My Brother's Internet Is Way Cheaper Than Mine -- and Yours

Gameday! Image source: Håkan Bylund.

This is my little brother. His name is Håkan Bylund, he runs about two inches and two shoe sizes larger than my piddly 6'5" and size 13, and he loves playing football. A two-way threat, Håkan is both a devastating defensive end and a solid hand at the crucial left tackle spot. Yes, this quarterback is a rightie.

He's also into computers and the Internet. In fact, I can't imagine him without a high-speed broadband connection. It's how he gets his news and information, where he enjoys most of his entertainment, and the only way to shop. Some things just run in the family, I guess.

Right now, he's using a fiber-optic connection that provides 30/30 speeds. That's 30 megabits per second for downloads and 30 for uploads. For this, he pays about $38 a month. He's planning to more than triple his downloads to 100 megabits and sacrifice some upload speed, landing at 10 megabits. It'll cost him $39.70 a month.

That is, if he stays with his current fiber provider. But that's not a given, since 11 providers offer 100/10 connections to Håkan's apartment. They range in price from $36 to $65 a month. For a cool $70 a month, he could even upgrade to a full gigabit connection. You know, like Google (NASDAQ: GOOGL  ) Fiber. But he doesn't know anyone using that package. "It's rare to need that kind of speed for personal use," he tells me.

Moreover, he's not locked in to fiber. There's also about 10 ADSL providers for his address, one cable TV vendor, and a plethora of mobile operators. Mobile broadband is a viable option, and can provide 40 megabits up and down over 4G LTE. One company sells these high-speed 4G LTE subscriptions for $15.40 a month, plus a one-time fee for the network router unless you're committing to a two-year contract. If you do, some of the hardware options would be free.

My own broadband is a bit faster than Håkan's current plan. I'm using Verizon (NYSE: VZ  ) FiOS fiber for a 50/50 connection. This comes in handy when I'm uploading videos to our Foolish systems, for example. And it costs me $83 a month.

For that price, my brother could get a full gigabit connection. And he'd have enough money left over for a couple of extra burgers every month. Gotta fuel the sack machine. His current 30/30 connection costs less than half of my subscription, which is somewhat faster but in the same ballpark.

No, Håkan doesn't live in one of the anointed Google Fiber cities. If he did, the gigabit connection would indeed cost $70 a month, but he'd have nowhere near the amount of choices that he has today.

So what's his magic bullet, then?
You see, my brother stayed in Sweden while I went to Florida. In the old country, there's a political will to encourage competition. Municipal fiber networks got tax breaks and subsidies early on. It's through one of those municipal fiber networks that my brother enjoys about a dozen service provider choices, all leasing access on the same infrastructure.

In America, the very thought of starting a municipal broadband service will raise an outcry, especially in big cities. The largest municipal broadband service in the nation is in Chattanooga, Tenn. As the fourth-largest city in Tennessee, The Nooga is home to just 170,000 residents. None of the true metropolises provide a municipal Internet connection, where you pay for broadband the same way you handle water or electricity.

Image source: Community Broadband Networks.

You can blame the lack of competition and public network services on a powerful cable lobby. The cable and telecom industries enjoy the current state of affairs, where you rarely have to choose between more than one cable guy and one phone service.

Me, I can pick and choose between Verizon or Brighthouse Networks, a Time Warner Cable (NYSE: TWC  ) subsidiary. Both offer high-speed Internet, digital telephony, and a cable-like TV package. But that's two choices -- not more than a dozen, like you'd get across Håkan's municipal backbone. And as we've already seen, these guys charge a lot more for similar services. Verizon and Time Warner Cable shareholders sure appreciate this high-margin business model, and the companies fight to the death to keep the status quo.

For example...
Today, there's a hearing scheduled in the Kansas legislature's Committee on Commerce. It's about SB 304, a proposed bill that would stop municipalities in Kansas from providing "to one or more subscribers, video, telecommunications, or broadband service," or even to build and maintain any facilities to that purpose.

The meeting was adjourned from January 28 in order to give bill sponsors some time to reword critical parts of the bill. Specifically, the first version had a provision for offering services in "underserved areas" where you can't get any broadband service today. But since the exclusion specifically mentioned mobile and satellite broadband services, which pretty much blanket the continental USA in low-grade broadband coverage, there would be no exceptions.

This might remind you of the grandstanding around Tesla Motors (NASDAQ: TSLA  ) , where a few states have passed laws to require a franchise license before selling cars. Since Tesla sells cars without a traditional dealer network, that prohibits Tesla from running company-owned car stores. This is another example of deeply entrenched interests, trying to defend an outdated business model against disruptive innovations.

