November 24, 2009 5:17 PM

Net Neutrality: Through the Looking Glass Pt.2

Here, we continue to explore the flawed premises, faulty reasoning (resulting from those premises), and the unintended (and frequently ironic) consequences of the proposed rules that result from this combination of either no "data", or unsupported assumptions disguised as facts.  Regardless of how unsupported, though, the Commission clearly believes.  Indeed, the Commission's certainty about these "facts" can be established by the lack of questions that go to central pieces of the Commission's theory.   One can only hope that, at least, Commissioner Copps will stick with the principle he so eloquently articulated a little over 5 years ago, "[w]ith the international economy increasingly dependent on broadband facilities, faith-based approaches to advanced telecommunications are insufficient."

NPRM: Unsupported assertions regarding the incentives and ability of broadband service providers to use alleged market power in the broadband Internet access market to extract supracompetitive prices in less competitive retail markets.  Alternatively, the Commission makes equally unsupported speculations regarding the incentives for vertically integrated broadband service providers to unfairly disadvantage firms in adjacent markets, such as the market for content delivery networks. See ¶¶ 7-9, 104-106.

Fact:  First, neither theory is supported by facts, or even theoretical citations that fit the facts in a way that would support the rules the Commission wishes to impose on the broadband service providers.  The reason is not that there is no set of facts upon which a firm would have the incentive and ability to act in an anticompetitive manner.  To the contrary, these are well-established single-firm theories of competitive harm; the logic underpinning the theories breaks down when you have multiple firms or the inability to practice location-specific price discrimination.  

The facts aren't here, because there is no evidence that any particular broadband Internet access providers: 1) have widespread market power vis-à-vis their retail customers, or potential wholesale competitors, 2) can use that market power, if it does exist, to practice price discrimination on a geographic market basis (for example, if one broadband provider faces no competition in a few small towns but offers and prices its service throughout a much larger territory, consumers of broadband Internet access services are not disadvantaged), 3) will maintain market power in the face of continued 4G expansion by incumbent wireless carriers and the new national wireless broadband provider, Clearwire, or 4) will unfairly disadvantage competitors in adjacent business or wholesale markets, because, to do so, a firm must have market power in both vertical markets--the input market and the retail market.

Indeed, contrariwise, no questions are asked as to whether the broadband Internet access providers have market power in any market in which the Commission's proposed rules are designed to "protect" from anticompetitive consequences.  Nor does the Commission ask whether geographic market price discrimination in the mass market for broadband Internet access is currently practiced, or is even practicable.  In other words, geographic market price discrimination might cost more to implement--through billing system modifications--than the anticompetitive rents it could capture (assuming the practice would net supracompetitive returns without attracting entry).  

The Commission's lack of curiosity is disappointing, because they have failed to realize, and act on, real consumer welfare harms resulting from vertical integration where the integrated firm does have market power in both the input and distribution markets: subscription television (which we will cover in greater detail in the next post).  To be fair, the Commission does explore what it calls "price discrimination" in the product market, but this "discrimination" should be more properly considered simple product differentiation (which the Commission claims to be comfortable with, NPRM, ¶ 106), because, again, there is no evidence that any firm targets its broadband service menu on a geographic level, based on its consumers' price elasticity (competitive alternatives).

But what happens when there is no theory to support consumer harm from vertical integration?  After all, most of the cable and wireless broadband Internet access providers have chosen to "integrate" vertically into the Internet backbone market through contract rather than acquisition; the Internet backbone market is that competitive--there are no scarcity rents to be extracted from owning a backbone.  Likewise, the larger, vertically-integrated broadband access providers have found no advantage to "submarket" specific pricing, within the larger geographic "mass market."  For example, AT&T currently maintains two sets of broadband prices--prices in legacy SBC territory, and prices in legacy BellSouth territory; soon, AT&T will likely transition to one price.

Faulty Consequence:  Broadband Internet access service providers must comply with regulations that limit the profitability, and thus pace, of broadband deployment.  Why?  Limitations on vertical market participation mean that broadband access providers are not allowed to participate fully in both sides of the normally two-sided broadband demand curve that characterizes the Internet.  These firms are prevented from using their assets to vertically integrate and compete for customers on both sides of the market for Internet services (the content and "eyeballs" sides), because unjustified ex ante rules prevent access providers from: 1) offering the same groups of Internet access consumers differentiated products, including lower-priced, lower-functionality broadband Internet access devices/services as well as higher functionality services for more sophisticated customers, 2) offering sophisticated business services in already-unregulated markets--targeting innovative firms of the future--better services or lower prices, depriving customers in these markets of their right to competition.

Bottom Line: the consequences of the "non-data-driven" assumptions in the NPRM may lead to the Commission's baseless adoption of blanket rules that reduce broadband deployment and broadband penetration across.  Moreover, the proposed rules will likely deprive innovative new businesses of specially tailored innovative technologies and services based simply on the unfounded ex ante fear that broadband Internet access providers may compete unfairly.  Let's look forward to discussing reasonable ways in which that legitimate public interest concerns can be protected by rules that limit only anticompetitive, i.e., output-restricting, practices by any party affecting the "core" broadband Internet access rights that the original broadband principles granted consumers.

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