry possible only for the financially strong firms that can realize the required economies of scale and scope. Yet, even the potential entrants become extra cautious about entry if they consider that because of growing demands market might become contestable. Therefore, they search for markets with lower demands but also lower probabilities of future rivalry.

Table of Contents

Abstract

Acknowledgements

List of Tables

List of Figures

Chapter 1: Introduction

Chapter 2: Literature Review
2.1 Introduction
2.2 Background
2.2.1 The Concept and Definition of Broadband
2.2.2 Industry Structure
2.2.3 The United State’s Broadband Vision and Economic Policy
2.3 The Competitive Landscape
2.3.1 Overview of Competitors’ Market Presence
2.4 Industry Environment Analysis
2.4.1 Threat of Substitutes
2.4.2 Threat of New Entrants
2.4.3 Bargaining Power of Buyers
2.4.4 Bargaining Power of Suppliers
2.4.5 Rivalry Among Established Firms
2.5 The Counteracting Barriers
2.5.1 Natural Barriers to Entry
2.5.2 Strategic Barriers to Entry
2.6 Competitive Analysis
2.6.1 Cable Modem (HFC)
2.6.2 FTTN-DSL
2.6.3 Fiber Optics (FTTH)
2.6.4 Summary of Competitive Analysis
2.7 Market Structure
2.8 From Multimarket Contact and Spheres of Influence to Mutual Forbearance and Low Intensity of Rivalry
2.9 The Guiding Research Questions
2.10 Summary

Chapter 3: Research Methodology
3.1 Introduction
3.2 Research Objective
3.3 Basic Approach
3.4 Research Methodology
3.5 Research Methods
3.5.1 Primary Research
3.5.2 Secondary Research
3.6 Methodology Limitations
3.7 Summary

Chapter 4: Results and Discussion
4.1 Introduction
4.2 Primary Research
4.2.1 Validation of Competitive Landscape and Market Structure
4.2.2 Consumers’ Immediate Demands
4.3 Secondary Research
4.3.1 Threat of New Entrants Revisited
4.3.2 Impact of Higher Competition on Incumbents Financial Returns
4.3.3 Entry Barriers
4.3.4 Maximizing Return by Minimizing the Intensity of Competition
4.3.5 Status of Competition
4.4 Summary

Chapter 5: Conclusion
5.1 Main Research Issues
5.2 Summary of Results
5.3 Recommendations
5.4 Knowledge Contribution
5.5 Recommendations for Further Research

References

List of Tables

Table 1- Characteristics of wireline broadband technologies

Table 2- Consumer demands in terms of price and speed

Table 3- Consumer motivation to switch to a faster broadband access

Table 4- ROCE for industry leaders

Table 5- Advertising expenditure for the top four firms

Table 6- State market share per most prominent broadband provider

List of Figures

Figure 1- Simplified view of Internet and broadband access connections

Figure 2- Composition of the US home broadband market

Figure 3- Estimated U.S. Internet protocol traffic

Figure 4- Countries with high speed broadband

Figure 5- US Wireline Broadband Marketplace

Figure 6- Telco strategic group’s broadband subscribers as of end of 2013

Figure 7- CATV strategic group’s broadband subscribers as of end of 2013

Figure 8- Porter’s five forces of competition framework

Figure 9- Customers' choice in US broadband market

Figure 10- Number of wireline subscribers per speed tier

Figure 11- Median monthly broadband prices

Figure 12- Economies of Scale

Figure 13- Strategic entry barriers

Figure 14- From Multimarket Contact to Mutual Forbearance

Figure 15- The Research Pyramid

Figure 16- Socio-demographic characteristics of the statistical sample

Figure 17- Distribution of wireline broadband technologies

Figure 18- US Broadband industry concentration

Figure 19- Market structure from consumers' point of view

Figure 20- Broadband subscribers use of Internet

Figure 21- Intensity of the competitive forces in the US broadband industry

Figure 22- Number of competitors and wireline broadband prices

Figure 23- US broadband price trends

Figure 24- US wireline broadband capital expenditure

Figure 25- Top Internet service providers in terms of market share

Abstract

The purpose of this paper is to present a clear and complete image of the current status of wireline broadband connectivity in the United States.

By reviewing the existing literature, this paper gathers the necessary data to capture an image of the US wireline broadband industry and its market structure. The study also examines the relevant academic concepts and theories that could provide an explanation for the higher broadband prices and lower broadband speeds in the country.

A customized research methodology is used to carry out the research project. Primary research in the form of a consumer survey is used to specifically address the research questions by collecting the relevant primary data. Secondary research is conducted to collect and synthesize data produced by others to grasp the realities of the U.S. broadband industry and its business environment.

The focus of the primary research is to verify the industry and market structure by viewing it from the consumers’ point of view and to investigate the immediate impacts of higher prices and lower speeds on consumers. The secondary research is carried out to analyze and discuss the underlying causes for the current low level of competition within the industry.

This study finds that two strategic groups – namely Telco and CATV, currently dominate the US broadband industry classifying it as a highly concentrated oligopoly. Nevertheless, the broadband competition in the United States has a duopoly nature since each customer has at most access to two access providers – typically one in each dominant strategic group.

The current level of internal rivalry in the industry is low. This is due to the fact that firms with “spheres of influence” meet each other in multiple geographic markets simultaneously, which leads to the phenomenon of “mutual forbearance”. Mutual forbearance can result in lower intensity of competition, higher prices, and lower data transfer speeds.

Furthermore, high levels of natural and strategic entry barriers makes entry to the industry possible only for the financially strong firms that can realize the required economies of scale and scope. Yet, even the potential entrants become extra cautious about entry if they consider that because of growing demands market might become contestable. Therefore, they search for markets with lower demands but also lower probabilities of future rivalry.

This study finds that one of the best options to encourage competition within the US broadband industry is by facilitating entry of new firms into the market. This can be achieved if the Federal Communications Commission (FCC) and the local governments adopt policies that lower the natural entry barriers under their control.

Although this paper discusses two of the available options that may ensure affordability and openness of broadband access, it does not analyze and discuss the future potential implications of these options. Further research is essential for identification and analysis of such potential implications.

The findings in this paper aims to help all stakeholders grasp a more complete understanding of the US broadband industry and its dynamics, which may consequently assist them in making better decisions in regards to progress of broadband in the country.

Keywords:

broadband, entry barriers, multimarket contact, and mutual forbearance.

Acknowledgements

I would like to thank my supervisor Dr. Tanya Sammut-Bonnici for her time, her sound advice, and guidance throughout the elaboration of this dissertation.

I need to also thank my wife and my children whose love and support gave me the energy to complete my studies.

Also, I want to thank Dr. Sotirios Paroutis, Dr. John Thanassoulis, Dr. Laure Cabantous, and Dr. Tazeeb Rajwani for sharing their knowledge and for their excellent courses at Warwick Business School.

Chapter 1: Introduction

Over the past few years, the principle of “open Internet”, which is also referred to as the “net neutrality” has attracted the attention of many politicians, lawmakers, and lobbyists in the United States. Net neutrality is meant to ensure that all traffic is treated equally and allows everyone to use, create and launch the applications and services of their choice, and freely decide of the lawful contents they want to access, create, and share.

Although open Internet is a fundamental prerequisite for having a competitive broadband ecosystem that encourages innovation and investment, it is not by itself sufficient to establish such environment. In fact, the competitive environment will be created and sustained if internal and external investments are facilitated within the US broadband access network industry.

The objectives of this paper are to determine the underlying cause for the slow progress of broadband in terms of speed and price, and to investigate the immediate impacts of the present industry conditions on US consumers. In order to meet these objectives, this paper will endeavor to draw an unbiased, clear, and complete image of the US wireline broadband access network industry and marketplace.

We will study the industry’s competition climate and the underlying elements that have shaped its market structure. We will also examine the impacts of the current status of market rivalry on consumers in terms of speed and price by understanding their current needs and wants.

In chapter 2, we use available literature to construct our guiding research questions. We start by explaining the concept of broadband and the country’s broadband vision and economic policy. Next, we examine the industry’s competitive landscape and market structure and will perform an industry analysis to evaluate the strength of various competitive forces. We will also carry out an analysis to identify and evaluate the competing technologies and will discuss various elements that influence the industry’s internal rivalry.

In chapter 3, we explain our methodology, which defines the structure of our study and guides us through the research process. We will also explain our research objective and elaborate on the methods we use in gathering and analyzing the information needed to answer the research questions.

Chapter 4 is dedicated to the analysis and discussion of the key insights generated by our primary and secondary research. This will include verification of some of our findings in the literature review, which is necessary for grasping an accurate and up-to-date understanding of the status of broadband industry and its market structure.

In the rest of the chapter we perform an in-depth analysis of the elements that shape the broadband industry and its competitive environment. Finally, we will provide answers to the research questions and give some policy recommendations that could improve the progress of the broadband in the United States.

Chapter 5 restates the main research issue addressed by this paper and summarizes the results of its analysis and recommendations. This chapter also outlines the knowledge contribution of this study to the industry and provides further research recommendations.

Chapter 2: Literature Review

2.1 Introduction

In this chapter, we introduce the reader to the concept of broadband, and underscore the importance of its definition in shaping the broadband industry and its competitive landscape. We examine the current status of connectivity and highlight the role of the “National Broadband Plan” as a blueprint in the rollout and progress of high-speed data transmission in the United States.

We explore the industry landscape by looking at the competing technologies and strategic groups and perform an analysis to evaluate the industry’s competitive forces.

We explain the concepts of natural and strategic entry barriers and examine how the dominant strategic groups may use them in neutralizing the threat of new entries.

