It's the Consumer, Stupid!

"It's the consumer, stupid!" 

No, I don't mean to call anyone stupid. You know me better than that. But with an obligatory nod to James Carville, I just want to grab your attention in order to emphasize a point I wish to make. 

At last Monday's oral argument before the D.C. Circuit in the Verizon v. FCC case in which Verizon is challenging the lawfulness of the FCC's net neutrality regulations, a considerable part of the argument focused on the business relationship between Internet services providers and a so-called "edge providers." The reason for the focus on edge providers is that, in essence, the Commission's regulations, in the form of a prohibition on discrimination, prevent the development of what economists call a "two-sided" market. 

In the context of the Internet marketplace environment, what this prohibition on a two-sided market means is that the FCC's net neutrality regulations don't allow an Internet services provider like Verizon to charge an edge provider like Google for the use of Verizon's Internet facilities as Verizon's customers access Google's content and applications – even though Google might willingly agree to pay Verizon for some form of premium access, say, ensured faster delivery. Of course, the same prohibition applies to any Internet services provider vis-à-vis any other content provider. 

Again, a good part of last week's oral argument focused on the way the net neutrality regulations' discrimination prohibition impacts the Internet provider – edge provider commercial relationship. Most observers came away from the argument with a sense that the court is likely to hold unlawful at least the regulations' discrimination prohibition, if not all the other provisions. As I said in this post-argument media advisory: 

"[T]he court seemed to agree with Verizon -- and this is a point that I have also made repeatedly and for years -- that the FCC's rules, as a practical matter, amount to converting Verizon's Internet access service into a common carrier service and that this is prohibited by the Communications Act. Or put another way, the FCC lacks authority to impose a common carriage mandate on Internet providers." 

And in an appearance on C-SPAN on this week's  The Communicators show, along with Public Knowledge President Gigi Sohn, I explained in some detail why I believe the FCC's regulation preventing Internet providers from discriminating against edge providers will be held unlawful. [As I said on the program, the usual caveat applies: Predicting the outcome of court cases can be hazardous to your reputation as a fortuneteller!] 

What I want to do now is relatively simple, but nevertheless important. With all the back-and-forth at the argument focusing – properly in the context of the legal argument – on the discrimination prohibition, the prevention of two-sided pricing, and the prohibition's impact on edge providers, it is easy to lose sight of what all of this means for the consumer. 

And, after all, what should be most important is not the impact of net neutrality mandates on edge providers like Google or Netflix, per se, or on Internet providers like Verizon or Time Warner Cable, per se, but rather the impact of the rules on consumers. And despite the fact that in other contexts prohibitions against "discrimination" may be quite proper, or even necessary, in the context of a competitive market environment, such as the Internet provider marketplace, a "discrimination" prohibition can be quite harmful to consumers and long-run consumer welfare. 

This is because the FCC's discrimination prohibition imposes a regulatory straightjacket on Internet providers that prevents them from experimenting with new business models or service variations that may, in fact, meet changing consumer demands. To the detriment of consumers, this regulatory straightjacket impedes the innovation that normally occurs when businesses are free to differentiate their services. In this case, Internet providers are discouraged from innovating because they know that they and their competitors are, to a meaningful extent, all "stuck in the same boat." 

And consumers may be especially adversely affected by the regulations' prohibition on two-sided pricing – again, the focus of so much of the oral argument. Two-sided pricing might well prove beneficial to consumers and edge providers alike, if Internet providers possessed the freedom – which other participants in a competitive marketplace possess – to experiment with various pricing models that reflect relative cost and value considerations. 

For example, it is well established that certain edge providers like Netflix and Google are responsible for generating outsized amounts of web traffic. If Internet providers were free to charge edge providers fees that, at least to some extent, reflected the outsized usage generated by them – and the associated costs imposed on Internet providers' networks – this would mean that lighter users would not be forced, in effect, to subsidize those entities that generate much heavier use of the Internet providers' facilities. 

The FCC-imposed regime, which in the name of preventing "discrimination," enforces such subsidization of heavier users by lighter users, and which thereby deters investment in facilities, is by no means necessarily consumer-friendly. And it is by no means necessarily consumer-friendly for lower-income persons who may prefer to forego faster or otherwise premium services in exchange for the opportunity to choose more affordable services. If two-sided pricing were permissible, it is more likely that a broader array of innovative service choices, including more affordable pricing options, would emerge in response to variations in consumer demand. 

So, amidst all the discussion concerning the net neutrality regulations' discrimination prohibition, the two-sided pricing ban, and the impact on edge providers, please don't forget whose welfare is really impacted: 

"It's the consumer, stupid." 

PS – Again, you can watch The Communicators program here.