The United States is number one in many areas, but Internet speed is certainly not one of them. This tech edition of Industry Focus looks at the reasons we lag, and whether ISPs such as Verizon (NYSE:VZ), AT&T (NYSE:T), and Comcast (NASDAQ:CMCSA) should be concerned about heightened competition.
A full transcript follows the video.
Sean O'Reilly: Tired of your Netflix (NASDAQ: NFLX) lagging? So was President Obama, but he has an executive order that can actually do something about it. All that and more on Industry Focus.
Howdy Fools, I am Sean O'Reilly with the one and only Nathan Hamilton. How are you today, sir?
Nathan Hamilton: I'm good. I'm looking forward to talking a little bit.
O'Reilly: Yes, we've got our coffee, we've got our pending faster Internet speeds -- crossing my fingers.
Hamilton: Yes, we'll talk a little bit. Hopefully not too much politics. We'll talk more ...
O'Reilly: He's the President of the United States, he wants to stream YouTube videos faster, so do I. There's no politics here.
Hamilton: You think it's "House of Cards?"
O'Reilly: I can only hope, yes. If Frank Underwood were President, this would all be done by now.
Hamilton: Or some people would be dead.
O'Reilly: Or some people would be dead. Probably both!
First and foremost, what's going on? We had our previous show a month or two ago; Obama basically came out in favor of an FCC ruling, basically he wants net neutrality. He doesn't care what has to be done to make sure this happens.
But we've got a few updates. What's going on?
Hamilton: Somewhat related to net neutrality, President Obama came out recently and outlined a plan where he might take executive action or urge the FCC to bring about, in a more swift process, municipal broadband.
Right now, as it stands in 19 states, it is limited. There are many states where you can get municipal broadband. The big thing is potentially it's cheaper, potentially even could be free, and it's faster than existing Internet speeds that most people have access to.
O'Reilly: You and I both obviously live here in suburban D.C. What is "municipal" broadband? I've got Verizon FiOS, you've got Comcast I assume. They give us Internet, it's relatively fast. What's municipal broadband?
Hamilton: I guess the play is more in the rural areas. It's built by a local government -- a municipality, of course. From what we see, they really burden the cost of laying the fiber and so forth.
It may be what they call "fiber to the node," which is where the fiber optic cable will go to a certain spot and then it will be other cable methods to get to houses. Or there's "fiber to the home," which many believe is faster.
O'Reilly: Right. So, where does the U.S. rank? As I understand it, and correct me if I'm wrong, there's a number of countries where the Internet is run and owned by the government.
O'Reilly: There's not Internet service providers. It's just run by the government and in a lot of cases it's really, really fast.
Hamilton: Yes. We'll get to that a little bit later; government-run networks and so forth.
If we look at how the U.S. ranks for Internet speeds some people that follow the industry know that the U.S. is very low, but I think most people would be shocked to find that the U.S. isn't doing that well.
Hamilton: We've got an image up for some of our listeners that are watching the video here. Unfortunately, our podcasters won't be able to see it.
O'Reilly: We'll run down the list.
Hamilton: If you look at it, the countries with the fastest Internet speeds, South Korea 24.6 average speed -- megabytes per second -- then going on down the list, Honk Kong, Switzerland, Japan, Netherlands, Sweden. Latvia? Okay.
O'Reilly: Ireland, yay!
Hamilton: Ireland, Czech Republic, Romania, and then about 14 slots on down, United States.
O'Reilly: One thing that pops into my mind, just as a fairness, I'm noticing that all these countries that have faster Internet speeds, they're a lot smaller than we are.
Hamilton: They are.
O'Reilly: It's really, really easy to get broadband Internet connection to everybody if you're the size of Latvia!
Hamilton: Yes, that does have a little bit to do with it. If you look at the real reason, or one of the reasons, why the U.S. isn't number one -- I guess we're not number one in everything -- it has a lot to do with population density.
There are a lot of open spaces in the U.S. and to get fiber cable or to get fast Internet speed to those locations, it costs a whole heck of a lot of money.
Hamilton: North Korea, population density and so forth is far higher than what it is in the U.S.
O'Reilly: You mean South. Yes.
Hamilton: Yes. You really have to look at it from a cost of capital, or the capex required to get fast Internet speeds. A lot of it has to do with population density. It is cheaper in these areas to get that Internet to more people. Obviously it makes sense.
O'Reilly: Has a lot of analysis been done? Obviously in these areas it's not cost beneficial for an AT&T or a Comcast to get a broadband Internet connection to people in, say, South Dakota, where there's, I don't know, five people per square mile. It's just not quite there.
What kind of burden does that put on the taxpayers, then? What's the outcome here?
Hamilton: For municipal broadband?
Hamilton: I don't know the exact figures, but I've seen some estimates. If we wanted to lay all the fiber infrastructure ...
O'Reilly: To every American, yes.
Hamilton: We're looking at ... I can't remember. I think it was $70 or $80 billion. I don't recall the exact amount but it's tens of billions of dollars and no one company can do it on its own.