Through an in-depth literature review, we study how multimarket contact among incumbents with spheres of influence may lead to mutual forbearance – a phenomenon that could help them control the intensity of the internal competition, maintain high prices, and raise barriers to entry.

Finally, we use our literature review to develop the guiding research questions for this paper.

2.2 Background

2.2.1 The Concept and Definition of Broadband

A “broadband network” is a collection of digital data transport infrastructures that employ a variety of transmission techniques to allow users to connect to the public Internet network. Figure-1 is a simplified illustration of the public Internet network and broadband transport infrastructures.

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Figure 1- Simplified view of Internet and broadband access connections (Source: FCC, National Broadband Plan)

From its first definition by Federal Communications Commission (FCC) in 1999 and until 2010, the term “broadband” referred to an Internet access that invariably provided downstream (i.e. download to customer) and upstream (i.e. upload from customer) speeds which were faster than the traditional dial-up access of 256 kilobits per second (Kbps) (FCC, 2010a).

However, the definition of broadband must be updated to take into account current requirements in terms of data transfer speed (bandwidth), which must respond to today’s Internet services and applications as well as the concurrency of users (Fung, 2014).

Therefore, the definition of broadband cannot remain unchanged and must be progressively aligned with users’ current bandwidth requirements. This was the reason behind FCC’s decision in 2010 to change the definition of broadband to an Internet connection service offering actual downstream and upstream speeds of at least 4 Mbps, and 1 Mbps respectively (FCC, 2010b).

It is important to mention that FCC does not categorize broadband as a “common carrier”. In telecommunications, the term “common carrier” refers to services that are classified by Federal Communications Commission as “basic” or “telecommunications” services.

Basic services are highly regulated by FCC and are subject to common carrier laws, which legally binds them to be provided to all clients with reasonable demand. On the contrary, “enhanced” or “information technology” services are not regulated by the commission and are subject to fewer limitations (DPAP, 2012 and Chatterjee, 2014).

As this paper is entirely focused on the wireline broadband (to the exclusion of wireless technologies), throughout this paper, the term “broadband industry” refers to the “wireline broadband industry”.

2.2.2 Industry Structure

The structure of the U.S. broadband industry is somewhat unique and different from many other countries where the majority of users connect to the Internet over telephone lines. In the United States, the advanced and omnipresent cable television networks allowed cable television companies to offer broadband services in large segments of the country (Wallsten and Mallahan, 2010).

Consequently, since the early days of broadband in the United States, two wireline broadband platforms namely Digital Subscriber Line (DSL), offered by telephone companies (Telco), and cable Internet, offered by cable TV providers (CATV), have concurrently served the market. Figure-2 shows the composition of the U.S. home broadband market before the emergence of other broadband platforms.

2.2.3 The United State’s Broadband Vision and Economic Policy

Because America is a large country in terms of area, infrastructure networks have always played a pivotal role in uniting its citizens, connecting them to their government, and facilitating the conduct of business in the country. Similar to electricity almost a century ago, broadband is a foundation for America’s economic growth and global competitiveness and the country’s greatest infrastructure challenge of the early 21st century (FCC, 2010a).

Although rapid development of the broadband ecosystem in the United States began in the year 2004, approximately 100 million Americans have not yet subscribed to the service and nearly 14.5 million people in rural areas lack access to it (FCC, 2012). Figure-3 illustrates estimated Internet protocol traffic since 2000.

In terms of total available broadband capacity, United States is ranked 35th in the world by the World Economic Forum (Schwab, 2013), and falls behind many developed countries including UK, Japan, and South Korea in terms of speed and price (FCC, 2010a). Figure-4 shows ranking of countries with high speed broadband.

Because of this lag, in 2009, the US Congress mandated the FCC to develop a plan to ensure broadband accessibility for every American citizen. The mandate also required FCC to detail the strategy needed for achieving affordability and maximizing use of broadband for national purposes (FCC, 2010a).

In 2010, America sketched a complete vision of how its entire broadband ecosystem (networks, devices, contents, and applications) should develop.

The vision called “The National Broadband Plan” developed by FCC made several recommendations to the Executive Branch, Congress, State governments, and local authorities in order to structure and accelerate broadband affordability and penetration in the country (FCC, 2010a).

2.3 The Competitive Landscape

“The fundamental nature of competition in many of the world’s industries is changing. The reality is that financial capital continues to be scarce and markets are increasingly volatile” (Statman, 2011).

The US broadband industry is no exception. The pace of change in the US broadband ecosystem is fierce, and the perpetual innovation and the resulting shorter product life cycles demand for improvements by the industry.

The new online applications and services continue to call for higher data transfer speeds; and this remains key to support the progress of the entire ecosystem.

Industry incumbents that had made massive investments in setting up their networks now see their projects being jeopardized by disruptive technologies. Only those with access to the necessary financial capital, superior resources, experience, and ability to gain access to the new technologies through alliances and acquisitions can adapt (Hitt et al., 2013).

2.3.1 Overview of Competitors’ Market Presence

Competing Technologies

Currently three major wireline technologies compete in the US broadband market: Cable Modem (Coaxial and HFC), Digital Subscriber line (DSL and FTTN-DSL), and Fiber to the Home (FTTH) also referred to as Fiber to the Premises (FTTP). These technologies provide services to approximately 32 percent of the total US broadband marketplace.

The remainder of the marketplace is covered mainly by mobile broadband (67 percent) and a number of other broadband platforms providing services to smaller niche markets such as aerial, maritime, and remote geographical locations that cannot be covered by the dominant players. The analysis of competition climate among these platforms falls outside of the scope of this paper.

Competing Strategic Groups

As suggested by Fageda et al. (2013), direct investment is only one of the tools used by the U.S. government to promote the broadband technology. Establishing the best market structure to maximize competition among network access providers is considered by the government as the most efficient and sustainable strategy for enhancing the penetration and progress of broadband.

This strategy has led to the development of two types of competition in the U.S. broadband market: inter-platform competition or the competition between different types of broadband platforms (i.e. DSL vs. Cable Internet), and intra-platform competition or the competition between network access providers using the same technology.

The analysis performed by Bouckaert et al. (2010) recognizes the inter-platform competition as the driving force behind broadband progress. Bouckaert’s study also indicates that intra-platform competition has no significant impact on the progress of broadband and in specific scenarios has even led to a negative effect. Hence, in this paper our focus will be on competition at the inter-platform or the inter-strategic group level.

A group of firms emphasizing similar strategic dimensions and using a similar strategy is called a strategic group (SG). The notion of strategic group is useful when analyzing an industry’s competitive structure (Hitt et al., 2013), and allows us to understand how cooperative strategies can be used to reduce price competition and raise entry barriers. This is true even when a large number of firms are involved, provided they fit into particular strategic groups.

Grant (2013) proposes that one can segment the industry into strategic groups based on the technology platforms used by the member firms. To illustrate, we have provided in Figure-5 the number and size distribution of the various strategic groups within the wireline broadband marketplace; this is indeed based on the technologies used by Americans for getting online (US Telecom, 2014).

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Figure-5 illustrates that there are currently two dominant and one emerging strategic groups in the US broadband industry:

- Telecommunications (Telco) strategic group: includes firms providing fixed access using one or a combination of DSL, FTTN-DSL, and FTTH technologies.

- Cable television (CATV) strategic group: consists of firms providing fixed cable modem broadband access using one or a combination of coaxial, HFC, and FTTH technologies.

- Non-RBOC (Regional Bell Operating Companies) FTTH strategic group: organizations whose objective is to provide faster and cheaper broadband access to consumers. They include independent telephone companies, municipal FTTH networks run by public entities such as municipalities, counties, electric utilities, and public utility districts as well as private-public partnerships between large firms and cities and communities. The latter includes the partnership between Internet search giant Google and three of major U.S. cities to provide broadband access with speeds of up to 1 Gbps (Reardon, 2013).

As illustrated in Figure-5, Telco and CATV strategic groups together represent about 98 percent of wireline broadband market in the United States. It therefore comes as no surprise that the industry’ concentration ratio is comprised of six firms (CR6) - three firms from each of the dominant strategic groups with a total market share of 81 percent (Leichtman Research Group, 2014).

Figures 6 and 7 show the market breakdown in terms of market share covered by major firms in each strategic group.

2.4 Industry Environment Analysis

In this section, we study how the structure of the U.S. broadband industry drives competition among various strategic groups. Using Porter’s five forces of competition framework to analyze the industry’s underlying structure, we endeavor to understand the horizontal and vertical competitive forces and their underlying causes (Figure-8).

2.4.1 Threat of Substitutes

There are currently no meaningful substitutes for broadband. All contents, applications and services that require high-speed data transfer through Internet are entirely dependent on broadband access. Although some of these contents, applications and services might partially or weakly operate with low-speed Internet connections, their quality is certainly degraded and their functionality is normally reduced to the point that they can no longer be considered operational.

As suggested by Porter (2008), when the threat of substitutes is low or non-existent, industry profitability increases because substitute products cannot place a ceiling on prices.

2.4.2 Threat of New Entrants

Talbot (2013) suggests that some cable giants such as Time Warner and Comcast are already making astronomical gross margins of around 97 percent on networks that according to Greenstein and McDevitt (2009) “have long been paid off”. This is an exceptionally high rate of revenue relative to the capital expenditure associated with offering wireline broadband services (Hussain et al., 2012).

Telco strategic group’s giants AT&T and Verizon also enjoy high level of revenues. AT&T reported a year-over-year revenue growth of 27.9 percent for its high-speed broadband services in 2013, now a $13 billion annualized revenue stream for the company (AT&T Inc., 2014a) and Verizon announced 14.4 percent year-over-year revenue increase for its high-speed broadband services for the same year (Verizon Inc., 2014b).

