I just got back from a Senate Commerce, Science, and Transportation Committee hearing on the future of the Internet. Much was said on both sides of the panelist table, so I’ll just take a moment to hit some highlights: competition and innovation, media consolidation and content, and FCC authority. One disclaimer: this summary represents (of course) how I interpreted the statements at the hearing. Where I can, I’ve included timestamps into the video; if you want more detail, watch the hearing direct from the Senate’s web site. Also, check out our press release.
Competition and Innovation:
Dr. Robert Hahn of the American Enterprise Institute gave the oft-repeated argument that carriers must be allowed pricing freedom, and the market will find the optimum balance between value for the consumer, application provider, and ISP. He gave an example of how the (hypothetical) company Oogle must be allowed to charge advertisers without restriction in order to get customers the benefit of free services, and we can deal with bad actors as we encounter them. [1:41:55] Some of the problems with this, in part as articulated by Professor Lawrence Lessig of Stanford Law School:
There is no effective competition in broadband. 98% of Americans get their broadband from either their phone company or their cable company. That’s called a “duopoly,” not “effective competition.”
The Oogle example misses the point that the innovation is at the application layer. That is, new ideas and the investments that power those new ideas are made by those who are at the edges of the network – both companies like Oogle and people like you and me. If innovation is to flourish, the ability of those entities to compete on a level playing field must be protected.
Net neutrality opponents argue that we cannot predict the future of the net, and so should allow it to evolve before regulating. But even if you are exceedingly optimistic that the DOJ will use antitrust to prevent bad behavior, allowing the network to be non-neutral will have immediate innovation-stifling effects. Why? Because while we don’t know what the net will look like in 5 years, venture capitalists are funding new ideas now based on what they think the net will look like in 5 years. [2:03:55] And if they think there’s the possibility that in 5 years, a cable company will give them substandard treatment if they are viewed as a competitive threat or other disfavored service, they simply will not invest, today.
Internet access is now “critical economic infrastructure” which enables competition among nearly-infinite applications. [2:10:25] That is – the Internet is infrastructure, like a highway, and like a highway must be neutral to the vehicles travel on it. Those that make the vehicles (i.e., the applications) can discriminate however they want.
Senator Dorgan also asked Dr. Hahn how the market would respond if a carrier, displeased with the anti-monopolist messages on t-shirts sold through Dr. Hahn’s (hypothetical) online business, decided to charge Dr. Hahn a little more for access to its customers. [2:11:55] As far as I could tell, we never got an answer.
Media Consolidation and Content:
It was especially nice to hear the voice of content creators not just once, but twice at the hearing, both times calling for net neutrality. In an age where most of the traditional media outlets for both entertainment and information are controlled by a very small group of large conglomerates, the Internet provides a democratic medium through which everyone can have a voice – at least as long as the net is neutral.
Patric Verrone, president of the Writers Guild of America, West, talked extensively about the history of media consolidation and about how last year the guild “used the Internet to win the Internet” during the writer’s strike. [1:46:10] Because the corporations that employed the writers were the same that controlled traditional media, the Internet was the only real way to get the message out – and in the end, they succeeded.
Actress, writer, and producer Justine Bateman [1:51:15]. Like Verrone spoke about media consolidation, and about how the reduction in quality, original content is directly proportional to the consolidation of media outlets. She also talked about how the Internet is being used by her and others to make such content available without the blessing of the consolidated media companies. And while she, like all content creators, is concerned about copyright infringement on the Internet, she recognizes that it is not a new problem, and not a problem which justifies allowing ISPs to decide whose content gets better treatment and whose does not.
FCC Authority:
Chairman Kevin Martin of the FCC testified on his own one-man panel at the start of the hearing. One issue he got pressed on was whether the FCC had the authority to enforce the four principles embodied in the Broadband Policy Statement. Comcast has alleged that the FCC does not have that authority. [1:05:00] His answer: He believes they do. Is he scared of a law suit if the Commission attempts to enforce those principles? He agrees that a law suit is likely, but he’s not scared; the FCC gets sued all the time. Does he think the Commission would benefit from a statute which removes any controversy about the FCC’s authority? I don’t think we ever got a clear answer on that one. But Kyle McSlarrow of the NCTA did get his two cents in on behalf of the cable industry. His key point: the cable industry “supports” the Policy Statement, but does not believe it should be enforceable – whatever that means. [2:09:40] There is no doubt that going forward, there will be more haggling on the issue of whether and how the FCC can enforce net neutrality rules, with or without Congress’ official blessing.
Wrap-up:
This should give you a taste of what went on at the hearing. And while this post is long enough as it is, I don’t want to miss the impassioned testimony of Michele Combs of the Christian Coalition of America, who talked about the importance of the Internet in reaching the public, and how a tiered Internet would be particularly damaging to public-oriented non-profits like her own, who have great value but comparatively small budgets. [1:36:20]
If you have the time, go watch the hearing or read the filed testimony. If you have a little less time, I especially encourage you to watch the Q&A sessions at [1:01:15] and [2:06:25].
Jef, Thank you for your
Jef,
Thank you for your helpful commentary. A couple of thoughts for discussion:
It sounds like Dr. Hahn was suggesting that Oogle’s advertising network should also be subject to net neutrality. Your arguments refuting this assertion fail to convince me.
