May 29, 2015 2:20 PMOrder.
Today, we're going to look at the origins of this theory--in competition law--and whether there is any historical evidence to validate this concern. This may seem risky, because if historical evidence isn't conclusive, it can be claimed as "support" for a lot of different theories.
For example, "ancient astronaut theorists" (as the History Channel calls the UFO crowd) point to surprisingly-advanced ancient wonders throughout the world (e.g., pyramids, or other very large inland structures) as "evidence" that aliens were responsible for these accomplishments. While some [non-History-Channel-viewers] will be inclined to dismiss ancient astronaut theories, these theories cannot be disproved, either. On the other hand, if the historical evidence is conclusive, it can rule out inconsistent theories. Is "ISP market share=interconnection degradation" theory at least as viable as ancient astronaut theories?
WorldCom "Will . . . Become the Internet"
The quote above was from an antitrust complaint, filed by one of WorldCom's smaller rivals in the Internet backbone market, in 1998. GTE Complaint at ¶2.a. (emphasis in original) The smaller rival was no beginner, it was GTE--the country's largest integrated local/long-distance telephone company (at a time when virtually all Internet traffic was carried on telephone company facilities).
Moreover, GTE wasn't crazy to be concerned. If you had a crystal ball, you could not have positioned yourself better than WorldCom did through a series of acquisitions from '94-'96, which--you may recall--was when the commercial Internet took shape. By the end of 1997, WorldCom was the largest provider of Internet backbone capacity in the country.
So, when WorldCom sought to acquire the second largest Internet backbone--MCI--in November 1997, the DoJ was concerned that the post-merger firm would control between 40-70% of the Internet backbone market. In early 1998, the Economic Policy Institute estimated that 62% of the entire Internet's revenue would need to traverse the MCI WorldCom backbone, and 50% of all ISPs would be dependent on access to the firm's backbone network.
A Flawed Theory Takes Root
GTE believed so strongly that the MCI-WorldCom merger threatened its ability to compete in both the Internet backbone, and long-distance, markets that it filed its own private antitrust suit to enjoin the MCI-WorldCom merger in May 1998. In GTE's Complaint, the company explains its concerns:
all of the major backbones . . . are . . . dependent upon each other for interconnection. They thus find it in their independent interests to cooperate to maintain and upgrade the capacity of interconnection among their networks in order to offer their customers ubiquitous, high-quality access to the whole Internet. . . . By concentrating . . . the two largest Internet backbone networks to create one dominant national network, the merger will give MCI-WorldCom a stranglehold over the burgeoning Internet and the incentive and ability to stifle competition from all other rival Internet backbone operators, including GTE.GTE Complaint, at ¶2.a. Interested readers should look at GTE's full Complaint, as (I promise) you'll find it all sounds very familiar.
GTE's case never made it to trial, because the facts of the Complaint would soon become less clear. In July of 1998, MCI agreed to spin off its own Internet backbone to Cable and Wireless; after which the DoJ cleared WorldCom's pending acquisition of MCI with a press release. The FCC issued its Order clearing the transaction soon after the DoJ's Press Release.
"So Much for Grand Efforts by Regulators to Dictate Outcomes"
MCI's divestiture of its Internet backbone didn't work out as the DoJ and FCC had hoped. There were soon allegations that MCI had "pulled a fast one," and had not provided C&W much more than the physical assets of its Internet backbone business. C&W sued MCI WorldCom in March of 1999.
Undeterred, WorldCom announced it was buying Sprint for $115B in October of the same year. In November of 1999, C&W aired its grievances at a Congressional Hearing on the Sprint/WCOM merger. A little over a month later, Carleen Hawn wrote an incredibly insightful short piece for Forbes, entitled "Swimming with Sharks."
In her article, Ms. Hawn recounts C&W's complaints, but notes significant industry disagreement about which side was to blame. According to Jim Crowe, founder of Level 3, the divestiture would never have worked as expected by DoJ, because C&W lacked a domestic U.S. network with which to interconnect the MCI backbone network. C&W would, therefore, have had to purchase domestic Internet transit capacity. (Note: this would have been right before Internet transit prices began a swift, steep, and inexorable, period of decline. See, Dr. Peering table of Internet transit prices.)
