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 →
During the 1970’s, I remember a bumper sticker that summed up the prevailing anti-colonial attitude that had developed during the late 1960’s: “U.S. Out of North America.”
That sentiment reflects nicely my activities this week, which include three articles decrying efforts by regulators to oversee key aspects of the Internet economy. Of course their intentions—at least publicly—are always good. But even with the right idea, the unintended negative consequences always overwhelm the benefits by a wide margin.
Governments are just too slow to respond to the pace of change of innovations in information technology. Nothing will fix that. So better just to leave well enough alone and intercede only when genuine consumer harm is occurring. And provable.
The articles cover the spectrum from state (California), federal (FCC) and international (ITU) regulators and a wide range of truly bad ideas, from the desire of California’s Public Utilities Commission to “protect” consumers of VoIP services, to the FCC’s latest effort to elbow its way into regulating broadband Internet access at the middle milel, to a proposal from European telcos to have the U.N. implement a tariff system on Internet traffic originating from the U.S.
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(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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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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More this week on the efforts of Reed Hastings of Netflix to reignite the perennial debate over network access regulation, courtesy of the New York Times. Hastings is seeking a free ride on Comcast’s multi-billion-dollar investment in broadband Internet access.
Times columnist Eduardo Porter apparently believes that he has seen the future and thinks it works: The French government forced France Télécom to lease capacity on its wires to rivals for a regulated price, he reports, and now competitor Iliad offers packages that include free international calls to 70 countries and a download speed of 100 megabits per second for less than $40.
It should be noted at the outset that the percentage of French households with broadband in 2009 (57%) was less than the percentage of U.S. households (63%) according to statistics cited by the Federal Communications Commission.
There is a much stronger argument for unbundling in France – which lacks a fully-developed cable TV industry – than in the U.S. As the Berkman Center paper to which Porter’s column links notes on pages 266-68, DSL subscriptions – most of which ride France Télécom’s network – make up 95% of all broadband connections in France. Cable constitutes approximately only 5% of the overall broadband market. Competition among DSL providers has produced lower prices for consumers, but at the expense of private investment in fiber networks.
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I wanted to follow up on Eli Dourado’s excellent previous post (“Real Talk on Net Neutrality“) to reiterate the importance of a few points he made and add some additional thoughts about the issues raised in that New York Times article on Net neutrality and forced access regulation that lots of people are talking about today.
What Eli’s post makes clear is that there are those of us who think about Net neutrality and infrastructure regulation in economic terms (a rapidly shrinking group, unfortunately) and those who think it about in quasi-religious terms. The problem with the latter ideology of neutrality uber alles, however, is that at some point it must confront real-world economics. This is Eli’s core point: Something must pay the bills. In this case, something must cover the significant fixed costs associated with broadband investments if you hope to sustain those networks. Unless you are ready to make the plunge and suggest that the government should cover those costs through massive infrastructure expenditures and even potential nationalization or municipalization of broadband networks — and some clearly would be — then you have to get serious about how those costs will be covered by private operators.
Thus, we come back to the importance of business model experimentation and pricing flexibility to this debate. I have been harping on this point for a long time now, going all the way back to this 2005 essay, “The Real Net Neutrality Debate: Pricing Flexibility Versus Pricing Regulation.” And there’s a litany of other things I’ve penned on the same point, many of which I have cited at the end of this essay.
Here are the core points I have tried to get across in those earlier essays: Continue reading →
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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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 →
The folks at the Concurring Opinions blog were kind enough to invite me to participate in a 2-day symposium they are holding about Brett Frischmann’s new book, Infrastructure: The Social Value of Shared Resources. In my review, I noted that it’s an important book that offers a comprehensive and highly accessible survey of the key issues and concepts, and outlines much of the relevant literature in the field of infrastructure policy. Frischmann’s book deserves a spot on your shelf whether you are just beginning your investigation of these issues or if you have covered them your entire life. Importantly, readers of this blog will also be interested in the separate chapters Frischmann devotes to communications policy and Net neutrality regulation, as well as his chapter on intellectual property issues.
However, my review focused on a different matter: the book’s almost complete absence of “public choice” insights and Frischmann’s general disregard for thorny “supply-side” questions. Frischmann is so focused on making the “demand-side” case for better appreciating how open infrastructures “generate spillovers that benefit society as a whole” and facilitate various “downstream productive activities,” that he short-changes the supply-side considerations regarding how infrastructure gets funded and managed. I argue that: Continue reading →
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