Nevertheless, as suggested by Park and Taylor (2006), telecommunications networks can be characterized by high levels of capital investment that lead to the existence of substantial sunk costs and significant economies of scale and scope.

In order to be profitable and recover the sunk costs associated with building broadband networks, competing firms must achieve economies of scale and scope. Consequently, in the broadband access market, entry barriers are significantly high to smaller entrants that could not meet either of the foregoing.

Sunk costs associated with establishing market presence through brand establishment make the entry even more risky for smaller entrants (Park and Taylor, 2006). As suggested by Cooper and Nakanishi (1988), for smaller firms trying to make an entry, “the mad rush to establish presence might have dire consequences”.

Park and Taylor (2006) also identify absolute cost advantage as another important entry barrier in the broadband access market. This essentially consists in the costs normally associated with patents, rights-of-way fees, and exclusive contracts with input suppliers, which are only born by the entrants and therefore allow the incumbents to provide their services at lower costs.

Therefore, our literature review suggests that even though the US broadband industry’s potential high level of profitability makes it attractive for new entrants, because the entry barriers are significantly high, the threat of entry is limited to large and financially strong firms.

2.4.3 Bargaining Power of Buyers

Susan Crawford former assistant to president Obama on science, technology, and innovation policy stated, “Americans pay so much (for broadband access) because they don’t have a choice” (Geoghegan, 2013).

The evidence for the first part of the statement can be found in the working paper published by Greenstein and McDevitt (2010). The authors note that despite the rapid growth in adoption and revenue of broadband services there has been a modest price decline of 3 to 10 percent in broadband prices from 2004 to 2009, which is drastically lower than similar industries such as computers and consumer electronics.

Figures 9 and 10, which are based on the data released by the Federal Communication Commission show consumers’ available service provider choices and the number of subscribers for various speed tiers respectively.

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Figure 9-Customers' choice in US broadband market (Source: FCC, 2014a)

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Figure 10- Number of wireline subscribers per speed tier (Source: FCC and broadbandtrends)

From Figure-9, one can see that the percentage of U.S. homes having access to more than one service provider has inverse relationship with the downstream speed tier. In other words, as downstream speed tier increases, the percentage of homes having access to more than one service provider decreases.

It is interesting to observe that at 50 Mbps, more than 82 percent of U.S. homes have in the best-case access to only one service provider, which literally leaves consumers with no choice. Even in the best-case scenario at 4 Mbps, only 14.6 percent of U.S. homes have access to more than two service providers (FCC, 2014a).

Figures 9 and 10 illustrate that at most two wireline broadband services, typically one company in each of Telco and CATV strategic groups pass the majority of homes, which leaves consumers with little choice - confirmation for the second part of Susan Crawford’s statement.

2.4.4 Bargaining Power of Suppliers

Porter (2008) states that in any industry, powerful suppliers aim to capture more of the value for themselves by charging higher prices, limiting quality, limiting services, and transferring costs to industry participants. “Powerful suppliers can squeeze profitability out of an industry that is unable to pass on cost increases in its own prices”.

In the broadband access industry, technology suppliers are generally network equipment makers, fiber optic cable producers, mobile handset producers, and billing software developers. After the burst of the speculative dotcom bubble, the demand anticipated by suppliers before the burst never materialized, which led to overcapacity and demise of many of these firms (Goutham, 2008).

The excess capacity and continuous fall in demand for several years after the burst of the dotcom bubble, dramatically undermined the capacity of suppliers in negotiating and securing deals, which put many of them in survival mode (Goutham, 2008).

Low concentration of suppliers, high competition among supplying firms, low product differentiation, high number of substitutes, and service providers’ high level of product knowledge are other factors that contribute to reduction of suppliers’ bargaining power in the broadband industry (Agamya, 2012).

Although as suggested by Goutham (2008) installation of new fiber-based networks is increasing demand for fiber-optic cable and network equipment, Hayes (2006) states that even prices of fiber-optic cables and equipment continue to decrease as a result of greater market volume, yet another factor for weakening suppliers’ power in the U.S. broadband industry.

2.4.5 Rivalry Among Established Firms

As suggested by Grant (2013), the overall state of competition and profitability of an industry are mainly determined by the level of competition within the industry. In some industries, aggressive competition between firms leads to price wars and possible industry-wide losses, and in others, price wars are muted and competition is focused on differentiation and other non-price dimensions. Although not obvious, the latter seems to be the case in the US broadband industry.

We discovered that majority of US homes have at most two choices from which they can select their broadband service, typically one company in each of Telco and CATV strategic groups. Moreover, the research conducted by Wallsten and Mallahan (2010) indicates that in the highly concentrated broadband industry, dominant strategic groups have adopted a parallel pricing scheme based on advertised speeds. Figure-11 shows the median monthly prices for different strategic groups.

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Figure 11- Median monthly broadband prices (Source: TopTenReviews, FierceTelecom, Google, Verizon, AT&T, Comcast, Time Warner, and Wallsten and Mallahan, 2010)

As illustrated in Figure-11, there is close similarity between median monthly prices and therefore almost no price competition among dominant strategic groups.

Park and Taylor (2006) suggest that despite differences between access technologies, broadband access is a homogeneous and price-sensitive service. Consequently, product differentiation is not common in the industry because it could not be strategically used to weaken price competition.

Yet, Kalunga (2014) argues that today, there are many services such as streaming multimedia, IP telephony, games, health care, and safety-critical applications that require a guaranteed level of speed and Quality of Service (QoS); and these may become differentiating factors.

As suggested by Ford et al. (2007), intelligent use of these factors can be an efficient strategy to weaken price competition between inter-platform competitors.

Furthermore, according to the US National Research Council’s report, fundamental research in the broadband industry aimed at breakthroughs has drastically declined in favor of small short-term incremental projects aimed at generating returns within a short period of time, which do not address the real needs of consumers and the industry (Lucky and Eisenberg, 2006).

Thus, there is nearly no price competition among the dominant strategic groups in the US broadband industry, which is partly resulted from the incumbents’ use of a certain level of product differentiation as a strategy to weaken price competition. However, such differentiation does not address the real needs of consumers and the industry.

2.5 The Counteracting Barriers

Begg and Ward (2013) state that the level of costs associated with a particular industry can create entry barriers for that industry. These entry barriers can be categorized as natural or strategic.

2.5.1 Natural Barriers to Entry

Natural entry barriers are concerned with exogenous costs, which are outside the firm’s control. The minimum efficient scale (MES), which is the minimum scale of operation for a firm to function at the lowest cost, if high, is considered a natural entry barrier. The MES is quite high in oligopolies such as the US broadband industry where the level of fixed costs is high (Begg and Ward, 2013, and Hazlett and Weisman, 2009).

Consequently, in order to compete in the US broadband industry, entrants must be able to operate at or above a high level of MES (Figure-12).

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Figure 12- Economies of Scale (Source: Begg and Ward, 2013)

2.5.2 Strategic Barriers to Entry

Although MES is already quite high in the broadband industry, incumbents strive to develop strategies that can further increase MES and make entry even more difficult. They usually achieve this by “changing cost characteristics of the industry or as economists say, endogenizing the cost function” (Begg and Ward, 2013).

Grant (2013) suggests that in industries where products are to some degree differentiated, the incumbents enjoy the advantages of brand recognition. Therefore, new entrants to such markets must spend heavily on advertisement and promotion and accept the associated sunk costs to achieve the same level of brand awareness, market presence, and goodwill as the incumbents.

As we saw previously, in the US broadband industry, product differentiation remains limited and geared towards elements that are of no real value to the consumers. Despite this, it has allowed the dominant strategic groups to achieve two simultaneous objectives - weakening price competition and increasing MES (Grant, 2013 and Begg and Ward, 2013).

Figure-13 shows how increasing MES through differentiation strategies is used as a strategic entry barrier in the US broadband industry.

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Figure 13- Strategic entry barriers (Source: Begg and Ward, 2013)

2.6 Competitive Analysis

The main purpose of our competitive analysis is to determine the strengths and weaknesses of the technologies used by the three strategic groups.

This analysis allows us to objectively compare the characteristics of each technology, which is crucial for evaluating whether current dominant technologies are in fact the best available solutions in the market. We strive to keep this section as short and as technically comprehensible as possible.

2.6.1 Cable Modem (HFC)

Coaxial cable, which is now also used for data transmission, was originally built for high bandwidth, low latency applications such as cable TV and video distribution. Coaxial cable connection already exists in 90 percent of US homes, which creates a market with 120 million potential cable modem customers (Gelphman, 2012).

According to California Cable and Telecommunications Association (CCTA), this omnipresent technology footprint has been the main reason behind the massive nationwide investments to create a state-of-the art national hybrid fiber-coaxial (HFC) cable modem broadband network (CCTA, 2014).

Castelli (2003) suggests that one of the main challenges of HFC technology is sharing of its limited capacity to the end-users. In a HFC network, end-users in one neighborhood sharing the same fiber cable can cause congestion during peak access hours leading to degradation of response time especially for real-time applications requiring low latency.

2.6.2 FTTN-DSL

As of 2012, there were 139 million used fixed telephone lines in the United States, a substantial market for DSL broadband service providers (CIA World Factbook, 2014).

DSL broadband transmission rates are inversely related to the length of the copper wires used in the end-to-end data transmission lines. Therefore, the massive investment of DSL service providers since 2006 has been concentrated on building FTTN networks by deploying fiber optics cables to electronic fiber nodes in neighborhoods to minimize the length of the used copper wire from the fiber node to the customer’s home (Corning, 2005).

