The ISP Market Has Changed Since 2002 — Does the FCC Recognize This?

Bruce Kushnick recently pointed out to me that the FCC is using data from a period between 1997 and 2002.

The key difference between then and now is that through 2002, the ISPs still had control of the market, but today, the phone and cable companies rule.

Here are snapshots of the market from Q4 2002 and Q3 2008.

In 2002, the top 5 ISPs were AOL, MSN, EarthLink, United Online, and Comcast. Together, the top 5 ISPs controlled just over 50 percent of the market, which was already too much.

In 2008, the top 5 ISPs were SBC, Verizon, RoadRunner, Verizon, and AOL (representing 4 companies). Together, these four companies controlled about 56.2 percent of the market.

In 2002, I estimated that independent ISPs had about one third of the market and comprised three of the top 5 U.S. ISPs.

In 2008, I estimated that independent ISPs had none of the top spots and that EarthLink, ranked sixth, was doomed. I estimated that independent ISPs had much less than one quarter of the U.S. market.

Today, independent ISPs have an even smaller share of the market.

What the new administration is doing right

The Obama administration aims, through the stimulus, to fundamentally change the ISP business. The ideal depicts a local business serving a rural community and helping it thrive in the face of negligence from the large monopoly internet providers.

The data that the FCC is using ignores the fact that the phone companies are ditching landlines by selling them to entities that will surely go bankrupt.

AT&T has already filed for permission to shut down its copper network. AT&T believes that the future is VoIP, which explains why AT&T has tried to prevent a free market in VoIP services.

What the FCC is doing wrong

Small businesses are harmed more by regulatory uncertainty than by any actual action of the FCC. In an environment in which investors and entrepreneurs do not know whether they will have permission to run their businesses, conspiracy theories are running rife.

The FCC appears to be embroiled in chaos of the worst kind. It is preparing to try to enact rules that were just ruled illegal by the DC Circuit Court.

The FCC should take this an opportunity to change the way the internet is regulated. The internet should be regulated as one entity — as today’s Waxman Rockefeller letter (.pdf) so rightly notes. The false splitting of the internet baby into an information service and a telecommunications component dates back to a disastrous anti-competitive finding from 2002.

A bold FCC would articulate a vision for how the internet should be regulated and then proceed to figure out how to get there. A bold FCC would define the internet as a utility over which the services of the 21st century flow in an unprecedented, connected manner.

One such vision was articulated in 2002: take away the monopoly protections and let the legacy networks fail fast. Current policy is to allow these legacy networks to lie and to pile debt on the backs of companies that will soon fail. Current policy is the opposite of fail fast — it is a constant bailout in which ever more government cash is devoted to businesses that could not survive a genuinely competitive and free market.

The New York Times called for clear regulation of the internet (Verizon opposes the idea). The most popular comment on the editorial said, “The giants controlling the market have no interest in ensuring that everyone has access at all, much less equal access. And they certainly have no interest in competitive pricing.”

I agree.

The ISP business just needs honesty and sanity

The ISP business should be a reliable and dependable business. Customers pay the same fee every month (or pay up front for six months to a year) and the ISP delivers the same reliable service to customers day after day.

Uncertainty in the ISP business comes not from customer behavior — ISPs with a sufficient number of customers can generally predict customer behavior in a manner similar to that employed by insurance company actuaries. Instead, uncertainty comes from the behavior of the monopolies. Every price change affects the industry.

All too often, independent ISPs advertise the actual price of service while the monopolies do not. Cellular pricing is even more opaque than wireline, though a few are working hard to decode prices every time they change.

The FCC has never enforced truth in billing rules.

The recent national broadband plan made some positive recommendations for forcing the monopolies to stop lying about broadband speeds, but failed to do anything about pricing lies. Doing nothing about the problem is not a plan. The rip offs continue.

This distorts the market. Customers have to compare the real prices posted by independents with fake heavily advertised price points set by the monopolies. Few are able to do so.

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