DOJ Rejects Broadband Market Failure Thesis

January 6, 2010

In a filing to the FCC on the National Broadband Plan, the DOJ Antitrust Division, the U.S Government’s leading expert in assessing the state of competition in communications markets, implicitly rejected net neutrality proponents’ core thesis of broadband market failure.

  • This DOJ filing, which represents the most recent U.S. Government expert assessment of broadband competition, could make it extremely difficult for the FCC to legitimately conclude in the coming months the factual opposite — broadband market failure.
  • Without a sound factual finding of broadband market failure, it also could be extremely difficult for the FCC to legally justify preemptively mandating common-carrier like regulations on un-regulated broadband information service providers in the FCC’s pending open Internet proceeding.
Let’s review the DOJ’s core broadband competitive conclusions, which are relevant to the alleged broadband market failure thesis and the FCC’s open Internet proceeding.

First, DOJ implicitly rejected the assertion of net neutrality proponents that low adoption rates prove a lack of competition by explaining:

  • Relatively low adoption rates for a given group may reflect the relative absence of… complementary inputs, rather than a problem inherent in the supply of broadband services themselves.” (p. 4, para 3)

Second, DOJ implicitly rejects the proposed simplistic static snapshot of broadband competition of net neutrality proponents and supports a dynamic, forward-looking analysis of markets like broadband.

  • In an industry subject to significant technological change, it is important that the evaluation of competition be forward-looking rather than based on static definitions of products and services.”
  • “In the case of broadband services, it is clear that the market is shifting generally in the direction of faster speeds and additional mobility.” (p.6, para 2)

Third, DOJ rejects the core expectations of net neutrality proponents: commodity competition and incremental cost pricing.

  • In markets such as this, with differentiated products subject to large economies of scale (relative to the size of the market), the Department does not expect to see a large number of suppliers. Nor do we expect prices to be equated with incremental costs. If they were, suppliers could not earn a normal, risk-adjusted rate of return on their investments in R&D and infrastructure.” (p.7, para 2)
    • This realist view of economics, total cost, and market pricing is a strong implicit rejection of the utopian information commons economics of Harvard’s Yochai Benkler and other “dumb pipe,” end-to-end purists who predicate their economic theories on the un-supported view that incremental internet usage involves no cost — so it should be free.
    • The DOJ’s continued support for longstanding proven economics and competitive analysis based on total costs, also implicitly raises the question why the FCC’s proposed open Internet regulations regulations allow for differentiated pricing for broadband consumers, but prohibit differentiated pricing for large application/content providers like Google, Amazon and eBay.

Fourth, the DOJ also implicitly rejects the one-size-fits-all notion of net neutrality proponents that all markets should be subject to the same preemptive government intervention.

  • Competitive conditions vary considerably for consumers in different geographic locales.” (p.7, para 3)

Fifth, the DOJ does not support the assessment of net neutrality proponents that the broadband market is at best a weak duopoly and that wireless broadband cannot be a competitive substitute for wireline broadband.

  • Wireless may be a very attractive alternative for consumers who greatly value mobility and for consumers who do not place much value on the highest speeds.”
  • Wireless broadband “appears to offer the most promising prospect for additional competition in areas where user density or other factors are likely to limit the construction of additional broadband wireline infrastructure.” (p.8, para 1)
 

Sixth, the DOJ understands that consumers can benefit substantially from allowing more competition to develop.

  • “… consumers can enjoy substantial benefits when the number of strong competitors rises from two to three or three to four, especially if the additional competitor offers products based on a new and distinctive technology. Developments in both the MVPD and the wireless markets over the past 15 years underscore this point.” (p. 15, para 1)

Seventh, the DOJ rejects the pessimistic premise of net neutrality proponents that broadband competition is not working and cannot work going forward.

  • Between the ongoing deployment of wireline broadband networks, the geographic expansion of wireless broadband services (hopefully spurred by the availability of additional spectrum to broadband wireless services), and increased transparency, the Department is hopeful that the vast majority of American households will benefit from significant competition in their local markets. Put differently, most regions of the United States do not appear to be natural monopolies for broadband service.” (p. 28, para 1)

Finally, the DOJ warns that preemptive monopoly regulation (proposed by net neutrality proponents) would discourage deployment and efforts to expand broadband access.

