Natural Experiments in U.S. Broadband Regulation

Abstract

Network neutrality (NN) regulations governing how broadband Internet Service Providers (ISPs) package and price high-speed last mile access are being considered. Advocates say such rules are necessary to separate transport and application layers of the Internet, protecting innovation at the edge. Opponents argue that such rules are unnecessary and could block efficient forms of vertical integration. Either side points to future developments - NN advocates to anti-competitive foreclosure by ISPs, opponents to a deterrence of investment due to regulatory disincentives - as primary arguments. Such predictions are sharply contested.

A natural experiment, however, may yield market evidence. U.S. residential broadband markets have been subject to open access rules, analogous to NN regulation, that have varied across time and technologies. These policy switches allow empirical measurement of consumer reactions. Using the simple metric of market penetration, which incorporates both demand and supply effects, the relative effectiveness of rival policy regimes can be appraised.

This paper considers three distinct regimes governing the two leading technologies for residential broadband, cable modems (CM) and digital subscriber line (DSL) service. Prior to 1Q2003, CM service was unregulated (and has remained so), while DSL was subject to network unbundling mandates that included line sharing rules enabling rival Internet Service Providers to access last-mile loops at incremental cost. CM service enjoyed nearly a two-to-one market share advantage during this period. Following 1Q2003, when line-sharing rules were eliminated by the Federal Communications Commission (FCC), effectively raising wholesale access prices, DSL subscribership sharply increased relative to trend and to DSL trend and to contemporaneous CM subscriber growth. This pattern continued unabated following further deregulation in 3Q2005, when the FCC classified DSL as an information service. By year-end 2006, DSL subscribership was about 65% above the linear growth trend established in the regulated pre-1Q2003 era, some eight to ten million more households than predicted. This evidence, in sum, suggests open access broadband regulation deters subscriber growth, potentially important empirical input into the ongoing regulatory debate.

Keywords: network neutrality, broadband regulation, last mile access, regulatory disincentives, open access, cable, DSL, unbundling, bundling, line sharing, Internet Service Providers, ISPs

JEL Classification: G18, K23, L96