Google, Net Neutrality, and Antitrust

Josh Wright —  16 October 2006

Hanno Kaiser at Antitrust Review discusses the implications of Google’s acquisition of YouTube for the net neutrality debate. Hanno opines that the deal may increase the likelihood of a neutrality result even without legislation. While Google’s public pro-neutrality stance is well known, GMU’s Tom Hazlett (my office neighbor and fellow UCLA Economics alum) has a great column in the Financial Times highlighting the difference between Google’s “public policy” stance on net neutrality and its business model. Here’s Hazlett on Google’s now well-known position on net neutrality legislation:

The company became the leading champion of the hottest topic in technology policy over the past year, asserting that if web innovation such as theirs was to be retained, new laws were warranted. The specific fear was that internet service providers delivering last-mile broadband would shift their pricing strategies, charging not only end users for their connections but application vendors (say, search engines) for access to their customers. Worse, they might move into content and then favour their own web products over those of competitors. “Network neutrality� rules were needed, Google argued, because the architecture of the internet demanded it. That structure relies on traffic flowing freely over a network that is “open, end to end�.

But Hazlett points out that Google’s business model sends a different message — to the benefit of investors and consumers:

The internet lurches forward in spasms of business model discovery, as when Google figured out how to auction off search-targeted advertising slots, leaving banner advertisements behind. Today, Google’s absorption of its little video cousin is part of this jockeying for positions of competitive superiority. The internet really is not open – if, as Google hopes, it is doing it right.

Google has been doing it flawlessly – forging exclusive bargains nonpareil. Mr Vise [ed. — author of “The Google Story“] declares the watershed business event in the company’s history to have occurred on May 1 2002 when its search engine was licensed to AOL. “Web properties that connected more than 34m subscribers . . . had a small search box on every page that said, ‘Search Powered by Google.’â€? To land this deal, Google extended to “AOL a very large financial guaranteeâ€?, including stock options. An ISP getting paid to feature a favoured search engine? What net neutrality would presumably end is what helped launch Google.

Very interesting. The Google story reinforces an important economic lesson that exclusive contracts are frequently part of the normal competitive process. Go read it.

I am becoming increasingly interested in the antitrust-related components of the net neutrality debate, and have heard the argument that antitrust law isn’t sufficient to handle the competitive problems implicated in this space. Specifically, I have read and heard the claim that Trinko renders Section 2 enforcement impotent to deal with the harm caused by these types of contracts. As I understand it, the primary competitive concern is the use of exclusive or exclusionary contracts (or exclusion of rivals via vertical integration) to the detriment of consumers. In other words, this is a conventional “raising rivals’ cost” story. Assuming this is an accurate characterization of the competitive argument for neutrality, there is much to be said for Section 2 enforcement here if it is agreed (and I have no reason to believe otherwise) that consumer welfare is the appropriate standard for evaluating potential restrictions on these types of contracts.

One obvious point is that the antitrust is designed to identify and distinguish pro-competitive from anticompetitive contracting. Agencies and courts have been doing this for a long time. There is hundreds of years of common law and agency expertise involved in tackling this tough problem. Obviously, antitrust enforcement is not perfect. And Section 2 is arguably the source of the most lively existing debate between antitrust scholars. But this is precisely because this task is so difficult. I’m skeptical that would-be neutrality legislation offers a superior alternative.

A second point is that the content of antitrust law imposes sensible boundary conditions on enforcement efforts. For instance, the firm making use of these contracts must have monopoly power in order to establish an antitrust claim. This is a critical boundary on limitations on exclusive contracting since we know that firms without market power frequently engage in these types of contracts, which are part of the normal competitive process. It is important for consumer welfare that we not chill this form of competition.

A related, are more pertinent point in this setting, is that antitrust law also requires that the contracts generate an anticompetitive effect. Because many exclusive contracts are pro-competitive, liability under Section 2 sensibly requires that plaintiffs demonstrate an anticompetitive effect. There are other conditions, but these two suffice to make the point for my purposes. While there are conditions under which exclusive contracts may harm competition, the conditions are narrow and sometimes difficult to distinguish from the normal competitive process. This is why the anticompetitive effect requirement is such an important component of enforcement efforts.

To be clear, I’m not suggesting there are no sensible reasons why neutrality advocates might prefer neutrality legislation to Section 2 jurisprudence (and specifically, Trinko). But my sense of the neutrality debate is that there has been insufficient attention paid to the role of exclusive and exclusionary contracts in the competitive process, as evidenced by Google’s AOL deal among many others in the same space, and harm to consumers sure to follow from a rule that prohibits these contracts. Economists have identified the necessary conditions for competitive harm via exclusionary contracts. The limitations offered by Section 2 enforcement are offered to enhance consumer welfare by ensuring that enforcement does not deter pro-competitive conduct. To my knowledge, and I readily admit that I am relying on descriptions of the legislation I have read, the proposed neutrality legislation is not concerned with these types of limitations and thus appears only to be interested “cheap talk” about enhancing consumer welfare.

11 responses to Google, Net Neutrality, and Antitrust

  1. 

