One of the most egregious examples of special interest pleading before the Federal Communications Commission and now possibly before Congress involves the pricing of “special access,” a private line service that high-volume customers purchase from telecommunications providers such as AT&T and Verizon. Sprint, for example, purchases these services to connect its cell towers.
Sprint has been seeking government-mandated discounts in the prices charged by AT&T, Verizon and other incumbent local exchange carriers for years. Although Sprint has failed to
make a remotely plausible case for re-regulation, fuzzy-headed policymakers are considering using taxpayer’s money in an attempt to gather potentially useless data on Sprint’s behalf.
Sprint is trying to undo a regulatory policy adopted by the FCC during the Clinton era. The commission ordered pricing flexibility for special access in 1999 as a result of massive investment in fiber optic networks. Price caps, the commission explained, were designed to act as a “transitional regulatory scheme until actual competition makes price cap regulation
unnecessary.” The commission rejected proposals to grant pricing flexibility in geographic areas smaller than Metropolitan Statistical Areas, noting that
because regulation is not an exact science, we cannot time the grant of regulatory relief to coincide precisely with the advent of competitive alternatives for access to each individual end user. We conclude that the costs of delaying regulatory relief outweigh the potential costs of granting it before [interexchange carriers] have a competitive alternative for each and every end user. The Commission has determined on several occasions that retaining regulations longer than necessary is contrary to the public interest. Almost 20 years ago, the Commission determined that regulation imposes costs on common carriers and the public, and that a regulation should be eliminated when its costs outweigh its benefits. (footnotes omitted.)
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Count me among those who are rolling their eyes as the Department of Justice initiates an investigation into whether cable companies are using data caps to strong-arm so-called “over-the-top” on-demand video providers like Netflix, Walmart’s Vudu and Amazon.com and YouTube.
The Wall Street Journal reported last week that DoJ investigators “are taking a particularly close look at the data caps that pay-TV providers like Comcast and AT&T Inc. have used to deal with surging video traffic on the Internet. The companies say the limits are needed to stop heavy users from overwhelming their networks.”
Internet video providers like Netflix have expressed concern that the limits are aimed at stopping consumers from dropping cable television and switching to online video providers. They also worry that cable companies will give priority to their own online video offerings on their networks to stop subscribers from leaving.
Here are five reasons why the current anticompetitive sturm und drang is an absurd waste of time and might end up leading to more harm than good.
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By Geoffrey Manne and Berin Szoka
Everyone loves to hate record labels. For years, copyright-bashers have ranted about the “Big Labels” trying to thwart new models for distributing music in terms that would make JFK assassination conspiracy theorists blush. Now they’ve turned their sites on the pending merger between Universal Music Group and EMI, insisting the deal would be bad for consumers. There’s even a Senate Antitrust Subcommittee hearing tomorrow, led by Senator Herb “Big is Bad” Kohl.
But this is a merger users of Spotify, Apple’s iTunes and the wide range of other digital services ought to love. UMG has done more than any other label to support the growth of such services, cutting licensing deals with hundreds of distribution outlets—often well before other labels. Piracy has been a significant concern for the industry, and UMG seems to recognize that only “easy” can compete with “free.” The company has embraced the reality that music distribution paradigms are changing rapidly to keep up with consumer demand. So why are groups like Public Knowledge opposing the merger?
Critics contend that the merger will elevate UMG’s already substantial market share and “give it the power to distort or even determine the fate of digital distribution models.” For these critics, the only record labels that matter are the four majors, and four is simply better than three. But this assessment hews to the outmoded, “big is bad” structural analysis that has been consistently demolished by economists since the 1970s. Instead, the relevant touchstone for all merger analysis is whether the merger would give the merged firm a new incentive and ability to engage in anticompetitive conduct. But there’s nothing UMG can do with EMI’s catalogue under its control that it can’t do now. If anything, UMG’s ownership of EMI should accelerate the availability of digitally distributed music.
To see why this is so, consider what digital distributors—whether of the pay-as-you-go, iTunes type, or the all-you-can-eat, Spotify type—most want: Access to as much music as possible on terms on par with those of other distribution channels. For the all-you-can-eat distributors this is a sine qua non: their business models depend on being able to distribute as close as possible to all the music every potential customer could want. But given UMG’s current catalogue, it already has the ability, if it wanted to exercise it, to extract monopoly profits from these distributors, as they simply can’t offer a viable product without UMG’s catalogue. Continue reading →
The Wall Street Journal reports that “The Justice Department is conducting a wide-ranging antitrust investigation into whether cable companies are acting improperly to quash nascent competition from online video.” In particular, the DOJ is concerned that data caps may discourage consumers from switching to online video providers like Hulu and Netflix. The following statement can be attributed to Berin Szoka, President of TechFreedom:
It’s hard to see how tiered broadband pricing keeps users tethered to their cable service. Even watching ten hours of Hulu or Netflix a day wouldn’t exceed Comcast’s 300 GB basic data tier. And Comcast customers can buy additional blocks of 50 GB for just $10/month—enough for nearly two more hours a day of streamed video. Such tiers provide a much-needed incentive for online content providers to economize on bandwidth. They also allow ISPs to offer fairer broadband pricing, charging light users less than heavy users. Consumers might have been better off if cable companies could have simply charged online video providers for wholesale bandwidth use, but the FCC’s net neutrality rules bar that.