With current access protocols, FTTN-DSL can support downstream speeds of up to 26 Mbps over short distances, however; by using more advanced access protocols such as VDSL2, downstream speed can be improved to up to 50 Mbps.

Although this is a substantial improvement, some analysts suggest that it won’t be sufficient to compete with the downstream speeds achievable by cable modem access providers. As for the upstream speed, the new access protocol allows for data transmissions of up to 6 Mbps (Atkinson et al., 2011).

2.6.3 Fiber Optics (FTTH)

FTTH networks were first deployed by independent smaller non-RBOC telcos (wireline voice service providers other than AT&T, Verizon, and CenturyLink) with the purpose of providing voice services to rural areas. However, as demand for broadband services increased, the technology became mainstream very quickly (US Telecom, 2013).

Unlike DSL and cable broadband access, which are offered only by their respective service providers, FTTH broadband services are provided by telcos, independent telcos, and non-telephone companies such as electric utilities, wireless ISPs, and search engine giants (Zager, 2013).

The point-to-multipoint architecture in conjunction with the Gigabit-capable Passive Optical Networks (GPON) standard permits service providers to theoretically achieve 2.4 Gbps of downstream and 1.2 Gbps of upstream bandwidth over a single fiber-optic cable (Accton, 2012).

Unlike FTTN-DSL where transmission speed is sensitive to the length of the twisted-pair cable, fiber-optic cable can be extended for up to 20 Km from the central office to the customer premises without impacting the speed or degrading the service quality (Corning, 2005).

2.6.4 Summary of Competitive Analysis

Table-1 summarizes characteristics, advantages, and limitations of each wireline broadband technology.

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Table 1- Characteristics of wireline broadband technologies (Source: Corning and OOKLA)

As shown in Table-1, the FTTH technology is the most advanced technology in terms of data transmission speeds and despite this superiority only slightly more expensive than the HFC and FTTN-DSL technologies. Nevertheless, as previously shown, the non-RBOC FTTH strategic group holds only 2 percent of the market share.

2.7 Market Structure

Oligopolies are markets with a small number of players and are referred to as highly concentrated industries (Begg and Ward, 2013). Therefore, one can characterize the US broadband industry as an oligopoly since it has a six-firm concentration ratio of 81 percent.

Economides (2011) proposes that from the consumers’ point of view, the broadband competition in the United States has in fact a duopoly nature since each customer has at most access to two broadband service providers - typically one company in each of Telco and CATV strategic groups. This is in fact in line with our findings from literature review as provided in the industry analysis (section 2.4.3).

Economides emphasizes that the duopoly nature of the market bestows greater market power to network access providers, allowing them to charge higher prices, and “to engage in other anticompetitive practices” than markets with more competitors.

The author suggests that the duopoly nature of the market also increases the switching costs that are technology and/or contract related, which in turn grants even more market power to the duopolists. For instance, a subscriber might be required to change his equipment and/or pay a contract exit penalty when switching from one provider to the other.

Furthermore, Prieger (2013) identifies “multimarket contact” as the root cause for the soft competition in US broadband industry.

Jayachandran et al. (1999) define multimarket contact as competitive situations in which two or more firms in highly concentrated industries (such as leading firms in the dominant strategic groups in the US broadband industry) compete against each other at the same time in multiple product or geographical markets. The authors state that the multimarket contact has significant impacts on the competitive behavior of firms and the intensity of rivalry in the market.

One approach to study the intensity of rivalry in a multimarket competition is to investigate the existence of the necessary elements that can lead to “Mutual Forbearance”, which will be the focus of the next section.

2.8 From Multimarket Contact and Spheres of Influence to Mutual Forbearance and Low Intensity of Rivalry

Tacit collusion is a cooperative strategy that refers to a situation in which two firms understand each other’s motives and strategies and implicitly coordinate to avoid intense competition in such domains as pricing and production. Tacit collusion is facilitated by multimarket contact and is normally used as a competition-reducing business-level strategy (Hitt et al., 2013, Prieger, 2013, and Jayachandran et al., 1999).

As stated by Edwards cited in Bernheim and Whinston (1990), through the development of spheres of influence, each competitor “may informally recognize the other’s primacy of interest in markets important to the other, in the expectation that its own important interest will be similarly respected”. Thus, each competitor might specialize in a subset of markets, which may help firms maintain high prices.

Co-existence of multimarket contact and Spheres of influence may result in mutual forbearance, which is a form of tacit collusion in which firms avoid competitive attacks against those rivals they meet in a number of distinct geographic markets (Bernheim and Whinston, 1990).

Jayachandran et al. propose that even though multimarket competition increases the opportunity that rivals have to compete with each other, the intensity of competition between firms with overlapping markets may be reduced by mutual forbearance.

In a research performed on the US airline industry, Ciliberto and Wiliams (2012) provide the empirical evidence that supports this hypothesis. The authors state, “We cannot reject the hypothesis that carriers with a significant amount of multimarket contact can sustain near-perfect cooperation in setting fares”.

Jayachandran suggests that for mutual forbearance to occur, two criteria must be met – familiarity and deterrence.

Multimarket contact makes mutual learning easier by providing the firms with the opportunity to become familiar with each other and recognize their independence.

Spheres of influence enhance deterrence, which is the outcome of the ability of firms to cause serious financial damage to their competitors, happens when firms hold credible threats of retaliation against each other. As argued by Jayachandran, when deterrence exists, firms might not compete aggressively because “expected gains from aggressive moves may be lower than future losses due to retaliation”.

Figure-14 illustrates the process model between multimarket contact and lower intensity of competition.

Multimarket Contact and Development of Spheres of Influence in US Broadband Industry

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Figure 14- From Multimarket Contact to Mutual Forbearance (Source: Jayachandran et al., 1999)

2.9 The Guiding Research Questions

The US broadband industry lags behind many developed nations in terms of speed and cost, and literature points to the lack of competition in the industry as the main cause.

The evaluation of the industry’s competitive forces reveals the threat of new entrants as the strongest force in the industry.

The literature review suggests that to neutralize this force, the incumbents have adopted a cooperative strategy with just an adequate level of product differentiation that could weaken price competition and raise strategic entry barriers.

The collection of elements covered in the literature review leads us to the guiding research questions for this paper:

(1) Is the slow progress of the broadband in the United States in terms of price and speed, due to the lack of competition within the industry?

(2) Does the current status of the broadband in the United States have immediate impacts on consumers?

This paper aims to answer these questions through analysis and discussion using the research methodology detailed in the next chapter.

2.10 Summary

United States lags behind many developed nations in terms of broadband speed and cost despite the increasing need for such networking infrastructure. By sketching a comprehensive plan, America set the goals towards establishing the most advanced and affordable broadband networks, a plan which will succeed depending on the outcome of the competition between the industry’s strategic groups.

In this chapter, we performed an industry analysis using Porter’s five forces of competition framework and described the competition landscape of the US broadband industry. We also conducted a competitive analysis to identify the strengths and weaknesses of the competing technologies.

Our literature review revealed that although the US broadband market benefits from a limited level of inter-platform product differentiation, such differentiation is solely employed as a strategy to minimize price competition and does not address consumers and industry’s real needs.

Rather than approaching the issue from a “competition among firms” point of view, we decided to identify the main strategic groups within the industry and focus on the structure and level of competition among them. This approach allowed us to explore the possible cooperative strategy between the dominant strategic groups.

We explained the natural entry barriers in the US broadband industry, and described how dominant strategic groups may address the threat of new entrants by raising the strategic entry barriers through endoginizing the cost function. We also examined the market structure and explored the relationship between the duopoly nature of the market and current high prices.

Through an in-depth literature review, we observed how multimarket contact between firms with spheres of influence can act as the root cause for the soft level of competition in the industry and explored how it can lead to mutual forbearance - a phenomenon that further supports the incumbents’ control over the intensity of competition, and their capacity to maintain high prices and barriers to entry.

Finally, we developed our research questions, which we aim to answer by following a relevant research methodology detailed in the next chapter.

Chapter 3: Research Methodology

3.1 Introduction

Our research consists of three parts: research topic (problem) and research questions, which were outlined in the chapter “literature review”, and the answers to the research questions, which will be the focus of our analysis and discussion in chapter 4.

In order to follow a structured approach to research, we use the research pyramid suggested by Jonker and Pennink (2009) and illustrated in Figure-15.

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Figure 15- The research pyramid (Jonker and Pennink, 2009)

However, before going through different layers of the research pyramid, we need to define our research objective. As suggested by Zikmund and Babin (2007), research objective is an outline of the type of research needed, and the intelligence that results from the research that help stakeholders make informed decisions. Research objective expresses what should be delivered by the research and derives the research process.

The first layer of the pyramid is research “paradigm”, which is defined by Jonker and Pennink (2009) as the researcher’s assumptions on the research subject (theoretical paradigm) or the way the research must be conducted (methodological paradigm). In this instance, we do not have any assumptions regarding the research subject, but rather a methodological paradigm, consisting of our views on how the research must be conducted, which is set out in the section “Basic Approach”.

Next, we outline a customized methodology that best suits our research project. Without specifying the individual steps, this section will set out how the research must be carried in order to produce reliable answers to the research questions.

In the section “Research Methods” we will elaborate on our approach to the primary and secondary research. We will explain the sample selection, data collection, data analysis, and research techniques for the primary research and will describe the criteria that need to be considered when conducting the secondary research.

Finally, we will talk about our methodological limitations and provide a summary of the chapter.

3.2 Research Objective

In our literature overview, we explored the current competition climate in the U.S. broadband industry and applied our insight to specify the guiding research questions. The purpose of this section is to define our research objective based on the literature review and the research questions.