This Tesla Motors showroom is not a traditional car dealership. Other car dealers hate this business model, and some states support their plight.

States like Texas, which passed such a bill last year, are starting to change their tune. Not because of changing political winds but because Tesla is planning to build a $5 billion battery factory somewhere -- and every state in Tesla's target region wants that enormous economic benefit. So now it makes sense to lighten Texas regulations against Tesla's factory-direct sales model, because that might make the company more positive to building a big factory in the state.

Points for Tesla! But what about the broadband market?
The broadband industry doesn't have any carrots like that to hold in front of state legislators. Sure, fiber networks require a large amount of infrastructure investments, but the equipment and materials are already readily available on a global scale. No $5 billion fiber-optics factories will spring into existence to support municipal networks.

Which is why Google Fiber is such a big deal.

The high-speed and low-cost service has a very small footprint today, covering just three metro areas. Another nine metro regions are on the shortlist to explore installing Google Fiber, but that's not at all the same thing as a firm commitment.

Google doesn't really want to own the network. Instead, the company hopes to encourage serious competition. It's the stick instead of the carrot.

And it's starting to work.

Image source: Google Fiber.

How Google is poking the bear
When Google announced a Fiber network in Austin, Texas, incumbent telephony provider AT&T (NYSE: T  ) immediately announced its own gigabit solution -- in Austin. Cable giant Comcast (NASDAQ: CMCSA  ) has introduced a reasonably competitive 250/50 plan for $70 a month in Provo, Utah. Provo just happens to be another of the Google Fiber locations.

And that's exactly what Google wanted. This isn't about making Google a leading service provider. It's about giving better and cheaper broadband connections to all Americans, regardless of their provider. It's about introducing just a whiff of actual competition into a stagnant market, where industry interests walk hand in hand with political support to keep this lucrative model from falling apart. Because Google wins when more people use the Internet, and more often. Doesn't really matter who owns the pipes, as long as there is a reasonably fast connection at affordable prices.

But fall apart, it must. Google Fiber may be the first shot across the bow of today's monolithic Internet providers, but it won't be the last. Just look at the Swedish model for an example of what strong competition does to broadband prices. That's right, they plunge.

I'm using Sweden as an example because I have a background and plenty of connections there. I could have done a similar study of broadband business models in France, South Korea, or Russia, and still walked away with similar results.

They all do it a little bit differently, but it's all about supporting a competitive landscape rather than picking a government-supported winner in each territory. What you get is low prices and high-quality services, because a plethora of providers must compete on pricing and features.

So my brother tackles his broadband needs by staying in Sweden, despite his love for a sport that's really only seen in North America. Priorities, priorities.

The big takeaway
But if Google Fiber has any impact at all, I would assume that American consumers will get that kind of competition in the end. This will hurt cable and telecom specialists, which currently enjoy fat margins and huge profits on a series of government-shielded local monopolies or duopolies.

Consumers will eventually see low prices and high speeds just a few miles down the road and start demanding comparable terms for their own Internet pipes. The process might be slow, but I believe that it's unstoppable, inevitable, and good for consumers.

And it's terrible for the cable and telecom guys. This is why I wouldn't touch a Comcast, AT&T, Time Warner Cable, or Verizon share with a 10-foot pole. An important part of their collective business model is destined for destruction, at the hands of cheaper rivals and enlightened consumers. And when that happens, their margins will crash.

That's a touchdown for American consumers. I only wish it would have happened earlier in the game, before this rigid framework of reduced competition was constructed.

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Read/Post Comments (22) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 25, 2014, at 6:30 PM, STMacKenzie wrote:

    The mistake Verizon and AT&T made was that they took the bait and put in competitive networks.

    It would have been so much better if the let Google build out their network, then watch the government move in and start regulating them like they do the Telco ISPs. It's still not out of the question, but Google still hasn't reached the point where they'll just say "stuff it" and walk away.

    Let 'em think they're getting away with something, then swoop in, nail them with blanket after blanket of oppressive regulation and leave them "squeekin' from the freakin', squealing from the feeling, and oinkin' from the boinkin"

  • Report this Comment On March 25, 2014, at 6:59 PM, RLLH wrote:

    Sounds great if you live in Chicago, New York City, or Los Angeles. But who is going to pony up the billions of dollars to lay fiber to Fargo, ND and Bluefield , WV? Unless we are willing to see New Yorkers pay $20 per month and North Dakotans pay $500 per month I don't see this happening.

    Thank Congress and the FCC for mandating the phone companies spread their cost across the whole country rather than charging what it costs to actually provide the service. Remove AT&T or Verizon from having to follow the mandates of Washington and see who survives the era of the "cheaper rivals".

