Broadband & Neutrality Regulation

Forbes commentary on Susan Crawford’s “broadband monopoly” thesis

by on March 4, 2013 · 3 comments

Over at Forbes we have a lengthy piece discussing “10 Reasons To Be More Optimistic About Broadband Than Susan Crawford Is.” Crawford has become the unofficial spokesman for a budding campaign to reshape broadband. She sees cable companies monopolizing broadband, charging too much, withholding content and keeping speeds low, all in order to suppress disruptive innovation — and argues for imposing 19th century common carriage regulation on the Internet. We begin (we expect to contribute much more to this discussion in the future) to explain both why her premises are erroneous and also why her proscription is faulty. Here’s a taste:

Things in the US today are better than Crawford claims. While Crawford claims that broadband is faster and cheaper in other developed countries, her statistics are convincingly disputed. She neglects to mention the significant subsidies used to build out those networks. Crawford’s model is Europe, but as Europeans acknowledge, “beyond 100 Mbps supply will be very difficult and expensive. Western Europe may be forced into a second fibre build out earlier than expected, or will find themselves within the slow lane in 3-5 years time.” And while “blazing fast” broadband might be important for some users, broadband speeds in the US are plenty fast enough to satisfy most users. Consumers are willing to pay for speed, but, apparently, have little interest in paying for the sort of speed Crawford deems essential. This isn’t surprising. As the LSE study cited above notes, “most new activities made possible by broadband are already possible with basic or fast broadband: higher speeds mainly allow the same things to happen faster or with higher quality, while the extra costs of providing higher speeds to everyone are very significant.”

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What Does Netflix’s Decision to Block Internet Content Tell Us About Internet Policy?

by on January 23, 2013 · 9 comments

I posted an analysis of Netflix’s new Internet blocking strategy last week. I concluded that Netflix is attempting to leverage net neutrality regulations to gain an anticompetitive price advantage in the marketplace. In my view, this harm is an unintended consequence of the FCC’s decision to abandon its free market approach to the Internet and adopt net neutrality rules that enhance the market power of so-called “edge” companies. As Neil Stevens said in his Tech at Night column: “Told you so.”

Harold Feld apparently agrees that Netflix is threatening competition, and he has is own case of Cassandrafreude (“told you so,” but with a smile). In his view, however, the problem is that the FCC didn’t go far enough. He believes this situation could have been avoided if the FCC had applied common carrier regulation to the Internet (also known as Title II), which would regulate the Internet using statutes written for the old monopoly telephone network.

Though Harold Feld and I disagree on the appropriate level of Internet regulation (I would prefer less rather than more), it appears we do agree on several issues raised by Netflix’s decision to block access to its Super HD service. The unintended consequence of Netflix’s decision is that the ensuing debate has clarified some important Internet policy issues. Continue reading →

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Screw results, motives matter

by on January 21, 2013 · 4 comments

“Mixed Response to Comcast in Expanding Net Access.” That’s a headline in The New York Times today.

What an utterly disgraceful hit piece. According to the article, participants in Comcast’s broadband program for low income families, as well as school administrators and city officials, are happy with the program. So what’s this “mixed response”?

But as the program gains popularity, the company has come under criticism, accused of overreaching in its interactions with local communities — handing out brochures with the company logo during parent-teacher nights at public schools, for instance, or enlisting teachers and pastors to spread the word to students and congregations.

That’s the sixth paragraph, and its passive voice foreshadows that we’re never told who is criticizing nor what exactly is the critique (besides, perhaps, the fact that Comcast is a for-profit business and that it is advertising its low-income program). The gall! How dare Comcast inform people about a product offering! And these teachers and pastors being “enlisted” by Comcast, do they really think the program might benefit their students and congregations?

Then there’s this:

Broadband service is “a natural monopoly” controlled by a handful of private companies, said Mr. Karaganis, of the American Assembly, adding that Internet Essentials gave Comcast access to people in community settings where it could use the lure of low prices to tap into a new consumer base.

Now, I really appreciate and respect Joe Karaganis’s research on copyright, but he needs to look up the definition of “natural monopoly.” If Comcast is so powerful, it’s kind of odd that they need to use “the lure of low prices to tap into a new consumer base.” Oh, the lure! Kvorka! What this really shows is how price discrimination can serve to benefit lower-income folks (as well as those who don’t value broadband very much).

No, Comcast isn’t doing anything “out of the goodness of their hearts,” but why should that matter when what they’re doing is benefitting everyone involved?

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Toward a Technology “Watchful Waiting” Principle

by on January 17, 2013 · 2 comments

When the smoke cleared and I found myself half caught-up on sleep, the information and sensory overload that was CES 2013 had ended.

There was a kind of split-personality to how I approached the event this year. Monday through Wednesday was spent in conference tracks, most of all the excellent Innovation Policy Summit put together by the Consumer Electronics Association. (Kudos again to Gary Shapiro, Michael Petricone and their team of logistics judo masters.)

The Summit has become an important annual event bringing together legislators, regulators, industry and advocates to help solidify the technology policy agenda for the coming year and, in this case, a new Congress.