The literature review revealed that the U.S. broadband industry is behind nine other nations in terms of speed and cost. More than 75 percent of U.S. homes can select between only two service providers and 15 percent do not have access to broadband at all.

The strongest competitive force in the industry was identified as the threat of new entrants. The literature review suggests that neutralizing this threat is the foundation for the dominating firms’ strategy formulation, which results in restricting entry to the industry and consequently lack of competition.

Further, because of the lack of competition and the cooperative strategy between dominant strategic groups, these groups do not have the financial incentives to improve speeds by investing in their networks or to reduce the price of their current offerings.

Hence, the literature review identifies the lack of competition in the industry as the underlying cause for the slow progress of broadband in the United States in terms of speed and cost.

The research objective for this paper is to investigate if this hypothesis holds and whether current status of broadband in terms of speed and price has immediate impacts on US consumers.

3.3 Basic Approach

Panda and Gupta (2014) argue that, in certain instances, academic research has limited relevance to business organizations and practitioners, and this is attributed to some academic researchers who “seem to be out of touch with the language, problems, and concerns of the business world and practitioners”.

The purpose of this research is to be practical and useful to all readers including practitioners and academics. Although we make extensive use of academic frameworks and theories to structure and elaborate our research, our main objective is to take into account the realities of the industry’s competitive environment. Consequently, we equally rely on active practitioners’ and consumers’ inputs for our analysis.

3.4 Research Methodology

In this section, we explain the research methods and their corresponding data collection procedures used in this paper to fulfill the research objective.

In order to make this paper more relevant to the business world as well as to the practitioners and consumers, we take a pragmatic approach to research and use a mixed research method, which includes both quantitative and qualitative research. We believe this is the best approach since in addition to the numerical data, we need to grasp a first hand and unbiased understanding of consumer demands and opinions as well as opinions of the industry experts (Creswell, 2014).

We require inputs from all players in the industry and the market; therefore, we conduct our research in two phases - a primary research to understand consumers’ views, needs, and wants, and a secondary research to grasp the intensity of rivalry in the industry.

In the primary research we conduct a survey and ask for consumers’ input without involving them in the technicalities of the subject. In other words, we strive to understand consumers’ opinions and demands from the industry by asking them questions in a simple language. This will allow us to validate the US broadband’s competitive landscape and market structure and to evaluate the immediate impacts of current status of connectivity on consumers.

In the secondary research, our objective is to grasp the realities of the U.S. broadband industry and its business environment in order to investigate whether the lack of competition in the industry is the underlying cause for the slow progress of broadband in terms speed and price. We endeavor to understand the perspective of all players by collecting inputs from a variety of reliable academic and non-academic sources.

3.5 Research Methods

3.5.1 Primary Research

A clear advantage of survey methodology is that it secures the collection of primary data while being specifically designed to address the research question. Data collected through surveys are accurate, and when properly conducted, extremely valuable to stakeholders (Zikmund and Babin, 2007). Since the results of the surveys are crucially important and that, in certain instances, the survey remains the only way to study a phenomenon, the quality of the survey research must be given the highest priority by the researcher (Slater and Atuahene, 2004).

Therefore, we give special attention to areas such as sample selection, sample size calculation, survey design, data collection, and data analysis. The following sections describe our approach to each of these areas.

Sample Selection and Sample Size Calculation

Our target population set consists in all residents of the United States above the age of 18; however, since we do not have access to the entire set, we need to calculate a sample size that is large enough to allow extending the results to the entire targeted population. By using the following formula we can calculate the necessary sample size (Smith, 2013).

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Z = Z-score (calculated for a confidence interval from the z-score table)

= Standard deviation

E = Margin of error

For our experiment:

Z = 1.96 for the confidence interval of 95%

is unknown, however = 0.5 ensures that the sample is large enough

E = 1 – Confidence interval =[Abbildung in dieser Leseprobe nicht enthalten]

Therefore:

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Consequently, we need at least 384 respondents. Although we defined our sample target as 400, we received additional responses through email and social media requests. Overall, we succeeded to gather a sample size of 419 respondents that is a large enough sample size to avoid statistical problems.

According to the “Central-limit theorem”, as sample size increases, the mean of the sampling distribution will approach the population mean, therefore, we decided to include the extra responses in our primary research to have a more normally distributed sample (Zikmund and Babin, 2007).

Socio-demographic Characteristics of Survey Respondents

Ford et al. (2007) identifies demographics as an important driver for broadband adoption in the United States, therefore, our statistical sample includes respondents in various US states from different gender, age, household income, and educational background groups.

The socio-demographic characteristics of our survey respondents are set out in Figure-16. The reason for selecting this socio-demographic profile was to ensure that our sample sufficiently represented the entire population of the United States above the age of 18.

Our sample did not include respondents below the age of 18 due to the fact that minors need the consent of their parents to participate in a research, which would make the survey significantly complex and expensive.

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Figure 16- Socio-demographic characteristics of the statistical sample

Survey Design and Data Collection Method

In order to ensure a high response rate, the survey was intentionally designed to be short and simple with easy to understand questions and response options. It includes 8 questions developed to either statistically verify some of the data and hypotheses covered in our literature review to explain the competitive landscape and market structure or to grasp an understanding of consumers’ immediate needs and wants in terms of speed and price.

We also included 5 optional questions in the survey to obtain the socio-demographic profiles of our respondents and to ensure that our sample was reasonably distributed over different socio-demographic groups.

Survey Monkey, which is a popular and familiar tool for creating and publishing online questionnaires, was used for the survey design, data collection, and data analysis.

To verify the end-to-end process and to ensure survey’s clarity, we conducted a pilot survey for which data were collected and analyzed by tools provided by Survey Monkey. It is only after the completion of this first step, that the survey was sent to the population using survey monkey’s services, direct emails, and LinkedIn and Facebook requests.

Data Analysis Methods

To eliminate possibility of errors, the survey was entirely designed using multiple-choice questions. Therefore, we did not have to scan and edit raw data for possible errors prior to analysis. In addition, we did not make use of computers to analyze the raw data, consequently, there was no need to code or create data files.

We mostly rely on sample descriptive statistics to summarize and discuss the results of the survey. Since only nominal and ordinal level scales of measurement are used, statistics obtained from the survey are mostly presented and analyzed using frequency and proportion tables. Tabulation and cross-tabulation techniques might also be utilized when they are found helpful to present results and reinforce or clarify an argument or point of view (Zikmund and Babin, 2007).

3.5.2 Secondary Research

In the course of the secondary research, we collect and synthesize the data produced by others to perform our own analysis. We mainly use secondary data for fact-finding without any intentions to derive descriptive or predictive equations.

We make use of reliable sources pertinent to our research project– books, academic papers, journal articles, government agency publications, and trade association publications will be among these sources.

Data Collection Method

As oppose to primary data, secondary data are not specifically designed to meet the requirements of the research, thus, the researcher must exercise caution when selecting secondary sources. Zikmund and Babin (2007) identify the most common reasons why secondary data do not adequately satisfy research needs as:

- Outdated information
- Variation in definition of terms
- Different units of measurement
- Lack of information to verify the data’s accuracy

Hence, by examining the collected data against these factors we evaluate their relevance to our research.

In order to stay impartial in our analysis, we will mainly rely on statistical reports published by government agencies, trade associations, non-profit organizations, and educational institutions.

The main library databases and websites we use in our study include:

- University of Warwick Library Website
- Business Source Premier
- ABI/INFORM Global
- Munich Personal RePEc Archive (MPRA)
- Social Science Research Network (SSRN)
- Journal Storage (JSTOR)
- Emerald

For statistical data collection we mainly use the following sources:

- Federal Communications Commission (FCC)
- Canadian Radio-television and Telecommunications Commission (CRTC)
- United States Telecom Association (US Telecom)
- The Statistics Portal (Statista)
- Kantar Media
- WebPageFX

Data Reliability and Validity

Compared with the primary research, access to historical data allows proving or disproving of an argument or theory in a relatively shorter period of time. However, in secondary research, the reliability and validity of the sources need to be examined (University of Leicester, 2009).

The key criteria identified for assessing such reliability and validity are identified as authenticity, credibility, representativeness, and meaning (Scott, cited in Nock, 1991).

- Authenticity: Document genuineness - consideration of frauds and errors in the copy
- Credibility: Motivation for producing the document
- Representativeness: How much of the total the document really represents. Can conclusions be made based on the document?
- Meaning: How well the document can be understood by the reader

In addition, the following criteria need to be considered when using documents published on the Internet (Stein cited in University of Leicester, 2009):

- Authorship
- Authority of the author
- Authority of the material
- Authority of the site/organization
- Pressure groups/objectivity

We will consider all of the above criteria when collecting data through secondary research.

Data Analysis

Similar to the primary research, we will mainly use descriptive analysis to present, interpret, and discuss the results of our secondary research. For our qualitative research, we make use of concept mapping to illustrate relationship between concepts and ideas.

Furthermore, we include secondary analysis of some of the primary data in our secondary research since as suggested by Glaser (1963), we might as independent researchers be able to provide new insights into the current status of broadband connectivity and “lend new strength to the body of fundamental social knowledge”.

3.6 Methodology Limitations

The biggest limitation of our research methodology is the lack of access to a bigger sample size in the primary research. Due to the expenses involved, we were constrained to a confidence interval of 95% and therefore had to accept a higher margin of error for our experiment.

Another limitation in our research methodology concerns the secondary research. Considering the magnitude of the available sources on the Internet and the volume of data, rigorous application of all the discussed criteria for selecting information sources would be difficult; yet, we will use our best endeavors to ensure that inputs to our research are dependable and reflective of the realities of the industry and the market.