  • Report this Comment On March 26, 2014, at 11:43 AM, tom474e wrote:

    In the US, home of the free market place, we have monopolies, this is the problem. Instead of competition and choice we have monopolies.

  • Report this Comment On March 26, 2014, at 11:52 AM, navarac4301 wrote:

    Sweden: 176K square miles.

    USA: 3,794K square miles.

    The competition is out there, just so happens that it has not caught up with the smaller countries. It sounds nice to talk about a dozen or so providers laying lines accross the land, but it will get excessive. Honeslty, if your complaining about your $80 a month internet bill, you obvisously didnt grow up in the 90's where we were paying per hour, not per month. Your article was nothing but a waste of time stating what other countries do, I get it, they are smaller and therefore can lay lines accross the nation like its butter over bread, but as you stated, as soon as one person does it, they all do it, but tomorrow its something new, and they drop what they're doing and move to the new project. Either way, who the hell needs 100mbs? I use 30mbs to stream TV and use all my portables at the same time. Maybe bandwidth overkill and greed is whats making you waste your money

  • Report this Comment On March 26, 2014, at 2:33 PM, CountryBarks wrote:

    Texas, like most states, long ago was bought and paid for by the automobile dealership associations and either severely restricted or outright denied the selling of automobiles except through a dealership. Texas may have changed the law last year, but the basis has been around for decades. Remember, there was a time when the dealers and politicians were concerned about the power of the manufacturers and them doing away with the dealers, many of whom were involved in state and local politics. It is simple rent seeking.

  • Report this Comment On March 26, 2014, at 2:34 PM, gadfly1000 wrote:

    Your brother has a bad deal.

    I'm in France, where 28MB unlimited DSL, free phone calls to 100 countries and close to 200 TV channels sells for $33, and a few dollars more adds cell phone access.

    That's BEFORE the optic fiber options that are now gaining ground.

    Enough of this nonsense from masochists like navarac who have been justifying US price gouging since Europe and the rest of the world came from behind and passed us years ago.

  • Report this Comment On March 26, 2014, at 6:42 PM, GaryDMN wrote:

    It's an over regulated mess now ! Open it up to the free market, get the government out of it and void all monopolistic cable and telco franchise agreements and their exclusivity.

  • Report this Comment On March 26, 2014, at 8:12 PM, danico22 wrote:

    Just came back from ROMANIA:

    1000Mbs(One THOUSAND) 17.50$/month

    100Mbs+TV 16$/month

    2Gb on cell phones 5$/month

    here on Long Island NY Cablevision offer is "speed UP to 5Mbs(FIVE) for 50$/month! When they will ever IF ever have 1000Mbs will want to charge maybe 800$/month!This is ridiculous and Congress sit on their butts and do NOTHING!

  • Report this Comment On March 26, 2014, at 10:48 PM, margiecfl wrote:

    Thank you for a good column.

  • Report this Comment On March 27, 2014, at 12:04 AM, DevonShire123 wrote:

    I live in Thailand. Internet in my apartment is $15 per month. Phone: $10/month unlimited.

  • Report this Comment On March 27, 2014, at 2:13 AM, cri33 wrote:

    STMacKenzie ..if I am not mistaken ATT DSL has been around before Google was even around. I was living in Pasadena, Ca a very long time ago (like maybe 15 or so years ago) and I think that was the pre-Google days. Yahoo was the dominant search engine then. I don't know about Verizon. It would have been hard for Google to build fiber networks when they were not even around at that time.

  • Report this Comment On March 27, 2014, at 5:02 AM, btc909 wrote:

    100 years from now parts of the US will still be on dial up or DSL. One of the criteria in the US when buying a home is to make sure what internet is available. That's pathetic.

    navarac4301 most can't even get 30mbps in the US. If you can the price is generally jaw dropping. FiOS is already phasing out the 15/5 plan and offering you 25/25 but of course for more money.

  • Report this Comment On March 27, 2014, at 6:20 AM, rav55 wrote:

    Municipal service is a great idea. But take the expense say for the top 50 cities and now you have enough money for nationwide satelite internet for a very low price. Direct TV could offer it along with HD TV.

    It won;t have the backbone depth of fiberoptic but it will not suffer any regulatory issues either.

  • Report this Comment On March 27, 2014, at 9:06 AM, loofllams wrote:

    What's to stop one of the larger world telecom companies from coming into the U.S. with a nationwide satellite internet and just blowing comcast and verizon both out of the water? When China or the European owner of T-mobile get the cash, it seems like a wide open market to me.I mean if no one else steps into it sooner.

