Smaller Networks Marshall the Evidence for Broadband Market's Competitiveness

A report by ACA Connects – included in a February 22 ex parte filing with the FCC – provides a window into the competitiveness of the broadband market from the vantage point of medium and smaller providers. Members of ACA Connects collectively serve nearly 32 million households – or about 25% of all U.S. households – including 7.3 million households in rural communities – or about 29%.

Insightful data points about communities served by ACA members include the following:

• "Members reached 31% more households via FTTH over the last year, a rate far higher than their overall increase in coverage."
• "96% of households have two or more fixed broadband options—and 85% have three or more options."
• "Over a third of all households (37%) in areas served by ACA Connects Members have access to gigabit broadband service."
• "The ACA Connects Members increased gigabit service availability in [] rural communities from 24% in 2022 to 33% in 2023." 

The ACA Connects report also includes figures about trends in the wider broadband market. This includes a breakdown of the share of U.S. households with competitive presence by technological capabilities of 100/20+ Mbps. According to FCC and Cartesian data for 2022-2023, almost 95% of households are in census blocks where there is an actual or potential presence of a cable, fiber, or licensed fixed wireless access (FWA) broadband provider offering speeds of 100/20+ Mbps. For 89.1% of households, a cable provider offering those speeds has a competitive presence, for 49.7% a fiber provider has a competitive presence, and for 39.6% a licensed FWA has a competitive presence. While those figures are higher than actual access figures for households, there are strong pro-deployment and pro-competitive trends. Back in 2017, only 69% of households had access to a provider offering 100/20+ Mbps, with a cable/fiber/licensed FWA competitive presence breakdown in 2017 of 59.3%/19.4%/1.7%.

 

The ACA Connects report was filed with an ex parte regarding the FCC's proposal to reclassify broadband Internet services as Title II telecommunications services and subject them to public utility regulation, including conduct-based restrictions that could eliminate consumer choice for reduced pricing options such as usage-based billing or free-data mobile offerings.

 

In December 2023, the Free State Foundation filed comments opposing the FCC's Title II reclassification proposal. And in January of this year, FSF filed reply comments. If the Commission adopts its proposal, the harm to private market investments and the ability to generate returns on future investments would come to all broadband providers, with small and medium providers almost certainly being hit the hardest. 

FCC's Privacy Order Will Result in Higher Broadband Prices

On October 27, 2016, the FCC adopted a Report and Order purporting to “protect the privacy of customers of broadband and other telecommunications services.” The rules require consumers to affirmatively opt-in before Internet service providers (ISPs) can collect “customer proprietary information,” which applies to information that the ISP “acquires in connection with its provision of telecommunications service.”

For example, if a consumer who subscribes to Comcast chooses not to opt-in, it appears Comcast cannot collect information regarding that consumer’s Amazon purchases because the data would be acquired through the Comcast-provided Internet connection. However, Comcast will be able to purchase that consumer’s Amazon information either directly from Amazon or perhaps from the consumer’s operating system and/or web browser. In other words, ISPs are allowed to purchase consumer information from edge providers, which are not subject to the FCC regulations, even though the edge providers have greater access to consumer information than ISPs.

FCC Commissioner Michael O’Rielly discussed this important issue during his dissent:

[A]ll that the FCC has really done is raise the transaction costs. The FCC, in its typical nanny state fashion, seems to assume that consumers prefer an opt-in regime. But when consumers find out the end result is that they may have to pay more for heightened privacy rules that they never asked for, I doubt they will be grateful that the FCC intervened on their behalf. Indeed, this is a grandiose attempt to enact legacy talking points into rules so that Commission leadership can pat itself on the back while consumers receive no actual, practical protections.

Because the FCC’s regulations with the opt-in default are not imposed on edge providers, such as Google, these platforms will continue to collect massive amounts of consumer information. As FSF scholars stated in their comments, due to encryption technologies, edge providers have a greater access to consumer information than ISPs. In order to provide targeted benefits, such as zero-rated services, to consumers who choose not to opt-in, ISPs will have to purchase information from edge providers or other Internet companies. (See my Perspectives from FSF Scholars entitled “FCC Privacy Rules Would Harm Consumers by Creating Barriers for ISP Advertising.”)

As Commissioner O’Rielly discussed, because ISPs need consumer information in order to offer targeted benefits, these regulations simply raise the costs for ISPs to engage in online advertising, zero-rated programming, or other targeted consumer offerings. Consumers who choose not to opt-in will be confused because edge providers will continue to collect their information and sell it to ISPs. And it’s likely ISPs will increase the price of broadband service in order to cover the costs of purchasing consumer data from edge providers.

The FCC order also envisions case-by-case investigations of “pay-for-privacy” practices. ISPs will be less likely to charge different prices to consumers with different privacy preferences. For example, consumers who choose not to opt-in but who still want to receive targeted offerings should end up paying more than those who choose to opt-in because ISPs need to purchase consumer information on their behalf. However, the FCC’s investigation likely will chill any efforts by ISPs to offer differentiated pricing based on consumer privacy preferences. Therefore, if ISPs want to offset the increase in regulatory costs, the FCC’s investigation is more likely than not to force providers to raise broadband prices for all consumers, not a subset.

