U.S. Internet users pay more and have fewer choices than Europeans

Introduction

Editor’s note: April 3, 2015: This article has beenupdated to reflect the position of Roslyn Laytonthat competition among Internet providers is not working as intended.

More than a quarter of Americans cannot go online at home to check their children’s grades at school, apply for jobs, pay bills or research health issues. They don’t have what has become a crucial service for participation in modern society: Internet service at home.

The proportion of households with Internet service had been rising steadily for decades, according to the Pew Research Center, until the past few years when the adoption rate slowed.

One reason? The high cost of broadband and the lack of competition that leads to those high prices.

A Center for Public Integrity analysis of Internet prices in five U.S. cities and five comparable French cities found that prices in the U.S. were as much as 3 1/2times higher than those in France for similar service. The analysis shows that consumers in France have a choice between a far greater number of providers — seven on average —than those in the U.S., where most residents can get service from no more than two companies. The Center’s analysis echoes the findings of several studies on Internet pricing disparities worldwide.

By mapping the service areas of U.S. providers, The Center for Public Integrity also found that telecommunications companies appear to carve up territory to avoid competing with more than one other provider.

Higher broadband prices don’t just mean fewer dollars in Americans’ wallets at the end of every month. They make it difficult for low- to middle-income families to afford fast Internet service, which has become a necessity for job training, education, health care.

According to data in a report by the U.S. National Technology and Information Administration, more than 8 percent of U.S. households say they cannot afford broadband. President Barack Obama this year called for faster, more affordable Internet service for everyone.

“Just like we today expect clean running water, sewage and electricity as essential, so is broadband necessary to partake in society, to interact with government, to learn, to inform and be informed, to be a fully functioning member of society,” said Rudolf van der Berg, a telecommunications and broadband policy analyst who studies policy at the Organisation for Economic Co-operation and Development (OECD).

Many studies have been conducted looking at price and competition. The Center’s research isn’t as comprehensive. Rather, it’s a snapshot meant to show the state of broadband for some American cities. The high prices and lack of competition and in towns like these — and there are many — add to a growing divide between the connected and unconnected. And for theunconnected, the increasing gap will be measured in fewer economic opportunities,less access to healthcare and other inequities.

The non-competitive advantage

When it comes to shopping for Internet service, most Americans don’t have much of a choice.

Consider the Seattle, Washington, metropolitan area, which includes Bellevue, Tacoma and Redmond. The area boasts three providers who offer residents Internet service of more than 10 megabits per second: Comcast, CenturyLink and Frontier Communications.

But no Seattle resident has a choice of all three. While Comcast serves 95 percent of the Seattle metro area, CenturyLink only offers service in a territory south of the city, to about 31 percent of the area’s residents, according to data compiled by the Federal Communications Commission and mapped by the Center for Public Integrity. Frontier Communications serves residents north of the city, and covers just 29 percent of the metro area. The two companies’ service areas rarely overlap. That leaves the vast majority of residents in the metropolitan area that’s home to tech giant Microsoft Corp. with a choice of just two Internet providers.

Coverage areas in other U.S. cities the Center mapped are similar. Most residents have to choose between one company that offers Internet via cable and another via DSL, or a fast telephone line.

In the five French cities that the Center studied, residents have a choice of at least six providers for high-speed Internet access. What makes that possible is open access, a regulatory requirement that allows companies to share networks for a fee, which would allow providers over time to invest in networks, broadband experts said. Not all researchers believe it is working, however.Roslyn Layton, a fellow at the American Enterprise Institute who studies broadband at Aalborg University in Copenhagen, said regulators have allowed providers that lease an incumbents’ network to continue to pay the low access costs instead of investing in infrastructure, which means the model does “little to promote competition, service-variety, and innovation.”

The U.S. Internet system, where territory appears to be deliberately carved up to minimize competition, grew from the telephone and cable television system that was already in place.

Most Internet providers — including CenturyLink, Frontier and AT&T — started out as, or bought, phone companies, giving them control of one of the only physical lines that serve each household. The second choice comes from the cable TV providers who in turn own the cables that enter almost every home. Wireless and satellite companies try to compete but those technologies still can’t reliably provide high speeds, and often cap the amount of data consumers can use.

Some researchers argue that lower population density in the United States leads to higher prices. Butvan der Berg doesn’t see it that way.

“Population density is an important factor in the cost of broadband, when you compare Hong Kong to Sweden or the USA,” van der Berg said in an email. “However just as decisive is the amount of competition or the lack of it.”

A choice of just two, even three, providers isn’t enough to create a competitive market that will keep a check on prices, said Nicholas Economides, an economics professor at New York University who studies telecommunications.

“The only competition that remains is between telephone Internet service providers and cable Internet service providers — if you have it,” Economides said. “That’s the real problem, and that’s why we don’t have enough competition and higher prices.”

Higher costs

If you live in Columbus, Ohio, and you want fast Internet service, you have two choices: Time Warner Cable’s $70-per-month plan or AT&T’s $61-per-month package, after any discount expires.

