"The Simple Economics of Broadband Regulation"

Shane Greenstein discusses "The Simple Economics of Broadband Regulation." The discussion (from mid May) comes in response to a court ruling in the Comcast v. FCC case. Here's how the FCC describes the regulatory problems caused by the ruling in the Comcast case:

A month ago, the United States Court of Appeals for the D.C. Circuit issued an opinion...  [in] Comcast v. FCC, the so-called Comcast/BitTorrent case.  The case began in 2007, when Internet users discovered that Comcast was secretly degrading its customers’ lawful use of BitTorrent and other peer-to-peer applications.  In 2008, the FCC issued an order finding Comcast in violation of federal Internet policy as stated in various provisions of the Communications Act and prior Commission decisions.

The D.C. Circuit held that the Commission’s 2008 order lacked a sufficient statutory basis ... because the Commission, in 2002, classified cable modem offerings entirely as “information services” (a category not subject to any specific statutory rules...), it could not, in 2008, enforce ... nondiscrimination and consumer protection principles in the cable modem context. ...

[U]nder Comcast, the FCC’s 2002 classification decision greatly hampers its ability to accomplish a task the Commission unanimously endorsed in 2005:  “ensur[ing] that broadband networks are widely deployed, open, affordable, and accessible to all consumers.” 

The court ruled that the FCC did not have the authority to stop Comcast from limiting the services of applications that flow over its network (i.e. the ruling allowed net non-neutrality). In response, the FCC reclassified the cable carriers so as to reestablish their regulatory authority. What are the economics behind the FCC's response (the original post has quite a bit more detail)?:

The Simple Economics of broadband regulation, bu Shane Greenstein: There is a simple economic rationale behind the FCC’s recent announcement, made last week by Chairman Julius Genachowski, on May 6th.The FCC had to act. The costs of not acting were too great. Here is why. Broadband carriers have strong economic incentives to provide services that compete with the applications of others. Yet, those same broadband carriers carry the data of all those applications. These carriers face what is often called “mixed incentives”, and until recently all carriers were forbidden from acting on them. Genchowski wanted to keep things that way, but an appellate court made that hard to do.

Let me make the issue concrete. Just ask your neighbor what they would think of the following: Would they be angry if Comcast blocked Skype from operating and told all users they had to go through an approved vendor of IP telephony? Would your neighbor be unhappy if Google slowed down when the search concerned local car dealers because AT&T broadband had a local search service on which local car dealers advertised? Would your neighbor be frustrated if they could not go to Hulu, but instead had to go to the approved TV distributor who worked with Verizon?

Look, none of that has happened yet, but that is because it was forbidden by regulators until a few weeks ago. It is not anymore, and that illustrates what any sensible regulator should fear. ... Households have gotten used to having unrestricted choice online of innovative services, and there would be a minor revolt if narrow firm self-interest got in the way of that.

I have no axe to grind with carriers, so let me say that more positively. The ... present limitations have fostered an innovative ecosystem. Software vendors and Internet hosting companies have developed a range of innovative services in anticipation of (1) better infrastructure on which to run it, and (2) sending their applications across broadband lines that behave the same way everywhere.

In other words, application vendors do not worry about which carrier delivers the data to which homes because carriers are not allowed to act on their mixed incentives. Knowing that, application developers innovate in all sorts of ways that users enjoy.

Those simple economics explains quite a bit of regulatory action..., it is not surprising the FCC feared what would happen if it permitted no legal restraint on carrier action. ...

There were two economic reasons to take action, and both point towards limiting mixed incentives. One has to do with the incentives to act on mixed incentives today, and the other has to do with the long term trends of the evolutions of the network, which reinforces incentives to act on mixed incentives tomorrow...

I am not saying anything that many other analysts have not noticed. Comcast’s management is ambitious. So is AT&T’s, and so is Verizon’s. They must be considering how a carrier can develop its own television service (instead of relying on Hulu), or get a piece of revenue from selling online movies (instead of letting Netflix collect all the revenue), or get a piece of online advertising for local services (instead of letting Google collect all the revenue).

This is an old lesson in regulatory economics. Commercial ambition from a dominant firm is a good thing when it fuels competitive conduct, innovative services, and invading of new service territories. Ambition from dominant firms is usually not such a good thing when it motivates such those firms to block a rival’s access to channels, when it leads dominant firms to refuse to deal with potential rivals, and when it leads dominant firms to raise a rival’s cost. ...

Mixed incentives are a very old problem in communications access regulation, and easily understood by every regulator on the planet. Every regulator can sense the danger of letting carriers move down the slippery slope of not cooperating with another participant in the Internet ecosystem. That bright line had to be protected, if only for the sake of preserving the innovative ecosystem that has driven the Internet forward in these last two decades.

Let’s hope the ecosystem continues to be innovative in the next decade with these new set of rules.