Welcome to Net Neutrality

Josh Wright —  1 April 2011

Recently, I’ve been blogging about the difference between so-called “bias” in vertically integrated economic relationships and consumer harm (e.g., here and here).  The two are different.  Indeed, vertical integration and contractual arrangements are generally pro-consumer and efficient.   Many of the same arguments surrounded the net neutrality debate with critics largely skeptical that the legislation was not needed (antitrust could be used when such contractual arrangements actually generated competitive harm) and would chill pro-competitive behavior.

In January, the Federal Communications Commission has now received its first complaint under the Order against MetroPCS.  So, is the complaint about a monopolist Internet Service Provider (ISP) employing vertical contracts to exclude rivals and harm consumers?  You be the judge.  My colleague Tom Hazlett describes the situation in his (always) excellent Financial Times column:

MetroPCS, hit with its first formal complaint, is an upstart wireless network offering low prices and short-term contracts. As part of their $40 a month “all you can eat” voice, text and data plan, they slipped in a bonus: free, unlimited YouTube videos, customised to run fast and clear.  Activist groups, led by Free Press, went ballistic. Their petition to the FCC declared that the mobile provider was favouring YouTube over other video sites, creating just the sort of “walled garden” that would destroy the internet. “The new service plans offered by MetroPCS give a preview of the future in a world without adequate protections for mobile broadband users,” they wrote.

The complaint performs a great public service, revealing just how net neutrality would “adequately protect mobile broadband users”. In fact, MetroPCS advances the interests of consumers by supporting enhanced access to the applications most popular with users.  Such arrangements do not sabotage internet development, but drive it.

But what about the possibility of consumer harm so prominent in the Net Neutrality Order? As Hazlett explains, not only is such a competitive threat unlikely, but the regulatory restrictions imposed by the Order will impede competition and hurt consumers (in this case, especially targeting the price sensitive customers).  Indeed, the crux of the complaint surrounds an effort by MetroPCS and Google to offer consumers additional choices.  Read on:

MetroPCS possesses no market power. With 8m customers, it is the country’s fifth largest mobile operator, less than one-tenth the size of Verizon. Under no theory could it force customers to patronise certain websites. It couldn’t extract monopoly cash if it tried to.

Indeed, low-cost prepaid plans of MetroPCS are popular with users who want to avoid long-term contracts and are price sensitive. Half its customers are ‘cord cutters’, subscribers whose only phone is wireless and usage is intense. Voice minutes per month average about 2,000, more than double that of larger carriers.
The $40 plan is cheap because it’s inexpensively delivered using 2G technology. It is not broadband (topping out, in third party reviews, at just 100 kbps), and has software and capacity issues. In general, voice over internet is not supported by the handsets and video streaming is not available on the network. The carrier deals with those limitations in three ways.

First, the $40 per month price tag extends a fat discount. Unlimited everything can cost $120 on faster networks. Second, it has also deployed new 4G technology, offering both a $40 tier similar to the 2G product (no video streaming), but also a pumped up version with video streaming, VoIP and everything else – without data caps – for $60 a month. Of course, this network has far larger capacity and is much zippier (reliable at 700 kbps).  PC World rated the full-blown 4G service “dirt cheap”.
Third, to upgrade the cheaper-than-dirt 2G experience, MetroPCS got Google – owner of YouTube – to compress their videos for delivery over the older network. This allowed the mobile carrier to extend unlimited wildly popular YouTube content to its lowest tier subscribers.  Busted! Favouring YouTube is said to violate neutrality. …

The FCC has already erred. Innovators such as MetroPCS and Google should need no
defence in supplying customers’ superior choices. Neither consumers nor the internet are “protected” by rules hostile to co-operative efforts – even if money were to pass between firms – that expand outputs and lower prices. If the FCC is to take such ill-targeted attacks on competitive rivalry seriously, it will do far more to deter the open internet than to preserve it.

Not an auspicious beginning for the Net Neutrality regime — or consumers.

3 responses to Welcome to Net Neutrality


    “Net Neutrality” is a PR phrase that has nothing to do with the effect of the regulations. The entire issue was just an excuse for the FCC to start regulating the Internet. The original complaints that led to the regulations were from cable broadband users who were upset that Comcast restricted their ability to download massive (mostly pirated movie) files via BitTorrent. Not exactly a sympathetic group, but the FCC needed a foot in the door. The FCC is not bothered by the fact that treating all types of data identically is stupid: streaming media that needs medium to high bandwidths without interruptions is not the same as file downloads that need only low to medium bandwidths and can tolerate interruptions.

    Not content to just mess with data type “neutrality,” the FCC pretended that it was also the FTC and the Department of Justice and has regulated the contractual arrangements that ISPs can make.

    I’m hoping that someone brings a case to a federal court that will rule that the FCC far overstepped its authoritiy.

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