When we talk about the monthly cost of home internet, we usually focus on how
annoyingly expensive it is. But another odd aspect about internet prices is how much they can vary
from place to place, even inside the same country. It's generally weird that you need to pay around
$100 a month for internet service in Minneapolis that is roughly the same quality as internet service
you can get for just $60 a month in Fort Worth, Texas. The reason most commonly cited for
high internet prices is lack of competition between internet service providers or ISPs.
And that's not wrong, but it's worth unpacking why that is. And no, the answer isn't just
because they're dicks. They are, but that's not the whole story. The basic problem with the
free market approach to broadband internet service is that it's actually incredibly hard for new
competitors to join the market and potentially financially ruinous even to try. Similar to
water pipes, electrical wires, and rail lines, internet cables are both expensive to install and
basically useless until you create an extensive network of them. This creates an extremely high
upfront cost that a private company will typically only take on if there's a near absolute guarantee
that they'll be able to recoup their investment and more. This often results in what economists call
a natural monopoly. These are usually relatively small markets where the barrier to entry and
startup costs are so high that once a single service provider establishes itself, no other
competitor will even bother to try. Though in larger markets, this is more likely to result in
a duopoly or oligopoly with a small number of large stable players who mostly stay out of each
other's way. You might think of the entire United States as a pretty big market, but because each
company needs to lay infrastructure into every single little community, each contiguous urban
area is effectively its own isolated market. Therefore, many of us only have a choice between
one or two ISPs, pretty much for the same reason that everyone else has only one choice for their
water utility. There's only one set of pipes leading to the house. What determines whether a
particular region winds up with one, two, or three ISPs is a combination of geography, population
density, and local regulations. The harder it is to install and replace cables and other infrastructure,
the more customers you need to absorb the fixed cost of installation. This can be a big problem
for countries with large, sparsely populated rural areas like Canada, the United States,
and Australia, but it's also a problem for places with lots of rivers, deserts, and mountains
like Canada, the United States, and Australia. It's exactly these kinds of high infrastructure
costs that could make satellite internet a potential game changer for many rural markets
if it became significantly cheaper in the near future. In the meantime, however, shooting
satellites into space is still relatively expensive. For now, the places globally where
broadband is both extremely fast and relatively cheap typically have extremely dense urban populations
and little or no rural population such as Hong Kong and Singapore must be nice. Of course,
just because Monopoly is natural does not mean there's no funny business involved,
and it doesn't mean there's no way to fix it. The problem with natural monopolies is that
they make the free market not act like a free market. They discourage rather than encourage
competition because when actually competing is expensive and hard, it's much easier to succeed
through lobbying and bullying small competitors. In order for a small ISP to grow, it will need
to get any number of government permits, all of which can be tweaked to make them harder than
necessary to acquire. Plus, the small company will typically need to be able to build enough
infrastructure to actually appeal to some customers. In the meantime, they might need to rent access
to some of their larger competitors' infrastructure and bandwidth, something which those competitors
might not be willing to do unless compelled by the law. Most countries do require this kind of
cooperation for just this reason. Theoretically, these small companies could eventually hit a
tipping point and compete completely independently, but long, long before they hit that point,
they'll hit a different tipping point where the smartest thing to do is to sell themselves
to the biggest competitor. In a natural monopoly scenario, the incentive of the primary players
is to gradually gobble up all small companies and eventually merge into one massive company
so they can make bigger margins and stop investing so much in infrastructure. In this situation,
antitrust action and legislative prevention of further mergers are likely the only option to
restore competition. Regulation is messy, and that's why it makes everybody either bored or angry.
Here again, Canada is a good example. We have both ineffective antitrust regulators and
high regulatory barriers to entry. While most of the country has abominable internet prices due
to astronomical infrastructure costs, Ontario and Quebec, the most populous provinces, have
worse prices than the next two most populous provinces, British Columbia and Alberta, due
to greater consolidation among ISPs. So is the answer here even more government involvement?
Some telecom industries are fully nationalized and run either directly by the government or by a
semi-independent public corporation, while other countries heavily subsidize building infrastructure
as a way of getting past the initial barrier of upfront investment. While this probably doesn't
reduce the overall cost of the infrastructure, it can at least encourage faster development
by spreading out risk across the entire tax base of the populous, rather than concentrating it into
a single company with a relatively small pool of customers. An interesting American example is that
of Chattanooga, Tennessee, which is very fun to say, and has some of the cheapest and fastest
internet speeds in the United States. And it was the first US community to adopt Gigabyte speed
internet back in 2010. Chattanooga, I'll never get sick of that, businesses can even get 25 Gigabyte
internet as of 2022, though it is understandably pricey. In this case, the Chattanooga Electric
Power Board is the city-owned ISP and operates essentially like a normal local utility company.
Some governments even take the middle-of-the-road approach of creating a public corporation
without a monopoly so that it can provide a consistent competitor to private companies
in the same market, such as SaskTel, the public corporation created by the Canadian province
of Saskatchewan. You've heard of it. For context, this is the very rough Canadian equivalent of
Montana or one of the Dakotas. Despite its large area and low population density, many Saskatchewan
residents have access to cheaper, faster internet than what's available in large dense population
centers like Vancouver. But if you hate big government exactly as much as you hate big
corporations, there is always the option of a telecommunications cooperative where the ISP
is collectively owned by the customers. While they can vary a lot in size, some are quite small.
Telecom co-ops are found throughout the United States and around the world, often in rural
areas that are typically neglected by traditional telecom companies and ISPs. Not only can this
be a way of providing cheaper, higher-quality telephone and internet services in smaller
markets, it can sometimes be the difference between decent internet access and no access at all.
No matter what we wind up doing, this problem of varying prices across regions
is not something that's going to get better on its own. It's going to require concerted effort,
cooperation and investment to change the incentives that led us here. But that change
is possible. Thanks for watching guys. If you liked this video, why not learn more about how
the internet works by checking out our video on top-level domains? Surprisingly, very interesting.