You look across the U.S., there's different pockets of markets where a user may only have access to one option, so for one company to provide access across the U.S. it's a huge investment.
O'Reilly: Right, got it. Very, very good.
Other than population density, are there any other reason the United States lags behind here? Or is it just you've got to come up with the money, $80 billion, Comcast definitely is not going to do a bond issue and ...
Hamilton: There are other factors. A lot of it can just come down to the regulatory process. The cable lobby as well, they throw a lot of money behind it.
I won't get into the political aspects of it, but if you look at some of the regulations that have been put forth companies -- AT&T, Verizon and so forth -- have voiced their concerns over how they don't want more competition in municipal broadband, the want to be able to be the sole provider. You can see where it makes sense for them to lobby for that.
O'Reilly: I'd like to own a monopoly too!
Hamilton: Exactly. Maybe you said it more succinctly than I did.
O'Reilly: I call them like I sees it. Sorry to interrupt. So what exactly is President Obama willing to do through executive order, to make this happen?
Hamilton: It's unclear, through executive order what he wants to do, but I know they've mentioned in the State of the Union address that he will talk about it some more.
Beyond that, it's really just urging the FCC. How do we get Chairman Wheeler on board? He's had some pretty interesting comments related to municipal broadband because, you look at the whole picture, it really comes down to -- a lot of it -- competition.
Right now there's not a huge amount of competition, and that may be some of the reason, beyond population density, that a lot of us don't have access to the highest Internet speeds. Chairman Wheeler many times says, "Competition, competition, competition, competition, squared to the eighth power." That's something that is very important.
But there also has to be a profit incentive. If you own your monopoly, Verizon ...
O'Reilly: I have very little incentive to get those five people per square mile.
Hamilton: Exactly. You're not going to lay fiber to my house just so I can pay $20 a month for service.
Hamilton: It just doesn't make sense.
O'Reilly: Right. You're talking about miles upon miles of cable for one person. It's like ... yeah.
Hamilton: Yes. There are some interesting statistics here. It was just looking at how much companies have invested in the broadband or Internet infrastructure over the past decades, and so forth.
Surprisingly, the U.S. has invested a whole lot more than, say, Europe. You're looking at $500-plus per household. In Europe it's more in the range of $300 per household. So we're investing aggressively to get the infrastructure up to speed, and maybe get it on par with some of the other countries, but it's still not enough to really get it to that first rank.
O'Reilly: $300 versus $500, though. Isn't Europe -- correct me if I'm wrong -- way more dense than the United States of America? Ergo, that's not that surprising?
Hamilton: Yes. It shows up on some of the rankings as well. You see that they have faster Internet speeds.
Bringing this back around, hypothetically I'm a Comcast shareholder, I'm a Verizon shareholder. What does this mean for the Internet service providers and how does it circle around to the whole FCC regulation about these guys potentially being regulated under Title II now?
Hamilton: I don't think, as an investor, it's something to run for the door or sell shares. But you have to look at it. The cable companies and broadband providers, ISPs, they are scared. Why else would they throw money at these sort of initiatives?
O'Reilly: Right. We want them to invest $80 billion, but we're like, "We want to regulate you more."
Hamilton: Yes. No doubt about it, they're going to invest a lot of money. AT&T invests the most in capex of any company in the U.S. That's because they want to get this infrastructure out there.
O'Reilly: They're Ma Bell. They have to!
Hamilton: Yes, but there has to be that profit incentive. There's no way AT&T is going to invest unless there is that incentive. It's what makes a business, it's what makes shareholders flourish and see returns.
So, a little bit scared but ultimately I don't know if it affects the share price right now because you have to look at it. Right now it's just a lot of talk. There are some regulations out there which are up for public comment, but nothing's been set in stone.
The FCC still has to make a decision on it. There's a whole heck of a lot of things that could go on through Congress, different amendments and so forth -- so, scared, but don't run for the door.
O'Reilly: Right. Real quick before we wrap up, you look at the returns on capital and returns on equity of the AT&Ts and the Comcasts and the Time Warners (NYSE: TWC) and everything over the last five years, and these numbers have gotten into 20-25% returns annually.
That wasn't the case 10 years ago, so I have to wonder if, just as a consequence of these regulations, that it's just going to revert to the mean and they'll start making 10, 12, 14% again.
Hamilton: Yes. Could it be like utilities? Utilities are completely regulated.
Hamilton: They have an ROE that they're allowed to get.
O'Reilly: They make their 10%.
Hamilton: Yes. You can't get any more than that unless the government says.
O'Reilly: Oh, man. I might run for the hills anyway. No!
Very good. Thank you for sharing your thoughts. I look forward to no more lags on my Internet speed when I'm visiting rural Ohio.
Hamilton: I hope so. Don't bank on it right now, though!
O'Reilly: Years away.
All right, very good. Thanks for listening, Fools, and Fool on!
Nathan Hamilton has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Netflix and Verizon Communications. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.