FTC Urges Caution on Net Neutrality Regulation

by on June 28, 2007 · 0 comments

The Federal Trade Commission is “unaware of any significant market failure or demonstrated consumer harm from conduct by broadband providers,” according to a Staff Report on Broadband Connectivity Competition Policy, which advises:

Policy makers should be wary of enacting regulation solely to prevent prospective harm to consumer welfare, particularly given the indeterminate effects on such welfare of potential conduct by broadband providers and the law enforcement structures that already exist.

The report indicates FTC staff believes it is “impossible to determine in the abstract” whether allowing content and applications providers (or even end users) to pay broadband providers for prioritized data transmission will be beneficial or harmful to consumer welfare. Similarly, staff feels broadband providers have “conflicting incentives” relating to blockage and discrimination against data from non-affiliated providers and that, in the abstract, “it is impossible to know which of these incentives would prove stronger for each broadband provider.”

For example, prioritization may provide benefits such as improved incentives for investment and innovation in networks and improved quality of content that require higher-quality data transmission, as opponents claim. Or, prioritization may reduce the incentives for innovation by content and applications providers, as proponents of net neutrality regulation claim. Similarly, the incentives of broadband providers

may cut both ways: for example, despite potentially having an incentive to favor affiliated content and applications, access providers have argued that they have an interest in providing access to a wide range of content and applications, which are essential complements to the services they sell.

Antitrust law recognizes that some conduct is always or nearly always injurious to competition and to consumers, but other conduct can be good or bad depending on the circumstances. The former, conduct that is always or nearly always bad, generally is deemed per se illegal under the antitrust laws (meaning that it is forbidden regardless of the circumstances), because bright-line tests are easier to administer. But conduct that has the potential to be either anticompetitive or procompetitive is analyzed under the rule of reason to determine the net effect on consumer welfare.
In recent years, economists have demonstrated that many forms of conduct assumed always to be anticompetitive in fact sometimes can be procompetitive. For a recent example, check out an opinion handed down by the Supreme Court today (Leegin Creative Leather Products, Inc. v. PSKS, Inc.) which concerns Leegin’s refusal to supply retailers who discount its products. Retail price maintenance has long been deemed per se illegal, but the Court noted that a significant body of research supports the view that while retail price maintenance tends to reduce intrabrand competition (various retailers competing to lower the price of a particular brand), it also may promote competition between different brands. The Supreme Court ruled that retail price maintenance now falls in the rule of reason category, meaning that the net effect will govern.

For the reasons cited in the FTC staff report, which I have briefly noted here, prioritization and differentiation of network traffic should receive rule of reason analysis, in my opinion, and apparently also in the view of the FTC staff. Proponents of net neutrality regulation appear to prefer making most prioritization and differentiation per se illegal. If policymakers reject that approach, as I think they should, where does that leave content and application providers and consumers?

According to the staff, the FTC has the authority and expertise to intervene to protect content and application providers and consumers if it needs to:

The competitive issues raised in the debate over network neutrality regulation are not new to antitrust law, which is well-equipped to analyze potential conduct and business arrangements involving broadband Internet access ….

The FTC has been involved in the Internet access area for over a decade and will continue to be involved in the evolving area of broadband access. The FTC Act is sufficiently flexible to allow the FTC to enforce the antitrust and consumer protection laws in most industries, including those involving new and ever-changing technologies. The fundamental principles of antitrust and consumer protection law and economics that we have applied for years are as relevant to the broadband industry as they are to other industries in our economy.

Therefore, if Congress does nothing, allegations of unfair prioritization and differentiation of network traffic are and will nevertheless be subject to rule of reason analysis under existing antitrust jurisprudence.

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