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What Has Big Tech Ever Done for Us? Part Two

Dirk Auer —  25 March 2020

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Dirk Auer, (Senior Researcher, Liege Competition & Innovation Institute; Senior Fellow, ICLE).]

Across the globe, millions of people are rapidly coming to terms with the harsh realities of life under lockdown. As governments impose ever-greater social distancing measures, many of the daily comforts we took for granted are no longer available to us. 

And yet, we can all take solace in the knowledge that our current predicament would have been far less tolerable if the COVID-19 outbreak had hit us twenty years ago. Among others, we have Big Tech firms to thank for this silver lining. 

Contrary to the claims of critics, such as Senator Josh Hawley, Big Tech has produced game-changing innovations that dramatically improve our ability to fight COVID-19. 

The previous post in this series showed that innovations produced by Big Tech provide us with critical information, allow us to maintain some level of social interactions (despite living under lockdown), and have enabled companies, universities and schools to continue functioning (albeit at a severely reduced pace).

But apart from information, social interactions, and online working (and learning); what has Big Tech ever done for us?

One of the most underappreciated ways in which technology (mostly pioneered by Big Tech firms) is helping the world deal with COVID-19 has been a rapid shift towards contactless economic transactions. Not only are consumers turning towards digital goods to fill their spare time, but physical goods (most notably food) are increasingly being exchanged without any direct contact.

These ongoing changes would be impossible without the innovations and infrastructure that have emerged from tech and telecommunications companies over the last couple of decades. 

Of course, the overall picture is still bleak. The shift to contactless transactions has only slightly softened the tremendous blow suffered by the retail and restaurant industries – some predictions suggest their overall revenue could fall by at least 50% in the second quarter of 2020. Nevertheless, as explained below, this situation would likely be significantly worse without the many innovations produced by Big Tech companies. For that we would be thankful.

1. Food and other goods

For a start, the COVID-19 outbreak (and government measures to combat it) has caused many brick & mortar stores and restaurants to shut down. These closures would have been far harder to implement before the advent of online retail and food delivery platforms.

At the time of writing, e-commerce websites already appear to have witnessed a 20-30% increase in sales (other sources report 52% increase, compared to the same time last year). This increase will likely continue in the coming months.

The Amazon Retail platform has been at the forefront of this online shift.

  • Having witnessed a surge in online shopping, Amazon announced that it would be hiring 100.000 distribution workers to cope with the increased demand. Amazon’s staff have also been asked to work overtime in order to meet increased demand (in exchange, Amazon has doubled their pay for overtime hours).
  • To attract these new hires and ensure that existing ones continue working, Amazon simultaneously announced that it would be increasing wages in virus-hit countries (from $15 to $17, in the US) .
  • Amazon also stopped accepting “non-essential” goods in its warehouses, in order to prioritize the sale of household essentials and medical goods that are in high demand.
  • Finally, in Italy, Amazon decided not to stop its operations, despite some employees testing positive for COVID-19. Controversial as this move may be, Amazon’s private interests are aligned with those of society – maintaining the supply of essential goods is now more important than ever. 

And it is not just Amazon that is seeking to fill the breach left temporarily by brick & mortar retail. Other retailers are also stepping up efforts to distribute their goods online.

  • The apps of traditional retail chains have witnessed record daily downloads (thus relying on the smartphone platforms pioneered by Google and Apple).
  •  Walmart has become the go-to choice for online food purchases:

(Source: Bloomberg)

The shift to online shopping mimics what occurred in China, during its own COVID-19 lockdown. 

  • According to an article published in HBR, e-commerce penetration reached 36.6% of retail sales in China (compared to 29.7% in 2019). The same article explains how Alibaba’s technology is enabling traditional retailers to better manage their supply chains, ultimately helping them to sell their goods online.
  • A study by Nielsen ratings found that 67% of retailers would expand online channels. 
  • One large retailer shut many of its physical stores and redeployed many of its employees to serve as online influencers on WeChat, thus attempting to boost online sales.
  • Spurred by compassion and/or a desire to boost its brand abroad, Alibaba and its founder, Jack Ma, have made large efforts to provide critical medical supplies (notably tests kits and surgical masks) to COVID-hit countries such as the US and Belgium.

