Should Broadband Internet Services To The Home Offer Choice of ISP? Group E: *Brian Bohan *John Musacchio *Randi Thomas *Wanyu Tsai YES!

Criteria for Answering the Question Public Must Benefit through –Lower Prices –Broader Access –Variety of Services –Higher Quality

Narrowband to Broadband Nearly all home users using dial up access Barrier to entry for dial up ISPs low –over 4,000 ISPs available Appetite for bandwidth causing migration to broadband –barrier to entry prohibitively high to ISPs –ISP choice threatened

Broadband Internet Players Cable Industry Telecommunications Industry

Cable Industry A few big players getting bigger Regional monopolies Only one ISP per Regional Cable Co. –Usually partially owned by cable Road Runner-Time Warner –Controls how end user experiences Internet Controls quality of service

Telecommunications Industry Pre 1996: Looked a lot like cable today –RBOCs Monopoly provided high price solutions: ISDN, TI, T3 –Sat on DSL technology 1996 Telecommunications Act –unbundled infrastructure and services

Impact from the Act Data CLECs emerge –Introduced DSL to market RBOCs forced to respond Multiple Broadband ISPs offering variety of services

Does Sufficient Competition Exist in Cable Today? Negative will Argue Current Competition between Broadband is sufficient We will show that it is not To have true competition, the cable infrastructure must be opened to ISPs

DSL vs. Cable Not Sufficient Pocket Argument –More profit in Virgin areas Cost Argument –Cable = $40/mo vs. $60 for DSL –Cable technology enjoys greater economies of scale due to shared resources Momemtum –Cable outselling DSL 10 to 1 –Merger Mania AT&T planning to spend $5.7bn on TCI network upgrades Industry planning to spend $10bn in ‘99 on upgrades

Introduce Two-Layer Model Cable Company leases/sells infrastructure to ISPs at “reasonable rate” –ISP and cable company split monthly fee Cable companies continue to pay for infrastructure build out ISPs pay for web servers, caching, content, etc.

Why this model Increased Expansion into New Regions Within One Region PCPC PMPM QMQM Consumer Surplus ATC MC Demand for cable Internet access in a built-out region QCQC

Build-Outs in Today’s Model Big initial infrastructure + Marketing costs –Marketing for new build-outs involves huge cost/risk Cable/ISP company assumes costs & risks –Must achieve subscription rate to cover these costs –Non-Trivial Issue: 500K subscribers out of 20 million with access = 2.5%: Cable company manages this risk by building out slower than they could

Build-Outs in Two-Layered Model ISPs will assume the cost of marketing –They market agressively AOL spends upwards of $300 for every new subscriber 3.9 million new subscribers in 1998 –Primary demand stimulated nationwide – Cable companies can then rapidly expand service to new areas Result: More Access for the Public

Multiple ISPs Mean Variety AT&T wants to be your big brother –$57 bn to buy TCI & $54 bn to buy MediaOne –TCI/MediaOne biggest cable provider reaching 25 million homes, potentially 60 million –“They could rule the world” - Securities Analyst Imagine NBC as your only TV station will be just that, controlling all content –Increasingly important as Internet goes multimedia

Policy Goals Achieved Thanks to competition in ISP layer... The Consumer Wins! –We have lower prices –We have broader access As a result of shared risks and costs Due to more choice of service providers –We have variety of services

Vote Yes on Opening Cable