Next month, a new book entitled Captive Audience:  The Telecom Industry and Monopoly Power in the New Gilded Age (Yale University Press 2012) from Cardozo Law School Professor Susan Crawford will hit the bookshelves.  According to her publisher’s blurb, Professor Crawford’s book will examine how the United States has “created the biggest monopoly since the breakup of Standard Oil a century ago.”  But what is this “monopoly” to which Professor Crawford refers?  While the publisher’s promotional blurb is silent on this question, according to a 2010 paper authored by Professor Crawford in the Yale Law and Policy Review, it appears that she is talking about a purported “looming cable monopoly” for high-speed broadband service. Given such a dire prognostication, let’s take a quick look at Professor Crawford’s arguments to see if they have any merit.

At the crux of Professor Crawford’s argument is not her own independent economic analysis of the market, but rather her reliance on a discrete passage from the Federal Communications Commission’s 2010 National Broadband Plan (NBP), wherein the agency observed that:

Analysts project that within a few years, approximately 90% of the population is likely to have access to broadband networks capable of peak download speeds in excess of 50 Mbps as cable systems upgrade to DOCSIS 3.0.  About 15% of the population is likely to be able to choose between two robust high-speed service services—cable with DOCSIS 3.0 and upgraded services from telephone companies offering fiber-to-the-premises (FTTP).

These upgrades represent a significant improvement to the U.S. broadband infrastructure, and consumers who value high download and upload speeds will benefit by having a service choice they did not have before the upgrade.  The upgrades may, however, change competitive dynamics.  Prior to cable’s DOCSIS 3.0 upgrade, more than 80% of the population could choose from two reasonably similar products (DSL and cable).  Once the current round of upgrades is complete, consumers interested in only today’s typical peak speeds can, in principle, have the same choices available as they do today.  Around 15% of the population will be able to choose from two providers for very high peak speeds (providers with FTTP and DOCSIS 3.0 infrastructure).  However, providers offering fiber-to-the-node and then DSL from the node to the premises (FTTN), while potentially much faster than traditional DSL, may not be able to match the peak speeds offered by FTTP and DOCSIS 3.0.  Thus, in areas that include 75% of the population, consumers will likely have only one service provider (cable companies with DOCSIS 3.0-enabled infrastructure) that can offer very high peak download speeds …. (National Broadband Plan at p. 44 and emphasis supplied.)

According to Professor Crawford, we should interpret the preceding section of the National Broadband Plan to mean the following:

Where Verizon FiOS service exists, there will be competition with cable Internet access service providers for high-speed Internet access at speeds that are necessary to carry out real-time video conferencing or watch high-definition video.  Where FiOS is not installed, there will not be any competition, and consumers will have just one provider to choose from: their local cable monopoly.  Most Americans—perhaps as many as 85% of us—will fall into this latter category (emphasis supplied).

Such a pessimistic assessment of the future of broadband competition in America requires a somewhat narrow reading of the National Broadband Plan.  Indeed, it turns out that the NBP plan tells a very different story from that which Professor Crawford would have us believe.

First, the National Broadband Plan does not conclude that the presence of a single provider of very high-bandwidth services constitutes a monopoly.  As the Plan plainly states:

Broadband providers can compete for customers in a number of ways. They can offer similar products and compete on price, they can improve their product so that people are willing to pay more for it, and they can offer products targeted to different groups. (National Broadband Plan, Chapter 4, fn. 13.)

So, if not everyone wants the highest speeds of service (and evidence suggests that few actually do) and price differentials matter, then firms offering various qualities of service may lead to a workably competitive marketplace.  Certainly, differentiated competition is not the same as monopolization as Professor Crawford posits.

More to the point, the National Broadband Plan never once says that Professor Crawford’s professed dire outcome of a “cable broadband monopoly” will automatically come true (much less is here today); to the contrary, the Plan clearly states that the potential “tipping” she fears may occur if expected returns to telephone companies do not justify … upgrades….”  (National Broadband Plan at p. 44, emphasis supplied), and most of the Plan addresses the investment-trimming effects of regulation and bad policy.  FCC Omnibus Broadband Initiative (OBI) Technical Paper No. 1, The Broadband Availability Gap (2010) re-enforces this basic maxim, noting that:

“[p]rivate capital will only be available to fund investments in broadband networks where it is possible to earn returns in excess of the cost of capital. In short, only profitable networks will attract the investment required.” (Id. at p. 1.)