I spent Thursday and Friday on the show floor, looking in particular for technologies that satisfy what I coined the The Law of Disruption: social, political, and economic systems change incrementally, but technology changes exponentially.

What I found, as I wrote in a long post-mortem for Forbes, is that such technologies are well-represented at CES, but are mostly found at the edges of the show–literally. Continue reading →

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Netflix Blocking Internet Access to HD Movies

by on January 17, 2013 · 9 comments

Unfortunately, most consumers won’t realize that Netflix is trying to impose its costs on all Internet consumers to gain an anticompetitive price advantage against its over-the-top competitors.

At the Consumer Electronic Show two weeks ago, Netflix announced that it would block consumer access to high definition and 3D movies (HD) for customers of Internet service providers (ISPs) that Netflix disfavors. Netflix’s goal is to coerce ISPs into paying for a free Internet fast lane for Netflix content. If Netflix succeeds, it would harm Internet consumers and competition among video streaming providers. It would also fundamentally alter the economics and openness of the Internet, “where consumers make their own choices about what applications and services to use and are free to decide what content they want to access, create, or share with others.”

Ironically, Netflix’s strategy is a variant of the doomsday narrative spun by net neutrality activists over the last decade. Their narrative assumes ISPs will use their gatekeeper control to block their customers from accessing Internet content distributed by competitors. Of course, ISPs have never blocked consumer access to competitive Internet content. Now that the FCC has distorted the Internet marketplace through the adoption of asymmetric net neutrality rules, Netflix, the dominant streaming video provider, has decided to block consumer access to its content.

This may not seem like a big deal given the relatively limited HD content currently available on Netflix. But that’s about to change in a very big way. Netflix recently announced a new multi-year licensing agreement that makes it the “exclusive American subscription TV service for first run live-action and animated features from the Walt Disney Studios.” In addition to Disney-branded content (e.g., The Lion King), the deal includes content produced by Pixar (e.g., Brave), Lucasfilm (e.g., Star Wars), and Marvel (e.g., The Avengers). Netflix also announced a multi-year deal with Turner Broadcasting and Warner Bros. that includes the Cartoon Network and exclusive distribution rights to TNT’s television series Dallas. As an analyst recently told Ars Technica, “These movies, if you’ve got young kids—you’ve got to have Netflix.”

Netflix has decided to use this new market power to force ISPs to pay for its own Internet fast lane. In classic double-speak, Netflix calls its fast lane the “Netflix Open Connect” content delivery network (CDN). Though Netflix uses the word “open” to describe its CDN, it is not part of the open Internet. It is only “open” to Netflix for the delivery of its content, and it is only “open” to ISPs who connect to it on terms dictated by Netflix. Continue reading →

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Daniel Lyons on broadband pricing and data caps

by on January 15, 2013 · 0 comments

Daniel Lyons, assistant professor at Boston College Law School, discusses his new Mercatus Center Working Paper, “The Impact of Data Caps and Other Forms of Usage-Based Pricing for Broadband Access.” Describing the system most of us are used to as an all-you-can-eat version of internet access, Lyons explains why it might make more sense for Internet Service Providers (ISPs) to transition to usage-based pricing, a type of metered model for broadband.

According to Lyons, the fixed costs of building up a broadband network are so great that any attempt to create an equitable cost distribution that can recoup these costs forces lighter users to subsidize heavier users. These types of flat rate payment programs often can be a barrier to low-income users. Instead, Lyons advocates for a usage-based system. In response to concerns about possible anti-competitive behavior by ISPs, Lyons further proposes that enforcement of policy transparency among ISPs might be an appropriate role for government.

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Crawford’s Misplaced Nostalgia for Utility Regulation

by on January 10, 2013 · 0 comments

In her new book, Captive Audience, Susan Crawford makes the same argument that the lawyers for AT&T made in Judge Harold H. Greene’s courtroom in response to the government’s antitrust complaint beginning in 1981, i.e., that telephone service was a “natural monopoly.”  In those days, AT&T wanted regulation and hated competition, which is the same as Crawford’s perspective with respect to broadband now.  Here is what she said today on the Diane Rehm Show:

Diane Rehm: “Is regulation the next step?”
Susan Crawford: “It always has been for these industries, because it really doesn’t make sense to have more than one wire into our homes.  It is a very expensive thing to install; once it’s there, it has to be kept up to the highest level of maintenance, it has to allow for lots of competition at the retail level—across this wholesale facility—and it has to be available to consumers at reasonable cost.  That kind of result isn’t produced by the marketplace; it doesn’t happen by magic, because … when you can divide markets, and cooperate, you’re not going to come up with the best solution for consumers.

In her book, Crawford candidly says that “America needs to move to a utility model” for broadband … and “stop treating this commodity as if it were a first-run art film…”

It’s time for a stroll down memory lane.

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Old arguments about usage-based pricing are still wrong

by on December 21, 2012 · 4 comments

The following is a guest post by Daniel Lyons, an assistant professor at Boston College Law School who specializes in the areas of property, telecommunications and administrative law.

