May 11, 2015 11:25 AMOrder, the FCC justifies the need for the Order's pervasive regulations in essentially one statement, "broadband providers (including mobile broadband providers) have the economic incentives and technical ability to engage in practices that . . . harm other network providers, edge providers, and end users." Order ¶ 78. The Commission's discussion of the ISPs' incentives/ability to harm consumers and other market participants is almost as conclusory.
The FCC appeared focused on a result that required it to presume an uncompetitive broadband market. Supporting its premise, the FCC relies on citations from its 2010 Order, and some gerrymandered market shares, in which it defines "markets" by arbitrary selections of speed vs. consumer demand substitution. See, e.g., Order, n. 134. By ignoring broadband market performance, the Commission not only failed to understand that ISPs were unlikely to be the problem, but the FCC also missed a chance to conduct a more circumspect analysis of whether consumers could truly access the content of their choice online.
The FCC Didn't Consider Broadband Market Performance
The FCC states that, "[b]roadband providers may seek to gain economic advantages by favoring their own or affiliated content over other third-party sources." Order ¶ 82. The Commission offers less than a handful of specific examples ISPs "act[ing] to harm the open Internet." Order, n. 123.
Only in the Madison River example, was the ISP clearly seeking to favor its own service (long distance voice termination). It is worth noting, though, that the reason Madison River had an incentive to favor its circuit switched voice was because--as a rural ILEC--the FCC set Madison River's rates well in excess of cost; so its incentive was created by one FCC regulation and then preempted by another (later) FCC regulation.
Nonetheless, the best indicator of a market is performing competitively is whether it is responding to consumer demand by adding capacity, or whether it simply raises prices and takes more profits. Broadband speeds have consistently moved higher, actually following the Moore's Law trajectory. And, the Commission notes, broadband capital investment reached levels in 2013 that had previously only been seen during the telecom bubble. Order ¶ 2. Moreover, connected devices, bandwidth speeds, and user adoption of streaming services has soared. Order ¶ 9.
The FCC Didn't Consider the Evidence on ISP Incentives
The Commission recognizes that, "the growth of online streaming video services has spurred further evolution of the Internet." Order at ¶ 9. But, untethered by evidence to the contrary, the FCC leaps to the [wrong] conclusion that, "these video services directly confront the video businesses of the very companies that supply them broadband access to their customers." Id.
Almost a year ago, AT&T Chairman Randall Stephenson, explained why this theory didn't make sense for most ISPs. In his prepared testimony for the House and Senate Judiciary Committees about the AT&T's proposed acquisition of DirecTV, Stephenson states its motivation to acquire DirecTV is about trying to earn any profit on TV,
Today, 60 cents of every video dollar we earn goes straight to programmers, before we spend a penny to market our service, install a set top box, send a bill, or answer a customer's call. As a result, our video product is, on its own, unprofitable.Statement of Randall Stephenson, CEO and President, AT&T Inc., before the House Judiciary Committee, June 24th 2014 at p. 3 (emphasis added). Thus, the FCC's theory--that ISPs have an incentive to prevent consumers from accessing video content online, because the ISP would prefer to sell them the same content at a loss to the ISP--is simply untenable.
Even if the ISP does earn a profit on video, it would still not have any incentive to discourage their broadband customers from accessing online video content, unless it earns a greater profit from its video service than from its broadband service. This is not the case for Comcast, whose broadband revenues and company profits continue to boom, despite continued losses of video subscribers.
So, if the FCC's theory doesn't even make sense for the Prince of Darkness, then ISPs are unlikely to be the problem. But, why don't consumers have access to more content over the Internet?
Traditional Linear Content Owners Don't Have the Same Incentives As ISPs
Even though the three largest streaming video providers (Amazon, Hulu, and Netflix) have expanded their content through original programming, and consumers have embraced online streaming video, the fact is that consumers still don't have access to that many more online programming choices than they did in 2010. If you compare the most popular streaming sites in 2011, with what's available today, the only significant new entrants are Sling TV and HBO Now. Unfortunately, cord-cutting is more of a media headline than a consumer phenomenon.
At times, the FCC has seemed to (sort of) recognize the problem. A little over a year ago, Chairman Wheeler was telling broadcasters that he was looking out for them with strong net neutrality protections, and that they should embrace Internet distribution of their programming. Except for the few broadcast channels that are part of the Sling TV package, the Chairman's speech fell on deaf ears. Chairman Wheeler didn't seem to appreciate that--because the FCC ensures the broadcasters fat margins on retransmission fees (much like Madison River's terminating access margins)--they have no incentive to expand output!
Similarly, Chairman Wheeler understood that the linear content market had failed last summer, when he asked the CEO of TWC to resolve disputes between TWC's regional sports network (RSN), which carries the Los Angeles Dodgers, and other MVPDs serving the Dodger's home television market. Because of pricing disputes, when Chairman Wheeler wrote to TWC, a large majority of Dodgers' fans--4 months into the 2014 baseball season--could still not watch the team on TV.
Chairman Wheeler probably thought he understood TWC's incentives pretty well--the company had a merger with Comcast pending before the Commission--when he asked TWC to respond in a competitive manner to consumer demand. But, RSNs have powerful economic incentives to restrict output. Thus, Chairman Wheeler was, again, mistaken about incentives. TWC's merger with Comcast has come and gone, but 70% of the Los Angeles viewing market still cannot watch the Dodgers on TV or online.
A Question of Incentives
As of Friday, Chairman Wheeler was [still] telling cable ISPs they should "overcome their temptations" to favor their TV businesses over their broadband Internet services. Meanwhile, in an L.A. Times article yesterday, broadcast programmers candidly noted that, despite using public spectrum to distribute their content, they plan to favor even more of their own content over third party sources. Perhaps the Chairman was talking to the wrong group?
By now, you probably understand that I think the FCC would have been wise to spend some time thinking about whether the industries it regulates have incentives that are aligned with consumer welfare. Had the FCC thought about it, they probably didn't need to impose such pervasive regulations on ISPs. Likewise, if the FCC's rules are distorting the incentives of traditional TV programmers, then the FCC should eliminate these rules, also.
On the other hand, what if traditional linear programmers simply like their FCC incentives more than those of the competitive broadband Internet, and are simply in "harvest" mode (restricting output/raising prices in the face of a slow decline in demand)? Broadcasters aren't (usually) ISPs, so who will police them?
Certainly not the FCC. But, to be fair, neither have the DoJ or the FTC looked into the matter. However, some parties are looking out for consumers . . . and the answer may surprise you. We'll discuss further in the next post.