Counting cable content against caps might seem more fair, but it’s not necessarily something the law should mandate. Discriminating against a competitor isn’t a problem under antitrust law unless, on net, it harms consumers. Would consumers really be better off if their cable viewing reduced the amount of data available for streaming competing online video services? As long as the basic tier’s cap is high enough, few users will ever exceed it anyway—leaving consumers free to experiment with alternatives to cable subscriptions, just as cable providers are experimenting with new ways of offering cable content on multiple devices at no extra charge. Continue reading →
(Adapted from Bloomberg BNA Daily Report for Executives, May 16th, 2012.)
Two years ago, the Federal Communications Commission’s National Broadband Plan raised alarms about the future of mobile broadband. Given unprecedented increases in consumer demand for new devices and new services, the agency said, network operators would need far more radio frequency assigned to them, and soon. Without additional spectrum, the report noted ominously, mobile networks could grind to a halt, hitting a wall as soon as 2015.
That’s one reason President Obama used last year’s State of the Union address to renew calls for the FCC and the National Telecommunications and Information Administration (NTIA) to take bold action, and to do so quickly. The White House, after all, had set an ambitious goal of making mobile broadband available to 98 percent of all Americans by 2016. To support that objective, the president told the agencies to identify quickly an additional 500 MHz of spectrum for mobile networks.
By auctioning that spectrum to network operators, the president noted, the deficit could be reduced by nearly $10 billion. That way, the Internet economy could not only be accelerated, but taxpayers would actually save money in the process.
A good plan. So how is it working out?
Unfortunately, the short answer is: Not well. Speaking this week at the annual meeting of the mobile trade group CTIA, FCC Chairman Julius Genachowski had to acknowledge the sad truth: “the overall amount of spectrum available has not changed, except for steps we’re taking to
add new spectrum on the market.” Continue reading →
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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Boy, the symposium on “Competition in Online Search” that Daniel Sokol threw together this week over at the Antitrust & Competition Policy Blog could not have been better timed! As most of you know, the European Commission stepped up its attack on Google this week and all signs are that a lot more antitrust activity is on the way on this front.
Anyway, all the entries in the symposium are in and a few rebuttals have followed, including one by me. In my response, I took on Frank Pasquale and Eric Clemons, who were the most aggressive in their calls for search regulation. I thought I would just re-post it here to complement my early entry in the symposium on Monday.
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I enjoyed the entries in this symposium and learned something from each of them. I have a few things to say in response to both Frank Pasquale and Eric Clemons and their sweeping indictments of not just Google but seemingly the entire modern information economy.
Everywhere they look, it seems, Pasquale and Clemons see villainy. Someone completely alien to the modern online ecosystem would read Pasquale’s description of it — “digital feudalism,” “absolute sovereignty,” “opaque technologies,” “leaving users in the dark,” etc., etc. — and likely conclude that a catastrophe had befallen modern man. Of course, Pasquale’s narrative is missing any reference to the unparalleled expansion in the stock of knowledge and human choices that has been made possible by Google and the others companies he castigates (Apple, Facebook, Twitter, and Amazon). Meanwhile, Clemons wants to group Google in with supposed Wall Street robber barons as well as characters from Sinclair’s “The Jungle.” It’s all a bit much. Continue reading →
It’s my great pleasure this week to be participating in a 2-day symposium on “Competition in Online Search” that is being hosted by the Antitrust & Competition Policy Blog. Daniel Sokol, Associate Professor of Law at the University of Florida Levin College of Law, was kind enough to invite me to join the fun. Professor Sokol is the editor of the Antitrust & Competition Policy Blog. Others participating in this symposium include: James Grimmelman (NY Law); Eugene Volokh (UCLA); Marvin Ammori (Stanford Law); Mark Jamison (Univ. of Florida); Eric Clemons (Wharton School); Dan Crane (Michigan Law); and both Marina Lao and Frank Pasquale (Seton Hall); and more.
My entry is now live. In it, I focus on how dynamically competitive and innovative the digital economy has been over the past 15 years and question to need for intervention at this time, especially of the “public utility” variety. I’ve re-posted my entry below, but make sure to head over to the Antitrust & Competition Policy Blog to read all the contributions to this excellent symposium. Continue reading →
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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The airline would not let coach passenger Susan Crawford stow her viola in first class on a crowded flight from DC to Boston, she writes at Wired (Be Very Afraid: The Cable-ization of Online Life Is Upon Us).
Just imagine trying to run a business that is utterly dependent on a single delivery network — a gatekeeper — that can make up the rules on the fly and knows you have nowhere else to go. To get the predictability you need to stay solvent, you’ll be told to pay a “first class” premium to reach your customers. From your perspective, the whole situation will feel like you’re being shaken down: It’s arbitrary, unfair, and coercive.
Most people don’t own a viola, nor do they want to subsidize viola travel. They want to pay the lowest fare. Differential pricing (prices set according to the differing costs of supplying products and services) has democratized air travel since Congress deregulated the airlines in 1978. First class helps make it possible for airlines to offer both lower economy ticket prices and more frequent service. Which is probably why Crawford’s column isn’t about airlines.
For one thing, Crawford seems to be annoyed that the “open Internet protections” adopted by the Federal Communications Commission in 2010 do not curtail specialized services — such as an offering from Comcast that lets Xbox 360 owners get thousands of movies and TV shows from XFINITY On Demand. As the commission explained,
“[S]pecialized services,” such as some broadband providers’ existing facilities-based VoIP and Internet Protocol-video offerings, differ from broadband Internet access service and may drive additional private investment in broadband networks and provide end users valued services, supplementing the benefits of the open Internet. (emphasis mine) Continue reading →
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