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Report: US ISPs face higher costs, lower profits than Europe

July 11, 2022

Critics of America’s private-sector broadband system often argue it underperforms European prices, coverage, speed, and competitive offerings, ergo US policymakers should adopt similar regulations, such as making incumbent providers unbundle their services. But a report from the Information Technology and Innovation Foundation (ITIF), the think tank for science and technology policy, concludes that US and European providers face radically different cost structures, rendering the comparison invalid.

ITIF’s analysis suggests it costs broadband providers 53 per cent more to provide wireless and wireline broadband services in the US than it does in Europe. Moreover, European broadband providers’ profits are slightly higher than US providers’ even though US wired speeds are faster than every European nation’s except Denmark’s.

“The idea that the Europe has a better broadband system has been a perennial favourite for critics angling for a strong government role instead of relying principally on the private sector. But it turns out to be a false comparison, and when you break it down, the US system actually provides better value for the money,” said ITIF Founder and President Dr. Robert D. Atkinson, who co-authored the new report. “The key thing critics overlook is the structural cost of providing broadband in the United States versus Europe. American providers pay more for labour, more to build bigger physical networks, more for spectrum, more on advertising, and more on taxes with fewer subsidies. When you account for those factors, the rest of the critics’ argument falls apart.”

ITIF constructed a model to analyse the cost differential between US and European broadband markets by calculating what US broadband prices would be with European costs.

The analysis shows that in every regard, US telecom market participants have to invest a higher percentage of their revenues in capital expenditures, employee wages, and taxes, while European providers receive more generous government subsidies. The report finds that in areas such as the cost of spectrum licences, US companies pay nearly twice what European companies pay.

Differential cost structures between the US and European markets lead to higher costs for US providers that must be assumed, at least in part, by consumers—although, US telecommunications companies maintain slightly lower operating margins than European companies. In other words, the argument that US broadband providers earn excess profits does not hold up when comparing to Europe.

“When you examine the US and European broadband industries, you find they are essentially apples and oranges,” said ITIF Research Assistant Jessica Dine, who co-authored the report: “They are composed of markedly different labour markets. They serve customers in very different geographies. And they are subject to differing taxes and subsidies. As a result, they allocate different proportions of their revenues to various costs in order to stay competitive. Ignoring those differences and leaping to the conclusion that Europe’s regulatory system has ‘succeeded’ and the US system has ‘failed’ creates an entirely false impression.”

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