Thursday, November 3, 2005 - The Progress & Freedom Foundation Blog

A Silver Lining to Net Neutrality Merger Conditions?

As with any decision by committee, the FCC's recent approval of the mergers of AT&T-SBC and Verizon-MCI can be faulted in a number of respects. Despite some commissioners' reluctance, the decision imposes several conditions that are not necessary and, worse yet, do not remedy identified harms. And unless new commissioners are confirmed soon, the decision sets the stage for companies to accept more concessions simply to avoid delay in future proceedings.

If one squints hard, however, a silver lining may be visible: this week's merger decisions further undermine the rationale for adopting long-term, industry-wide "net neutrality" mandates, either by Congress or by the FCC.

The prospects for neutrality mandates rise or fall on lobbyists' ability to generate fear. They must frighten policymakers into believing that broadband network owners have the incentive and ability to block consumers' ability to use the content, applications and devices of their choice. As I have argued, however, this fear defies broadband providers' established behavior; in virtually all cases, they decline to block consumers' access, presumably because doing so would be a bad decision that would lose them money or customers or both.

The conditions, which require the merged companies to follow the FCC's neutrality policy statement for two years, should make neutrality proponents' ability to engage in such scare tactics weaker still. First, the conditions give consumers even more reason to expect that they will continue to enjoy the freedom of use they enjoyed when they connected to the Internet over "dial-up" connections. Broadband providers always have faced the threat that blocking customers' access to content would encourage them to switch to another provider or back to dial-up. Consumers would be reluctant to pay the extra money that broadband costs relative to dial-up if paying that premium afforded consumers less freedom. Consumers' expectations for such freedom will be bolstered further as news spreads of the government "guarantee" embodied in the merger conditions. These expectations will persist even after the conditions terminate. That means providers' incentive to retain customers -- which so far has preserved neutrality without a mandate -- will become stronger still. Thus there is even less reason to think a neutrality mandate will be necessary beyond the duration of the conditions.

Second, while the merger conditions are in place, broadband competition will continue to mount. Recent FCC figures show that broadband usage is growing by 30-40% each year, with larger increases for satellite and terrestrial wireless services. To serve this growing demand, the number of Americans with a choice of providers also has expanded. Telephone companies' efforts to deploy optical fiber to homes and neighborhoods are of particular note, as they allow these companies to provide the same suite of services (including video) that have led to cable broadband's early lead. This escalating competition makes it even less likely that providers will risk upsetting users after the merger conditions sunset by preventing consumers from using the Internet as freely as they have come to expect. If providers were to deny their customers such freedom, more and more of those customers would defect to competitors, thereby threatening providers' ability to recoup substantial investments in their networks.

Ray and Randy have raised legitimate questions regarding whether net neutrality or other merger conditions are truly voluntary, or whether they are the ransom demanded in the absence of a working majority to assist Chairman Martin. And for good reason -- truly voluntary adoption of neutrality principles would have discouraged the FCC from taking action in this area at all, as I have argued. But sadly, we can't change that past, just as we cannot undo this week's merger conditions. Perhaps the most observers can do now is to accept the conditions and convince policymakers that these unfortunate steps should be the last we take down the slippery slope toward regulating the broadband Internet.

posted by Kyle Dixon @ 4:02 PM | Broadband , Cable , Capitol Hill , Communications , Innovation , Internet , Net Neutrality , The FCC , VoIP , Wireless , Wireline