And it is not just retail that is adapting to the outbreak. Many restaurants are trying to stay afloat by shifting from in-house dining to deliveries. These attempts have been made possible by the emergence of food delivery platforms, such as UberEats and Deliveroo. 

These platforms have taken several steps to facilitate food deliveries during the outbreak.

  • UberEats announced that it would be waiving delivery fees for independent restaurants.
  • Both UberEats and Deliveroo have put in place systems for deliveries to take place without direct physical contact. While not entirely risk-free, meal delivery can provide welcome relief to people experiencing stressful lockdown conditions.

Similarly, the shares of Blue Apron – an online meal-kit delivery service – have surged more than 600% since the start of the outbreak.

In short, COVID-19 has caused a drastic shift towards contactless retail and food delivery services. It is an open question how much of this shift would have been possible without the pioneering business model innovations brought about by Amazon and its online retail platform, as well as modern food delivery platforms, such as UberEats and Deliveroo. At the very least, it seems unlikely that it would have happened as fast.

The entertainment industry is another area where increasing digitization has made lockdowns more bearable. The reason is obvious: locked-down consumers still require some form of amusement. With physical supply chains under tremendous strain, and social gatherings no longer an option, digital media has thus become the default choice for many.

Data published by Verizon shows a sharp increase (in the week running from March 9 to March 16) in the consumption of digital entertainment, especially gaming:

This echoes other sources, which also report that the use of traditional streaming platforms has surged in areas hit by COVID-19.

  • Netflix subscriptions are said to be spiking in locked-down communities. During the first week of March, Netflix installations increased by 77% in Italy and 33% in Spain, compared to the February average. Netflix app downloads increased by 33% in Hong kong and South Korea. The Amazon Prime app saw a similar increase.
  • YouTube has also witnessed a surge in usage. 
  • Live streaming (on platforms such as Periscope, Twitch, YouTube, Facebook, Instagram, etc) has also increased in popularity. It is notably being used for everything from concerts and comedy clubs to religious services, and even zoo visits.
  • Disney Plus has also been highly popular. According to one source, half of US homes with children under the age of 10 purchased a Disney Plus subscription. This trend is expected to continue during the COVID-19 outbreak. Disney even released Frozen II three months ahead of schedule in order to boost new subscriptions.
  • Hollywood studios have started releasing some of their lower-profile titles directly on streaming services.

Traffic has also increased significantly on popular gaming platforms.

These are just a tiny sample of the many ways in which digital entertainment is filling the void left by social gatherings. It is thus central to the lives of people under lockdown.

2. Cashless payments

But all of the services that are listed above rely on cashless payments – be it to limit the risk or contagion or because these transactions take place remotely. Fintech innovations have thus turned out to be one of the foundations that make social distancing policies viable. 

This is particularly evident in the food industry. 

  • Food delivery platforms, like UberEats and Deliveroo, already relied on mobile payments.
  • Costa coffee (a UK equivalent to starbucks) went cashless in an attempt to limit the spread of COVID-19.
  • Domino’s Pizza, among other franchises, announced that it would move to contactless deliveries.
  • President Donald Trump is said to have discussed plans to keep drive-thru restaurants open during the outbreak. This would also certainly imply exclusively digital payments.
  • And although doubts remain concerning the extent to which the SARS-CoV-2 virus may, or may not, be transmitted via banknotes and coins, many other businesses have preemptively ceased to accept cash payments. 

As the Jodie Kelley – the CEO of the Electronic Transactions Association – put it, in a CNBC interview:

Contactless payments have come up as a new option for consumers who are much more conscious of what they touch. 

This increased demand for cashless payments has been a blessing for Fintech firms. 

