Local Access is Not a Natural Monopoly; But Might be a Somewhat-Natural Duopoly
It always has been difficult to challenge the incumbent U.S. telcos and cable companies in the consumer access services business. For that reason, hopes for sustained and widespread competition to the incumbents hinges on how feasible such challenges are, or might become.
We can say that in every market, local access is not a natural monopoly, as exemplified by the presence of three to four mobile operators, plus at least one fixed network retailer. In a few markets there is facilities-based competition between cable TV and telcos on a widespread or even ubiquitous basis.
What remains unclear is the natural progression of markets over time, such as how many mobile or fixed providers with their own facilities can sustain themselves long term.
“Overbuilding” of U.S. telcos and cable TV companies by third parties is not new, and has been going on for decades. But it has been a niche undertaking, for the same sorts of reasons business service providers have had to specialize.
Fixed networks are horrifically expensive, so few would-be competitors can raise capital to enter the market. And even if capital can be raised, large sums generally cannot be raised if the business model is a complete, head-to-head competition with both cable TV and telcos in a market.
The obvious result is that there are a limited number of cases where a facilities-based fixed networks attacker can create a sustainable business model.
Where such competition has proven sustainable, it is on a “niche” basis.
That has tended to be urban cores for alternate access providers (generally metro fiber companies), all-IP, high-capacity long-haul routes and selected large buildings for business services.
In the consumer space, high-rise buildings have been a logical target, followed by selective operations in suburban areas of big metro areas and small towns in rural areas. There is a simple reason for that pattern. Fixed networks are expensive and stranded assets are a big issue. So attackers tend to focus on niches.
“We are focused on efficient capital spending,” says Wide Open West. In other words, the firm cannot build everywhere.
WideOpenWest, for example, “operates primarily in economically stable suburbs that are adjacent to large metropolitan areas as well as secondary and tertiary markets (smaller towns).”
The firm also grows incrementally by building in new areas adjacent to where it already has operations, using a technique known a edge-out, “making capital-efficient decisions and leveraging our existing operating infrastructure,” says WideOpenWest.
Even Google Fiber, with an ambitious overbuilder plan, found its neighborhood-by-neighborhood building program a challenge.
WideOpenWest, for example, ranks about sixth among U.S. consumer triple play providers, and might also be the largest overbuilder, with annual revenues of about $1.2 billion, passing about three million locations and claiming about 780,000 accounts, with take rates about 26 percent, across all 300 communities in 19 markets.
WideOpenWest overlaps Comcast about 53 percent of the time and competes with Charter Communications 39 percent of the time, and with AT&T virtually all the time. In some cases, WOW competes with Verizon FiOS (3.5 percent of cases) and Frontier Communications (2.7 percent).
Between the start of 2014 and end of 2016, though, the number of accounts served by WOW has declined slightly, as video and voice units have been lost, as internet access has grown.
That is not to say expansion (further edge outs) is precluded. Indeed, that has been a key growth driver for WOW. But WOW’s results might well suggest that a competent overbuilder has trouble sustaining market share beyond about the mid-20s level, over a long period of time, as markets evolve and incumbents create new sources of value.