  • “Although enacting some form of regulation to prevent certain providers from exercising monopoly power may be tempting… care must be taken to avoid stifling the infrastructure investments needed to expand broadband access.”
  • “In particular, price regulation would be appropriate only where necessary to protect consumers from the exercise of monopoly power and where such regulation would not stifle incentives to invest in infrastructure deployment.” (p. 28, para 2)

In short, the DOJ’s rejection of the broadband market failure thesis is a substantive and under-appreciated setback for net neutrality proponents.

  • Without the DOJ’s concurrence that the evidence shows broadband market failure, it will be much harder for the FCC to conjure up a legally-sustainable justification for preemptively regulating broadband as common carriers when there is such scant evidence of any net neutrality problem.

Importantly, the DOJ did not buckle under to FreePress’ and Google’s heavy political pressure to disregard the facts and merits of competition in the broadband market.

Sixth, the DOJ understands that consumers can benefit substantially from allowing more competition to develop.

  • “… consumers can enjoy substantial benefits when the number of strong competitors rises from two to three or three to four, especially if the additional competitor offers products based on a new and distinctive technology. Developments in both the MVPD and the wireless markets over the past 15 years underscore this point.” (p. 15, para 1)

Seventh, the DOJ rejects the pessimistic premise of net neutrality proponents that broadband competition is not working and cannot work going forward.

  • Between the ongoing deployment of wireline broadband networks, the geographic expansion of wireless broadband services (hopefully spurred by the availability of additional spectrum to broadband wireless services), and increased transparency, the Department is hopeful that the vast majority of American households will benefit from significant competition in their local markets. Put differently, most regions of the United States do not appear to be natural monopolies for broadband service.” (p. 28, para 1)

Finally, the DOJ warns that preemptive monopoly regulation (proposed by net neutrality proponents) would discourage deployment and efforts to expand broadband access.

  • “Although enacting some form of regulation to prevent certain providers from exercising monopoly power may be tempting… care must be taken to avoid stifling the infrastructure investments needed to expand broadband access.”
  • “In particular, price regulation would be appropriate only where necessary to protect consumers from the exercise of monopoly power and where such regulation would not stifle incentives to invest in infrastructure deployment.” (p. 28, para 2)

In short, the DOJ’s rejection of the broadband market failure thesis is a substantive and under-appreciated setback for net neutrality proponents.

  • Without the DOJ’s concurrence that the evidence shows broadband market failure, it will be much harder for the FCC to conjure up a legally-sustainable justification for preemptively regulating broadband as common carriers when there is such scant evidence of any net neutrality problem.

Importantly, the DOJ did not buckle under to FreePress’ and Google’s heavy political pressure to disregard the facts and merits of competition in the broadband market.

 

 

First, DOJ implicitly rejected the assertion of net neutrality proponents that low adoption rates prove a lack of competition by explaining:

  • Relatively low adoption rates for a given group may reflect the relative absence of… complementary inputs, rather than a problem inherent in the supply of broadband services themselves.” (p. 4, para 3)

Second, DOJ implicitly rejects the proposed simplistic static snapshot of broadband competition of net neutrality proponents and supports a dynamic, forward-looking analysis of markets like broadband.

  • In an industry subject to significant technological change, it is important that the evaluation of competition be forward-looking rather than based on static definitions of products and services.”
  • “In the case of broadband services, it is clear that the market is shifting generally in the direction of faster speeds and additional mobility.” (p.6, para 2)

Third, DOJ rejects the core expectations of net neutrality proponents: commodity competition and incremental cost pricing.

  • In markets such as this, with differentiated products subject to large economies of scale (relative to the size of the market), the Department does not expect to see a large number of suppliers. Nor do we expect prices to be equated with incremental costs. If they were, suppliers could not earn a normal, risk-adjusted rate of return on their investments in R&D and infrastructure.” (p.7, para 2)
    • This realist view of economics, total cost, and market pricing is a strong implicit rejection of the utopian information commons economics of Harvard’s Yochai Benkler and other “dumb pipe,” end-to-end purists who predicate their economic theories on the un-supported view that incremental internet usage involves no cost — so it should be free.
    • The DOJ’s continued support for longstanding proven economics and competitive analysis based on total costs, also implicitly raises the question why the FCC’s proposed open Internet regulations regulations allow for differentiated pricing for broadband consumers, but prohibit differentiated pricing for large application/content providers like Google, Amazon and eBay.