  • Though it is too early to gage the magnitude of this shift, early signs – notably from China – suggest that mobile payments have become more common during the outbreak.
  • In China, Alipay announced that it expected to radically expand its services to new sectors – restaurants, cinema bookings, real estate purchases – in an attempt to compete with WeChat.
  • PayPal has also witnessed an uptick in transactions, though this growth might ultimately be weighed-down by declining economic activity.
  • In the past, Facebook had revealed plans to offer mobile payments across its platforms – Facebook, WhatsApp, Instagram & Libra. Those plans may not have been politically viable at the time. The COVID-19 could conceivably change this.

In short, the COVID-19 outbreak has increased our reliance on digital payments, as these can both take place remotely and, potentially, limit contamination via banknotes. None of this would have been possible twenty years ago when industry pioneers, such as PayPal, were in their infancy. 

3. High speed internet access

Similarly, it goes without saying that none of the above would be possible without the tremendous investments that have been made in broadband infrastructure, most notably by internet service providers. Though these companies have often faced strong criticism from the public, they provide the backbone upon which outbreak-stricken economies can function.

By causing so many activities to move online, the COVID-19 outbreak has put broadband networks to the test. So for, broadband infrastructure around the world has been up to the task. This is partly because the spike in usage has occurred in daytime hours (where network’s capacity is less straine), but also because ISPs traditionally rely on a number of tools to limit peak-time usage.

The biggest increases in usage seem to have occurred in daytime hours. As data from OpenVault illustrates:

According to BT, one of the UK’s largest telecoms operators, daytime internet usage is up by 50%, but peaks are still well within record levels (and other UK operators have made similar claims):

Anecdotal data also suggests that, so far, fixed internet providers have not significantly struggled to handle this increased traffic (the same goes for Content Delivery Networks). Not only were these networks already designed to withstand high peaks in demand, but ISPs have, such as Verizon, increased their  capacity to avoid potential issues.

For instance, internet speed tests performed using Ookla suggest that average download speeds only marginally decreased, it at all, in locked-down regions, compared to previous levels:

However, the same data suggests that mobile networks have faced slightly larger decreases in performance, though these do not appear to be severe. For instance, contrary to contemporaneous reports, a mobile network outage that occurred in the UK is unlikely to have been caused by a COVID-related surge. 

The robustness exhibited by broadband networks is notably due to long-running efforts by ISPs (spurred by competition) to improve download speeds and latency. As one article put it:

For now, cable operators’ and telco providers’ networks are seemingly withstanding the increased demands, which is largely due to the upgrades that they’ve done over the past 10 or so years using technologies such as DOCSIS 3.1 or PON.

Pushed in part by Google Fiber’s launch back in 2012, the large cable operators and telcos, such as AT&T, Verizon, Comcast and Charter Communications, have spent years upgrading their networks to 1-Gig speeds. Prior to those upgrades, cable operators in particular struggled with faster upload speeds, and the slowdown of broadband services during peak usage times, such as after school and in the evenings, as neighborhood nodes became overwhelmed.

This is not without policy ramifications.

For a start, these developments might vindicate antitrust enforcers that allowed mergers that led to higher investments, sometimes at the expense of slight reductions in price competition. This is notably the case for so-called 4 to 3 mergers in the wireless telecommunications industry. As an in-depth literature review by ICLE scholars concludes:

Studies of investment also found that markets with three facilities-based operators had significantly higher levels of investment by individual firms.

Similarly, the COVID-19 outbreak has also cast further doubts over the appropriateness of net neutrality regulations. Indeed, an important criticism of such regulations is that they prevent ISPs from using the price mechanism to manage congestion. 

It is these fears of congestion, likely unfounded (see above), that led the European Union to urge streaming companies to voluntarily reduce the quality of their products. To date, Netflix, Youtube, Amazon Prime, Apple, Facebook and Disney have complied with the EU’s request. 

This may seem like a trivial problem, but it was totally avoidable. As a result of net neutrality regulation, European authorities and content providers have been forced into an awkward position (likely unfounded) that unnecessarily penalizes those consumers and ISPs who do not face congestion issues (conversely, it lets failing ISPs off the hook and disincentivizes further investments on their part). This is all the more unfortunate that, as argued above, streaming services are essential to locked-down consumers. 