If you live in Nice, France, it’s a different story. You can choose service from six Internet providers, and you’ll pay between $19 and $40 a month for a comparable, or even faster, service.

Columbus and Nice aren’t atypical, according to the analysis by The Center for Public Integrity. U.S. broadband providers charge more for high-speed Internet connections in four other U.S. cities when compared with cities in France that had similar population densities, the Center found. In some cases, prices in the French cities are nearly half those in the U.S. for speeds that are up to 10 times faster. (Read an explanation of the center’s methodology.)

American Internet companies argue that they provide better service and that’s why they charge more. Most of the connections in the French cities the Center studied were sent over copper wires rather than cable or fiber. Unlike cable, which 96 percent of Americans have access to, speeds slow over copper the farther a customer is from the central office where the signal originates.

DSL — as copper connections are called — is the primary reason European Internet providers deliver just 74 percent of their advertised speeds, according to the European Commission. U.S. providers give their users the speeds that they advertise, the Federal Communications Commission reported.

“Europeans pay less because they get less,”Layton saidin an email. Layton says competition in Europe depresses revenue and discourages investment in faster and better service. “Americans may pay more, but we get more.”

But even accounting for the slower speeds, Internet packages in France are still a better deal. For example, in Nice, French provider OVh Telecom offers the most expensive service, at $35.28 per month for 19 megabits per second, or $1.86 per megabit. Reducing the speeds by the 74 percent of what European telecoms truly deliver increases the cost per megabit to $2.50. That’s still 28 percent less than the $3.50 per megabit Time Warner Cable charges for nearly the same speed, and 26 percent less than what AT&T charges. In all but two instances, all Internet packages in the five French cities were a greater value.

The findings “are not surprising, unfortunately,” said Danielle Kehl, a policy analyst at the Open Technology Institute in Washington, D.C., and one of the authors of a study that also found U.S. broadband prices are higher than those in most other foreign cities.

Other studies have come to similar conclusions.

The U.S. has the ninth most expensive broadband service among the 34 OECD countries, which are among the largest economies in the world. The comparison looked at 15 megabit-per-second downloads, a speed fast enough to conduct most of today’s routine Internet applications with two devices running at the same time.

The conservative American Enterprise Institute and a professor at the University of Pennsylvania Law School who supports fewer regulations for the telecom industry, have each concluded that U.S. prices for broadband are higher than European countries for faster speeds, but lower for slower service.

Internet providers in the five U.S. cities studied defended their higher prices. Verizon Communications said its prices are “very competitive” and offer “great value.” An AT&T official didn’t answer a question asking why their prices were higher, but referred the center — “in an attempt to broaden your perspective,” according to an email — to two studies that actually concluded U.S. Internet providers charge higher prices for faster connections than providers in the European Union.

CenturyLink said in an email it “seriously questions whether these are appropriate comparisons to make” because of differences in population densities, the kinds of services providers offer and different regulations that affect the operations of U.S. and European companies.

Time Warner Cable said in an email that comparing prices of stand-alone Internet systems “doesn’t reflect typical consumer behavior in the U.S. and could well skew any price comparison to a different marketplace” because that majority of their customers bundle Internet with cable television. Cox Communications and Frontier Communications did not respond to questions.

Why Price Matters

The higher price Americans pay for fast Internet leads many lower-income people to forego the service.

The percentage of Americans with a home Internet connection has steadily risen since 2000, leveling off over the past few years at 73 percent of all households in 2013, according to the latest figures from the Pew Research Center.

A 2012 survey on Internet use in Illinois conducted by John Horrigan, who studied Internet adoption when working on the Obama administration’s 2010 National Broadband Plan, found that 29 percent of those who didn’t have Internet service in their homes said the high cost, including the price of a computer, was the reason.

The study showed a stronger link between price and adoption than previous and later studies, which didn’t specifically ask consumers if price affected their decision on whether to connect.

In a 2013 survey conducted by the U.S. Economics and Statistics Administration, nearly half of those without a home connection said the Internet was not relevant to their lives or they weren’t interested. Only 28 percent cited high costs as the reason for not buying an Internet connection.

Those findings have led some researchers such as Richard Bennett, a visiting fellow at the American Enterprise Institute, to argue that policies to teach computer skills are more important to increasing Internet use than focusing on lowering prices or providing subsidies. Higher prices do have a secondary effect, he said.

Horrigan, however, argues the earlier studies are flawed because of the way the questions were asked. In past surveys, those who said they didn’t have an in-home Internet connection were asked to provide reasons why. Interviewers didn’t offer any reasons. Responses were then grouped into categories, with the most popular answer being the Internet isn’t relevant.

When surveyors offered specific reasons, including cost, that factor rose to the top.

“Based on years of studying this, I am convinced that price is clearly the main reason” Americans don’t connect to the Internet, Horrigan said. “If you solve the price problem alone, we’re still going to have people not choosing to take the service. But you have to start with price.”

Will Fitzgibbon, a reporter with the International Consortium for Investigative Journalists in Washington, D.C., contributed to this report.

This story was co-published with The Verge.