With its new regulations, the FCC claims to “protect consumer choice” and “toughen pay-for-privacy safeguards.” But by expanding the definition of “customer proprietary information” to include non-sensitive information, the effect of the FCC order will be to impose higher prices for all broadband consumers without actually creating more choices. (See my October 2016 blog.) Instead of a fraction of consumers paying for privacy, all consumers are harmed by the likely result that the FCC's new regulations will lead to higher broadband prices.

The FCC’s Privacy Proposal Would Still Harm Consumers

In March 2016 the FCC adopted a Notice of Proposed Rulemaking (NPRM) purporting to protect “the privacy of customers of broadband and other telecommunications services.” The Commission is scheduled to vote on this item at the open meeting on October 26, 2016. FSF scholars submitted comments to the FCC in May 2016 explaining the reasons why the proposal would adversely impact consumers.

On October 6, 2016, FCC Chairman Tom Wheeler circulated a new proposal supposedly narrowing the regulatory reach of the opt-in requirement for only sensitive information. However, the definition of “sensitive information” in the FCC’s Fact Sheet is far too broad, including even all web browsing and app usage history. As Free State Foundation President Randolph May said regarding the Chairman’s new proposal in a Communications Daily report:

The latest revision to the privacy proposal seemingly may be a step in the right direction on a purely conceptual level, but it is not very helpful as a matter of reality. The categories of information requiring opt-in are much broader than necessary to protect consumer choice and, as importantly, broader than the framework the [Federal Trade Commission] FTC applies. This will lead to inequitable regulation and consumer confusion. And, to boot, the FCC lacks authority to go as far as it proposes.

Thus, the FCC’s proposed privacy regulation remains fatally flawed.

This proceeding originates, in an oddly circuitous way, out of the FCC’s Open Internet Order. The FCC reclassified broadband as a telecommunication service, imposing public utility-like regulation on Internet service providers (ISPs). The FCC failed to find evidence of a market failure, other than claiming that ISPs are “gatekeepers.” And although the Commission makes this unsupported “gatekeeper” claim when proposing regulations, it recently found in its Nineteenth Mobile Wireless Competition Report that competition in the mobile wireless industry has led to “lower prices and higher quality for American consumers, and [is] producing innovation and investment in wireless networks, devices, and services.” But as I suggested in a February 2016 blog, the FCC likely will continue to use its “gatekeeper theory” to impose additional regulations on ISPs.

FSF scholars went into further detail in their May 2016 comments to the FCC:

The Commission mistakenly relies on a factually unsupportable “gatekeeper theory” of competition and incentives in the broadband market as a basis for its proposed privacy regulations. The Commission now apparently relies on a “gatekeeper” claim as a regulatory prop of last resort when traditional market power analysis fails to support its expansive regulatory designs. The switching costs rationale upon which the Commission bases its proposed regulations is undermined by data demonstrating pro-competitive, pro-choice marketplace trends – documented in the Eighteenth Wireless Competition Report – favoring easier ability and incentives to switch providers.

The FCC’s privacy proposal would severely restrict the manner in which ISPs can collect and use consumer information. But as FSF scholars stated in their May 2016 comments, ISPs’ data collection practices do not pose a consequential threat to consumer privacy, and certainly not on the order of the large Internet content companies:

[A]s Peter Swire and his colleagues estimate in their paper, “Online Privacy and ISPs: ISP Access to Consumer Data is Limited and Often Less than Access by Others,” 70% of Internet traffic will be encrypted by the end of 2016. That means ISPs will, at best, only have access to roughly 30% of consumer data. Leading operating systems, web browsers, and video applications will have primary access to consumer personal information.

By subjecting ISPs to privacy regulations in the way it has proposed to do, the FCC is creating disparate regulations in the Internet ecosystem, confusing consumers as to the relevant applicable privacy policies because consumers do not distinguish between the two different categories of providers based on regulatory classifications, especially newly-adopted ones. Moreover, many large Internet companies have access to more information and a wider range of user information than ISPs. (See this FSF infographic.) For example, Google has access to 64% of online searches and holds over 61% of the mobile operating system market, allowing it to collect data on subscribers' location and app use.

FSF scholars explained further in their May 2016 comments:

By proposing to subject only broadband ISPs to its new privacy regulations, the Commission runs afoul of the rule of law principle that laws should be applied equally to all. Service providers that collect consumer personal information should be subject to the same rules unless clear reasons exist for treating them differently. The Commission fails to offer any reasons to justify the disparate treatment of ISPs embodied in its proposed regulations. The Commission should not adopt any privacy policy reflecting that degree of regulatory favoritism.