Critics may retort that small quality decreases hardly have any impact on consumers. But, if this is indeed the case, then content providers were using up unnecessary amounts of bandwidth before the COVID-19 outbreak (something that is less likely to occur without net neutrality obligations). And if not, then European consumers have indeed been deprived of something they valued. The shoe is thus on the other foot.

These normative considerations aside, the big point is that we can all be thankful to live in an era of high-speed internet.

 4. Concluding remarks 

Big Tech is rapidly emerging as one of the heroes of the COVID-19 crisis. Companies that were once on the receiving end of daily reproaches – by the press, enforcers, and scholars alike – are gaining renewed appreciation from the public. Times have changed since the early days of these companies – where consumers marvelled at the endless possibilities that their technologies offered. Today we are coming to realize how essential tech companies have become to our daily lives, and how they make society more resilient in the face of fat-tailed events, like pandemics.

The move to a contactless, digital, economy is a critical part of what makes contemporary societies better-equipped to deal with COVID-19. As this post has argued, online delivery, digital entertainment, contactless payments and high speed internet all play a critical role. 

To think that we receive some of these services for free…

Last year, Erik Brynjolfsson, Avinash Collins and Felix Eggers published a paper in PNAS, showing that consumers were willing to pay significant sums for online goods they currently receive free of charge. One can only imagine how much larger those sums would be if that same experiment were repeated today.

Even Big Tech’s critics are willing to recognize the huge debt we owe to these companies. As Stephen Levy wrote, in an article titled “Has the Coronavirus Killed the Techlash?”:

Who knew the techlash was susceptible to a virus?

The pandemic does not make any of the complaints about the tech giants less valid. They are still drivers of surveillance capitalism who duck their fair share of taxes and abuse their power in the marketplace. We in the press must still cover them aggressively and skeptically. And we still need a reckoning that protects the privacy of citizens, levels the competitive playing field, and holds these giants to account. But the momentum for that reckoning doesn’t seem sustainable at a moment when, to prop up our diminished lives, we are desperately dependent on what they’ve built. And glad that they built it.

While it is still early to draw policy lessons from the outbreak, one thing seems clear: the COVID-19 pandemic provides yet further evidence that tech policymakers should be extremely careful not to kill the goose that laid the golden egg, by promoting regulations that may thwart innovation (or the opposite).

In Amazon, Apple, Broadband, China, COVID-19, European Union, Facebook, Google, International, Net Neutrality, Platforms, Taxes, Telecommunications, The Law, Economics, and Policy of the COVID-19 Pandemic, Truth on the Market, Twitter, United Kingdom, Wireless , , , , , , ,
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MVPDs “Unlock” the Box (again), but the FCC Doesn’t Seem to Care

Kristian Stout —  21 September 2016

The FCC’s blind, headlong drive to “unlock” the set-top box market is disconnected from both legal and market realities. Legally speaking, and as we’ve noted on this blog many times over the past few months (see here, here and here), the set-top box proposal is nothing short of an assault on contracts, property rights, and the basic freedom of consumers to shape their own video experience.

Although much of the impulse driving the Chairman to tilt at set-top box windmills involves a distrust that MVPDs could ever do anything procompetitive, Comcast’s recent decision (actually, long in the making) to include an app from Netflix — their alleged arch-rival — on the X1 platform highlights the FCC’s poor grasp of market realities as well. And it hardly seems that Comcast was dragged kicking and screaming to this point, as many of the features it includes have been long under development and include important customer-centered enhancements:

We built this experience on the core foundational elements of the X1 platform, taking advantage of key technical advances like universal search, natural language processing, IP stream processing and a cloud-based infrastructure.  We have expanded X1’s voice control to make watching Netflix content as simple as saying, “Continue watching Daredevil.”

