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.
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