When analyzing the
cost-effectiveness of a regulation, the first questions that should be asked are:
Does the regulation address a market failure or systemic problem? If it does, how
does it correct the perceived market failure? And do the benefits of the
regulatory solution outweigh the costs of imposing new regulatory requirements?
The Federal Communication Commission’s (FCC’s) February 2015 Open Internet
order
failed to properly address these questions.
On August 6, 2015,
thirteen economists from prominent universities and policy institutes
submitted an amicus brief to the D.C.
Circuit Court of Appeals demonstrating that the FCC’s
2015 Open Internet order failed to include a basic cost-benefit analysis. One
of the main arguments in the amicus brief is that the FCC employed an
inaccurate assessment of market failure. The brief states that “the FCC had no
basis for its finding that, absent Title II, Internet Service Providers will
utilize ‘gatekeeper’ power to harm consumers and content providers.”
So how does the
Commission attempt to justify the Open Internet order? It makes a number of
assumptions about ISPs and consumer preferences but it fails to provide any
evidence to back up these assumptions. The Commission claims that ISPs are
monopolies. It argues that ISPs are “gatekeepers” who control the point of Internet
access between content providers and consumers. The Commission says that this
relationship encourages ISPs to harm consumers by discriminating against
content providers who do not pay for priority.
In reality, ISPs
have no incentive to block or throttle content when consumers have a choice
between multiple providers. But the Commission creates a false narrative that
so-called “switching costs” (or the time and/or money spent in order to switch from
one provider to another) are too high, creating monopolistic market power even
when multiple providers offer access in a given area. The order claims that
“once a consumer chooses a broadband provider, that provider has a monopoly on
access to the subscriber.”
The amicus brief responds
with the following: “The same ‘monopoly’ could be said to exist for customers
who have entered a movie theater or restaurant.” The amicus brief also explains
that competition within a local market creates consumer choice and “compels
ISPs to offer high quality services at attractive prices to prospective
consumers in the hope they become actual customers.” For example, if one
provider in an area requires early termination fees for a contract, competitors
in the area would likely offer a lower priced service to offset those fees and
attract consumers to switch.
The amicus brief
gives the following example of how consumers respond to what they perceive is
harm: “Time Warner Cable’s losses of broadband subscribers during its dispute
with CBS in 2014, even when that dispute was over access to television content,
is indicative of how strongly and rapidly consumers respond to changes in
content availability.”
The Commission’s “gatekeeper”
analysis is completely inconsistent. The Commission claims that the
requirements of the Open Internet order, which supposedly prevent ISPs from
acting as gatekeepers, are especially important for “rural areas or areas
served by only one provider.” But then the Commission claims that areas with
multiple providers are also essentially monopolies. The Commission also
manipulates its broadband competition analysis by stating that “mobile
broadband is not a full substitute for fixed broadband connections.” This despite
the fact that 10 percent of Americans have
a smartphone but do not have a fixed broadband subscription, according to the
Pew Research Center. The fact that 10 percent of Americans made this switch
means that the valuation of switching costs and the substitutability of
broadband technologies are subjective to the individual consumer and should not
be objective determinations by the Commission.
The Open Internet
order uses Title II public utility style regulation, which was created for
telephone monopolies, so I can see why the Commission – wrongly – attempted to
justify its action by claiming that ISPs are monopolies. But because the
Internet access market is dynamically competitive among multiple technologies,
these regulations create costs which will crowd out innovation and investment. And
the burdens of these regulations are likely to harm smaller competitors even
more than larger, more-established ones.
So then how does
the Open Internet order correct the perceived problems of gatekeepers, high
switching costs, and alleged broadband monopolies? It doesn’t. In fact, the
Open Internet order creates the exact problems that it is supposed to fix. The
order creates an Internet access gatekeeper – the FCC – which must first
approve ISPs’ (and likely content providers’) decisions to innovate,
interconnect, and invest. It ultimately creates a higher market concentration
due to higher regulatory costs pushing out competitors. And the order creates higher
switching costs because, as competition decreases, consumers will have fewer
choices.
The Commission’s
attempt to create a market failure or systemic problem was inconsistent and its
analysis was inaccurate. Unfortunately, it seems as if the decision to regulate
the most dynamic market in the world came before any assessment of a market
failure.
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