Yet, on the topic of consumer video choice, Chairman Wheeler lives in two separate worlds. On the one hand, he recognizes that:

There’s never been a better time to watch television in America. We have more options than ever, and, with so much competition for eyeballs, studios and artists keep raising the bar for quality content.

But, on the other hand, he asserts that when it comes to set-top boxes, there is no such choice, and consumers have suffered accordingly.

Of course, this ignores the obvious fact that nearly all pay-TV content is already available from a large number of outlets, and that competition between devices and services that deliver this content is plentiful.

In fact, ten years ago — before Apple TV, Roku, Xfinity X1 and Hulu (among too many others to list) — Gigi Sohn, Chairman Wheeler’s chief legal counsel, argued before the House Energy and Commerce Committee that:

We are living in a digital gold age and consumers… are the beneficiaries.  Consumers have numerous choices for buying digital content and for buying devices on which to play that content. (emphasis added)

And, even on the FCC’s own terms, the multichannel video market is presumptively competitive nationwide with

direct broadcast satellite (DBS) providers’ market share of multi-channel video programming distributors (MVPDs) subscribers [rising] to 33.8%. “Telco” MVPDs increased their market share to 13% and their nationwide footprint grew by 5%. Broadband service providers such as Google Fiber also expanded their footprints. Meanwhile, cable operators’ market share fell to 52.8% of MVPD subscribers.

Online video distributor (OVD) services continue to grow in popularity with consumers. Netflix now has 47 million or more subscribers in the U.S., Amazon Prime has close to 60 million, and Hulu has close to 12 million. By contrast, cable MVPD subscriptions dropped to 53.7 million households in 2014.

The extent of competition has expanded dramatically over the years, and Comcast’s inclusion of Netflix in its ecosystem is only the latest indication of this market evolution.

And to further underscore the outdated notion of focusing on “boxes,” AT&T just announced that it would be offering a fully apps-based version of its Direct TV service. And what was one of the main drivers of AT&T being able to go in this direction? It was because the company realized the good economic sense of ditching boxes altogether:

The company will be able to give consumers a break [on price] because of the low cost of delivering the service. AT&T won’t have to send trucks to install cables or set-top boxes; customers just need to download an app. 

And lest you think that Comcast’s move was merely a cynical response meant to undermine the Commissioner (although, it is quite enjoyable on that score), the truth is that Comcast has no choice but to offer services like this on its platform — and it’s been making moves like this for quite some time (see here and here). Everyone knows, MVPDs included, that apps distributed on a range of video platforms are the future. If Comcast didn’t get on board the apps train, it would have been left behind at the station.

And there is other precedent for expecting just this convergence of video offerings on a platform. For instance, Amazon’s Fire TV gives consumers the Amazon video suite — available through the Prime Video subscription — but they also give you access to apps like Netflix, Hulu. (Of course Amazon is a so-called edge provider, so when it makes the exact same sort of moves that Comcast is now making, its easy for those who insist on old market definitions to miss the parallels.)

The point is, where Amazon and Comcast are going to make their money is in driving overall usage of their platform because, inevitably, no single service is going to have every piece of content a given user wants. Long term viability in the video market is necessarily going to be about offering consumers more choice, not less. And, in this world, the box that happens to be delivering the content is basically irrelevant; it’s the competition between platform providers that matters.

In Amazon, Antitrust & Competition, Apple, Broadband, Copyright, Federal Communications Commission, Google, Intellectual Property, Market Definition, Platforms, Telecommunications, Truth on the Market , , , , , , ,
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The FCC distorted market realities to scuttle the Comcast-TWC merger

Geoffrey Manne —  2 October 2015

Last week, FCC General Counsel Jonathan Sallet pulled back the curtain on the FCC staff’s analysis behind its decision to block Comcast’s acquisition of Time Warner Cable. As the FCC staff sets out on its reported Rainbow Tour to reassure regulated companies that it’s not “hostile to the industries it regulates,” Sallet’s remarks suggest it will have an uphill climb. Unfortunately, the staff’s analysis appears to have been unduly speculative, disconnected from critical market realities, and decidedly biased — not characteristics in a regulator that tend to offer much reassurance.