The Federal Trade Commission, the expert agency with jurisdiction over privacy violations within the entire Internet ecosystem, addresses consumer complaints on a case-by-case basis and focuses “on whether the collection and use of information is consistent with the context of a consumer’s interaction with a company and the consumer’s reasonable expectations.” Therefore, it should be no surprise that the former FTC Chairman Jon Leibowitz opposes the FCC’s NPRM. Additionally, it should be acknowledged that consumers have different preferences regarding how and if they want their data collected, and ISPs often update their settings to adjust to consumer trends. At the 2016 Advertising and Privacy Law Summit in June, FTC Commissioner Maureen Ohlhausen said:

Beneficial uses of consumer data go far beyond targeted advertising, of course. In the ISP context, such benefits could include lower prices and improved security and services. Regulatory restrictions on use of consumer data may foreclose these benefits, imposing significant costs on consumers – a fact often overlooked by advocates who may have different privacy preferences than average consumers.

Despite the fact that ISPs do not have access to the amount of data to which non-ISPs have access, ISPs still can use consumer data to offer targeted benefits. (See my August 2016 Perspectives from FSF Scholars entitled “FCC Privacy Rules Would Harm Consumers by Creating Barriers for Advertising.”) Many ISPs and edge providers incorporate advertising into their business model. Instead of consumers paying subscription fees for access to online information, consumers send personal non-sensitive information, which the ISP or edge provider then uses to sell targeted advertisements. If the FCC’s proposal is adopted, ISPs would be restricted with regard to the manner in which they use the advertising business model. This potentially could stifle the implementation of “free” data programs or other innovative services which use consumer information to develop such targeted offerings.

As the FSF scholars’ May 2016 comments explained:

If imposed, the nearly ubiquitous “opt-in” requirements regarding PII risk would discourage ISPs from offering consumers targeted marketing deals, selling advertisements to personally design consumer experiences, or offering sponsored data as well as free data or zero-rated plans – all of which potentially could benefit them. The Commission’s contemplation of a ban on certain ‘financial inducement practices, such as offering discounts for use of PII, would deprive consumers of their choice to enjoy free or inexpensive services. Consumers are competent to decide for themselves what form of ‘payment – whether in the form of the exchange of personal information or money – that they are willing to make for services.

An alternative approach to privacy that would benefit consumers was proposed:

Instead of imposing uneven, sector-specific, choice-limiting regulations, the better policy approach to protecting consumer privacy on the Internet is to establish common standards under the jurisdiction of a common enforcer. The digital privacy framework proposed by the White House in 2012 offers a realistic means of establishing a set of common rules with a common enforcer. Under this approach, privacy codes of conduct are to be established through a voluntary multi-stakeholder process. The Federal Trade Commission (FTC) would have authority to enforce those codes against providers who agree to abide by them but fail to do so in practice. Significant efforts have already been expended in that process. Obviously, the proposed regulations effectively would doom the prospects of the multi-stakeholder process for establishing consumer privacy protections for ISP subscribers. The far better approach for protecting consumer privacy is to refocus resources and attention on the multi-stakeholder process in order to forge a common set of rules and a common enforcer to protect consumer privacy on the Internet.

With a vote now scheduled for the October open meeting, it is important that the Commission recognizes how the FCC’s proposal would harm and confuse consumers by creating disparate – and overly restrictive – regulations within the Internet ecosystem. 

The FCC's Attempt to Make Choices for Consumers Will End up Harming Them

In February 2016, the Federal Communications Commission (FCC) adopted a Notice of Proposed Rulemaking (NPRM) purporting to “unlock the box,” mandating requirements for video navigation devices. Including the time the FCC spent writing the NPRM, this proceeding has lasted roughly ten months. After heavy criticism from inside and outside the FCC, the Commission is now apparently proposing an entirely new set of regulations which would require pay-TV providers to deliver video service through an application (as opposed to a set-top box) that can be used on “widely deployed platforms.” The draft Report and Order (unseen by the public) is scheduled to be voted on during an Open Meeting on September 29, 2016.  
If the technological innovation of the video marketplace has changed so much in the last ten months that the Commission has revised its proposal, what makes the FCC so sure that “apps” will be the technology consumers want in the future? And shouldn’t the FCC let the public comment on such a dramatic revision before the Commission casts its votes?

In FSF’s recent comments to the FCC regarding the status of competition in the video market, FSF scholars explained that consumers have more choices for video access than ever before. Our comments also discussed how the FCC’s original and new proposals would violate copyright terms, disincentivizing creators from producing additional content. (In addition to our comments, see my August 2016 blog and Senior Fellow Seth Cooper’s February 2016 blog for more on the copyright violations that the FCC’s proposal would enable.) Regardless of these very important issues, the FCC has misunderstood what should be a pretty simple concept: consumers like having choices in the video market. The fundamental mistake the FCC made in its original proposal was not the type of technological mandate; it was the mandate itself!

