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Thursday, March 16, 2006

Network Neutrality: It's the Jurisdiction, Stupid
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As I mentioned in my testimony before the Senate Commerce Committee and again at an economics conference this week, addressing network neutrality concerns on a case-by-case basis can mitigate some of the potential risks associated with prophylactic rules in this area. But it's worth underscoring another benefit that would result if Congress adopted this approach in new legislation: it would clarify government's authority to address the concerns underlying proposed network neutrality mandates.

The risks to broadband network competition (i.e., "horizontal" effects) of imposing an up-front network neutrality mandate are clear, especially given investors' continued skittishness regarding whether large investments in broadband will earn a meaningful return. First, ambiguities regarding what network neutrality actually means could burden and delay the deployment of broadband services and networks. The clearest definition of network neutrality would preclude all forms of "discrimination" but that also would preclude many existing arrangements that are generally considered benign, such as agreements to feature content on internet "home pages" or to make Yahoo! or AOL a "preferred" Internet service provider on a network. More sophisticated definitions of network neutrality would result in costly uncertainty and litigation, especially given that policymakers must largely speculate on what future consumer harms might arise.

Second, a network neutrality mandate would invite additional regulation of broadband, either in an effort to refine "exceptions" to a strict nondiscrimination requirement or to address other terms, such as the price of "neutral" access. Certainly, the FCC's experience with the Computer Inquiries and with interconnection generally suggests that we should expect any network neutrality mandates to become more, rather than less, complex over time.

Third, to the extent a network neutrality mandate discouraged broadband providers from trying to address Internet problems such as latency, authentication and security, the mandate could harm both network providers and content and applications companies that need these problems addressed to release further demand for broadband.

More fundamentally, however, a network neutrality mandate risks making all broadband network providers relatively fungible, "dumb pipes" that can only differentiate themselves to consumers based on price and the size of their networks. This would exacerbate the "economies of scale" and "network effects" associated with broadband. Smaller broadband providers would have less freedom to develop profitable niches and thereby overcome larger networks' ability to spread their high fixed costs over more customers. And consumers would have fewer reasons to favor smaller, growing networks over similar larger networks.

Thus, imposing a network neutrality mandate at this early stage will probably make the horizontal aspects of this issue worse by discouraging investment in competing broadband networks and by making it harder for new entrants to gain a foothold in the market for "last mile" broadband connections.

Nor would a network neutrality mandate have much positive impact with respect to "vertical" relationships between networks, on the one hand, and content and applications companies, on the other. Proponents of network neutrality mandates express concerns that broadband network owners will parlay their position in the market to constrain the market for complementary products, such as content, applications and devices. But vertical integration can be neutral or beneficial with respect to consumers. Moreover, the risk of consumer harm from vertical integration generally turns on a company having monopoly power in a core market, which appears to be absent in the broadband market. And as indicated, network neutrality mandates are more likely to make competition among broadband networks weaker, rather than stronger.

All that said, if Congress were simply to decline to adopt a network neutrality mandate, questions would remain regarding whether the FCC retains authority to address the competitive concerns underlying such proposals. In light of the FCC's Supreme Court victory in Brand X, it is unclear how far the agency can go in regulating broadband Internet access classified as an "information service" under the Communications Act. Although the FCC, pursuant to its "ancillary authority" to regulate information services, might have authority to force broadband networks to provide some degree of access to content, etc., the agency could have little power to dictate detailed terms for such access, such as price. Consequently, in the unlikely event that broadband providers obtain and abuse market power, the FCC might be hard pressed to remedy such abuse without first asking Congress to broaden the agency's authority.

Thus, one of the primary benefits of Congress giving the FCC a rigorous competitive standard to adjudicate specific network neutrality cases (e.g., the "unfair competition" standard proposed by the Digital Age Communications Act) is that such delegation of authority would remove any doubt that the agency can act if real problems arise. In that sense, even proponents of network neutrality can consider the case-by-case, market power approach an important step forward, just as opponents of such mandates take solace that this approach avoids some of detriments of imposing sweeping prospective mandates on a broadband market that is not yet mature.

posted by Kyle Dixon @ 8:22 PM | Antitrust & Competition Policy , Broadband , Cable , Capitol Hill , Communications , DACA , Innovation , Internet , Net Neutrality , Supreme Court , The FCC , VoIP , Wireline

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