Vertical Integration, Paid Prioritization and the Marketplace Realities that Undermine the FCC's Open Internet Rules
Posted: 2 Apr 2015
Date Written: March 31, 2015
Net neutrality is now the law of the land. The FCC argued in the 2015 Open Internet Order that the rules were necessary to preserve the free and open Internet. But do the FCC’s justifications for its rules comport with economic and marketplace realities? This paper proposes to examine the history of the broadband (and content) marketplace in order to assess the FCC’s narrative of market competition underlying the 2015 Order.
In Part I, the paper will argue that the Internet has never been neutral: prioritization is baked in to Internet protocols.
In Part II, the paper will analyze the underlying premises of the Order and argue that they don’t justify the rules. What is the actual magnitude of the alleged harms to be prevented? What are the costs of doing so? What evidence exists that the proposed rules will actually prevent the alleged harms? Why aren’t antitrust regulations sufficient to accomplish the rules’ objectives? There must be a sound basis for establishing regulations - and even more so for changing long-established regulatory frameworks upon which massive investment decisions have been predicated. The rationale underlying the proposed rules lacks empirical support, and is premised on questionable assertions.
In Part III, the paper will analyze vertical restraints similar to paid prioritization in other areas of the economy and propose that they are rarely harmful to consumer welfare. Rigorous economic scholarship and antitrust authorities have found that vertical restraints are generally beneficial for consumer welfare and only condemn them as anti-competitive in rare circumstances.
In Part IV, the paper builds on this economic learning to develop the argument that bans on prioritization may actually harm startups, and argues that the effects will be ambiguous and may actually prevent startups from competing in many cases.
In Part V, the paper will consider the costs and benefits of pricing regulation. Flat-rate billing and zero-price interconnection remove powerful price signals. The sorts of practices prohibited under the Order allow ISPs to ensure that users and content providers take account of the costs they impose on others. The idea that consumers and competition generally are better off when content providers face no incentive to take account of congestion externalities in their pricing (or when users have no incentive to take account of their own usage) runs counter to basic economic logic and is unsupported by the evidence. The result is that consumers will tend to over-consume lower-value data and under-consume higher-value data, and, correspondingly, content developers will over-invest in the former and under-invest in the latter. Among other things, this means that, particularly where there is congestion, the socially optimal solution is for broadband providers to encourage users to prioritize, not necessarily to maximize, their data usage. The predictable consequence of mandated neutrality rules is a net reduction in the overall value of content, both available and consumed, and network under-investment.
In Part VI, the paper will explore the level of demand for prioritization in the economy currently and whether that demand will increase over time.
In Part VII, the paper will propose that the FCC isn’t really concerned with neutrality, but with competition. Content-provider initiated non-neutrality faces no such animus from the FCC. The questions that must be answered - and that to date remain steadfastly unanswered - are whether ISPs really are exceptional, whether they really deserve to be singled out, whether consumers will really benefit, and whether the benefits of doing so will really outweigh the costs. Unless and until these questions are answered sufficiently to justify special rules, existing antitrust and consumer protection laws (of general applicability) are sufficient to regulate any possible competition problems.
Keywords: net neutrality, Open Internet Order, FCC, vertical integration, paid prioritization, competition, edge providers, ISPs
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