Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Facebook is building drones that would beam WiFi to rural Africa. Google is laying down fiber lines to connect homes and businesses in Kansas City and Atlanta. And now Amazon is thinking about adding broadband to the palette of services it sells in Europe with its customer loyalty program, Prime, according to tech website The Information.

It's enough to feed a collective fantasy that Silicon Valley derring-do will fix the shabby and overpriced broadband that plagues many users. Unfortunately, the dream of cheap and fast broadband for all remains just that in much of the world.

In the U.S., the dominance of a handful of cable and telecom companies leaves most Americans with few choices for broadband. As a result, Americans pay more than people do elsewhere, often for an inferior product. The picture is better in places like Japan and Korea, where governments subsidized construction of fast fiber networks, as well as across Europe, where regulators require the largest telecom companies to rent access on their fixed lines to competitors. 

Big Range
Prices charged for fixed broadband services vary greatly in different countries. The U.S. is more expensive than other advanced economies because of a lack of competition in many regions.
Source: OECD Broadband Portal
Fixed broadband prices per megabit per second of advertised speed, September 2014, in USD purchasing power parity

Yet no one has really hit on the perfect way to persuade private companies with shareholders to satisfy to invest in infrastructure that counts payback times in decades. Telecom and cable markets tend to turn into oligopolies because of high capital expenditure needs and economies of scale, which in turn keeps consumer prices high unless regulators intervene. But if the watchdogs go too far, then the network operators complain and threaten to withhold capex without assured returns.

That's where the Silicon Valley dreaming comes in. Surely the big brains at Google and Amazon can solve this problem? They certainly have the means.

Pipes and Tubes
Companies that sell broadband or other telecom services spend roughly 10 percent to 15 percent of their revenue to build and maintain their networks. Big tech companies' capital spending tabs are mostly comparable.
Source: Bloomberg
Note: Most companies' figures reflect capex and revenue in the last 12 months. Vodafone data is for year ended March 31, 2016.

The early signs aren't good, though. Google has seemed uncertain about its commitment to its six-year-old Google Fiber project to build high-speed broadband networks and to its intriguing low-cost mobile service called Project Fi. Google Fiber had revenue of roughly $100 million in 2015, according to news reports, which was about 0.1 percent of total revenue last year for Google’s parent company. Mark Zuckerberg has made it his top priority to expand internet access globally, but Facebook has hit roadblocks in the form of political objections in India and the recent explosion of a satellite that was meant to spread the internet.

As Amazon's potential move into broadband shows, U.S. tech giants will launch broadband or wireless internet services when it suits their larger business purposes. They have not yet proved willing, however, to light piles of cash on fire just to make a broadband connection in rural England or New Hampshire faster and cheaper.

If Amazon wants to make Prime more attractive in Britain, adding broadband service would be an easy and smart way to do so. That's because BT Group, the owner of the U.K.'s only national broadband network, is legally required to rent its internet pipeline to rivals like Sky and Vodafone -- or a newcomer such as Amazon -- at regulated rates. In the U.K., then, Amazon can sell internet access without having to shell out big bucks to build its own network.

That's a victory for U.K. consumers, right? Well, sort of. They would get another option for broadband service. But because the web traffic would still move over BT's network, Amazon isn't the competition that might spur much needed improvement in speed and quality. Instead, Amazon is happy to piggyback on BT because its aim is to keep its big spending Prime customers happy and loyal. It doesn't actually care about lighting a fire under BT by trying to steal broadband market share in the country.

Slim Pickings
About 61 percent of Americans have at most one choice of a home internet provider that offers download speeds of at least 25 megabits per second
Source: FCC's 2016 Broadband Progress Report

In the U.S., nothing requires the telecom and cable companies that own the internet networks to open its pipes to Amazon or anyone else. About 61 percent of Americans have access to one or fewer choices of home providers that offer zippy broadband service, according to the FCC's definition. Mobile internet access isn't much more competitive, with Verizon and AT&T holding a firm grip on the mobile market.

Those broadband and mobile internet oligopolies are arguably the biggest barriers holding back broader use of online video and other web services. That's true in the developing world but also for richer countries. Bolstering investment in networks is a real issue, and tech companies aren't the answer (yet). Maybe that will change, but Silicon Valley doesn't seem willing to deliver us to broadband paradise.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Leila Abboud in Paris at labboud@bloomberg.net
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net