3.7 Summary

To structure our research, we made use of the research pyramid suggested by Jonker and Pennink (2009), which consists of 4 layers: research paradigm, research methodology, research methods, and research techniques.

We defined our research objective as “determining whether the slow progress of broadband in terms of speed and price is the result of lack of competition in the industry, and to study if current status of broadband in terms of speed and price has immediate impacts on US consumers”.

We explained in our research paradigm that even though this paper makes considerable use of academic sources, it equally relies on active practitioners’ and consumers’ inputs to study the realities of the US broadband industry and its competitive environment.

The research methodology followed in this paper consists of a combination of quantitative and qualitative research, which carries out the study through primary and secondary research methods.

The primary research, which validates the US broadband competitive landscape and evaluates the impacts of current status of connectivity on consumers, is fulfilled through an online survey.

The survey’s necessary sample size to represent the population was calculated as 384 (respondents), a short and comprehensible questionnaire with 8 mandatory and 5 optional questions is designed, and the services of Survey Monkey is employed in conducting the survey.

The focus of the secondary research is on the realities of the U.S. broadband industry and its business environment. The objective is to grasp whether the lack of competition in the industry is the underlying cause for the slow progress of broadband in terms of speed and price.

For the secondary research, we identified the criteria that need to be considered when assessing any sources of information and verifying the reliability of the online documents. We also identified the main library and statistical data sources.

Finally we identified the limitations of our research methodology as lack of access to a bigger sample size and rigorous application of all the discussed criteria for selecting information sources.

In the next chapter we will analyze and discuss the data collected through primary and secondary research in order to draw a conclusion and answer the research questions.

Chapter 4: Results and Discussion

4.1 Introduction

This chapter mainly aims at providing answers to the research questions without making any conjectures about the current status of the industry and the market.

In doing so, we have turned to consumers to understand their view on the structure of the US broadband industry. This was useful in confirming our own understanding of the industry, which in turn, allowed us to perform a detailed analysis of the current status of competition with the help of theories and data covered in the literature review.

While analysis and discussions are the milestones for reaching conclusions, they do not provide any potential solutions to the stakeholders. Hence, after reviewing the underlying conditions that contribute to sustaining the industry’s current status of competition, we will discuss potential options to remedy the situation.

4.2 Primary Research

As explained in the previous chapter, our primary research is mainly conducted (a) to verify whether the data and the hypotheses covered in literature review adequately reflects the current US broadband competitive landscape and market structure and (b) to grasp a first hand understanding of consumers’ immediate needs and wants in terms of speed and price.

Therefore, we structure the presentation and analysis of the results into two sections to address each of (a) and (b) above separately.

4.2.1 Validation of Competitive Landscape and Market Structure

Dominant Strategic Groups

As part of our survey, we asked our respondents about the type of broadband technology they used for Internet access. Figure-17 shows the distribution of wireline technologies used by the respondents.

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Figure 17- Distribution of wireline broadband technologies

Figure-17 clearly illustrates the domination of the CATV and Telco strategic groups within the industry. The distribution shown in the figure is closely in line with our findings in literature review. Since all three strategic groups provide their own FTTH solutions, the number of respondents using fiber technology is distributed among the three strategic groups.

Therefore, one can conclude with great certainty that the CATV and Telco strategic groups dominate the US broadband industry.

Also despite the fact that FTTH is the most superior broadband access technology that has been available for many years, it only holds a small percentage of the market share.

Industry Concentration

Another critical element to verify is the industry concentration since it allows exploring the possibility of multimarket contact and tacit collusion among firms in the industry’s dominant strategic groups. Therefore, we asked our respondents which company they used for their Internet access. Figure-18 illustrates the results.

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Figure 18- US Broadband industry concentration

As shown in the figure, our primary research resulted in a CR6 with a total market share of 75 percent. This is in line with our findings in the literature review, which indicated a six-firm concentration ratio of 81 percent. Moreover, we can see that the top 4 firms clearly dominate the market with a total market share of 64 percent that is also in line with our previous findings.

Therefore, one can deduce that the US broadband market is a highly concentrated oligopoly, which increases the possibility of multimarket contact and tacit collusion among the leading firms in dominant strategic groups. The industry’s high concentration and associated fixed costs also elevates the natural entry barriers against potential entrants.

Duopoly Nature of the Market

Our literature review indicated that in the best-case scenario, 85.4 percent of US homes have access to at most two service providers. In other words, from the point of view of 85.4 percent of US consumers, the US broadband market is at best a duopoly.

To verify this theory, we asked our respondents to indicate whether CATV and Telco strategic groups were duopolizing the market to maintain high prices. Results are shown in Figure-19.

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Figure 19- Market structure from consumers' point of view

Results indicate that 81 percent of US consumers believe that the US broadband industry has a duopoly nature and that strategic groups use this to maintain high prices. Such duopoly allows dominant strategic groups to impose high switching costs, which in turn leaves consumers with little motivation for switching from one strategic group to another to take advantage of a better offering if at all available.

4.2.2 Consumers’ Immediate Demands

The purpose of this section is to grasp an understanding of consumers’ current needs and wants and to evaluate whether the slow progress of broadband in terms of speed and price is having immediate impacts on broadband subscribers in the United States.

Table-2 illustrates respondents’ answers to two survey questions intended to understand consumers’ demands in terms of broadband speed and price.

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Table 2- Consumer demands in terms of price and speed

Results presented in Table-2 show that an important majority of respondents believe that US broadband prices are high; however, only slightly more than 50 percent see an immediate need for faster broadband access. In order to understand the reasons for the latter, respondents were asked to describe for what purposes they mostly used their broadband access. The results are presented in Figure-20.

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Figure 20- Broadband subscribers use of Internet

Figure-20 shows that respondents use their broadband access mostly for non real-time applications such as sending and receiving emails, finding information online, using social networking websites, and paying bills none of which requires high data transfer speeds. This explains why consumers do not see an immediate need for faster broadband access.

Furthermore, in order to accurately measure the respondents’ level of motivation to switch to a considerably faster broadband access and also to tentatively gauge the current range of acceptable prices for available broadband solutions, we asked respondents whether they were satisfied with their current broadband access and if they were willing to switch to the fastest available FTTH solution in the market for the advertised price of 70 dollars per month. Results are presented in Table-3.

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Table 3- Consumer motivation to switch to a faster broadband access

Results re-confirm the fact that a strong majority of respondents do not see an immediate need for a faster broadband access and therefore are not motivated to switch to the fastest solution in the market with the current advertised price.

In other words, considering the current type of applications used by respondents and the current high prices, the fastest and the best quality FTTH solutions available in the market are attractive to the majority of consumers only if they are offered at or below the price of their current broadband access.

This implies that unless the consumers’ speed demands increase beyond the capacity of their current services, the majority of consumers will not switch to FTTH solutions except if they are offered at or below their current subscriptions.

In conclusion, the US broadband’s lag in terms of speed has immediate impacts on 52 percent of consumers while high US broadband prices have immediate impacts on 62 percent of consumers.

4.3 Secondary Research

Our analysis and discussion through secondary research is structured into five sections. Each section provides the reader with deeper insights into the main topics covered in the literature review and verifies the validity of their preliminary conclusions.

The first section evaluates the threat of new entrants as a competitive force within the industry. In the second section, we study the effects of higher competition resulting from new entries on incumbents’ financial returns. The third section investigates the elements that allow the incumbents to deal with this competitive force. In section four, we analyze how incumbents control the level of internal competition to maximize return, and finally in the last section we will briefly discuss the grounds on which the current low competition sustains and the potential options to rectify the situation.

4.3.1 Threat of New Entrants Revisited

In our literature review, we learned that firms in the US broadband industry enjoy gross margins of as high as 97 percent. However, one needs to keep in mind that these companies have invested substantial amounts of capital to earn their profits (Hawks et al., 2014).

For this reason, a financial ratio such as Return on Capital Employed (ROCE), which evaluates earnings against the cost of investment, is a more appropriate appraisal method to measure the industry’s attractiveness (Clive, 2012). Any industry earning a ROCE in excess of Weighted Average Cost of Capital (WACC) will attract firms outside the industry (Grant, 2013).

According to Leichtman Research Group (2014), Comcast and Time Warner represent the top cable companies providing services to 66 percent of cable broadband subscribers while AT&T and Verizon represent the top telephone companies providing services to 73 percent of DSL broadband subscribers in the US. Thus, by estimating the industry leaders’ profitability we will gain an insight into the attractiveness of the entire industry.

As an example, Comcast’s Capital Employed (CE) in 2013 amounted for $140 billion. Considering the company’s earnings of $14 billion before interest and tax (EBIT), we can calculate Comcast’s ROCE as 10 percent for the year (Comcast, 2013). The ROCE for the other three industry leaders are set out in Table-4.

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Table 4- ROCE for industry leaders (Source: Comcast, 2014, Time Warner, 2014, AT&T, 2014(b), Verizon, 2014(b), Krause Fund Research, New York Times, and Leichtman Research Group)

As shown in Table-4, these leading firms enjoy ROCEs that are higher than their WACC, which is an indication of their profitability. As stated by Grant (2013), such profitability will attract outside firms to enter the industry if barriers to entry are not high enough. Therefore, the threat of new entrants is a strong competitive force within the industry.

In our literature review, we carried out a systematic analysis of the industry by evaluating each of the Porter’s five competitive forces. Figure-21 is an illustration of our findings.

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Figure 21- Intensity of the competitive forces in the US broadband industry

As suggested by Porter (2008), the strongest competitive force becomes the most important to strategy formulation. As shown in Figure-21, in the case of the broadband industry, the strongest competitive force is identified as the threat of new entrants.