Merger analysis is inherently speculative, but, as courts have repeatedly had occasion to find, the FCC has a penchant for stretching speculation beyond the breaking point, adopting theories of harm that are vaguely possible, even if unlikely and inconsistent with past practice, and poorly supported by empirical evidence. The FCC’s approach here seems to fit this description.

The FCC’s fundamental theory of anticompetitive harm

To begin with, as he must, Sallet acknowledged that there was no direct competitive overlap in the areas served by Comcast and Time Warner Cable, and no consumer would have seen the number of providers available to her changed by the deal.

But the FCC staff viewed this critical fact as “not outcome determinative.” Instead, Sallet explained that the staff’s opposition was based primarily on a concern that the deal might enable Comcast to harm “nascent” OVD competitors in order to protect its video (MVPD) business:

Simply put, the core concern came down to whether the merged firm would have an increased incentive and ability to safeguard its integrated Pay TV business model and video revenues by limiting the ability of OVDs to compete effectively, especially through the use of new business models.

The justification for the concern boiled down to an assumption that the addition of TWC’s subscriber base would be sufficient to render an otherwise too-costly anticompetitive campaign against OVDs worthwhile:

Without the merger, a company taking action against OVDs for the benefit of the Pay TV system as a whole would incur costs but gain additional sales – or protect existing sales — only within its footprint. But the combined entity, having a larger footprint, would internalize more of the external “benefits” provided to other industry members.

The FCC theorized that, by acquiring a larger footprint, Comcast would gain enough bargaining power and leverage, as well as the means to profit from an exclusionary strategy, leading it to employ a range of harmful tactics — such as impairing the quality/speed of OVD streams, imposing data caps, limiting OVD access to TV-connected devices, imposing higher interconnection fees, and saddling OVDs with higher programming costs. It’s difficult to see how such conduct would be permitted under the FCC’s Open Internet Order/Title II regime, but, nevertheless, the staff apparently believed that Comcast would possess a powerful “toolkit” with which to harm OVDs post-transaction.

Comcast’s share of the MVPD market wouldn’t have changed enough to justify the FCC’s purported fears

First, the analysis turned on what Comcast could and would do if it were larger. But Comcast was already the largest ISP and MVPD (now second largest MVPD, post AT&T/DIRECTV) in the nation, and presumably it has approximately the same incentives and ability to disadvantage OVDs today.

In fact, there’s no reason to believe that the growth of Comcast’s MVPD business would cause any material change in its incentives with respect to OVDs. Whatever nefarious incentives the merger allegedly would have created by increasing Comcast’s share of the MVPD market (which is where the purported benefits in the FCC staff’s anticompetitive story would be realized), those incentives would be proportional to the size of increase in Comcast’s national MVPD market share — which, here, would be about eight percentage points: from 22% to under 30% of the national market.

It’s difficult to believe that Comcast would gain the wherewithal to engage in this costly strategy by adding such a relatively small fraction of the MVPD market (which would still leave other MVPDs serving fully 70% of the market to reap the purported benefits instead of Comcast), but wouldn’t have it at its current size – and there’s no evidence that it has ever employed such strategies with its current market share.

It bears highlighting that the D.C. Circuit has already twice rejected FCC efforts to impose a 30% market cap on MVPDs, based on the Commission’s inability to demonstrate that a greater-than-30% share would create competitive problems, especially given the highly dynamic nature of the MVPD market. In vacating the FCC’s most recent effort to do so in 2009, the D.C. Circuit was resolute in its condemnation of the agency, noting:

In sum, the Commission has failed to demonstrate that allowing a cable operator to serve more than 30% of all [MVPD] subscribers would threaten to reduce either competition or diversity in programming.

The extent of competition and the amount of available programming (including original programming distributed by OVDs themselves) has increased substantially since 2009; this makes the FCC’s competitive claims even less sustainable today.

