Econ 101: Competition lowers broadband costs

The cost of local access to the Internet is disproportionately higher than the cost of sending the same bits over long haul networks, but the price difference is far from random. A study of access prices on long haul and local transit found that the technology used and local competition were likely to determine how much higher the cost would be.

The study, by analyst firm TeleGeography isn’t really a surprise, but it’s a nice, thorough look at the difference in transmission costs for bits under the ocean as compared to transmission into a business park or corporate campus. TeleGeography focused on corporate connections back to a local point of presence, so it’s not the same as your Comcast(s cmcsa) or BT connection to the home, but many of the same conditions apply.

The review of prices found that Ethernet is cheaper than a T-1 line and that Mumbai has the cheapest local access prices. It also noted the disproportionate costs of shorter local access compared to long haul. For example the report notes, “the average annual price of a 2 Mbps E-1 local loop within central London is $6,823 — nearly 30 percent more than that of a 5,500-kilometer E-1 circuit from New York to London.”

Some of this is because of the economies of scale that come from operating long-haul cables. They are fat, so you can sell a many customers dedicated bandwidth and recoup the cost of building the pipe. Connecting a building to a POP does require a dedicated cable for that customer. But the Telegeography study doesn’t think that’s the only reason, nor is the pricing disparity random. From the release on the survey.

“Local access prices are, as their name suggests, determined by highly localised market conditions,” said TeleGeography analyst Greg Bryan. “While they can vary widely across regions and even within a single city, they are far from random. In fact, a close analysis of local access transactions reveals clear tendencies by market in terms of typical price ranges, service offerings, and competitive intensity.”

There you have it. When it comes to broadband pricing, real competition matters.