Too Much or Too Little Competition Can Depress Investment in Next-Generation Networks

Communications policy makers often face tough choices: policies that promote competition often decrease appetite for investment in new facilities. On the other hand, policies to incentivize investment often require or produce less competition. 

Maximum feasible competition, but also maximum feasible investment in next generation facilities often are preferred. But the two objectives lie in a state of tension. Too much competition dampens investment. But too little competition also dampens investment.

The trick is finding the balance between one monopoly supplier and some number greater than one, that produces a stable competitive outcome and sustained investment in next-generation facilities. Excessive competition drives companies out of the market because profits are not attainable. Too little competition reduces incentives for robust investment. 

As Federal Communications Commission staffers have argued, “private capital will only be available to fund investments in broadband networks where it is possible to earn returns in excess of the cost of capital. In short, only profitable networks will attract the investment required. 

A good example of this is the impact of competition on profit margins, average revenue per account and customer market share in facilities-based competitive markets.  

The first new facilities-based competitor in a market with a single provider reduces average revenue per user by four percent, but market share by 50 percent, FCC analysts calculated. 

source: FCC 

In markets with four competitors, potential market share is reduced 75 percent and ARPU falls 28 percent, according to FCC analysts.

Even in many wholesale-based markets, where retail competitors all use a single physical network, market share and ARPU reductions might mirror those of facilities competition markets. 

The point is that communications policy now also now is created under very different market circumstances than in the pre-1990s monopoly environment. Regulators want competition, but they also want investment. 

The problem is that too much competition tends to depress investment, as does too little competition.