Policy Documents

Broadband Competition in the Internet Ecosystem

Jeffrey A. Eisenach –
October 1, 2012

Like the other information technology (IT) markets that comprise the Internet ecosystem, broadband communications services are characterized by rapid innovation, declining costs, product differentiation, competitive price discrimination, network effects, and “multisidedness.” Broadband Internet service providers (ISPs) make large sunk cost investments and seek to differentiate their products so that they can earn economic returns on those investments. They seek to assemble or participate in systems that create value for consumers and do so by choosing both the platforms they join and the products with which they interconnect. They experience both supply-side economies of scale and scope and demand-side externalities that create powerful incentives to increase volumes by maximizing system openness, but as with other IT firms, these incentives do not always outweigh the costs of interoperability. In short, like other IT markets, broadband (1) is characterized by rapid innovation, high sunk costs, and declining average costs (dynamism); (2) functions as a complementary component in modular platforms (modularity); and (3) is subject to demand-side economies of scope and scale (network effects).

Despite these similarities, broadband is treated differently from other IT industries when it comes to competition policy: competition in the rest of the IT sector is subject to scrutiny under antitrust laws, while broadband is regulated by the Federal Communications Commission (FCC). Indeed, the FCC is currently in court defending its authority to impose “net neutrality” regulations prohibiting broadband ISPs from engaging in business practices that are both presumptively legal and commonplace in other industries. In the wireless arena, the FCC asserts its authority over the electromagnetic spectrum to impose economic regulation on wireless ISPs. And the commission’s recent decision to extend the $9 billion “universal service” program (heretofore limited to telephone services) to broadband promises to impose de facto price controls on broadband ISPs that participate. In short, while other elements of the “Internet ecosystem”—applications, content and devices— receive ex post treatment under the antitrust laws, broadband ISPs are subject to ex ante regulation.

Broadband is regulated differently from other IT markets in part because it is analyzed differently. Although important unsettled questions remain about how best to police competition in such markets, it is generally agreed that analysis of such markets should deemphasize the traditional “structure-conductperformance” paradigm and assess the consequences of potentially harmful conduct on a case-by-case basis. Thus, high levels of concentration in IT markets such as handsets, operating systems, search engines, and social networks are not regarded as signals of market power (or at least not market power sufficient to justify ex ante regulation), but the FCC often still utilizes anachronistic measures of concentration to justify regulation of broadband markets.

One asserted rationale for asymmetric treatment is the notion that broadband networks are uniquely at the “core” of the Internet while content, applications and devices are at the “edge.” This metaphor is at best misleading, and in any case does not justify differential policy treatment. To the contrary, for purposes of competition analysis, it is no longer possible to distinguish meaningfully between the competitive characteristics of broadband markets and other IT markets, and accordingly, there is no basis for asymmetric regulatory treatment. Accordingly, ex ante oversight of competition by the FCC should be replaced by the same ex post enforcement framework that applies to the rest of the Internet ecosystem.