Thus, post-merger MCI WorldCom's market position was unaffected by the divestiture, as its share of the backbone market continued to grow faster than rivals. In January 2000, Hawn states, "MCI WorldCom is simply more dominant than ever," concluding, "so much for grand efforts by regulators to dictate outcomes."
A Dominant Gatekeeper . . . Isn't Abusive?
But, if the MCI backbone divestiture did nothing to diminish MCI WorldCom's dominance in the Internet backbone market, what was the outcome? If GTE's theory was correct, MCI WorldCom would now have "both the incentive and the ability to act opportunistically to degrade the quality of interconnection and increase costs for its rivals." GTE Complaint ¶23.
Apparently, though, even with 60% of the revenue-generating traffic on the Internet being dependent on its network, MCI WorldCom never found it profitable to act on its incentives/ability to degrade rivals' interconnection terms. Indeed, there's no evidence they--or any other ISP (either with respect to access or backbone transit)--has ever acted on such an incentive. But it would take more than a decade for a court to make this finding.
The Theory Goes to Court
There are two lasting legacies of GTE's theory of dominant ISP discrimination: 1) the general justification for the FCC's current Net Neutrality/Broadband Reclassification Order, and 2) Cogent's peering strategy. Beginning with its very first ISP peering dispute, with AOL in 2002, Cogent has been the torch-bearer for GTE's never-tested (at the time) theory. In fact, Cogent has wheeled out this argument every time it's been de-peered (which is a lot--partial list here), and most of the time it files something new at the FCC, or speaks to the press.
So, it was only a matter of time before Cogent tried to really test the GTE theory in an adjudicatory proceeding. In 2011, Cogent filed a complaint with the French competition authority, alleging, among other things, that France Telecom's peering ratio (of 2.5X) constituted anticompetitive discrimination, as was France Telecom's refusal to unilaterally add capacity in violation of the firm's prior peering agreement. Customers of France Telecom experienced congestion when downloading content from Cogent client, Megaupload.
In many ways the French competition authority was the most sympathetic forum for this claim. European competition law--with respect to dominant firm behavior--gives much more weight to preserving opportunities for smaller, and mid-size, firms (U.S. antitrust laws tend to focus primarily on economic efficiency). See here at pp. 5-6/16. French competition law is more favorable (than E.U. law) to smaller firms versus dominant rivals, and includes the notion of "abuse of a situation of economic dependence."
But, Cogent could not make the theory overcome its facts; real-life ISPs simply don't discriminate as predicted. The French competition authority ruled against Cogent. See summary here. Cogent appealed the decision, and a French appellate court affirmed, noting that peering was not an "essential facility," and is in no way functionally different from, or inferior to, transit. See summary here.
It Costs More $$ to Believe a Theory than Our Own Lyin' Eyes
In May of 1998, the commercial Internet had only been around for a few years. At the time, GTE's concern that a "dominant" firm would abuse its position to degrade access to, and raise prices of, interconnection facilities needed by its smaller rivals was not an unreasonable concern.
However, GTE's concern was immediately put to the test in actual market conditions, and it proved inaccurate. More recently, as noted, Cogent failed to convince a regulator, under the most lenient standards, that it was harmed by the dominant firm's observance of international peering standards. A French appellate court agreed, and confirmed this finding.
Yet the "dominant ISPs will harm consumers/competitors" theory--unlike the ancient astronaut theories--continues to pick up traction from sources that should be more skeptical. But, unlike the ancient astronaut theories, continued belief in the GTE theory is not harmless. Last week, in a policy memo, Hal Singer of the Progressive Policy Institute describes some of the many costs--in terms of services and innovations foreclosed, and investments forgone--of continuing to believe in the possibility of a theory that our "own lyin' eyes" have never seen happen.