It’s damning enough to the FCC’s case that there is no marketplace evidence of such conduct or its anticompetitive effects in today’s market. But it’s truly impossible to square the FCC’s assertions about Comcast’s anticompetitive incentives with the fact that, over the past decade, Comcast has made massive investments in broadband, steadily increased broadband speeds, and freely licensed its programming, among other things that have served to enhance OVDs’ long-term viability and growth. Chalk it up to the threat of regulatory intervention or corporate incompetence if you can’t believe that competition alone could be responsible for this largesse, but, whatever the reason, the FCC staff’s fears appear completely unfounded in a marketplace not significantly different than the landscape that would have existed post-merger.

OVDs aren’t vulnerable, and don’t need the FCC’s “help”

After describing the “new entrants” in the market — such unfamiliar and powerless players as Dish, Sony, HBO, and CBS — Sallet claimed that the staff was principally animated by the understanding that

Entrants are particularly vulnerable when competition is nascent. Thus, staff was particularly concerned that this transaction could damage competition in the video distribution industry.

Sallet’s description of OVDs makes them sound like struggling entrepreneurs working in garages. But, in fact, OVDs have radically reshaped the media business and wield enormous clout in the marketplace.

Netflix, for example, describes itself as “the world’s leading Internet television network with over 65 million members in over 50 countries.” New services like Sony Vue and Sling TV are affiliated with giant, well-established media conglomerates. And whatever new offerings emerge from the FCC-approved AT&T/DIRECTV merger will be as well-positioned as any in the market.

In fact, we already know that the concerns of the FCC are off-base because they are of a piece with the misguided assumptions that underlie the Chairman’s recent NPRM to rewrite the MVPD rules to “protect” just these sorts of companies. But the OVDs themselves — the ones with real money and their competitive futures on the line — don’t see the world the way the FCC does, and they’ve resolutely rejected the Chairman’s proposal. Notably, the proposed rules would “protect” these services from exactly the sort of conduct that Sallet claims would have been a consequence of the Comcast-TWC merger.

If they don’t want or need broad protection from such “harms” in the form of revised industry-wide rules, there is surely no justification for the FCC to throttle a merger based on speculation that the same conduct could conceivably arise in the future.

The realities of the broadband market post-merger wouldn’t have supported the FCC’s argument, either

While a larger Comcast might be in a position to realize more of the benefits from the exclusionary strategy Sallet described, it would also incur more of the costs — likely in direct proportion to the increased size of its subscriber base.

Think of it this way: To the extent that an MVPD can possibly constrain an OVD’s scope of distribution for programming, doing so also necessarily makes the MVPD’s own broadband offering less attractive, forcing it to incur a cost that would increase in proportion to the size of the distributor’s broadband market. In this case, as noted, Comcast would have gained MVPD subscribers — but it would have also gained broadband subscribers. In a world where cable is consistently losing video subscribers (as Sallet acknowledged), and where broadband offers higher margins and faster growth, it makes no economic sense that Comcast would have valued the trade-off the way the FCC claims it would have.

Moreover, in light of the existing conditions imposed on Comcast under the Comcast/NBCU merger order from 2011 (which last for a few more years) and the restrictions adopted in the Open Internet Order, Comcast’s ability to engage in the sort of exclusionary conduct described by Sallet would be severely limited, if not non-existent. Nor, of course, is there any guarantee that former or would-be OVD subscribers would choose to subscribe to, or pay more for, any MVPD in lieu of OVDs. Meanwhile, many of the relevant substitutes in the MVPD market (like AT&T and Verizon FiOS) also offer broadband services – thereby increasing the costs that would be incurred in the broadband market even more, as many subscribers would shift not only their MVPD, but also their broadband service, in response to Comcast degrading OVDs.

And speaking of the Open Internet Order — wasn’t that supposed to prevent ISPs like Comcast from acting on their alleged incentives to impede the quality of, or access to, edge providers like OVDs? Why is merger enforcement necessary to accomplish the same thing once Title II and the rest of the Open Internet Order are in place? And if the argument is that the Open Internet Order might be defeated, aside from the completely speculative nature of such a claim, why wouldn’t a merger condition that imposed the same constraints on Comcast – as was done in the Comcast/NBCU merger order by imposing the former net neutrality rules on Comcast – be perfectly sufficient?