    Let’s not forget that websites are already (and, of course, justifiably) being charged based on bandwidth consumption. (Access to a T3 is more expensive than access to a T1, etc.) The real issue with Net Neutrality, as I see it, is that certain (“premium”) packets get preferential routing, irrespective of actual bandwidth use. That’s where the threat of content or application discrimination comes in. Take BitTorrent as an example. Torrents are extremely efficient means of distributing large files (e.g., Linux distros). In a neutral net, torrents compete on equal footing with other protocols. If torrents are better than other means of distribution, then they will succeed in the marketplace. In a tiered net, torrents, as the new kids on the block, will be stuck in the right lane while less efficient “premium” packets zip by in the left lane. A new protocol would therefore either have to find a significant up-front financial backer to pay for “left lane access” or decisively overcome the disadvantage built into the net infrastructure. In many ways, Net Neutrality is comparable to “road neutrality” and, of course, “phone neutrality.” The real economic benefits of Net Neutrality are in the dynamic efficiencies that a level playing field at the packet and protocol level is likely to generate.

  2. 
    John L. Davidson 20 October 2006 at 9:57 pm

    Montgomery asks:

    How is content any more threatened in the world where some or all ISPs charge back to web sites based on bandwidth consumption?

    Because ATT will charge me $1000 bucks to download a movie I want to see from Disney but $999 to watch its crap. However, if all that ATT can do is sell be the bandwith, then 1000s of sites can compete to sell be content.

    I don’t want ATT getting it hands on content, directly or indirectly. This is net neutrality. The ISP should be neutral, have no interest directly or indirectly in the content.

  3. 

    The economic argument I have seen in favor of NN are the “antitrust/prevent monopolization” argument to which the post responds. One might also call the argument that neutrality is necessary for the growth of the net and techology more generally an economic argument in terms of dynamic efficiency. I find neither argument persuasive. Perhaps there are others I am unaware of.

    There are plenty of non-economic arguments that can be made, i.e. fairness, culture, etc. These are not very well defined objectives, to be sure. And I’m not sure that these objectives are devoid of economic considerations like price, quality, output, variety, etc. But at a more fundamental level, these arguments are problematic because they demand that consumers subsidize some Congressionally-created notion of fairness, culture, etc.

  4. 

    One way to understand the NN movement is an attempt to import the antiquated (and non-economic) Robinson-Patman suspicion of price discrimination into the law.

    I have not researched this, but perhaps you might know the answer — what is the best principled economic argument in favor of NN?

    NN can be argued in terms of “fairness,” but it’s hard to see an economic justification. I think more facts are probably necessary, but most of what I have heard described seems like NN is a system whereby low-bandwidth users cross-subsidize high-bandwidth users. If that is the case, wouldn’t it naturally lead to inefficient use of bandwidth? Much like the result if the electric utilities did not increase rates during peak hours.

  5. 

    Montgomery, thanks again for the comments and questions! I think we basically agree across the board on this issue.

    I fully agree that one must define a market to assess anticompetitive effects, and am not suggesting otherwise. I think you are dead on that the basic idea here is your ATT / Google contract in your question. I was merely holding the market definition constant so that we could make some comparisons about the purposes of the proposed NN legislation relative to Section 2.

    I also agree that it is difficult not to imagine the market solving this in most instances. The theoretical conditions under which such contracts might harm consumers are well established, infrequently (though not never) observed, and difficult to distinguish from the competitive process.

    That last point was driving the thoughts in my post. The NN discussion that I have seen has focused on the “existence” of market power in the ISP market rather than tacking the problem of identifying the exercise of that power to the detriment of consumers. This approach is highly likely to harm consumers by chilling important dimensions of competition.

    Now, NN advocates could come out and say that they are willing to impose the costs of neutrality on consumers in the name of achieving some other social policy objective, i.e. “neutrality,” or maintaining some version of “culture.” But perhaps this would be bad marketing. Instead, there are arguments that NN will simultaneously preserve internet “culture” (whatever that means in this context) AND improve consumer welfare in economic terms (price, quality, variety, output), or that the negative consumer welfare effects simply don’t matter. The latter position is unjustifiable. Surely, consumer welfare losses matter — even if not dispositive. And the argument that NN will improve consumer outcomes is dubious because such deals are such an integral part of the normal competitive process.

    I’ve mostly seen NN discussed as an alternative to antitrust. And on those grounds, I think the measure is counterproductive and an inferior alternative to Section 2 to catch the limited instances under which such contracting threatens consumer welfare. Section 2 doctrine imposes screens on claims that such contracts would harm competition (market power, substantial foreclosure, etc.) — and these screens and experience evaluating these sorts of claims in Section 2 render it a much more effective tool that NN legislation. It appears we also agree on this point.

  6. 

    Josh — I think the trouble is that to analyze whether there is an anticompetitive effect requires that you specify the market in which there would or would not be such an effect. I agree you don’t have to proceed with the typical legal framework in order to evaluate the economic effects; however, I think it’s useful in this case.

    So — I agree this is a useful approach to thinking about the issue. In terms of foreclosure (or anticompetitive effects, if you like), the issue I was hoping you’d clarify is, who would allegedly be foreclosed from access to which consumers, in the absence of NN?

