The Internet sector is a dynamic, fast-changing and increasingly competitive space. Even though some Internet service providers (ISPs) have continued to grow and consolidate in the industry, they have historically failed to deter competition and innovation in any meaningful way. Instead, it is local governments and public utilities that create barriers to entry in Internet service, not dominant ISP firms.

Competition, Substitutes and the Internet

In 2015, a list of major ISPs includes CenturyLink, Comcast, Time Warner Cable, Verizon, Charter, AT&T, Dish, DirectTV, AOL and MSN. The delivery of high-speed Internet is still an incredibly young service, but the U.S. market alone has an extensive list of competitive firms. Around the same time, major players such as Google and SpaceX detailed plans to cover the entire globe with wireless Internet.

On the surface, cable providers appear to be monopolistic in small markets where no other ISP has laid cable. Even there, mobile networks and digital satellite can carry data without having to touch Internet cables. Free Wi-Fi hotspots have promoted a revolution among local businesses such as libraries and cafes, proving that Internet consumers are willing to travel wherever their costs are lowest.

Wireless Internet service providers (WISPs) are a natural economic response to dominant cable ISPs. Literally thousands of WISPs were up and running in the U.S. by the end of 2014. Most of these are regional and serve limited areas, such as the Pennsylvania-based Netlinx or the Utah-based Vivint.

Rather than deterring startups, the profits of huge ISPs actually attract more providers. These substitutes limit the prices that major ISPs can charge without making these new competitors more attractive.

Local Governments and Competitive Restrictions

In most communities, major ISPs need two forms of permission before they build new networks. They need government permission for access to rights of way to run wires through property that the providers don't own. They also need to contract with public utilities to rent utility poles or use conduits for underground wires.

Smaller players are priced out of the market because these permissions are expensive. New competitors are rarely granted permission once an established provider is in place. The actual monopolists of the ISP sector aren't huge firms, but public institutions.

Historical Analogy

The young Internet market in 2015 has parallels to the infant oil industry in the 19th and early 20th century. The first oil well was drilled in Missouri in the 1850s; by the 1890s, the oil industry appeared on the path to monopolistic domination by John D. Rockefeller's company, Standard Oil.

According to economic theory, monopolies introduce barriers to entry and raise prices once they have control of a market. In 1870, when Standard Oil owned 4% of the market, the price of a gallon of refined oil was 30 cents. By 1880, Standard Oil owned 90% of the market, and oil prices dropped to 9 cents per gallon. In 1897, still with 90% market share, Standard Oil had reduced costs to 5.9 cents per gallon.

By the time the Supreme Court broke up Standard Oil for intent to monopolize in 1911, its market share had declined to 64% and it had more than 150 competitors (including Shell and Texaco) – exactly the opposite of anti-monopoly concerns. Similarly, the success of dominant ISPs increase new start-ups, not deter them.

  1. What are the primary risks an investor should consider when investing in the Internet ...

    Learn what risks to look out for when considering investments in the Internet sector in order to maximize potential profits ... Read Answer >>
  2. What portion of the global economy is represented by the Internet sector?

    Find out the size of the global Internet sector, how much of the global economy it represents and what businesses are included ... Read Answer >>
  3. What emerging markets are best positioned to benefit from growth in the Internet ...

    Explore which emerging markets are best positioned to benefit from the growth in the Internet sector. The sector continues ... Read Answer >>
  4. What are the main reasons for investing in the internet sector?

    Explore key reasons for investing in companies in the Internet sector. Learn about leading companies delivering products ... Read Answer >>
  5. Why is the price to sales ratio commonly used for comparing companies in the Internet ...

    Find out why Internet stocks are valued, traded and compared to each other based on the price to sales ratio versus other ... Read Answer >>
  6. What are some of the most popular ETFs that track the Internet sector?

    Learn about leading Internet exchange traded funds (ETFs). Find out how to invest in a diversified basket of stocks from ... Read Answer >>
Related Articles
  1. Insights

    How The Trump Admin Might Affect Net Neutrality

    The internet industry is scrambling to figure out what implications Trump's presidency have on open internet rules.
  2. Investing

    Senate Votes to End ISP Consumer Privacy Rule

    The Senate voted to remove a FCC rule that prevented ISPs from selling customers' web browsing histories.
  3. Insights

    A History Of U.S. Monopolies

    These monoliths helped develop the economy and infrastructure at the expense of competition.
  4. Insights

    SpaceX Wants to Launch a Massive Satellite Internet Network (TSLA, GOOGL)

    According to newly filed documents, the California-based company hopes to operate an orbiting digital communications array consisting of 4,425 satellites.
  5. Investing

    How To Value An Internet Stock

    An academic study, published several years after the peak of the dot-com bubble in March 2000, accurately described just how whacky internet valuations grew until the bubble burst. The study's ...
  6. Personal Finance

    E-Marketing Specialist: Career Path & Qualifications

    Learn more about the duties and responsibilities performed by eMarketing specialists and common career paths this profession takes.
  7. Investing

    How Oil Prices Impact the U.S. Economy

    Now that the United States has increased oil production through shale oil and fracking, low oil prices can harm the U.S. oil industry and its workers.
  8. Taxes

    Revisiting the Internet Sales Tax Bill: 2013 Vs. 2015

    Learn about the Marketplace Fairness Act of 2015 being reviewed by congress and the differences between it and the 2013 Marketplace Fairness Act.
  9. Insights

    Internet.org: What It Is and How It Works

    Basic Internet access remains out of reach for many in developing nations. Internet.org aims to bring basic Internet access to these countries.
  10. Investing

    The One ETF To Own The Top Internet Company Stocks

    Grab a pie of booming online businesses in one shot! Here is the one ETF that lets you own stock in the top Internet companies.
  1. Monopolistic Market

    A type of market that features one, if not all, of the traits ...
  2. Internet of Things (IoT)

    The Internet of Things (IoT) is a network comprised of physical ...
  3. Monopoly

    A situation where a single company or group owns all or nearly ...
  4. Internet Bubble

    A rapid rise in equity markets caused by speculation into online-based ...
  5. Permission Marketing

    Permission marketing is a form of advertising where the intended ...
  6. Price Maker

    A price maker is an entity with a monopoly that has the power ...
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center