Tim Lee and I are narrowing in on our core disagreement (or, at any rate, one of them) with respect to cable broadband regulation. I argued that certain unpopular price discrimination techniques, such as broadband caps, have efficiency rationales. After some apparent talking past each other, Tim has clarified that he agrees with my argument as far as it goes, but his real concern is that cable companies will prevent new forms of content from emerging.
Internet video isn’t just a lower-cost source for the same kind of video content you can get from Comcast. Internet video has the potential to offer totally new kinds of video content that wouldn’t be available on Comcast at any price.
As Tim put it in a comment on my last post,
But the point is that the product Comcast delivers is not homogenous. The YouTube video “Charlie Bit My Finger” and the TV program “Mad Men” have both been watched by hundreds of millions of people, but the process of producing and distributing them is radically different. A vertically integrated video platform is unlikely to deliver “Charlie Bit My Finger” to users because the transaction costs of negotiating carriage exceeds the benefits the producers would get. Hence, if vertical integration had prevented the emergence of Internet video a decade ago, 400+ million users would have been deprived of the opportunity to watch it.
I don’t see any way your economic model can account for this kind of difference, which is qualitative rather than merely quantitative. Vertical integration doesn’t just affect “how much” output and who gets paid for it, it also has powerful effects on the kinds of content and services that get produced. And in my view, that’s more important in the long run. By itself, Charlie Bit My FInger isn’t so important, but YouTube the platform is tremendously important.
Let me state at the outset that I agree with Tim that the opportunity to discover new kinds of amateur and professional content, such as viral videos on YouTube, is important. However, the reason I did not include content diversity in my model is because it’s not immediately clear to me how it’s relevant.
Following Tim’s lead, I’m going to try to be as concrete as possible. Let’s suppose that Comcast were an unregulated monopoly with substantial market power in some areas. What kinds of content would it have an incentive to block? The most obvious answer is ESPN. Comcast owns NBC Sports Network, but ESPN is by far the dominant player in sports broadcasting. Comcast carries ESPN 1 through ocho, at considerable expense, because its customers demand ESPN. If Comcast really were an unconstrained monopolist, their incentive would be to drop all ESPN channels, block access to ESPN streaming, and promote its own sports channels as a substitute.
If NBC Sports Network were a good substitute for ESPN, which it clearly is not at the moment, this move would benefit Comcast. (Counterintuitively, if it were a perfect substitute for ESPN, it would necessarily also benefit Comcast customers, who would be spared a double monopoly problem.) Comcast would gain at least ESPN’s old monopoly rent, possibly more.
OK, all this arguably sounds bad, at least if NBC Sports Network is not a really good substitute for ESPN. And it clearly is not Comcast’s situation, since, without regulatory interference, they recently expanded consumer access to ESPN on the iPad, which I enjoy watching from time to time. But the bottom line is that even though Comcast might have an incentive, under some circumstances, to block certain kinds of content for which it produces a close substitute, I think Tim would agree that this is not the kind of scenario that is truly worrisome.
What worries Tim is Comcast blocking YouTube or newer, heretofore undiscovered forms of content. But here’s the rub: Comcast benefits from the existence of YouTube. If users get consumer surplus from watching YouTube videos, that’s great because Comcast can raise its price to try to capture some of that consumer surplus. YouTube increases the demand for what Comcast already owns, its cable infrastructure that users must go through to get online. Similarly, if some nascent form of online content starts taking off, that will also benefit Comcast. And if the new form of content is bandwidth-intensive, Comcast will have an incentive to revisit its price discrimination scheme in order to ensure that it is capturing as much of the surplus as possible. There is no realistic scenario I am aware of in which Comcast has an incentive to block or inhibit altogether new types of content.
For all the worry about “gatekeepers” on the Internet, gatekeepers do not behave malevolently or randomly. As I try to underscore in all my posts on broadband, digital economics are frequently counterintuitive, so maybe it’s not surprising that some on the Internet perceive gatekeepers as evil or unpredictable. Furthermore, I have no doubt that there are some instances where the effect of gatekeepers is negative. But I think that if we temper our assessment with realistic assumptions about incentives, the case for regulating the cable industry on content diversity grounds is pretty weak.