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Tuesday, February 10, 2004

Net Neutrality, Private Ordering and FCC Jawboning
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Chairman Powell's speech at Silicon Flatirons is receiving a fair amount of attention, and rightly so. Kevin Werbach has some comments, as does Professor Lessig.

I think some ambiguity in the speech allows proponents and opponents of so-called net neutrality to see what they want. While the Chairman endorses the principles of maintaining end-to-end, he affirms that there is no need for regulation:

Based on what we currently know, the case for government imposed regulations regarding the use or provision of broadband content, applications and devices is unconvincing and speculative. Government regulation of the terms and conditions of private contracts is the most fundamental intrusion on free markets and potentially destructive, particularly where innovation and experimentation are hallmarks of an emerging market. Such interference should be undertaken only where there is weighty and extensive evidence of abuse.

Two presentations made before the chairman's speech at SFTP bear on this. Howard Shelanski and Simon Wilkie -- both former FCC chief economists -- discussed the economic case for 'net neutrality' regulation, and in different ways urged caution before regulating. I think Professor Shelanski's conclusions are quite right: "Policy makers should presume the end-to-end principle but should not make it an unconstrained objective." Only if you are in a situation of a physical layer monopoly might you be worried about mandating an end-to-end principle.

It seems to me that the end-to-end principle is valuable, but should not be unduly elevated so as to impede consumer-beneficial network-side integration and discrimination. For instance, you can imagine a broadband provider, either as a way to effectuate (good) price discrimination or offer consumers a sorting function, will implement in-network solutions that consumers would benefit from. Indeed, some security and sorting might even be better if not relegated to the ends. So long as the consumer knows, I see no problem with this. Another example might be a "walled Internet" package for children, where the broadband provider takes it upon itself to sort and limit access to the many non-kid friendly parts of the Internet. Do it yourself at the ends, you say? Why if I am willing to pay my broadband provider to do that function for me should I be denied that choice as a consumer?

In student questions, the Chairman emphasized that there are beneficial forms of "discrimination" and that he would never want to prohibit bundling and packaging that consumers might find beneficial. Integration might allow providers to add a inframarginal customer, for instance, or meet the needs of the Weiser "dumb consumer."

Finally, I am not all that fond of the "regulation by jawboning"
school that this speech represents. One needs only to look at the Brand X Internet case to see its potential weaknesses. That said, in the words of Professor Wilkie, you can foresee both a good and bad equilibrium developing in the broadband market. Because you don't know which one we will end up in, it is probably prudent to hold out the possibility of regulation to correct the bad equilibrium, but also set out your principles such that you signal you are a long way from actually seeing that bad equilibrium and hence regulating.

posted by Ray Gifford @ 6:25 PM | General

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