Grant (2013) highlights that when the threat of new entrants is high, if the entry of new firms is not restricted, the rivalry among competitors will cause the rate of profit to fall toward its competitive level, which will be the focus of our analysis in the following section.

4.3.2 Impact of Higher Competition on Incumbents Financial Returns

As suggested by Hitt et al. (2013), firms formulate and implement their strategies with the intent of achieving and maintaining above-average returns. Therefore, it is imperative to examine the impact of the competition that may result from new entries on incumbents’ returns.

Our literature review and primary research indicated that the US broadband industry has a duopoly nature. Several papers have studied the relationship between the number of competitors and market prices.

Bresnahan and Reiss (1991) state: “Entry lowers margins”. The authors suggest that in markets with five or fewer competitors, the competitive conduct changes quickly as the number of competitors increase. Hence, markets with three or more competitors have lower prices than monopolies and duopolies.

Furthermore, the research performed by Cooper (2013) indicates that the introduction of more competitors will clearly result in lowering prices in the US broadband market. Figure-22 shows the relationship between number of competitors and broadband prices.

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Figure 22- Number of competitors and wireline broadband prices (Source: Cooper, 2013)

Cooper’s analysis suggests that broadband prices decrease as the number of competitors increase to three and four. His research also indicates that introduction of the fifth competitor would slightly increase the price, which is nevertheless maintained at about half of its level in a duopoly.

Consequently, more competition will increase the industry’s intensity of rivalry and negatively impacts incumbents’ financial returns.

Nevertheless, literature suggests a modest decline in broadband prices between 2004 and 2009, and data show an increase in prices after 2009 (Figure-23).

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Figure 23- US broadband price trends (Source: Canadian Radio-television and Telecommunications Commission)

The price increase can be explained by the dominant strategic groups having managed to deter potential entrants. In so doing, they have protected themselves against the price-reducing effects of increased competition while limiting the level of internal rivalry to a minimum in order to avoid price wars and sustain above-average financial returns.

As found by Smith et al. (2013), the competition resulting from any form of entry into the broadband market would support an increase of broadband speeds. Indeed, the lack of competition does not encourage the incumbents to upgrade their networks and therefore does not promote any efforts to improve speed levels.

This is also confirmed by FCC chairman Tom Wheeler who states “Americans need more competitive choices for faster and better Internet connections, both to take advantage of today’s new services, and to incentivize tomorrow’s innovations” (FCC, 2014a).

In the following sections we will conduct an analysis of the elements that allow the dominant strategic groups to maintain their position.

4.3.3 Entry Barriers

In their study, Connolly and Prieger (2013) have found a certain level of entry and exit in the US broadband market, corresponding to a 3.1% net entry, but this mostly results from existing providers expanding into new geographic areas or diversifying their service offerings within the already served geographic areas.

By analyzing the yearly data supplied by the broadband providers to the FCC, the authors found that 71 percent of entry is from geographic expansion of firms within the dominant strategic groups while 21 percent is from their product diversification within the already served areas. Let us explore how this scenario can be explained by the principles covered in our literature review.

Normally, entrants to the broadband markets have two options: they can either build their own networks or make use of part of the incumbents’ networks by paying an access price (Smith et al., 2013). In the somehow peculiar US broadband industry where broadband services are not subject to common carrier regulations, entrants only have one choice, and that is to build their own networks.

Our literature review pointed out that due to the high level of fixed costs the minimum efficient scale for the US broadband industry is relatively high. Since 1996, the total US wireline broadband CAPEX has amounted for $901 billion (Figure-24).

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Figure 24- US wireline broadband capital expenditure (Source: US Telecom, Statista, and McGarty, 2006)

The CATV strategic group has invested nearly $210 billion in building networks and it continues to invest about $13 billion every year in maintenance and upgrades. Telco strategic group has also invested nearly $691 billion in building their networks in the same period (US Telecom, 2014 and Rinehart, 2014).

Finally, building a FTTH network can cost as high as $3520 per subscriber depending on the selected configuration. In case of Verizon communications the CAPEX of building a network to provide services to 20 million subscribers can be estimated as $40 billion (McGarty, 2006).

Such high level of MES works as a natural entry barrier against entrants. This confirms that in the US broadband industry, entry is only viable for firms with strong financial resources that can cover the start-up costs and operational expenses associated with building and maintaining their own networks.

In addition, these firms should also possess or acquire the necessary human and innovation resources to create organizational capabilities and establish core competencies (Hitt et al., 2013).

Furthermore, the dominant strategic groups continue to spend heavily on advertisements and promotions in order to maintain high levels of brand awareness and build a “brand-name” barrier against the potential entrants. Table-5 shows the advertising expenditures of the industry’s top four players in 2012 and 2013.

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Table 5- Advertising expenditure for the top four firms (Source: Kantar Media)

Therefore, the potential entrants must also incur costs associated with establishing a brand name, creating a perception of product quality, and creating positive reputation with suppliers and customers (Hitt et al., 2013). By further elevating the MES, these sunk costs create an absolute cost disadvantage for potential entrants.

The combination of natural and strategic entry barriers make the potential entrants “extra cautious about entry if they decide that the market will become contestable due to potential of growing demand” (Drew, 2014). Therefore, as suggested by Xiao and Orazem (2007), the potential entrants may look for other markets with lower demands but also lower probabilities of future rivalry.

4.3.4 Maximizing Return by Minimizing the Intensity of Competition

The focus of our analysis in this section is to understand the contributing factors that enable the incumbents to control the level of competition within the industry in order to maximize returns.

In its comments to the FCC, Competitive Communications Association (COMPTEL) states that “there is an extensive and growing body of evidence that demonstrates that (broadband) duopoly market conditions produce high prices, frustrate innovation and can lead to tacit collusion by providers”.

In their study, Parker and Roller (1997) evaluated wireless pricing between 1984 and 1988 when FCC created a market duopoly by licensing only two competing companies to serve each geographic area. They concluded, “Carriers’ behavior was consistent with tacit collusion to sustain higher prices”.

Although due to the lack of previous research, relevant data, and historical facts it would be difficult to directly analyze incumbents conduct, it is possible to study how the existence of spheres of influence in a situation of multimarket contact can facilitate mutual forbearance. Figure-25 shows the current broadband landscape in the United States.

The above figure shows that one provider from Telco or CATV strategic groups leads each state in terms of market share. Consumers perceive products of the market leader better simply because of its position in the market. This perception provides the leader with market power (Rhoades, 1985), which in turn results in its sphere of influence, that is, being dominant in that specific market (Jayachandran et al., 1999).

Table-6 on the next page shows the list of the market leaders for different states and their corresponding market share.

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Table 6- State market share per most prominent broadband provider (Source: WebpageFX)

As stated by Baum and Korn (1996), the intensity of competition is negatively impacted in a situation where firms with different spheres of influence come across each other in different geographic markets. In other words, as multimarket contact increases, intensity of competition decreases.

We try to clarify the concept using an example based on the model by Jayachandran et al.

We can consider the situation where Comcast and Time Warner Cable (highlighted in Table-6) compete against each other in New Hampshire and Maine, so that Comcast is the market leader in New Hampshire and TWC is the market leader in Maine. If Comcast attacks TWC in Maine, TWC is likely to retaliate by attacking Comcast in New Hampshire where Comcast has more to lose.

At the same time, Comcast and TWC will want to prevent intense rivalry in the markets they dominate (Comcast attacking TWC in New Hampshire or TWC attacking Comcast in Maine), because if that was the case, the dominant firm has more to lose. This situation may lead to reciprocal tacit collusion, in which Comcast will allow TWC to dominate the Maine market in the expectation that TWC will allow Comcast to dominate the New Hampshire market.

In conclusion, as stated by Jayachandran et al. (1999), “the asymmetry of competitive market positions in different markets leads to symmetry in overall retaliatory capability for the firms”. This may enhance mutual forbearance and lead to lower intensity of competition, higher prices, and lower broadband speeds.

4.3.5 Status of Competition

Current status of competition in the US broadband industry in terms of price and speed will remain unchanged unless policies with regards to competition in the industry are re-evaluated and changed.

In the past, the attention of regulators has been entirely focused on the “net neutrality”, which aims at freedom and openness of the Internet and ensuring a non-discriminatory access to the lawful contents and applications regardless of consumers’ choice of broadband service provider.

Nevertheless, such assurance does not address the fundamental requirement for the progress of broadband adoption in the country, that is, consumer affordability.

Furthermore, because of inverse relationship between broadband prices and broadband adoption (Sangwon and Brown, 2008), high broadband costs delays broadband take up. This will eventually hinder the improvement of network speeds, which in turn impedes development of the best and most advanced contents and applications.

Therefore, to ensure a broadband Internet access that is both open and affordable, regulators also need to adopt policies that are targeted at changing the industry’s competitive landscape. Although an in-depth analysis of such policies falls outside the scope of this paper, we will review our findings and briefly discuss the available options and their pros and cons.

Regulating the Industry

One option to reduce broadband prices is to categorize broadband access providers as common carriers and classify the transmission component of broadband service as “telecommunications” service. Doing so would give the FCC the necessary power to regulate broadband prices similar to other utilities such as telephone, water, and electricity while at the same time allowing the commission to implement the net neutrality rules (open, free, and non-discriminatory access to Internet).

The main argument against this option is that government’s control over companies’ return on investment (ROE) discourages infrastructure investment and consequently leaves these companies with little incentive to re-invent, improve, or expand their networks, which could hinder delivery of broadband to more people in the country (Platform, 2014).

Facilitating New Entries

The second alternative to accelerate broadband affordability is for the FCC and local governments to adopt policies that facilitate entry of new firms into the market.

