Why The Announcements from Google and Facebook Matter for US ISPs

Last week, both Facebook and Google made big announcements to get the world’s unconnected onto the Internet. Google released plans to provide all of Sri Lanka with Internet via their Project Loon. And Facebook announced they have developed a drone that is as large as a Boeing 737 and can provide Internet services at much higher throughput speeds than before. If I were an ISP, I would be watching carefully; the next 15 years are going to be rough.

Why do I say this? First, we need a theory of competition, first articulated by Eli Dourado.

In the Internet ecosystem, competition occurs along the stack. Facebook, Google and Netflix are all upstream content providers while ISPs are located downstream with access to the consumer. Many worry that ISPs will turn off the spigot to content to squeeze both consumers and upstream content providers. At core, this was the concern with network neutrality, but the story fails basic economic logic. Content and access are complementary goods, and like razor blades and razor handles, are worth more when combined. As more content flows over Internet infrastructure, Internet access itself becomes more valuable, which means higher returns for the ISP. The result is more investment to build out more robust pipes.

Adding in competition at the ISP level can decrease the price, bump up the speed, or do a little of both. With competition, consuming content is now cheaper. The barrier to devouring the next video on Facebook or YouTube is now marginally lower. Conducting another Google Search is quicker.

With this theory in mind, Ina Fried’s warning that “there are a number of reasons why [Apple] offering its own cellular service may not make sense, especially at this moment in time,” takes on more meaning. Part of the benefit of an Apple carrier would be downstream competition on the wireless ISP to keep consumer prices low and encourage more use of Apple content, like Apps and the new iTunes. But, as Fried rightly points out, the wireless industry is already excessively competitive. The marginal benefit of sparking lower prices in wireless is simply not worth it in the long term game.

And what did Project Loon’s deal with Sri Lanka signal? For one, the speeds will be at 4G LTE thresholds, around 3–12 Mbps, thus potential competitors to wired ISP service in other countries. Second, Sri Lanka has a population density of over 300 people per square kilometer, comparable to the Netherlands, Belgium, and Japan. If it goes through, Sri Lanka’s Loon service would be a testbed for deployment in the US and Europe. Google has labeled this project a moonshot, which it is to an extent. But if either Google or Facebook figure out to provide widespread basic cheap Internet service, ISPs core competency will be competed down, forcing them to compete via quality, pushing up speeds.

And who wins with faster speeds? Content. It is still king.


Senior Research Fellow | Center for Growth and Opportunity | @WillRinehart

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Will Rinehart

Senior Research Fellow | Center for Growth and Opportunity | @WillRinehart