The video market has experienced tremendous innovation in the last five to ten years as online video distributors (Netflix, Amazon, Hulu) have emerged to become competitors with facilities-based pay-TV providers (Comcast, Verizon, Time Warner Cable). In fact, Netflix, Amazon, and Hulu combined have more than twice as many subscribers as all cable providers combined. The video market has been transitioning from set-top boxes to applications, so this mandate simply creates unnecessary uncertainty and removes the traditional options for consumers who are less likely to adopt to the latest market trends. (See here, here, and here for examples of the innovative transition that is occurring in the video market.)

If adopted, the mandate proposed by the FCC will raise costs for pay-TV providers. In fact, the FCC’s fact sheet acknowledges this because the proposal exempts providers with fewer than 400,000 subscribers in an attempt to “limit burdens on smaller providers.” Ultimately, consumers will end up paying for this technological mandate with an increase in the price of their pay-TV service.

Consumers likely will be able to see the increase in their provider’s costs on their monthly bills, but there will also be hidden costs. The FCC’s mandate could disable pay-TV providers from differentiating their application’s interface and usability. This would discourage providers from developing new ways to deliver their service. Such a requirement could force video distribution, which recently has been at the forefront of innovation, onto the back burner of technological development. Consumers would enjoy less innovation in the video market than they otherwise would, absent the FCC’s proposed regulations.

On September 16, 2016, Jason Furman, Chairman of the Council of Economic Advisers for President Obama, praised FCC Chairman Tom Wheeler for his efforts to “improve the proposal.” But neither President Obama and his closest advisers nor Chairman Wheeler and his FCC colleagues are knowledgeable enough to predict the future and mandate efficient outcomes in the video marketplace. Consumers, collectively, are the only group of people who can dictate what technologies provide value and which do not. While applications (as opposed to set-top boxes) might be closer to where the video market is moving right now, technology changes so rapidly that it may be only be a matter of weeks or months before the mandated technology is out-of-date.

Over the period of ten months, the FCC changed its mind about what technology to mandate for pay-TV providers and consumers. Who is to say that the FCC will not mandate a new technology a year or so down the road? The FCC should shut down this proceeding and allow consumers in the competitive marketplace to choose the technologies and platforms they prefer when accessing video content. If not, at the very least, the FCC should issue a new NPRM, instead of a Report and Order, so the public can comment on its quick switch from set-top boxes to applications. 

Commissioner O'Rielly: FCC Investigation Has Suppressed Zero-Rated Offerings

On September 20, 2016, FCC Commissioner Michael O’Rielly spoke at the International Bar Association Conference, where he talked about the FCC’s investigation of zero-rated services. Commissioner O’Rielly said that the ten-month investigation has suppressed the implementation of new pro-consumer offerings:  “I have had conversations with industry participants that withheld new offerings because it isn’t worth being caught up in an FCC investigation. One company told me that their engineers came up with some new interesting ideas that were shot down almost immediately by their general counsel because of this rule. It is never a good thing when lawyers are dictating technology winners and losers, no offense to the lawyers in the room.”

Consumers benefit from more choices offered by their Internet service providers, but the FCC’s general conduct standard has discouraged ISPs from developing new services. It is time for the Commission to end its investigation of zero-rated services.

Netflix Wants the FCC to Investigate Data Caps

Earlier the month, Netflix submitted comments to the FCC with regards to the Commission’s Twelfth Broadband Progress Notice of Inquiry. In the comments, Netflix asked the FCC to “take into account the impact of data caps—and low data caps in particular—on a consumer’s ability to watch Internet television using a mobile network.”

This is a clear example of rent-seeking. Netflix would benefit from an FCC rulemaking that would limit the use of data caps by fixed and/or mobile providers, because it would enable consumers to spend more time streaming Netflix. However, consumers who do not use Netflix or infrequently use mobile data – often low-income consumers – are better off buying a fixed amount of mobile data each month as opposed to paying extra for unlimited data. Additionally, the FCC is currently investigating zero-rated services, which are a complement to data caps. It would be costly and contradictory for the Commission to investigate and possibly regulate two services which work in conjunction with each other.

Zero-Rating Promotes Upward Mobility for Minority and Low-Income Consumers

The Multicultural Media, Telecom and Internet Council (MMTC) published a May 2016 white paper entitled “Understanding and Appreciating Zero-Rating: The Use and Impact of Free Data in the Mobile Broadband Sector.” The paper discusses how zero-rated services positively impact consumers, particularly minority and low-income individuals. The consumer benefits of zero-rated services deserve close attention. Regrettably for consumers, the FCC’s reclassification of broadband as a Title II service in its February 2015 Open Internet Order has created concerns that zero-rated services could be regulated out of existence.

Zero-rated services are also known as “free data” services. These pro-consumer services are mobile broadband offerings which allow consumers to access curated online content with an exemption from monthly data caps. Typically, that means consumers can access unlimited curated online content at no additional cost. MMTC’s paper explores five positive impacts of zero-rated services on the Internet ecosystem: lessening the digital divide, increasing the ability of smartphone-only consumers, driving innovative mobile broadband business models, spurring innovation within the entire mobile ecosystem, and empowering consumers.