1) You point out that there is “no effective competition in broadband.” If you apply this argument to ISPs, why doesn’t it apply to Oogle. According to eMarketer, 81% of all advertisements are run on networks controlled by Oogle or Ahoo! (guzundheit!). How is this not a “duopoly”?
2) You argue that “innovation is at the application layer.” There is no evidence provided here. Are you asserting that Omcast should be regulated and Oogle should be exempt because (in your opinion), Oogle is more innovative than Omcast? The way I see it, both Oogle and Omcast built networks. A great amount of innovation was required on both companies’ parts to build their networks. Today, both Oogle’s advertising network and Omcast’s broadband network serve as tremendous platforms for future innovation.
If Public Knowledge advocates policies in the public interest, how can you not argue for neutrality regulations on Oogle’s advertising platform? The entire future of Web 2.0 depends on the ability to monetize behavioral targeted advertisements. As you say, “venture capitalists are funding new ideas now.” Oogle’s platform controls 70% of advertisements. If I’m creating a Web 2.0 startup, why shouldn’t my company be able to sell advertisements on Oogle’s platform on a wholesale, nondiscriminatory basis? If I can’t do this, it is highly doubtful that there will ever be a “level playing field.”
3) I think you are vastly underestimating the power of existing antitrust laws to deal with violations of “net neutrality.” First, make no mistake, any company that gives “substandard treatment” to competitors “if they are viewed as a competitive threat or other disfavored service” is in violation of the Sherman, Clayton, and FTC acts. You put all of your faith in the DOJ. I do not. Not only do these laws give strong powers to the DOJ and FTC, but the Hart Scott Rodino Act gives any state’s Attorney General the authority to enforce these laws on behalf of its citizens. If none of these authorities will act, any citizen who has been harmed by anticompetitive practices can sue the offending company in civil court and recover attorneys’ fees, court costs, and three times the actual damages (for a class action suit, this adds up to serious punishment).
These laws, by the way, apply equally to Oogle and Omcast.
4) I can make a very strong argument that an advertising platform is indeed “critical economic infrastructure.” According to eMarketer, online advertising revenue will exceed $50 billion over the next four years. Oogle’s closed network enables it to act as the gatekeeper for all future Web 2.0 commerce. If innovators cannot create new ad-supported products without permission from this monopoly gatekeeper, venture capitalists will not invest and the Web 2.0 revolution will stop in its tracks. Furthermore, Oogle’s dominant control over these networks gives them the unchecked power to favor advertisers who partner with Oogle, and lock out potential competitors. Without an open network, Oogle can censor free speech and shape the Internet in its image. Ad net neutrality is in the public interest—why doesn’t PK support it?
CLAIMS THAT MARKET POWER
CLAIMS THAT MARKET POWER EXISTS AMONG CONTENT PROVIDERS UNDER NET NEUTRALITY ARE FLAWED AND AVOID THE ISSUE
It is precisely the effect of net neutrality to dilute and diminish the potential market power of any content provider, large or small.
It doesn’t make any difference how much traffic Google gets, as long as it can be bypassed with one click.
Claims that particular content providers are as large and powerful as the players in the heavily concentrated “broadband pipe market” only become legitimate in the absence of net neutrality, not because of it.
Once particular content providers are capable of aligning themselves with particular broadband providers or favored pricing and packaging plans within a provider, the vibrant, thriving competition among content producers and consumers that exists today begins to break down.
Recent actions by the RIAA and MPAA along with Hulu against net neutrality are clearly an attempt to undermine the competitive content market with discriminatory pricing and volume packages that would never survive the scrutiny and discipline of genuine competition, for which net neutrality acts to offset in the absence of competition.
The powerful scale and scope economies associated with the “broadband pipe market” which generate dramatic efficiency should not be confused with competition in the content market, which requires no such structure, where it’s one voice, one vote with very low entry and exit costs.
The monopoly-duopoly broadband pipe market is a market failure in the sense that competition does not result in efficiency in most areas other than selected ones of urban concentration, for which net neutrality is required as an offset to the absence of competition.
As Lessig has demonstrated by analogy, the provision of “neutrally” available electricity over a monopoly grid has generated competition both on the input and output edges of the grid, like an internet network. That’s why bandwidth should be provided and sold neutrally, like “kilowatts”, or in some cases like “kilowatt hours”, the former equivalent to Mbs of bandwidth and the latter to GBs of volume.
Without net neutrality, it’s like the electricity grid being taken over by particular factions of electric consumers and producers, i.e., “air conditioning” or “refrigeration” or “lighting” on the consumption end, or “coal” and “nuclear” on the supply side, all attempting to put in “fast lanes” and “bus lanes” and “everything packages” with favored prices and terms of service for their particular source or use of electricity.
If accomplished, the provision and consumption of electricity would look like today’s cable tv, grossly overpriced packages of forced bundling designed to force users into the highest priced service to get what they already have today.
For once, the real deal of “free trade, free markets” has broken through over an open internet as genuine competition in a content market and the same ones who preach this doctrine everywhere else through “open access” are now trying to shut this one down with “closed access” using bogus claims against net neutrality. To support net neutrality is to support competition.