Digitopoly

AT&T and Time Warner want to merge. What interests me are two key assumptions underlying the Department of Justice’s case that are at odds with other Trump Administration policy or pronouncements. The first is network neutrality. The Trump Federal Communications Commission wants to do away with it — perhaps today. But if net neutrality was in place, then the DOJ concern that the integrated firm will use its power to harm other content providers and damage growing Internet competition would be significantly mitigated.

It has long been recognized that networked services contain weak-link vulnerabilities. That is, the performance of any frontier device depends on the performance of every contributing component and service. This column focuses on one such phenomenon, which goes by the label “congestion.” No, this is not a new type of allergy, but, as with a bacteria, many users want to avoid it, especially advanced users of frontier network services. Congestion arises when network capacity does not provide adequate service during heavy use.

Congestion slows down data delivery and erodes application performance, especially for time-sensitive apps such as movies, online videos, and interactive gaming. Concerns about congestion are pervasive. Embarrassing reports about broadband networks with slow speeds highlight the role of congestion. Regulatory disputes about data caps and pricing tiers question whether these programs limit the use of data in a useful way. Investment analysts focus on the frequency of congestion as a measure of a broadband network’s quality. What economic factors produce congestion? Let’s examine the root economic causes.

[Commentary] One of the arguments made in the proposed Comcast-Time Warner merger is that these two, very large cable companies do not actually compete.

They are in different markets. This is something Tyler Cowen, for example, has pushed as a reason the merger should go ahead.

Now this might be a good argument as to why, straight out horizontal stories won’t cut it to prevent this merger and we would have to look elsewhere. But what should cause us to have pause was an issue raised in this excellent commentary on the state of the industry by John Oliver. The part I want to address is where John Oliver asks: how is it that cable companies are not competing? Potential competitors stay out of each other’s turf and divide the market.

This type of collusion is understudied in economics and, indeed, one of the implications is that it has consequences for mergers. Thus, those who say Comcast and Time Warner should merge because they don’t compete should also explain precisely why they don’t now and ought not to compete in the future.

[Commentary] Amazon.com, in its zeal to keep book prices low, is in a large fight with Hachette -- the smallest of New York’s big 5 publishers.

According to the New York Times, it started with tactics to crimp Hachette’s sales and has now apparently led to the removal of many Hachette books including, ironically, the paperback version of Brad Stone’s terrific book on Jeff Bezos but far more interestingly, JK Rowling’s latest that is due to be released soon.

For Hachette, with its looming JK Rowling book launch date, there is opportunity. If people want to be able to read her book on their Kindle, Hachette need only provide it in .mobi format. Yes, that would leave them with the spectre of potential piracy but that exists anyway and the music industry has demonstrated that most consumers will take convenience over free anyday; especially curmudgeonly readers tied to their existing devices.

All they need to do is set up a site that allows people to pay and then click a ‘send to Kindle’ button. Not only will Hachette bypass Amazon but they can sell the book for less because they don’t have to pay Amazon’s commission.

[Commentary] Network neutrality requires a lot of neutrality to be effective. Put simply, in situations where consumers have a direct pricing relationship with content providers (such as is the case with Netflix), if you prohibited ISPs from charging different access fees to different content providers, ISPs could use consumer charges to undo any real consequences of that.

Also, the mechanism by which an ISP obtained rents from content providers was by charging consumers more for content from ‘high value’ providers. Strong net neutrality will put all content providers on the same terms and so that mechanism will not be available. Thus, content providers will hang on to the surplus they create in competition with other content providers while ISPs will capture only baseline value common across all content.

Then there’s the critical question of ISP investment incentives. Their investment increases the value of all services. If that increase is correlated positively or is independent of content value, then net neutrality regulation has no impact on the ISPs ability to capture the marginal value of their investments.

So this is not a situation where price discrimination allows ISPs to cover fixed costs they would not ordinarily cover. Instead, when it comes to network quality, net neutrality regulation does not stand in the way of investments that increase quality in a more or less neutral fashion.

Finally, there’s competition amongst ISPs. Many commentators -- myself included -- have suggested that if only we had enough ISP competition there would be no role for net neutrality regulation. Even strong net neutrality will not be effective in ensuring that content providers receive profits consistent with competitive outcomes.

[Commentary] The recent interest in network neutrality has been spurred on by Netflix’s fight with Comcast for a fast lane. Should Netflix itself have a fast lane?

Why does Netflix exist only as a streaming format instead of with a local storage option? And why is it shelling out money for what seems to be an inefficient solution? If I had to guess it is because (a) consumers don’t have the alternative option and (b) storage rights cannot be easily negotiated with video copyright holders because they fear that storage leads to piracy while streaming is somehow safer. That last one has worked out so well since users don’t know how to share passwords!

But I think that streaming video is a puzzle. And Net Neutrality advocates should be concerned about this. If network congestion is a real thing -- and I suspect it is -- then streaming video (in all its forms) is currently the culprit.

The concern is that congestion is itself causing a barrier to start-ups who may have a legitimate reason for real-time bandwidth. We need to think creatively about empowering consumers to put Netflix and others in their right place in the queue. At the moment, that market force does not seem to be present.

[Commentary] At the heart of the problem with competition on the Internet and how this might impact on consumer choice is the ‘last mile problem.’

The issue is that there is a single ‘pipe’ running into dwellings and premises. To have more than one is not cost effective. And that ‘pipe’ will always be owned by someone and that someone will have monopoly access to the consumer as a result. So what are the options for the US to deal with the last mile?

• Regulated prices: it could adopt regulated pricing as in other countries and open up access.
• Privatization: the essential problem with the last mile is that there will always be a last mile because there is always a customer at the edge of a network. The problem at the moment is that the customer is a bottleneck and then the owner of the last mile to the customer is a second, sequential bottleneck. Essentially, the double monopoly problem is built into this structure.
• Municipal broadband: saving the customer owning the last mile, individual localities could set up their own networks to provide a second option against incumbent firms. This is the ‘thousand cuts approach.’ Basically, what we have in broadband is a number of monopolies equal to the number of customers (dwellings/premises). The fight is over each one individually. One approach would be for a large national competitor to emerge and do this everywhere. But what would make more economic sense is that there were local solutions based on local needs.

[Commentary] In the Aereo case, it is very clear what is happening: broadcasters are seeking to keep a rent stream going that was essentially handed to them historically by license agreements with the government.

They are using copyright law to do this where it is clear that the license agreement was intended to restrict those sources of revenue in the first place and to limit their options.

Broadcasters have a simple choice: they can keep to the terms of the license agreement or just stop and give up the licenses and restore to themselves the full range of options under copyright. It is not Aereo who are confused but the broadcasters. And from what I can gather the lawyers are doing a good job of keeping the Justices confused as well.