The Netflix–Comcast arrangement has brought fresh accusations of so-called “net neutrality” violations. The flames were stoked when Netflix’s CEO, in a blog posting, bemoaned the plight of “intermediaries” such as Akamai, Cogent, and Level 3; he advocates new “net neutrality” rules to prevent Internet service providers (ISPs) from charging a toll for interconnection to these Internet middlemen. Some commentators fear that, if direct connections between ISPs and content providers such as Netflix proliferate, Internet middlemen “will become mere resellers of access” or “may be cut out of the loop altogether.”
In light of the D.C. Circuit’s decision in Verizon v. FCC, which rejected the FCC’s effective prohibition of payments from content providers to ISPs, a widespread acceptance is emerging for case-by-case review of discrimination complaints by a content provider against an ISP. In this middle ground, pay-for-priority deals would be tolerated but the arrangements would be policed for abuses by the FCC. Should the same protections be extended to resolve interconnection disputes involving Internet middlemen?
Although I accept the case for regulatory protections of content providers, the FCC may not be the right venue to deal with the antitrust and political aspects of interconnection disputes involving Internet middlemen. Before explaining why, however, a brief refresher on how we got here is in order.
The term “net neutrality” was first coined by Tim Wu to describe a world in which all packets on the Internet are equal and should be treated that way by ISPs. This vision implies no favoritism of an individual content provider’s packets over another’s. And the strong form of net neutrality implies that if there is priority treatment of a content provider’s packets, it should be priced at zero.
Peering arrangements between networks have always been outside the purview of net neutrality, because the FCC had expressed the view for years that the backbone market was competitive and not in need of regulation. In their dealings with ISPs, Internet middlemen such as Cogent carry the packets of myriad content providers, making discrimination vis-à-vis an individual content provider impractical. Moreover, unlike “settlement-free” peering, exchanges of unequal amounts of traffic between two networks have involved positive prices for years, which is also inconsistent with the zero-pricing principle of net neutrality. Accordingly, the FCC did not extend net-neutrality protections to peering arrangements in its Open Internet Order (see footnote 209).
Flash forward to the Netflix–Comcast arrangement, which bypasses the middlemen. To the extent that such direct connections become the new norm, these intermediaries may find themselves marginalized, or even obsolete. What role, if any, should the FCC play in preventing such a development? Stated differently, should ISPs be forced to deal with these middlemen at regulated interconnection rates?
The answer to this question can be informed by a limiting principle that should define the scope of the FCC generally: Is there some important social objective not recognized by antitrust laws for getting the FCC involved in these affairs?
Setting aside any of the particulars of the Netflix–Comcast arrangement, an ISP could make life difficult for these middlemen by requiring content providers to purchase data transport or content delivery services (“middle-mile services”) from the ISP as a condition of getting access to its customers (or getting a working connection). As a variant of this strategy, an ISP could refuse to supply terminating access to middlemen, forcing the content provider to deal directly with the access provider.
It is not clear how additional protections for these middlemen, above and beyond those afforded by antitrust laws, would advance any important social objective: Why is it a good thing to promote standalone providers of these middle-mile services via regulatory protection? Unlike content providers, who generate positive spillovers (information and artistic content can be viewed as “public goods”) and thus cannot be expected to monetize their investment, the Internet middlemen are more akin to resellers of a homogenous product (data packets), and are likely to capture the entire value-added of these services.
The best justification I can conceive for the FCC’s providing a backstop for these middlemen is that it is better for providers of these services to be independent from the provision of broadband access, because their independence ensures that content providers will get “better” treatment in middle-mile services. But the question of whether this “better” treatment is a worthy social objective is really a political judgment that should come from Congress, not the FCC.
To the extent that independent firms can provide middle-mile services at a lower cost than ISPs, basic Coasian economics predicts that market forces should ensure their survival. Why would Comcast, in its “make or buy” decision, exclude Akamai from the market if doing so would impose higher costs on Comcast? Over the last three months, Akamai has outperformed the Nasdaq index (a 30% return versus virtually no return), indicating that financial markets are not discouraged by these direct, pay-for-priority developments.
Moreover, to the extent any exclusionary conduct by an ISP leads to higher prices or lower output, the antitrust laws offer all the protection these middlemen need. Competition laws were designed to prevent, among other things, a dominant firm from leveraging its market power from one market (broadband access) into another (data transport or content delivery service). Because these cases could get a serious hearing in an antitrust court, middlemen do not need any additional regulatory protection.
In what appears to be a plea for regulatory intervention, Cogent’s CEO recently claimed that ISPs “are attempting to leverage their monopoly on broadband residential Internet connections to increase their profits by imposing tolls on traffic requested by their customers and delivered by other Internet service providers.” Although such comments likely caught the telecom regulator’s attention, by articulating an antitrust claim, Cogent made a pretty good case for why no FCC involvement was needed.
The case for preemptive protections for Internet middlemen is ultimately based in politics, rather than economics. Either we let the market naturally develop and let middlemen live or die on the economic merits, or Congress bans vertical integration in this space because it produces a political outcome we cannot tolerate. There is no added economic benefit for the FCC to dicker around the margins.
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