I just finished a second read-through of Chris Yoo’s excellent paper, “Network Neutrality and the Economics of Congestion.” It’s an excellent paper, and in this post I’m going to highlight some of the points I found most compelling. In a follow-up post I’ll offer a few criticisms of parts of the paper I didn’t find persuasive.
One point Yoo makes very well is that large companies’ ability to coerce their media environment is often overrated. He points out that people often overestimate the ability of media companies to dominate the online discussion. He points out, for example, that fears that the AOL Time Warner merger would become an unstoppable online juggernaut turned out to be overblown. The merged firm turned out to have little ability to shape the browsing habits of AOL customers, and AOL continued to bleed customers.
Similarly, Yoo makes the important point that when evaluating the ability of a broadband provider to coerce a website operator, it is the broadband company’s national market share, not its local market share, that matters:
application and content providers care about the total number of users they can reach. So long as their total potential customer base is sufficiently large, it does not really matter whether they are able to reach users in any particular city. This point is well illustrated by a series of recent decisions regarding the market for cable television programming. As the FCC and the D.C. Circuit recognized, a television programmer ’s viability does not depend on its ability to reach viewers in any particular localities, but rather on the total number of viewers it is able to reach nationwide. So long as a cable network can reach a sufficient number of viewers to ensure viability, the fact that a particular network owner may refuse carriage in any particular locality is of no consequence. The FCC has similarly rejected the notion that the local market power enjoyed by early cellular telephone providers posed any threat to the cellular telephone equipment market, since any one cellular provider represented a tiny fraction of the national equipment market. Simply put, it is national reach, not local reach, that matters. This in turn implies that the relevant geographic market is a national one, not a local one. What matters is not the percentage of broadband subscribers that any particular provider controls in any geographic area, but rather the percentage of a nationwide pool of subscribers that that provider
controls.Once the relevant market is properly defined in this manner, it becomes clear that the broadband market is too unconcentrated for vertical integration to pose a threat to competition. The standard measure of market concentration is the Hershman-Hirfindahl Index (HHI), which is calculated by summing the squares the market shares of each individual firm. The guidelines employed by the Justice Department and the Federal Trade Commission establish 1800 as the HHI threshold for determining when vertical integration would be a cause for anticompetitive concern. The FCC has applied an HHI threshold of 2600 in its recent review of mergers in the wireless industry. The concentration levels for the broadband industry as of September 2005 yields an HHI of only 1110, well below the thresholds identified above. The imminent arrival of 3G, WiFi, WiMax, BPL, and other new broadband technologies promises to deconcentrate this market still further in the near future.
To put this in concrete terms, if Verizon wants to twist Google’s arm into paying fees for the privilege of Google’s customers, Verizon’s relatively limited national market share (about 9 percent) doesn’t give it a whole lot of leverage. It is, of course, important to Google to be able to reach Verizon’s customers, but Google has enough opportunities in the other 91 percent of the broadband market that it wouldn’t be catastrophic if Verizon blocked its customers from accessing Google sites. Conversely, Google would have a strong incentive not to accede to Verizon’s demands because if it did so it would immediately face demands from the other 91 percent of the broadband market for similar payoffs. Which mens that Verizon, knowing that blocking Google would be a PR disaster for itself and that Google would be unlikely to capitulate quickly, isn’t likely to try such a stunt.
The analysis would be different if we had a single firm that controlled a significant chunk of the broadband market—say 50 percent. But there aren’t any firms like that. The largest appear to be Comcast and AT&T, with about 20 percent each. That’s a small enough market share that they’re unlikely to have too much leverage over web providers, which makes me think it unlikely that broadband providers would have the ability to unilaterally impose a “server pays” regime on them.
The Technology Liberation Front is the tech policy blog dedicated to keeping politicians' hands off the 'net and everything else related to technology.