Fourth, the DOJ also implicitly rejects the one-size-fits-all notion of net neutrality proponents that all markets should be subject to the same preemptive government intervention.

  • Competitive conditions vary considerably for consumers in different geographic locales.” (p.7, para 3)

Fifth, the DOJ does not support the assessment of net neutrality proponents that the broadband market is at best a weak duopoly and that wireless broadband cannot be a competitive substitute for wireline broadband.

  • Wireless may be a very attractive alternative for consumers who greatly value mobility and for consumers who do not place much value on the highest speeds.”
  • Wireless broadband “appears to offer the most promising prospect for additional competition in areas where user density or other factors are likely to limit the construction of additional broadband wireline infrastructure.” (p.8, para 1)
 

Sixth, the DOJ understands that consumers can benefit substantially from allowing more competition to develop.

  • “… consumers can enjoy substantial benefits when the number of strong competitors rises from two to three or three to four, especially if the additional competitor offers products based on a new and distinctive technology. Developments in both the MVPD and the wireless markets over the past 15 years underscore this point.” (p. 15, para 1)

Seventh, the DOJ rejects the pessimistic premise of net neutrality proponents that broadband competition is not working and cannot work going forward.

  • Between the ongoing deployment of wireline broadband networks, the geographic expansion of wireless broadband services (hopefully spurred by the availability of additional spectrum to broadband wireless services), and increased transparency, the Department is hopeful that the vast majority of American households will benefit from significant competition in their local markets. Put differently, most regions of the United States do not appear to be natural monopolies for broadband service.” (p. 28, para 1)

Finally, the DOJ warns that preemptive monopoly regulation (proposed by net neutrality proponents) would discourage deployment and efforts to expand broadband access.

  • “Although enacting some form of regulation to prevent certain providers from exercising monopoly power may be tempting… care must be taken to avoid stifling the infrastructure investments needed to expand broadband access.”
  • “In particular, price regulation would be appropriate only where necessary to protect consumers from the exercise of monopoly power and where such regulation would not stifle incentives to invest in infrastructure deployment.” (p. 28, para 2)

In short, the DOJ’s rejection of the broadband market failure thesis is a substantive and under-appreciated setback for net neutrality proponents.

  • Without the DOJ’s concurrence that the evidence shows broadband market failure, it will be much harder for the FCC to conjure up a legally-sustainable justification for preemptively regulating broadband as common carriers when there is such scant evidence of any net neutrality problem.

Importantly, the DOJ did not buckle under to FreePress’ and Google’s heavy political pressure to disregard the facts and merits of competition in the broadband market.

 

 

Sixth, the DOJ understands that consumers can benefit substantially from allowing more competition to develop.

  • “… consumers can enjoy substantial benefits when the number of strong competitors rises from two to three or three to four, especially if the additional competitor offers products based on a new and distinctive technology. Developments in both the MVPD and the wireless markets over the past 15 years underscore this point.” (p. 15, para 1)

Seventh, the DOJ rejects the pessimistic premise of net neutrality proponents that broadband competition is not working and cannot work going forward.

  • Between the ongoing deployment of wireline broadband networks, the geographic expansion of wireless broadband services (hopefully spurred by the availability of additional spectrum to broadband wireless services), and increased transparency, the Department is hopeful that the vast majority of American households will benefit from significant competition in their local markets. Put differently, most regions of the United States do not appear to be natural monopolies for broadband service.” (p. 28, para 1)

Finally, the DOJ warns that preemptive monopoly regulation (proposed by net neutrality proponents) would discourage deployment and efforts to expand broadband access.

  • “Although enacting some form of regulation to prevent certain providers from exercising monopoly power may be tempting… care must be taken to avoid stifling the infrastructure investments needed to expand broadband access.”
  • “In particular, price regulation would be appropriate only where necessary to protect consumers from the exercise of monopoly power and where such regulation would not stifle incentives to invest in infrastructure deployment.” (p. 28, para 2)

In short, the DOJ’s rejection of the broadband market failure thesis is a substantive and under-appreciated setback for net neutrality proponents.

  • Without the DOJ’s concurrence that the evidence shows broadband market failure, it will be much harder for the FCC to conjure up a legally-sustainable justification for preemptively regulating broadband as common carriers when there is such scant evidence of any net neutrality problem.

Importantly, the DOJ did not buckle under to FreePress’ and Google’s heavy political pressure to disregard the facts and merits of competition in the broadband market.

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