Articles by Eli Dourado 
Eli is a research fellow at the Mercatus Center at George Mason University with the Technology Policy Program. His research focuses on Internet governance, the economics of technology, and political economy. His personal site is elidourado.com.
In my [last update on WCIT](http://techliberation.com/2012/06/20/wcitleaks-gets-results/), I noted that due to pressure generated by WCITLeaks, the Secretary-General of the ITU promised to make a recommendation to the ITU’s Council to open up access to WCIT preparatory documents. Here is what has happened since then:
– Secretary-General Touré indeed made his recommendation to the Council.
– The Council responded by releasing a single document, TD-64, which has already been on WCITLeaks for weeks. Indeed, it was the first document we posted.
– The ITU issued a [press release](http://www.itu.int/net/pressoffice/press_releases/2012/46.aspx) declaring this to be a “landmark decision.”
As I [told Talking Points Memo](http://idealab.talkingpointsmemo.com/2012/07/un-telecom-agency-releases-secret-treaty-critics-unswayed.php), I am not impressed by the ITU’s landmark decision. In fact, I am more convinced than ever that the ITU is too out of touch to be trusted with any role in Internet governance.
Consider these quotes from Secretary-General Touré at May’s WSIS Forum, [highlighted by Bill Smith](http://www.circleid.com/posts/20120723_itu_landmark_decisions/) at CircleID:
– “The ITU is as transparent as organizations are.”
– “The transparency of the ITU is not something that you can question.”
– “We don’t really have too much to learn from anybody about multi-stakeholderism because we almost invented it.”
Troubling, no?
If you would like to see first-hand how transparent the ITU is, you can [visit its site and download TD-64](http://www.itu.int/en/wcit-12/Pages/public.aspx), the “draft of the future ITRs.” Then go to [WCITLeaks.org](http://wcitleaks.org/) to read all the other documents it wants to keep from you.
I’ve argued (here and here, for instance) against worrying too much about the monopolization of Internet access. Broadband is pretty clearly an industry in which there are increasing returns to scale, and when returns to scale are severe enough, that results in natural monopoly. There are not clear welfare gains from regulatory solutions to natural monopoly problems generally, and broadband in particular is a case where many of the problems associated with monopolization are ameliorated by price discrimination.
Nevertheless, I accept that most people are not persuaded by this logic. Let me try a different tack, explaining what I would expect to see if profit-centered monopolists were really as bad for consumers as their critics claim.
The answer can be summed up in one word: mutuals. Mutual companies are not especially common in today’s economy, but they are worth pondering at some length. Mutuals are firms in which customers, in virtue of their ongoing patronage of the firm, are also its owners. A mutual company generally has no other shareholders to please, and it does not typically distribute dividends. Instead, if it makes a profit it will distribute it to its customers in the form of lower prices in the future.
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This morning, the Secretary-General of the ITU, Hamadoun Touré, [gave a speech at the WCIT Council Working Group](http://www.itu.int/en/osg/speeches/Pages/2012-06-20.aspx) meeting in Geneva in which he said,
> It has come as a surprise — and I have to say as a great disappointment — to see that some of those who have had access to proposals presented to this working group have gone on to publicly mis-state or distort them in public forums, sometimes to the point of caricature.
> These distortions and mis-statements could be found plausible by credulous members of the public, and could even be used to influence national parliaments, given that the documents themselves are not officially available — in spite of recent developments, **including the leaking of Document TD 64.**
> As many of you surely know, a group of civil society organizations has written to me to request public access to the proposals under discussion.
> **I would therefore be grateful if you could consider this matter carefully, as I intend to make a recommendation to the forthcoming session of Council regarding open access to these documents, and in particular future versions of TD 64.**
> I would also be grateful if you would consider the opportunity of conducting an open consultation regarding the ITRs. I also intend to make a recommendation to Council in this regard as well.