    Is the idea here that some ISP, say AT&T, might identify some provider, say Google, as the exclusive search engine for its customers? So that AT&T customers couldn’t access Yahoo?

    If the notion is along these lines, that seems to raise the question of market power in the local ISP market, combined with an exercise of that power that would reduce consumer choice. Hard to conceive of the market not fixing this in most instances.

    Here’s a marginally related question (admittedly more social policy than economics) that I’ve been considering. Imagine that an ISP provided two services, one of which blocked access to all “adult” content on the internet, and the other which permitted access to “adult” content. It would be interesting to test market such an offering, to determine which option would command a higher price.

  7. 

    JLD — Seems to me the issues of volume-based service charges and gating of content are orthogonal. How is content any more threatened in the world where some or all ISPs charge back to web sites based on bandwidth consumption?

  8. 
    John L Davidson 18 October 2006 at 1:23 am

    why is it neutral to charge the same rates to companies or individuals regardless of their volume of use?

    because it keeps the hands of ATT and its like off content

    google, likewise is net neutral—it doesn’t have its hand on content

  9. 

    Thanks for the comments and questions.

    1. Sometimes. Depends on who is using the term and how they are using it. I’ve heard it referred to in the sense that you describe, i.e. price discrimination across bandwidth use which is unlikely to produce an anticompetitive effect. I have heard variants of the NN position that accept variation in performance that is responsive to bandwidth concerns but not other margins, i.e. exclusive via vertical integration or contract. These contracts may or may not involve price discrimination, but in either case, exclusive dealing is part of the pro-competitive process in many instances.

    2. I’m not defining one here. I have skipped the nitty gritty of market definition and discussed the conditions under which, in any hypothetically well-defined market in a monopolization style claim, anticompetitive effects are likely to arise.

    I don’t see what the problem is with that approach. You write that all contracts are exclusive in some sense. Of course they are. But that misses what I meant to be the point. So let me try to be more clear:

    The overwhelming majority of exclusive contracts do not threaten competitive harm. One might think that in a world where the above fact was true, and I think it is, my approach is precisely the correct approach, i.e. focus on distinguishing contracts where anticompetitive effects are possible from those where the necessary conditions are not satisfied.

    I’m confused by your comment about the “problem” with this approach. Talking about anticompetitive effects does not excuse one from defining a market, and conversely, properly defining a market doesn’t get you out of ultimately analyzing competitive effects. I’ve just chosen to focus on the competitive effects question here because I think it highlights an important difference between antitrust analysis and the NN debate.

    We care about those contracts that are likely to generate anticompetitive effects. We are on the same page re: foreclosure. Contracts that do not substantially foreclosure access to some essential resource for a significant period of time cannot generate an anticompetitive effect by definition. If you favor separating the competitive analysis into foreclosure, and then anticompetitive effects that is fine by me. I am merely making the point that foreclosure is a necessary but not sufficient condition for AC effect.

    “I’d like to hear how you define the market – and whether there’s a sensible way to do that in the context of this net neutrality debate. Tough because there are so many search, content, and access providers.”

    Of course, under Section 2, all of this assumes that we define a market. There are plenty of Section 2 cases out there where markets are defined. The thrust of my post is that, if consumer welfare is the metric we are concerned about, the way to define a market is to AVOID doing so in the context of the NN debate and instead to engage in a Section 2 analysis.

  10. 

    A couple related questions:

    1. Isn’t “net neutrality” a misnomer? What we are talking about is metering by bandwidth consumption, either on the server or user side or both. That’s just price discrimination, isn’t it? So why is it neutral to charge the same rates to companies or individuals regardless of their volume of use?

    In other words, this is “neutral” in the same sense that it would be neutral to charge every electric utility customer a fixed $100 per month, regarless of their usage.

    2. More important, on the antitrust side of things, how are you defining the market? Your discussion seems to jump right into the anticipated effects on competition. The problem with that approach is that, in some sense, every contract is exclusive, in that it explicitly or implicitly precludes acquiring the same (albeit, not necessarily additional) goods or services from another supplier.

    I’d like to hear how you define the market – and whether there’s a sensible way to do that in the context of this net neutrality debate. Tough because there are so many search, content, and access providers. Once the market is defined, you have to identify conduct or contracts that cause a significant degree of foreclosure, before you get into the analysis of effects on competition.

Trackbacks and Pingbacks:

  1. Antitrust Review » Antitrust and Net Neutrality - October 22, 2006

    […] Josh Wright has an interesting discussion on Truth on the Market about Google, Net Neutrality, and Antitrust. Josh places the debate in the context of Section 2 law and asks, sensibly, where the competitive effects are. To be clear, I’m not suggesting there are no sensible reasons why neutrality advocates might prefer neutrality legislation to Section 2 jurisprudence (and specifically, Trinko). But my sense of the neutrality debate is that there has been insufficient attention paid to the role of exclusive and exclusionary contracts in the competitive process, as evidenced by Google’s AOL deal among many others in the same space, and harm to consumers sure to follow from a rule that prohibits these contracts. […]