Quick Thoughts: The Problem isn’t Net Neutrality, It’s Monopoly Power

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–          Arguments around “net neutrality” are missing the point – in a competitive market for broadband, consumers and content providers wouldn’t need protection from regulators

–          Cable modem is the ONLY broadband service fast enough for NFLX in 60% of American households. Most of the rest have a choice of just 2-3, with little variation in price or service

–          Broadband prices in countries with real competition are dramatically lower than in the US, with little risk of net neutrality abuse as poor performance on important content would cost share

–          With competition rising in wireless, net neutrality should be less of an issue. No matter, T’s deal for DTV would not further concentrate market power, CMCSA’s deal for TWC would.

The debate on Net Neutrality has been philosophical. Supporters argue from the Silicon Valley “Information needs to be free” ethic, focusing on the ability of broadband service providers to squelch free speech by giving significant performance advantages to their own content, or to content from companies willing and able to pay for privileged access to end users. In this way, small voices will be throttled, louder voices must pay the toll to be heard, and the loudest voices will be those of the system operators themselves.

Opponents of Net Neutrality regulation focus on property rights. Cable operators and telephone companies have invested billions of dollars in building out their broadband distribution assets, while internet companies ride that investment for free. Why shouldn’t these companies be allowed to make the best return on that investment that they can? To this camp, asking content providers, like NFLX, who use a lot of bandwidth on the networks, to pay a fee to insure excellent performance is a fair assertion of the rights of a private property owner.

Both sides have their blinders on as they argue past each other. The internet has never been strictly “neutral” – large internet players have long negotiated special arrangements for passing traffic from net to net, even extracting payment for especially fast and capacious private “peering”, while the hoi polloi were relegated to the several open public peering nodes, open to all, but notoriously slow. In this context, the assertion that the Internet has always been open and free rings hollow. Similarly, the broadband service providers have spent billions of dollars on infrastructure, but they have already reaped billions in accumulated profits from the exclusive franchise rights that had been granted to them decades ago. The idea that these behemoths are the product of risk taking and pure, unfettered competition, and thus, should not be subject to regulation is equally specious.

The problem in the broadband market is NOT net neutrality, but rather, a lack of real competition. For 60% of American households, the only option for broadband fast enough to watch an HDTV movie on Netflix is their local cable franchise operator. For most of the remainder, the choice is amongst 3 or fewer providers, typically offering similar ratios of speed and price. Not all developed nations have allowed such market concentration in residential broadband. In the UK, where regulation requires the incumbent telecoms service provider to make its distribution network available to all comers on a wholesale basis, competition is vibrant and consumer prices are less than half those in the US. If a competitor in London decided to deliberately limit the connectivity to a popular service like NFLX, seriously hampering the performance of that service for its subscribers, the result would be rapid share loss to competing services able to advertise their superior performance for streaming movies. In contrast, in New York, oligopolists Time Warner Cable and Verizon have both refused to increase their connections to NFLX despite rising complaints about buffering delays during prime time, using their customers’ pain as leverage to wrest payments back from the content streamer. Interestingly, this back-door service throttling isn’t even covered under the weak FCC net neutrality regulations that were successfully challenged by Verizon in Federal Court.

This last point raises the question as to whether or not regulatory oversight of the myriad technical issues that determine the quality of streaming services delivered to subscribers is even a viable way of maintaining a fair playing field. Rules need not be broken to be circumvented – who needs to build a “fast lane” toll road, when you can charge instead for using the entrance ramp? There are LOTS of technical ways to discriminate between various types and sources of traffic on a network, and it would difficult and expensive, if not impossible, for the FCC to monitor them all, even if it were allowed to. Given this, the hue and cry over the FCC’s watery net neutrality proposal seems weak.

If I were FCC Chairman Wheeler, my priority would be to promote real competition in broadband. The Comcast – Time Warner Cable deal is troubling, as I’m not sure that net neutrality restrictions on behavior can be written to actually prevent the exercise of the substantial market power that the combined company would have in controlling more than a third of all US broadband households. I believe that network wholesale requirements, which would allow 3rd parties to lease capacity on the incumbent network at a regulated “cost plus” rate, could be a workable solution. I also believe that wireless broadband has the potential to compete effectively with cable for residential customers before the end of the decade. I would pursue spectrum licensing processes that encourage deployment of capacity for this purpose – maintaining restrictions on incumbent bidding and relaxing requirements for broad blanket geographical build outs. In this regard, a Sprint take out of T-Mobile USA could be similarly anticompetitive. Time will see, but I have great hope that competition can save us, where regulation will not.

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