The digital divide is characterized as the gap between individuals who are online and those who are not. For non-adopters who have little interest in a broadband connection, zero-rated programs can help bridge the gap by offering unlimited video or music content, for example. For non-adopters who believe mobile broadband is too expensive, free data services allow for more Internet usage at a lower cost than a traditional mobile broadband subscription.

As the white paper states:

Free data helps to address these barriers by enhancing the value proposition for non-adopters. The ability to stream as much video and music content as possible – activities that are among the most popular wireless uses across every user group – could become an enticing on-ramp for non-users: if they come to wireless broadband for unlimited Netflix streaming, they may very well stay online and use their connections for additional, more meaningful uses. For those who perceive broadband of any kind – wired or wireless – to be too expensive, the promise of free data could allow them to purchase more basic plans with lower data caps, which would deliver significant monthly cost-savings.

There is a national trend among consumers of all income levels of substituting mobile broadband for fixed broadband. This trend is especially pronounced among minority and low-income consumers. Free data services allow smartphone-only consumers to accomplish more on the Internet without exceeding their monthly data caps. Because streaming video does not count towards data caps under zero-rated services like T-Mobile’s “Binge On,” smartphone-only consumers can allocate data for other uses, such as finding directions, reading a news article, or taking a political survey.

Zero-rated programs are innovative business models designed to benefit the individual consumer. A recent CTIA survey says that 65 percent of American adults are likely to sign-up with a new wireless provider offering free data, so providers are using these services to compete with each other. The MMTC white paper says that consumers find the personalization of zero-rated programs attractive:

These programs have been voluntary from the start – depending on the service provider, subscribers are free to either opt in or opt out at any time. This builds on the modularity inherent in the modern wireless sector, where users have significant freedom to customize their user experience by, for example, picking and choosing which apps to install, which handset to purchase, which network to use, and which service option best matches their data needs.

As the number of mobile devices and connections increases and as mobile networks upgrade to 5G over the next several years, innovation in zero-rated services could lay the groundwork for other personal data consumption. Although zero-rated services are used primarily for entertainment purposes, these offerings likely will expand into new (and arguably more important) spaces within the mobile ecosystem. Health, energy, and dietary monitoring are becoming popular tools among mobile broadband consumers. MMTC says that zero-rated programs could offer critical, time-sensitive, and life-enhancing services:

For example, zero-rating certain health-related mobile tools could prove enormously beneficial for African Americans, who, as a group, are more likely to develop chronic diseases such as diabetes and heart disease. Left unaddressed, these kinds of ailments incur significant healthcare costs. But when treated in a preventative and real-time manner, there is evidence to suggest that health outcomes in these communities improve while also helping to realize cost-savings for patients and healthcare providers alike. These benefits inure not just to communities of color but to everyone.

Zero-rated services provide enhanced value and choice, especially to low-income consumers. Because providers are offering free data services in competition with each other and because those services allow consumers to opt in/opt out at any time, consumers have the freedom to choose which offerings benefit them the most. MMTC states that “this overall trend toward greater consumer empowerment, of which free data is the most recent example, benefits all consumers in many ways – but for communities of color and low-income households, these benefits are especially impactful given their above-average use of mobile broadband.”

The FCC has scrutinized zero-rated services because many critics say they violate network neutrality principles. However, in the Open Internet Order, zero-rated services do not expressly fall under the definition of a “broadband Internet access service,” and therefore are not subject to Title II regulations. (At least that is the way it was presented during the D.C. Circuit Oral Argument in December 2015, but we are still waiting on a decision.)

During a “Fireside Chat” at Free State Foundation’s Eighth Annual Telecom Policy Conference, Commissioner Mignon Clyburn called it a “good thing” that zero-rated services were not discussed in the Open Internet Order. Commissioner Clyburn also acknowledged the pro-consumer aspects of zero-rated services. Commissioner Clyburn explained:

One of the reasons I was honestly very vocal inside of our house about not abandoning or not eliminating outright the other possibility for sponsored data or zero-rated plans was because when it comes to product differentiation and the like, it could be a good thing. It could be a worrisome thing too when it’s used in a way which we did not envision. And that's why we said we will look at these things on a case-by-case basis.

Commissioner Clyburn’s observations surely cut against simplistic claims of critics that zero-rated services categorically violate principles set out in the Open Internet Order. Even so, agency scrutiny of zero-rated services – whether based on a vague “general conduct” standard or some other unknown standard – results in a state of regulatory uncertainty. Innovative and pro-consumer service offerings are stymied when market providers cannot discern or predict what the agency's rules are and whether their new offering will be permitted.

