Ev Ehrlich's Everyday Economics

The Thoughts of Chairman Julius

Chairman Julius Genachowski this week offered up a vision of the Internet that, he believes, will “make sure that…the garage, the basement, and the dorm room remain places where innovators can…bring their dreams to life.” It involves developing assurances that no traffic will ever be ‘favored” over another, and that broadband providers must make their approaches to managing the traffic on their networks “transparent” to assure that this absence of favoritism is maintained.

I don’t have the time to write a full-scaled deconstruction of the Chairman’s remarks, and you have even less time to read one.  But let’s cut the chase.  Why is this trip necessary – what’s the danger to which these regulatory guidelines respond?

The Chairman’s argument is that doing nothing “would deprive innovators and investors of confidence that the free and open Internet we depend on today will still be here tomorrow.”  But his remarks were replete with examples of innovators such as Google, Facebook, or Wikipedia, or the iPhone and Blackberry, which all blossomed without these assurances.  (The iPhone is the exact opposite of this “neutral” principle, as it only works on the ATT system.)  And who would possibly subscribe to an Internet provider that limited what content its subscribers could see or what innovations it could access?  Who would buy broadband from a provider that announced “On my service, you can only trade with Schwab or buy music of iTunes or books from Amazon?”  But that’s the argument – that providers will do stuff like this that nobody wants and make it stick. 

Moreover, the Chairman continued, absent intervention, we risk losing the Internet as “an unprecedented platform for speech, democratic engagement, and a culture that prizes creative new ways of solving old problems.”  One again, the same two questions arise – one, we’ve had that culture and engagement without these regulatory principles and, two, who would ever do business with a grinning-idiot provider who only let you get your content from sites that met with Fox’s or MSNBC’s approval?  Why piss off half your customer base to keep the other half?

These ideas only make sense once you read an additional remark the Chairman made in his speech.  That remark was this;  “As American consumers make the shift from dial-up to broadband, their choice of providers has narrowed substantially.”

This, I think, is what it’s all about – the Chairman, like many proponents of regulation see the provision of broadband as uncompetitive – a cable and telco “duopoly.”  If you didn’t think that the industry was inherently uncompetitive and potentially collusive, you wouldn’t have to go through all the principles and posturing and politicking.  Because a competitive industry would never do the stuff the Chairman fears, like suppress good innovations or political speech.  After all, that requires you to believe that all the different Internet providers on all the different platforms – whether fiber, or cable, or mobile, or satellite, or whatever else comes along – will collude to stop the next Facebook or E-bay from coming into existence, or will block the next Google, and even choose to limit political speech, even if it costs them customers.

But even more fundamentally, from an economic view, the idea that you once had lots of Internet options and now you have just a few misses the point.  A decade ago, my tech-savvy friends told me that I could get something called “DSL” to replace my dial-up.  It was, of course, a revelation, and there were all manner of companies ready to sell it to me. But they were all selling the same thing – they were all buying time on a phone system that was mandated to sell to them, and they all simply used a standard modem to get you access.  They didn’t invest in new technologies or create any new infrastructure -- in fact, they were like symbionts in the ecology dominated by the telephone infrastructure providers – sucker fish attached to the telecom whales.

Today, these sucker fish have gone out to sea.  They’ve been driven out by entirely new platforms for broadband, not just a hundred other sucker fish selling the same stuff.  Verizon’s fiber-based system is new and different.  So are the cable-based offerings of Comcast or Cox.  And while they are not yet as good as fiber or cable, wireless providers such as Clearwire are growing rapidly in scope and speed, and if conventional telephony is any indication, users may be willing to take a small cut in quality for the mobility they gain when they “cut the cord.”

So, instead of competition among the sucker fish, we now have competition among the whales.  Cable, fiber, and now wireless are not cookie-cutter, “me, too” competitors like Earthlink and Covad were, but distinct, competitive systems.  Once a fiber or cable provider does their engineering or builds a loop, or once a wireless system puts up a tower, the heaviest lifting is done.  That means that making more money depends on getting as many subscribers as you can on to your system to spread the fixed costs around.  That makes collusion against the consumer awfully hard to pull off.

All told, this is not your father’s “duopoly,” like the steel industry in the 1950’s or the pre-Japan automotive Big Three.  It’s companies that have invested tens of billions in fixed-cost systems and sell a rapidly changing product to a public that likes its Internet open and fast.  And perhaps the proof of the pudding is that the Internet is open and fast, because these companies compete to give consumers what they want.

The Chairman should be applauded for recognizing that the Internet is a dynamic place that will inevitably evolve away from a fixed set of rules, much as the financial industry did, to disastrous results.  But that same dynamism affects industry structure.  The Chairman, to his credit, supports openness, even in his own mind, and if he has an open mind on this question, I’d urge him to think about it.  He could start with my paper, posted on this site, “The Reality of Competition in the Broadband Market.”    I’ve asked the Commission for the chance to present it to them at public hearings on broadband economics on October 9, and I’m hoping they’ll oblige.