Why Imposing New Tolls on Third-Party Content and Applications Threatens Innovation and will not Improve Broadband Providers’ Investment

26 Pages Posted: 20 Jun 2010 Last revised: 23 Dec 2013

Nicholas Economides

New York University - Leonard N. Stern School of Business - Department of Economics

Date Written: January 15, 2010

Abstract

While some broadband providers have called Internet content and application providers free riders on their infrastructure, this is incorrect and misguided. End-users pay for their residential broadband providers for access to the Internet, and content providers pay their own ISPs for connectivity as well. However, content providers need not pay residential broadband providers’ ISPs in order to reach their customers. This feature of the Internet has been one key factor that has allowed innovation to prosper and kept barriers to entry low, as the network transport market for content and application providers functions relatively efficiently.

In this paper, I consider the impact of a departure from this current system. I examine the possible impact of last-mile broadband providers’ imposing “termination fees” on third-party content providers or application providers to reach end-users. Broadband providers would engage in paid prioritization arrangements – that is, application and content providers could pay the broadband provider to have their traffic prioritized over competitors’ services. I argue that these arrangements would create inefficiency in the market and harm innovation. Because the last mile access broadband market is concentrated and consumers face switching costs, these concerns are particularly significant.

Broadband providers insist that imposing these new charges will greatly improve network investment, and thus these charges are beneficial. I argue that this is not the case. Possible higher revenues from discrimination may simply be returned to shareholders and not invested. Additionally, evidence suggests networks invest more under non-discrimination requirements, and paid prioritization schemes would divert money towards managing scarcity instead of expanding capacity. Paid prioritization could even create an incentive for broadband providers to create congestion to increase the price of prioritized service.

Keywords: Network Neutrality, Internet, Market Power, Discrimination, Two-Sided Market, Prioritization, Broadband, Termination Fees

JEL Classification: L1, D4, L12, L13, C63, D42, D43

Suggested Citation

Economides, Nicholas, Why Imposing New Tolls on Third-Party Content and Applications Threatens Innovation and will not Improve Broadband Providers’ Investment (January 15, 2010). NET Institute Working Paper No. 10-01; NYU Law and Economics Research Paper No. 10-32. Available at SSRN: https://ssrn.com/abstract=1627347 or http://dx.doi.org/10.2139/ssrn.1627347

Nicholas Economides (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

44 West 4th Street
New York, NY 10012
United States
212-998-0864 (Phone)
212-995-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/networks/

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