MMTC Vice President and Chief Research and Policy Officer Nicol Turner-Lee stated during the Hot-Topic Communications Issues Panel at FSF’s conference that the FCC consistently fails to take into account minority groups and diversity within the communications industry. As this white paper clearly outlines, free data services are innovative business models that benefit diverse groups across the United States, particularly minority and low-income consumers. Any intervention from the FCC to regulate or prohibit such offerings would show little consideration for diversity within the communications space and would hinder upward mobility for low-income consumers.

FSF scholars have written frequently about the positive economic impacts of zero-rated services and the scrutiny they have received from the FCC and foreign government agencies. See the following selection below:    

• Michael Horney, “Indian Regulators Ban Zero-Rated Services,” FSF Blog (February 8, 2016).

• Randolph J. May, “Internet Freedom That Isn’t: FCC Vows Not to Meddle with Innovation and Rates Ring Hollow,” Perspectives from FSF Scholars, Vol. 11, No. 6 (January 27, 2016).

• Randolph J. May Statement, “Verizon’s New FreeBee Plan,” FSF Blog (January 20, 2016).

• Daniel Lyons, “Usage-Based Pricing, Zero Rating, and the Future of Broadband Innovation,” Perspectives from FSF Scholars, Vol. 11, No. 1 (January 4, 2016).

• Randolph J. May, “Zero-Rating Is Not a Human Rights Violation,” FSF Blog (October 19, 2015).

• Michael Horney, “Zero-Rating Could Kick-Start Internet Connections for Low-Income Persons,” FSF Blog (March 5, 2015).

• Michael Horney, “Netflix’s new Deal with iiNet Violates Net Neutrality,” FSF Blog (March 3, 2015).

• Randolph J. May, “It’s the Consumer, Stupid! – Part III,” FSF Blog (January 13, 2015).

Indian Regulators Ban Zero-Rated Services

On February 8, 2016, India’s Telecom Regulatory Authority banned zero-rated services, such as Facebook’s “Free Basics” program, because they violate the concept of network neutrality by “shap[ing] the users’ Internet experience.” Free Basics offers access to a text-only version of Facebook and other news and health services in three dozen countries around the world.

In the United States, the legality of zero-rated services has been a topic of debate, especially since the FCC adopted its Open Internet Order in February 2015. FSF scholars have argued that zero-rated services offer more choices to consumers and can be particularly attractive to low-income consumers and/or individuals who would not have Internet access otherwise.  

For more on how zero-rated services can benefit consumers, see Daniel Lyon’s Perspectives from FSF Scholars entitled “Usage-Based Pricing, Zero-Rating, and the Future of Broadband Innovation,” Randolph May’s October 2015 blog, and my March 2015 blog.

New Paper: New Technologies are Upending the Typical Role of Regulation

On November 19, 2015, Will Rinehart, Director of Technology and Innovation Policy at American Action Forum, released a paper entitled "The Modern Online Gig Economy, Consumer Benefit, and the Importance of Regulatory Humility.” In the paper, Mr. Rinehart discusses the many consumer benefits of sharing economy platforms. He also says that reputational feedback mechanisms create transparency and enable trust between consumers, upending the typical role of regulation. This is an important paper for understanding why competition and self-regulating markets can often create more efficient outcomes for consumers than government regulation.

Consumer Choice is Always Better Than Government Mandates

On August 4th, Jon Brodkin wrote an article about SandyNet, a municipal broadband network in Sandy, Oregon, and its transition from a fixed wireless network to a fiber network. The fixed wireless service offers 5 Mbps down and 1 Mbps up for $25/month, while the fiber network offers 100 Mbps down and 100 Mbps up for $40/month. Once the fiber network is fully constructed, consumers can no longer use the fixed wireless network.

Mr. Brodkin makes the following claim about the transition: “It also didn’t make sense to have a $25-per-month service compete against the new fiber service that started at $40 a month, even if the slowest fiber service was 20 times faster downstream and 100 times faster upstream.”

Essentially, Mr. Brodkin is suggesting that consumers are better off if the municipality requires everyone to use the fiber network. For an elderly couple, 5 Mbps might be sufficient for an occasional email. For a poor household, $25/month might be the maximum it is willing to pay for access. Why presume that it makes sense to require everyone to have a faster, more expensive service if they prefer, for whatever reason, a slower less expensive one?

Consumer choice is always better than government mandates – not just for the welfare of the individual consumer, but also for the welfare of the Sandy community.

Senator Cruz Asks FTC To Not Regulate the Sharing Economy

On Friday, July 17^th, Senator Ted Cruz sent a letter to FTC Chairwoman Edith Ramirez asking the Commission to reject requests from Members of Congress and incumbent businesses to apply regulations to the sharing economy. Senator Cruz stated that burdensome regulations would restrict competition in the sharing economy which “offers consumers enormous freedom and economic potential.” He also declared the following: “In a number of instances, and in a number of states, pre-existing regulatory regimes have been extended to new entrants in ways that may ultimately deprive consumers of significant cost savings and convenience that would otherwise accompany an expanded sharing economy.”