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That is the title of my [new working paper](http://mercatus.org/publication/internet-security-without-law-how-service-providers-create-order-online), out today from Mercatus. The abstract:
> Lichtman and Posner argue that legal immunity for Internet service providers (ISPs) is inefficient on standard law and economics grounds. They advocate indirect liability for ISPs for malware transmitted on their networks. While their argument accurately applies the conventional law and economics toolkit, it ignores the informal institutions that have arisen among ISPs to mitigate the harm caused by malware and botnets. These informal institutions carry out the functions of a formal legal system—they establish and enforce rules for the prevention, punishment, and redress of cybersecurity-related harms.
> In this paper, I document the informal institutions that enforce network security norms on the Internet. I discuss the enforcement mechanisms and monitoring tools that ISPs have at their disposal, as well as the fact that ISPs have borne significant costs to reduce malware, despite their lack of formal legal liability. I argue that these informal institutions perform much better than a regime of formal indirect liability. The paper concludes by discussing how the fact that legal polycentricity is more widespread than is often recognized should affect law and economics scholarship.
While I frame the paper as a reply to Lichtman and Posner, I think it also conveys information that is relevant to the debate over CISPA and related Internet security bills. Most politicians and commentators do not understand the extent to which Internet security is peer-produced, or why security institutions have developed in the way they have. I hope that my paper will lead to a greater appreciation of the role of bottom-up governance institutions on the Internet and beyond.
Comments on the paper are welcome!
As Jerry noted [ten days ago](http://jerrybrito.org/post/24687446662/an-update-on-wcitleaks-org), [our little side project](http://wcitleaks.org/) got some good press right after we launched it. I am delighted to report that the media love continues. On Saturday, WCITLeaks was covered by [Talking Points Memo](http://idealab.talkingpointsmemo.com/2012/06/un-proposals-to-regulate-internet-are-troubling-leaked-documents-reveal.php), and a [Wall Street Journal article](http://online.wsj.com/article/SB10001424052702303822204577470532859210296.html) appeared online last night and in print this morning.
I think it’s great that both left- and right-of-center publications are covering WCIT and the threat to our online freedoms posed by international bureaucracy. But I worry that people will infer that since this is not a left vs. right issue, it must be a USA vs. the world issue. This is an unhelpful way to look at it.
**This is an Internet users vs. their governments issue.** Who benefits from increased ITU oversight of the Internet? Certainly not ordinary users in foreign countries, who would then be censored and spied upon by their governments with full international approval. The winners would be autocratic regimes, not their subjects. And let’s not pretend the US government is innocent on this score; it intercepts and records international Internet traffic all the time, and the SOPA/PIPA kerfuffle shows how much some interests, especially Big Content, want to use the government to censor the web.
The bottom line is that yes, the US should walk away from WCIT, but not because the Internet is our toy and we want to make the rules for the rest of the world. The US should walk away from WCIT as part of a repentant rejection of Internet policy under Bush and Obama, which has consistently carved out a greater role for the government online. I hope that the awareness we raise through WCITLeaks will not only highlight how foolish the US government is for playing the lose-lose game with the ITU, but how hypocritical it is for preaching net freedom while spying on, censoring, and regulating its own citizens online.
Today, WCITLeaks.org posted a new document called TD-62. It is a compilation of all the proposals for modification of the International Telecommunication Regulations (ITRs), which will be renegotiated at WCIT in Dubai this December. Some of the most troubling proposals include:
- The modification of section 1.4 and addition of section 3.5, which would make some or all ITU-T “Recommendations” mandatory. ITU-T “Recommendations” compete with standards bodies like the Internet Engineering Task Force (IETF), which proposes new standards for protocols and best practices on a completely voluntary and transparent basis.
- The modification of section 2.2 to explicitly include Internet traffic termination as a regulated telecommunication service. Under the status quo, Internet traffic is completely exempt from regulation under the ITRs because it is a “private arrangement” under article 9. If this proposal—supported by Russia and Iran—were adopted, Internet traffic would be metered along national boundaries and billed to the originator of the traffic, as is currently done with international telephone calls. This would create a new revenue stream for corrupt, autocratic regimes and raise the cost of accessing international websites and information on the Internet.