So, while there is certainly a legitimate risk that such “tipping” could occur sometime in the future, we are far from Professor Crawford’s world of a cable broadband “monopoly.”

That said, if the National Broadband Plan is correct that there is, in fact, a legitimate risk of “tipping”, then what should be the appropriate policy response?  Given the Plan’s repeat of the obvious maxim that firms will not invest unless such investments are profitable, it seems to me that if we want more broadband infrastructure investment, then the clear policy response would be for regulators to signal to investors that broadband infrastructure will provide (to quote Chairman Genachowski) a “healthy return on investment” both now and in the future so that telephone companies will be encouraged to push fiber deeper into their networks to keep pace with cable plant.  In practice, this means, at minimum, (1) an environment with regulatory certainty; and, more specifically, (2) a certainty that policies will not reduce the profitability of broadband service providers (and, in particular, presently-regulated telcos seeking to upgrade their plant).  Regulatory certainty, in and of itself, is not a useful goal—more certainty about expected returns is required to stimulate more investment.  (See our Perspective, What is the Effect of Regulation on Broadband Investment? Regulatory Certainty and the Expectation of Returns).

But here’s the rub:  Rather than seek to advocate policies that would incent investment and remove barriers to entry, Professor Crawford instead has a long history advocating policies that are expressly designed to shift profits away from Broadband Service Providers, thus making investment unattractive and contributing towards the very tipping she claims is inevitable.

As the most obvious example, we have network neutrality, Professor Crawford’s personal cause célèbre.  As I noted in an earlier blog post, despite all of Professor Crawford’s calls for a “free and open Internet”, the hard fact is that the FCC’s net neutrality rules (and most proposed net neutrality rules) turned out to be little more than price regulation aimed at shifting profits from the network providers to “over-the-top” firms like Google.  (A point also noted by other observers.)  These new rules also force consumers to bear the full cost of network upgrades and expansion, since the broadband providers are precluded from allowing applications providers to shoulder part of the cost.  And while many application providers are attempting to circumvent this rule and help fund network improvements (particularly in the mobile space, where the rules are more relaxed), such efforts are being challenged by those—like Professor Crawford—who are hostile to market solutions for inefficient outcomes.

Equally as important, net neutrality commoditizes the Internet and limits the ability for firms to compete on quality; instead, firms are left to compete primarily on price.  However, as firms compete on price, price-cost margins decrease, thereby shrinking the equilibrium number of firms a market can sustain.  So, once again, in the name of promoting an “Open Internet”, Professor Crawford (whether deliberately or by omission) aggressively advocates for policies that will accelerate the consolidation and potential “tipping” she so professes to detest.

Professor Crawford is also vehemently opposed to what she terms as the “sledgehammer” of usage-based pricing for broadband services.  According to Professor Crawford, usage-based pricing is instead nothing more than sheer monopoly rents, as there is no

connection between congestion or high usage and the need for the cable distributors to create usage tiers. *** Cable distributors have a choice:  They could maintain the 90+% margins they enjoy for data services and the astonishing levels of dividends and buybacks their stock produces, or they could rearchitect their networks to serve obvious consumer demand.  But they are in harvesting mode, not expansion mode.  And no competitor is pressuring them to expand.

As a result, argues Professor Crawford, the “major cable distributors can charge whatever they want, however they want, for whatever services they define.  There is no oversight of any of this and no visibility into what is actually going on.”

Professor Crawford’s argument is so truly bizarre and so lacking of any basic economic fundamentals, I’m not even sure where to begin.  Let’s start with Professor Crawford’s supposition that broadband networks never suffer from congestion.  This is just wrong on the facts.  As the Supreme Court astutely recognized in MGM v. Grokster, 545 U.S. 913, 920 n. 1 (2005), aggressive users of the Internet, particularly those who use peer-to-peer technologies, have absolutely “no incentive to minimize storage or bandwidth consumption, the costs of which are borne by every user of the network.”  So how do you deal with this lack of incentive?  Price: charge heavy users more, so light users can pay less.  Professor Crawford finds this outcome unsatisfactory, however, and instead argues for the heavy hand of uniform price regulation.