  • Report this Comment On March 27, 2014, at 9:54 AM, TMFMTHead wrote:

    Provo, UT may now have a better option from Comcast, but no where else in Utah. I live 65 miles north and my Comcast bill is $45 for 4/2 service. I was paying $65 for 14/5 service but had to reduce my costs. The service is also poor at best. If I had any better choices, believe me, I would switch in about .7 seconds.

    Americans have accepted that business will take advantage of them and there is nothing they can do about it. We do not demand anything from them other than mediocre service. We have become a nation of lemmings about service.

  • Report this Comment On March 27, 2014, at 2:05 PM, jvgfool wrote:

    Great article. From our founding days, we were a democracy first and a free market second. The magnetic poles have shifted to detriment of our fine USA.

  • Report this Comment On March 27, 2014, at 2:08 PM, jvgfool wrote:

    Unfettered free markets lead to banana republics.

  • Report this Comment On March 27, 2014, at 3:06 PM, mwanning wrote:

    Years ago, we had expensive long distance phone and cheap cable TV service. The long distance was controlled by the federal government and the cable was controlled by the local government. First, the courts took control of long distance away from the feds. Then Congress said cable was too expensive and took over the control of cable TV. Today we have long distance not under control of Congress and it is cheap and cable under control of Congress and it is expensive. See a pattern? Congress still has too much control of the media - the copper or fiber into your house. Make Congress give up control (and the money they get from the lobbyist of cable and telephone service) and quickly internet prices will fall. As seen by long distance cost, the billing of the service may be more expensive than the cost of the service once the structure is in place. Go back 150 years when Congress controlled the railroads "for the good of the people", a train ticket from NY to San Fran was $1200 - in 1870's money which is like $6,000 or more today. NY to LA airline fair in 1985 was $2400 or more when under control of Congress. Read good history of the "Robber Barons" of th late 1800's and you will find things very different than you expect. Petroleum was not under Congress control and a gallon of kerosene dropped from $.64/gallon to $.08/gallon in a few years. But where you found mass corruption, it was 99% assured that Congress and control of the market was involved. Congress is here to make things cheaper and better- no they are here to buy votes so they can get re-elected. And we always pay in some form or the other for the cost for them to buy our vote.

  • Report this Comment On March 29, 2014, at 12:36 PM, DACircles wrote:

    I was the IT Director for a city of 50,000 people in Florida 20 years ago. My boss the City Manager was a very smart man who wanted the city to take ownership of the fiber network and provide a front end for any internet provider to hook in. The cable companies came to our council workshop on this proposed network that would have cost about 10 million dollars and scared the heck out of our city council. Told them that if we did it, nobody would hook up and we would lose the money. The city council caved in and the project died. Huge mistake.

    I believe the City of Lakeland, Fl did what we proposed a couple of years later and it was successful. Live and learn. It should have been treated like a utility just like water and sewer service.

  • Report this Comment On March 29, 2014, at 1:57 PM, cmalek wrote:

    @mwanning:

    "NY to LA airline fair in 1985 was $2400 or more when under control of Congress."

    Was that First Class? I was flying between NY and LA at that time for $200 round trip economy. And I even got a breakfast or a dinner, depending on the time.

    However, I do agree that Congess screws up anything it decides to regulate.

  • Report this Comment On March 29, 2014, at 1:58 PM, BillS wrote:

    So, I'd disagree about avoiding Comcast. See, Comcast made the purchase of NBC Universal, so they own not only the distribution systems (cable systems, broadcasters, internet services, and competing phone systems). The key is that they also own major content (and the ability to distribute same), including sports. The license the distribution through franchise agreements.

    They agreed to restrictions on franchise agreements in order to get the merger through the anti-trust officials, but those restrictions expire in a few years. Once they come off, alternate providers will be affected. So you got high speed fiber? What happens if Comcast's content arm restricts distribution of sports through Netflix, Hulu, or Amazon's streaming services? You'll HAVE to buy through Comcast or your local cable provider.

    Not only are they using the political and legal system to protect outmoded business model, they're using content and franchise agreements to do the same.

    Look for costs to go up, not down, as we go forward into the future. Without content, the faster pipes are worthless.

  • Report this Comment On March 30, 2014, at 5:38 AM, Ladydidi wrote:

    People talking about Romania or Thailand prove that the price of service is linked to what local people are wanting -and can afford- to pay.

    As far as I know as a European working on an international level, all of Europe pays less than the US.

    As someone said above, the US have monopolies, not competition. Monopolies which are free to support/invest in political campaigns and dream of killing all competition in all parts of the world as they do in America. This is probably why the TAFTA agreement is secret and the European population up against it.

    In the present case the price is not related to cost. It is a "Psychological price", the same as if these services were fashion items.

    Americans accept to pay a high price, so why not ask for it? When competition is limited and demand blind, this is normal business and no investor should complain.

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