- The addition of a new section 2.13 to define spam in the ITRs. This would create an international legal excuse for governments to inspect our emails. This provision is supported by Russia, several Arab states, and Rwanda.
- The addition of a new section 3.8, the text of which is still undefined, that would give the ITU a role in allocating Internet addresses. The Internet Society points out in a comment that this “would be disruptive to the existing, successful mechanism for allocating/distributing IPv6 addresses.”
- The modification of section 4.3, subsection a) to introduce content regulation, starting with spam and malware, in the ITRs for the first time. The ITRs have always been about the pipes, not the content that flows through them. As the US delegation comments, “this text suggests that the ITU has a role in content related issues. We do not believe it does.” This is dangerous because many UN members do not have the same appreciation for freedom of speech that many of us do.
- The addition of a new section 8.2 to regulate online crime. Again, this would introduce content regulation into the ITRs.
- The addition of a new section 8.5, proposed by China, that would give member states what the Internet Society describes as a “a very active and inappropriate role in patrolling and enforcing newly defined standards of behaviour on telecommunication and Internet networks and in services.”
These proposals show that many ITU member states want to use international agreements to regulate the Internet by crowding out bottom-up institutions, imposing charges for international communication, and controlling the content that consumers can access online.
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,
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Tim Lee responds to my last post on net neutrality by invoking one of my favorite economists, Friedrich Hayek. As a matter of logic, a perfectly price discriminating monopoly can be as efficient as a competitive industry, at least in a static sense, but Tim wonders if any firm can ever know enough to price discriminate well, and whether in a dynamic sense these outcomes can really be equated.
In short, a market involving numerous competing over-the-top video providers will be fundamentally, qualitatively different from a market in which one or two large broadband incumbents decides which video content to provide to consumers. In the long run, the open Internet is likely to offer a radically broader range of video content than any single cable company’s proprietary video service, just as is true for text and audio content today. But Eli’s model can’t accomodate this difference, because it requires us to treat content as homogenous and service providers as omniscient in order to make the math tractable.
It’s a fair point that a basic price discrimination model like a simple graph with demand and marginal cost is not going to capture the texture of economic change over time. Nevertheless, I think Tim’s criticism is misplaced, and in fact it’s in a dynamic sense that laissez-faire really shines. Here are a few reasons:
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A lot of people are talking about this New York Times article on net neutrality, which highlights the effect on Netflix of Comcast launching its own video platform on the Xbox that is exempt from Comcast’s bandwidth limitations. While this policy may indeed result in more customers for Comcast’s video services and fewer for Netflix’s in the short run, I don’t think that critics are seriously thinking through the economics of Internet service before they speak.
The economics of running a large ISP is one of fixed costs. When you introduce large fixed costs, a lot of consumers’ ordinary economic intuition becomes worse than useless. If Comcast incurs a lot of fixed costs from building a network, someone has to pay for it. Suppose that the fixed cost is currently divided between TV subscription and advertising revenue and Internet service revenue. If Comcast’s TV revenues collapse because everyone is switching to Netflix, where will Comcast get the revenue to pay its high fixed costs? You guessed it, they will have to raise the price of Internet service.
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There is a Senate Commerce Committee hearing today on online video, and our friends at Free Press, Consumers Union, Public Knowledge, and New America Foundation argue that it should be used to investigate ISP-imposed data caps.
If data caps had a legitimate economic justification, they might be just a necessary annoyance. But they do not have such a justification. Arbitrary caps and limits are imposed by multichannel video providers that also provide broadband Internet access, because the providers have a strong incentive and ability to protect their legacy, linear video distribution models from emerging online video competition.
As someone who uses an ISP with a data cap and who is a paid subscriber to three different online video services, you might think that I too would concerned about these caps. But to the contrary, I think there are some legitimate economic reasons ISPs might impose data caps, and I don’t see a reason to stop ISPs from setting the price and policies for the services they offer.
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