While much of the broadband world anxiously awaits the DC Circuit’s net neutrality ruling, consumer groups have quietly begun laying the groundwork for their next big offensive, this time against usage-based broadband pricing. That movement took a significant step forward this week as the New America Foundation released a report criticizing data caps, and as Oregon Senator Ron Wyden introduced a bill that would require the Federal Communications Commission to regulate broadband prices.

But as this blog has noted before, these efforts are misguided. Usage-based pricing plans are not inherently anti-consumer or anticompetitive. Rather, they reflect different pricing strategies through which a broadband company may recover its costs from its customer base and fund future infrastructure investment. Usage-based pricing allows broadband providers to force heavier users to contribute more toward the fixed costs of building and maintaining a network. Senator Wyden’s proposal would deny providers this freedom, meaning that lighter users will likely pay more for broadband access and low-income consumers who cannot afford a costly unlimited broadband plan will be left on the wrong side of the digital divide.

In a working paper I published with the Mercatus Center in October I had already debunked the arguments that the New America Foundation relies upon to make their case. NAF suggests that broadband providers should be unconcerned about costs because gross margins on broadband service are high, and the marginal cost of data transport is relatively low and falling. This is largely true, but also largely irrelevant. For broadband providers, as many other networked industries, the challenge is generating sufficient revenue to recover their fixed costs and fund future network investment. Broadband providers have invested over $300 billion in private capital in the past decade to build and upgrade the nation’s broadband networks. And because Internet traffic is expected to triple by 2016, analysts expect them to continue to invest $30–40 billion annually to expand and upgrade their networks.

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Tears for Tiers: Wyden’s “Data Cap” Restrictions Would Hurt, not Help, Internet Users

by on December 20, 2012 · 1 comment

By Geoffrey Manne & Berin Szoka

As Democrats insist that income taxes on the 1% must go up in the name of fairness, one Democratic Senator wants to make sure that the 1% of heaviest Internet users pay the same price as the rest of us. It’s ironic how confused social justice gets when the Internet’s involved.

Senator Ron Wyden is beloved by defenders of Internet freedom, most notably for blocking the Protect IP bill—sister to the more infamous SOPA—in the Senate. He’s widely celebrated as one of the most tech-savvy members of Congress. But his latest bill, the “Data Cap Integrity Act,” is a bizarre, reverse-Robin Hood form of price control for broadband. It should offend those who defend Internet freedom just as much as SOPA did.

Wyden worries that “data caps” will discourage Internet use and allow “Internet providers to extract monopoly rents,” quoting a New York Times editorial from July that stirred up a tempest in a teapot. But his fears are straw men, based on four false premises.

First, US ISPs aren’t “capping” anyone’s broadband; they’re experimenting with usage-based pricing—service tiers. If you want more than the basic tier, your usage isn’t capped: you can always pay more for more bandwidth. But few users will actually exceed that basic tier. For example, Comcast’s basic tier, 300 GB/month, is so generous that 98.5% of users will not exceed it. That’s enough for 130 hours of HD video each month (two full-length movies a day) or between 300 and 1000 hours of standard (compressed) video streaming.

Second, Wyden sets up a false dichotomy: Caps (or tiers, more accurately) are, according to Wyden, “appropriate if they are carefully constructed to manage network congestion,” but apparently for Wyden the only alternative explanation for usage-based pricing is extraction of monopoly rents. This simply isn’t the case, and propagating that fallacy risks chilling investment in network infrastructure. In fact, usage-based pricing allows networks to charge heavy users more, thereby recovering more costs and actually reducing prices for the majority of us who don’t need more bandwidth than the basic tier permits—and whose usage is effectively subsidized by those few who do. Unfortunately, Wyden’s bill wouldn’t allow pricing structures based on cost recovery—only network congestion. So, for example, an ISP might be allowed to price usage during times of peak congestion, but couldn’t simply offer a lower price for the basic tier to light users.

That’s nuts—from the perspective of social justice as well as basic economic rationality. Even as the FCC was issuing its famous Net Neutrality regulations, the agency rejected proposals to ban usage-based pricing, explaining:

prohibiting tiered or usage-based pricing and requiring all subscribers to pay the same amount for broadband service, regardless of the performance or usage of the service, would force lighter end users of the network to subsidize heavier end users. It would also foreclose practices that may appropriately align incentives to encourage efficient use of networks.

It is unclear why Senator Wyden thinks the FCC—no friend of broadband “monopolists”—has this wrong. Continue reading →

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Ending Transaction ‘Mission Creep’ at the FCC

by on December 14, 2012 · 2 comments

by Larry Downes and Geoffrey A. Manne

Now that the election is over, the Federal Communications Commission is returning to the important but painfully slow business of updating its spectrum management policies for the 21st century. That includes a process the agency started in September to formalize its dangerously unstructured role in reviewing mergers and other large transactions in the communications industry.

This followed growing concern about “mission creep” at the FCC, which, in deals such as those between Comcast and NBCUniversal, AT&T and T-Mobile USA, and Verizon Wireless and SpectrumCo, has repeatedly been caught with its thumb on the scales of what is supposed to be a balance between private markets and what the Communications Act refers to as the “public interest.” Continue reading →

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