August 2006

The Chairman of the Federal Trade Commission made a significant contribution to understanding the proper role of government in ensuring net neutrality. Speaking at the Progress & Freedom Foundation’s Aspen Summit this week, Deborah Platt Majoras cited the principle that, absent clear and specific evidence of market failure or consumer harm, policymakers should not enact blanket prohibitions of particular business models or conduct.

Second, she reminds us that broadband Internet access services are within the FTC’s jurisdiction and that the agency’s powers are proven. The FTC has successfully targeted Internet service providers who have allegedly enganged in deceptive practices and it has also required a cable system to provide open access to Internet service providers. This track record makes it pretty clear the FTC not only has the power but it also has the inclination to preserve openness and other values associated with the Internet. The allegation is that the D-word (deregulation) is coming to broadband services. Aside from the FTC, the FCC and the Antitrust Division also have jurisdiction over broadband services. Contrary to what one might think from listening to the appeals of net neutrality advocates, there are three levels of government oversight of broadband services.

Third, Majoras acknowledged that important questions have been raised and more information is needed. She announced the formation of an Internet Access Task Force to examine issues related to net neutrality and other matters. Net neutrality has been a debate about hypotheticals, which is part of the reason it has seemed so unproductive. This task force will be made up of economists and attorneys from throughout the FTC who are competition and consumer protection experts. Unlike the FCC, which only does communications, the FTC has wide-ranging experience and expertise arising from their involvement in every sector of the economy. This makes the FTC, perhaps, less beholden to some of the passions and prejudices which animate the special interests that have a dog in this fight. The FTC’s involvement will probably contribute greatly to the debate. With this kind of comprehensive look at all the facts underway, I’ll bet many-to-most in Congress will prefer to review the findings before they cast a vote.
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See: “The Federal Trade Commission in the Online World: Promoting Competition and Protecting Consumers,” Remarks by Deborah Platt Majoras, Chairman, Federal Trade Commission, Progress & Freedom Foundation’s Aspen Summit, August 21, 2006

See: “PREPARED STATEMENT OF THE FEDERAL TRADE COMMISSION before the COMMITTEE ON THE JUDICIARY UNITED STATES SENATE on FTC JURISDICTION OVER BROADBAND INTERNET ACCESS SERVICES,” by William E. Kovacic, Commissioner, Washington, D.C., June 14, 2006

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Critics claimed broadband access is a duopoly (a market in which there are only two providers) but this is technically inaccurate in much of the country so now the complaint is that 98 per cent of broadband customers receive their service from either the telephone company or the cable company. Even this criticism is irrelevant. Consumer harm occurs where prices are excessive or quality is deficient. In the case of broadband, competition is leading to lower prices and higher bandwidth.

Most economists agree it’s misleading to read too much into market shares, although I could point out that regional bell operating companies–the main targets of net neutrality regulation–report only 39.3% of total high-speed connections and that this is far less than a dominant position (other providers who are not telephone companies are lumped together in the FCC’s broadband status report). More important is whether consumers could vote with their feet if an incumbent provider abuses its customer relationships. They could if there are alternate providers or new providers could enter the market. According to the FCC, satellite providers have at least some presence in 88% of the nation’s zip codes, ADSL in 82% and cable modem in 57%. These numbers suggest a lot of consumers have more competitive choices than the critics like to point to. Other technologies, such as fixed and mobile wireless (cellular, PCS and WiMAX) and power line, are growing fast and have enormous potential. They prove that new providers can enter the market.

Broadband is spreading rapidly, according to the FCC. High-speed lines increased by 18% during the second half of 2005 compared to a 12% increase during the first half of 2005. This wouldn’t be happening if broadband providers were gouging their customers or restricting their choices. In order to recoup their multi-billion dollar investments, the providers need to attract all the traffic they can.

The report also says that 99% of the nation’s zip codes have at least one provider who serves at least one customer, and that 99% of the nation’s population lives in those zip codes. Most would agree if only one household or business or a privileged handful have a choice of competitors, that’s a problem. The numbers are actually more positive and the methodology used to gather them more useful than it seems. Cable and telephone networks are never built to serve small groups of people. Networks are capital intensive with high fixed costs, so the cost of bringing on an additional user is always lower than it was for the most recent user. If you have a network you want to build it out as fast as you can, because every additional customer will generate a higher profit margin than the one before. Satellite and wireless providers are capable of serving small groups or even only one customer in an entire zip code, but the fact is they market their services widely and have no incentive to market in such a way as to manipulate the statistics that the FCC gathers in this report.

Duopoly is one of those frightening terms that can either be meaningful or meaningless. In the context of broadband access services, it is meaningless.

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See: “High-Speed Services for Internet Access: Status as of December 31, 2005,” Report of the FCC’s Industry Analysis and Technology Division, Wireline Competition Bureau, July 2006

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Prompted by the good discussion over on my recent ‘Lack of Competition’ Meme post, I’ve just spent some time looking over other posts here on TLF for articulation of why we seem to be so intransigent about net neutrality regulation.

I think it’s the consensus among TLFers that regulation is a poor way of getting the best delivery of bits to end-users. There are some good posts, but I couldn’t find the one or two that clearly show why we so prefer competition to regulation for solving this problem.

So here’s a quick summary of my thinking about why not regulation:

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