Free State Foundation Scholars submitted comments to the FTC before its June 9^th workshop regarding the sharing economy. (See this Perspectives from FSF Scholars on the 8 takeaways from the workshop.) We commend Senator Cruz for encouraging the FTC to promote permissionless innovation, marketplace freedom, and consumer choice within the sharing economy.

FSF Scholars Submit Comments Regarding FTC’s Sharing Economy Workshop

On May 26, 2015, Free State Foundation (FSF) Scholars submitted comments to the Federal Trade Commission (FTC) for its upcoming June 9^th workshop regarding competition, consumer protection, and economic issues raised by the “sharing economy.” FSF Scholars make several key points about the sharing economy’s positive impact and what the government’s ultimate role should be.

First, the sharing economy’s positive impact is one of fostering innovation, creating value, and providing cost savings options for consumers. From a recent PWC survey, 86 percent of U.S. adults who are familiar with the sharing economy agree that it makes life more affordable and 83 percent agree that it makes life more convenient and efficient. Further, the sharing economy is particularly beneficial for low-income consumers. As stated in a FSF blog, the sharing economy has shifted consumer preferences from owning to renting, and the additional benefits and savings low-income consumers accumulate from this shift has a substantial impact on their standard of living.

Second, as discussed in a Perspectives from FSF Scholars entitled “The Sharing Economy: A Positive Shared Vision for the Future,” the emergence and success of the sharing economy is unequivocally due to marketplace freedom and “permissionless innovation.” The lack of barriers to market entry (such as regulatory costs, licenses, and start-up fees) has enabled companies like Airbnb and Uber to quickly emerge and provide their services in many cities and towns throughout the world.

Third, fear of competition is not a valid basis for regulation. Traditional legacy businesses (such as hotel companies or taxicab commissions), which compete with sharing economy applications, argue that such emerging companies should be subjected to the same level of regulations and taxes. FSF Scholars argue that the best way to “level the playing field” is to deregulate down by eliminating old and unnecessary regulations, not regulate up. Unnecessary regulations can often be captured by well-established companies or applied in a discriminatory way by policymakers, leading to government picking winners and losers instead of consumers.

Lastly, sharing economy markets have efficient self-regulating mechanisms. Many sharing applications have online rating systems and feedback information in order to keep both buyers and sellers accountable and transparent. Other things like insurance policies and immediate payment systems help mitigate risk. FSF Scholars believe that by allowing for free-market innovation to flourish, competition - which we believe is the best form of regulation - will thrive. In competitive markets, sharing economy applications and its users have the incentive to provide friendly, safe, and healthy environments, because consumers will choose better alternatives if they do not.

FSF Scholars are very optimistic about the future of the sharing economy and all that it could possibly accomplish. Much of it is unknown and yet to be discovered, so we hope that policymakers at the FTC and at state and local levels presumably favor marketplace freedom over regulation.

Study Finds Low-Income Persons Gain Most from 'Sharing Economy' Markets

I have written several follow-up blogs to a Perspectives from FSF Scholars entitled “The Sharing Economy: A Positive Shared Vision for the Future,” which was published last year. These pieces have referred to the welfare gains consumers have experienced in the new “sharing economy.” Many new companies employing Internet-based applications, such as Airbnb and Uber, have emerged to provide competition to traditional business models and subsequently pushed down prices in their respective markets.

In the Perspectives from FSF Scholars entitled “The Sharing Economy: A Positive Shared Vision for the Future,” Randolph May and I stated the following:

These new online applications facilitate the exchange of goods and services in a way which easily enables a range of peer-to-peer connections and which reduces transaction costs. Individuals have always been able to sell or borrow goods and services through yard sales and community markets, but the Internet has changed the process with a faster, easy-to-use information exchange. For over a decade now, companies like E-bay and Craigslist have used the Internet to lower the transaction costs of modern commerce. But more recently, an influx of new companies and Internet-based applications has emerged enabling individuals to more easily “share” their underutilized things, including, for example, their homes, apartments, and cars.

In a newly-published March 2015 scholarly paper entitled “Peer-to-Peer Rental Markets in the Sharing Economy,” New York University professors Samuel Fraiberger and Arun Sundararajan empirically tested how rental markets within the “sharing economy” are impacting consumers. Professors Fraiberger and Sundararajan found, with statistical significance, that the benefits of “sharing economy” markets have a greater impact on low-income persons than high-income persons.

The new study states:

We highlight this finding because it speaks to what may eventually be the true promise of the sharing economy, as a force that democratizes access to a higher standard of living. Ownership is a more significant barrier to consumption when your income or wealth is lower, and peer-to-peer rental marketplaces can facilitate inclusive and higher quality consumption, empowering ownership enabled by revenues generated from marketplace supply, and facilitating a more even distribution of consumer value.