While FCC and local governments do not have any control over the strategic entry barriers set by the dominant strategic groups, they can still lower the natural entry barriers by leasing their public assets such as fiber, conduit, and real estate, facilitating underground construction to run fiber cables, eliminating or lowering the rights-of-way access fees, reducing license fees, allowing providers to operate within each State with a single license, and by giving new providers the right to build their networks selectively where adequate demand exists (Szoka et al., 2013, and Hovis, 2013).

By facilitating access and entry, this alternative could encourage new infrastructure investments while inducing more competition into the market and incentivizing the dominant strategic groups to participate in the competition by improving their prices and speeds.

In the past, this alternative has proven to make entry feasible for some of the companies in the Non-RBOC FTTH strategic group through establishing a public-private partnership with major US cities. Recent examples of such success are the FTTH networks established by Google in partnership with the cities of Kansas City, Austin, and Provo. Google is planning to expand its networks in nine other US cities (Google, 2014).

4.4 Summary

The US wireline broadband is a highly concentrated industry with a six-firm concentration ratio of at least 75 percent. This industry is dominated by two strategic groups namely CATV and Telco, which have managed to duopolize the market. This has resulted in a lack of competition among incumbents, which in turn has led the industry to lag behind other developed nations in terms of speed and price.

Our analysis indicated that the US broadband’s lag in terms of speed has immediate impacts on 52 percent of consumers, while high broadband prices have immediate impacts on 68 percent of broadband users in the country.

Despite high level of fixed costs and MES, the US broadband is an industry with returns on capital that are above the firms’ average cost of capital which in itself makes it attractive to the outside firms. Yet, any new entries into the industry would negatively affect the incumbents’ current above-average returns by increasing the industry’s internal rivalry.

To maintain returns, the incumbents need to (a) block new entries and (b) minimize the internal competition to avoid price wars.

Elevating the strategic entry barriers by further increasing the MES through building a “brand name” barrier against potential entrants helps the incumbents to deter the threat of new entry.

On the other hand, the incumbents’ control of market share helps them gain power in different geographic markets, which in turn allows them to develop spheres of influence and domination.

Since incumbents come across each other in different geographic markets (multimarket contact), they have become familiar with each other and learn that by avoiding aggressive competition and respecting each other’s spheres of influence, they can preserve their above-average returns. Such tacit collusion, also known as mutual forbearance, leads to lower intensity of competition, higher prices, and low broadband speeds.

In our analysis, we identified two potential remedies for the current situation.

One option requires the regulators to classify the transmission component of the broadband as a “telecommunications” service, which gives them the power to regulate prices. The drawback of this option is that controlling companies’ ROE discourages infrastructure investment and reduces their incentive to improve and expand their networks, which in turn may hinder broadband penetration in the country.

The second alternative implies that the FCC and local governments facilitate new entries into the market by lowering the natural entry barriers under their control.

Lowering the MES through the reduction of rights-of-way and license fees and providing entrants with access to public assets as well as giving them the right to build their networks where demand exists, would encourage new infrastructure investments, induces more competition, and incentivizes the dominant strategic groups to participate in the competition by improving and expanding their networks.

Chapter 5: Conclusion

5.1 Main Research Issues

Broadband can have significant impacts on economic growth, education, and quality of life. This is particularly true in the United States because of the country’s size and low population density. As a result, establishing broadband networks that are accessible, fast, and affordable are of highest priority for the nation.

In this paper we studied the status of broadband connectivity in the United States. To our surprise, we learned that the country is lagging behind nine other developed nations in terms of broadband speed and price.

To investigate the underlying causes, we thoroughly examined the US broadband industry to grasp an understanding of its competitive landscape. Our study resulted in three important findings:

- Two strategic groups namely Telco and CATV with almost no price competition between them currently control 98 percent of the US broadband market.

- Despite the fact that the US broadband industry has an average six-firm concentration ratio of 78 percent, which classifies it as a highly concentrated oligopoly, from the consumers’ point of view, it is in fact a duopoly that restricts their choice to only two network access providers – one in each of Telco and CATV strategic groups.

- The strongest competitive force within the industry is the threat of new entrants.

These findings led us to the following research questions:

(1) Is the slow progress of the broadband in the United States in terms of price and speed, due to the lack of competition within the industry?

(2) Does the current status of the broadband in the United States have immediate impacts on consumers?

5.2 Summary of Results

In order to answer the above questions, we had to investigate/validate the following elements:

(a) The relationship between an increase in new entries and the incumbents’ financial returns

(b) The relationship between the industry’s internal rivalry and the incumbents’ financial returns

(c) The current status of competition and its immediate impacts on consumers in terms of speed and price

(a) The relationship between an increase in new entries and the incumbents’ financial returns

The broadband industry’s profitability makes it attractive for the new entrants in the United States; yet, an increase in the number of competitors beyond two in any single geographic market raises the level of rivalry and negatively impacts the incumbents’ financial returns by lowering prices.

Although because of high levels of fixed and sunk costs entry barriers for the industry are naturally high, in order to more effectively neutralize the threat of new entrants, the incumbents build strategic barriers to further increase the Minimum Efficient Scale (MES). An example of such barriers is the brand-name barrier, which is built by the incumbents through heavily spending on advertisements and promotions.

By further increasing the MES, the incumbents make entry even more risky for the potential entrants. Higher levels of risk make the potential entrants hesitant, especially if a high level of rivalry is expected. This encourages the potential entrants to look for other markets.

A lower level of competition resulting from lack of new entries helps incumbents maintain high prices while reducing their incentives to improve their networks and increase speeds.

(b) The relationship between industry’s internal rivalry and the incumbents’ financial returns

Firms in the US broadband industry compete with each other at the same time in multiple geographic markets. Over time, these multimarket contacts have provided the firms with the opportunity to become familiar with each other and learn that any competitive attack initiated by one firm could result in a serious retaliation by the other.

In addition, one network access provider from either Telco or CATV strategic groups leads each state in terms of market share. A leading position creates the consumer perception that the leader’s products are superior to those of other competitors. Such perception gives the leading firm more market power, which in turn creates a sphere of influence that allows the leader to dominate the market.

The co-existence of multimarket contact and spheres of influence could lead to the phenomenon of mutual forbearance, which is a form of tacit collusion where firms avoid competitive attacks against rivals they meet in a number of distinct geographic markets.

When mutual forbearance occurs, firms with spheres of influence informally recognize and respect each other’s primacy of interest in markets important to them. Therefore, each firm specializes in a subset of markets in which it controls the prices.

This situation could also lead to higher prices and little incentive for the firms to improve their networks and increase data transmission speeds.

(c) The immediate impacts of the current status of competition on consumers in terms of speed and price

To validate our findings concerning the status of competition and in order to evaluate whether it has an immediate impact on US consumers, we conducted a simple survey to grasp a first hand understanding of the issue.

Our survey results confirmed that the market is indeed dominated and duopolized by the CATV and Telco strategic groups despite the fact that a superior access technology (FTTH) has been available for many years. It showed that the non-RBOC FTTH strategic group, which specifically utilizes this access technology, currently holds only 2 percent of the market.

Our survey also confirmed industry’s high concentration, which is a necessary condition for the occurrence of multimarket contact.

We learned that 68 percent of respondents believe that US broadband prices are currently high. However, only 52 percent sees an immediate need for higher broadband speeds. This is because they use their access mostly for the non-real-time applications such as email, search engines, and social media that in general do not require high data transfer speeds.

Consequently, a strong majority of US consumers are not willing to switch to the best available access solution unless it becomes available at the same price as their currently subscribed service.

The summary of our analysis presented in (a) and (b) provides the answer to our first research question: The slow progress of the broadband in the United States in terms of price and speed is due to the lack of competition within the industry. The lack of competition occurs for two main reasons: absence of new entries and insufficient level of internal rivalry.

The summary of our primary research presented in (c) provides an answer to our second research question. It shows that 68 percent of consumers are currently impacted by higher broadband prices while 52 percent sees an immediate need for faster broadband access.

5.3 Recommendations

To ensure a broadband access that is both open and affordable, the industry’s competitive landscape needs to be changed and the most efficient solution may be to allow new entries into the market.

By easing entry through lowering the natural barriers under their control, the FCC and the local governments can encourage new infrastructure investments and generate more competition in the market. The higher level of rivalry will incentivize the dominant strategic groups to participate in the competition by improving their prices and speeds.

Public-private partnership between major cities and potential entrants is one of the solutions proven to be successful in facilitating entry and encouraging competition.

5.4 Knowledge Contribution

This paper links the academic knowledge in interpreting the industry data with the underlying causes for the lack of competition in the US broadband industry. Some of the applied academic principles and theories such as multimarket contact, spheres of influence, and mutual forbearance are used for the first time in analyzing this industry.

By performing a primary research, we endeavor to confirm the realities of the market as shown by data. Our findings underline that even though openness of the Internet is crucial, there is an urgent need to increase the level of competition within the industry to improve affordability and speed, which in turn, is key in supporting the progress of the entire US broadband ecosystem.

5.5 Recommendations for Further Research

This study aims to deliver a clear image of the current state of broadband connectivity in the United States and present the most viable option to improve it; yet, it does not analyze or discuss the future potential implications of the proposed solution for the incumbents.

Further research is needed to identify and discuss these potential implications.

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• Université: University of Warwick (Warwick Business School)
• Auteur: Peyman Pouryeganeh (Auteur)
• Année de publication: 2015
• Pages: 83
• N° de catalogue: V309451
• ISBN (ebook): 9783668077720
• ISBN (Livre): 9783668077737
• Langue: anglais
• mots-clé: broadband, race, case, study, status, connectivity, united, states