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Net Neutrality—Analyzing Georgetown’s Position

Posted in Antitrust and Competition Policy, FCC, Lawsuits, Net Neutrality

100033462Georgetown University’s business school (specifically the Center for Business and Public Policy) submitted an Amicus Brief in the currently pending net neutrality lawsuit at the D.C. Circuit. It is highly critical of the FCC and dependent upon ideas that are deeply suspect. The Brief is based on the “Economic Policy Vignette.

Economic Flaws. The policy paper argues that in adopting the “radical” Net Neutrality rules, the FCC ignored economic considerations resulting in the following three economic flaws:

  1. The Order overstates the likely benefits of its stringent regulatory regime by relying on implausible theory and speculation about anticompetitive threats from broadband access providers;
  2. By failing to account appropriately for the overwhelming empirical evidence showing the benefits of “light-touch” regulation, the Order overstates the benefits from additional regulatory control and understates the costs of net neutrality regulation; and
  3. The Order recklessly dismisses evidence of the very real threat to investment, innovation and output that will result from net neutrality regulations.

Basis for Georgetown’s Critique. The fundamental question arising from net neutrality is whether broadband providers would use their control over your access to the Internet (either by wireline or mobile facilities) to affect your experience on the Internet, and if so, whether regulation should prohibit or limit such control. Georgetown concludes that this is not a real issue:

The gatekeeper theory motivating the [FCC’s] sudden leap to Title II ignores… fundamental economic principles. Instead of recognizing the important role of competition, the Order artificially narrows reality to the “monopoly” an ISP has “once a consumer chooses a broadband provider.” This implausible view of monopoly (true only in the literal sense that the customer is being served by a single ISP at a given moment in time) is economically vacuous. The same “monopoly” could be said to exist for customers who have entered a movie theater or restaurant. Yet this everyday phenomenon has never been seen as a market failure demanding the imposition of comprehensive regulation…. (Emphasis added.)

The [FCC’s] speculation that switching costs lock consumers into a given provider are flatly contradicted, however, by data that reveal both a rapidly growing market (compelling competition for new customers) and the propensity of consumers to switch (compelling competition to retain customers).

Georgetown also argues that net neutrality regulations will prohibit ISPs from offering innovative, economically attractive “products,” and that absent such regulations, broadband providers would not undertake practices harmful to consumers or about which consumers are ignorant. This is a canard. Nothing in the net neutrality regulations prohibits ISPs from voluntarily offering economically attractive offerings—provided that consumers have a choice of offerings that doesn’t violate neutrality principles.

Consumers Are Capable of Evaluating the Validity of Georgetown’s Premise. Many of us are hesitant to challenge (or even try to understand) expert economic analysis. Georgetown’s report is crafted so as to make sense to the layperson. As a result, it lays bare the essential foundation of Georgetown’s economic argument.

And the argument is this: Consumers do not believe that their Internet service provider has an effective “monopoly” over their access to the Internet. We are as free to switch ISPs as we are to switch restaurants or movie theaters.

Our Take.

It is hard to imagine professional economists making the argument to one another with a straight face that broadband providers do not control our access to the Internet. A family with three (or a half dozen) phones on a single plan designed to provide maximum broadband capacity are not free to change plans like they are free to decide which restaurant to frequent on any given Wednesday night. And unless you have an in-family IT manager, the practical complexities of changing a wireline ISP are significant. (Just upgrading an ISP’s router may take days or weeks for the uninitiated, and the knowledge of this retards change.) The FCC understood this, and Georgetown complains that the FCC’s analysis was based upon consumer surveys, meaning talking with consumers. Georgetown argues that consumers do, in fact, change wireless providers (US$10 million in the 2014 4th Q alone), but the economists fail to identify why they did so, or the nature of the costs of doing so.

It simply is not logical to argue that consumer displeasure with certain aspects of their ISPs means there is no principled basis for regulatory intervention to minimize further displeasure.

In the end, net neutrality is an area where economists can inform, but ultimately have less to say than it appears. Often, economists’ telecom arguments are tautological, starting with a political value judgment, and proceeding to an argument in support of that value judgment. In this case, Georgetown argues that there are no real problems with changing ISPs, and that any problem is as easy to resolve as the question of which restaurant to visit. Good luck with that. And by the way, what about those large portions of the country where there is only one restaurant?

Net neutrality is a serious issue, and it deserves to be treated that way. Rhetoric that the FCC has been “reckless” and “thoughtless” is just politics masquerading as analysis. It also conveniently ignores the fact that both Verizon and Sprint have said that net neutrality policies will not affect how they run their businesses, thus fatally undermining Georgetown’s thesis.

The high rhetoric exists mostly to obscure what are fairly simple positions. In this case, should ISPs have to make a neutral offering available to consumers, provided that the ISP is also free to market more complicated, non-neutral programs?