The explanation of the results is quite simple. Due to the accountability and transparency that many sharing applications provide about their users, the emergence of trust between individuals to share their goods and services has shifted consumer preferences from owning to renting. People who could not afford to own a house, car, or even a power saw can now more easily rent them from others and ultimately enjoy a higher standard of living than they would have otherwise. Additionally, people who would have owned a car or power saw in the past might now rent them instead, saving a significant portion of their income.

Of course, high-income people gain from the sharing economy as well. But the savings accumulated from a shift in owning to renting is more valuable to people with low incomes than to people with high incomes. In economic terms, this is the law of diminishing marginal returns. All else equal, each dollar earned is valued less than the previous one.

Similarly, low-income people, who already own goods that can be rented out, stand to gain more from these transactions than high-income people. The extra income from sharing a car with someone is much more valuable to a poor college student than it is to a wealthy professional. As I have written before, Airbnb, for example, makes traveling less expensive, not only because it provides competition – and often lower prices – to traditional hotels, but also because travelers can share their living space while away. (See here.) In other words, as a result of the sharing economy, the same traveler on the same trip may realize economic benefits in his or her capacity as both a lessor and lessee.

The emergence of the “sharing economy” has provided large welfare gains to the economy as a whole. Consumers have additional, and often less expensive, options in everyday markets, and entrepreneurial activity has been created by ordinary people because Internet-enabled applications have vastly lowered the barriers to market entry.  

Professors Fraiberger and Sundararajan’s paper is significant in its use of empirical data to conclude that access to peer-to-peer rental markets has the effect of increasing savings for renters and increasing incomes for suppliers. While this economic effect of the “sharing economy” is beneficial to all market participants, it proves most valuable to low-income persons. The paper makes for an interesting read as well as a scholarly contribution to the limited academic literature regarding the new “sharing economy.”

Entrepreneurs Cannot Predict the Future and Neither Can Regulators

Whether you are an entrepreneur, a venture capitalist, or an economist, it is almost impossible to envision with any certainty what a given market will look like one, five, or ten years down the road. And it is especially difficult to do so for a highly innovative and dynamic market such as broadband. Successful entrepreneurs need to have vision and alertness about consumer demands, but it is fair to say that even successful entrepreneurs cannot predict the future. But more importantly for my purposes, regulators and politicians cannot predict the future either.

In a recent Perspectives from FSF Scholars, Gus Hurwitz wrote a piece entitled “Open Internet and the Law, or Removing the Cart from Afore the Horse.” He makes the point that ex ante rules which will “protect the Open Internet” are a solution in search of a problem. He says that whether the appropriate legal framework for regulating the broadband market is Section 706, Title II, neither, both, or something else, “until we know the rules’ purpose, we cannot speak to the appropriate authority.”

Professor Hurwitz emphasizes that ex ante bright-line rules, or rules that would prohibit specific conduct that has yet to occur, are not needed because they do not consider that such conduct may not be problematic for consumers in some circumstances. In other words, if it is unknown how the broadband market will look in one, five, or ten years, how can the Federal Communications Commission (FCC) definitively say that specific conduct from Internet Service Providers (ISPs) is wrong if such conduct has yet to occur in a manner that is detrimental to consumers? And even if such conduct would be foreseeably problematic in most circumstances, it does not mean it would be problematic in all circumstances.

For that reason, Professor Hurwitz suggests that the FCC issue guidelines with flexible standards rather than mandatory rules:

These guidelines should reiterate what the D.C. Circuit in Verizon made clear, that the Commission has substantial authority in this area under Section 706. And the Commission should say that, if Section 706 proves insufficient to curtail problematic conduct, it will explore other tools for protecting consumers from harmful conduct – including Title II or seeking greater Congressional involvement. And it should say what everyone knows -- that the world is watching – that the Commission, aided by a concerned Congress and an army of public interest lawyers and an agitated Silicon Valley, is watching, and that it won’t hesitate to bring swift action against any firm that engages in problematic conduct.

The guidelines would act as market norms. So while disregarding the guidelines may not get an ISP in trouble with the law, per se, the firm could lose out on consumers and/or market share. But guidelines, as opposed to rules, allow for case-by-case interpretation of situations where the market norms are broken. Of course, the FCC could have the authority to “bring swift action against any firm that engages in problematic conduct.” But a competitive market should need an overseeing enforcer of market norms only infrequently. Competitive markets allow for consumers to choose if an ISP’s disregard for market norms is warranted or not.

In other words, increasing competition is almost always the best market regulator because ISPs are motivated to satisfy consumer demands. So while ISPs do not have the incentive to engage in conduct detrimental to consumers, if an ISP does engage in such conduct consumers can choose to subscribe to a different ISP.

So, ultimately, regulators at the FCC should spend much less time trying to predict market outcomes or attempting to predict how they think ISPs might act in the future. Regulatory costs create barriers to entry into the market and likely lead to less competition, lower levels of investment and deployment, and higher prices for consumers. Instead, regulators should spend time paving the way for even more competition by reducing regulatory impediments. This would put more of the “regulating power” in the hands of consumers.