As it turns out, Phoenix Center Chief Economist Dr. George Ford looked at this argument in detail in a Perspective we released last May entitled A Most Egregious Act?  The Impact on Consumers of Usage-Based Pricing, and found the economic logic opposing usage based pricing wanting.  Using a very simple economic example, George shows that that charging a positive price to account for the substitution of over-the-top video services for the broadband provider’s own “core” services can make consumers and society better off.  Consequently, regulations that prohibit such actions can make consumers and society worse off.  Indeed, George demonstrates that “it is not difficult to show that prohibiting this practice can harm consumers and reduce economic welfare.”  As George explains,

A prohibition of usage-based pricing may force some consumers to pay more for services they do not want or use, while others are allowed to pay less for services they do.  The prohibition, in effect, results in a transfer of wealth from one group of consumers to another, and reduces profits.  Overall consumer welfare may be diminished, even though some consumers are better off.  Given numerous valid reasons for usage-based pricing, the positive case for regulatory intervention is weak.

For those interested in exploring this issue in more detail, I commend reading George’s analysis in more detail.

And, of course, we have Professor Crawford’s support of AllVid.  For those unfamiliar with AllVid, AllVid was the FCC’s attempt to double-down on its billion dollar CableCard policy dud by mandating a single cable box across all platforms.  According to Professor Crawford, the Commission should impose AllVid to prevent MVPDs from exercising their supposed “market power” to ensure that “unauthorized video isn’t allowed into approved consumer devices, and don’t let anyone create new devices that will play well with subscription services.”  However, as we explained in great detail in our paper Wobbling Back to the Fire:  Economic Efficiency and the Creation of a Retail Market for Set-Top Boxes (which is about to be published in the forthcoming issue of CommLaw Conspectus) and in a subsequent blog, the economics tell a very different story.  Contrary to Professor Crawford’s polemics, a serious analysis of the economics reveals that forcing a commercial retail market for set-top equipment by regulatory fiat is arguably poorly motivated because providers have no demonstrated anti-competitive incentives with regard to the set-top box.  If anything, MVPDs are strongly motivated to provide low-cost, high-feature set top equipment to consumers and regulation is unlikely to lower price, improve quality, or increase innovation.

Which brings me to back to the original question of whether the Commission’s prognostication is correct that the differential cost of network investment will cause a competitive “tipping” to cable broadband.  Notwithstanding the heavy hand of regulation that characterized the last four years, last week AT&T—the nation’s largest copper-based wireline firm—just announced that it intended to make a staggering $6 billion dollar investment into their wireline network (along with a concurrent $8 billion investment into their wireless network) to accelerate the transition of their legacy TDM architecture network to a modern and efficient all-IP network.  In so doing, AT&T is publicly committing to avoid the exact sort of “tipping” to cable plant that Professor Crawford so vehemently fears.  Rather than welcome this development, however, Professor Crawford continues to complain.

According to Professor Crawford, the looming need to transition from legacy TDM architecture to more efficient (i.e., cheaper) advanced IP networks is actually bad for consumers because the IP transition means that we are “moving away from the basic social contract of voice service at a reasonable cost and moving to an almost-completely unregulated world of expensive, second-class broadband that is serving only about 70% of Americans.”  Of course, to make such a claim, Professor Crawford conveniently ignores the findings of the NTIA’s broadband map which revealed that 95% of homes in this country have access to a broadband service satisfying the FCC’s definition of high-speed Internet service, and other research indicates that only a small share of non-adopters view the monthly service price as a deterrent to adoption.  Along the same lines, she argues that the IP transition will somehow deprive “all Americans … equivalent broadband capacity”, as if there was one homogenous American consumer with a unified demand profile and the costs of serving that consumer—regardless of geographic location—are the same.

When I read Professor Crawford work, I am consistently reminded of Goldmember’s admonition to Austin Powers:  “there is no pleasing you.”  The telecom community is well aware of Professor Crawford’s enamourment with the Australian government-monopoly $30 billion “national network” model (notwithstanding the fact that it has been shown that this network is behind schedule, over budget, and falling far short of the subscribership levels needed to break even).  If Professor Crawford is so convinced that the private sector is incapable of delivering affordable, high-speed broadband access, and that the U.S. broadband market should be turned over to a government-run monopoly, then perhaps she should make her position clear.  If and when she does and we can have that debate in open view, then perhaps we can finally stop pretending that there is a group of regulators from a parallel universe who can turn the market into a fairyland where every citizen demands equal quantities of broadband and providers can supply everyone—no matter what the deployment cost—for free.

 

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