While the FCC staff analysis accepted as true (again, contrary to current marketplace evidence) that a bigger Comcast would have more incentive to harm OVDs post-merger, it rejected arguments that there could be countervailing benefits to OVDs and others from this same increase in scale. Thus, things like incremental broadband investments and speed increases, a larger Wi-Fi network, and greater business services market competition – things that Comcast is already doing and would have done on a greater and more-accelerated scale in the acquired territories post-transaction – were deemed insufficient to outweigh the expected costs of the staff’s entirely speculative anticompetitive theory.

In reality, however, not only OVDs, but consumers – and especially TWC subscribers – would have benefitted from the merger by access to Comcast’s faster broadband speeds, its new investments, and its superior video offerings on the X1 platform, among other things. Many low-income families would have benefitted from expansion of Comcast’s Internet Essentials program, and many businesses would have benefited from the addition of a more effective competitor to the incumbent providers that currently dominate the business services market. Yet these and other verifiable benefits were given short shrift in the agency’s analysis because they “were viewed by staff as incapable of outweighing the potential harms.”

The assumptions underlying the FCC staff’s analysis of the broadband market are arbitrary and unsupportable

Sallet’s claim that the combined firm would have 60% of all high-speed broadband subscribers in the U.S. necessarily assumes a national broadband market measured at 25 Mbps or higher, which is a red herring.

The FCC has not explained why 25 Mbps is a meaningful benchmark for antitrust analysis. The FCC itself endorsed a 10 Mbps baseline for its Connect America fund last December, noting that over 70% of current broadband users subscribe to speeds less than 25 Mbps, even in areas where faster speeds are available. And streaming online video, the most oft-cited reason for needing high bandwidth, doesn’t require 25 Mbps: Netflix says that 5 Mbps is the most that’s required for an HD stream, and the same goes for Amazon (3.5 Mbps) and Hulu (1.5 Mbps).

What’s more, by choosing an arbitrary, faster speed to define the scope of the broadband market (in an effort to assert the non-competitiveness of the market, and thereby justify its broadband regulations), the agency has – without proper analysis or grounding, in my view – unjustifiably shrunk the size of the relevant market. But, as it happens, doing so also shrinks the size of the increase in “national market share” that the merger would have brought about.

Recall that the staff’s theory was premised on the idea that the merger would give Comcast control over enough of the broadband market that it could unilaterally impose costs on OVDs sufficient to impair their ability to reach or sustain minimum viable scale. But Comcast would have added only one percent of this invented “market” as a result of the merger. It strains credulity to assert that there could be any transaction-specific harm from an increase in market share equivalent to a rounding error.

In any case, basing its rejection of the merger on a manufactured 25 Mbps relevant market creates perverse incentives and will likely do far more to harm OVDs than realization of even the staff’s worst fears about the merger ever could have.

The FCC says it wants higher speeds, and it wants firms to invest in faster broadband. But here Comcast did just that, and then was punished for it. Rather than acknowledging Comcast’s ongoing broadband investments as strong indication that the FCC staff’s analysis might be on the wrong track, the FCC leadership simply sidestepped that inconvenient truth by redefining the market.

The lesson is that if you make your product too good, you’ll end up with an impermissibly high share of the market you create and be punished for it. This can’t possibly promote the public interest.

Furthermore, the staff’s analysis of competitive effects even in this ersatz market aren’t likely supportable. As noted, most subscribers access OVDs on connections that deliver content at speeds well below the invented 25 Mbps benchmark, and they pay the same prices for OVD subscriptions as subscribers who receive their content at 25 Mbps. Confronted with the choice to consume content at 25 Mbps or 10 Mbps (or less), the majority of consumers voluntarily opt for slower speeds — and they purchase service from Netflix and other OVDs in droves, nonetheless.

The upshot? Contrary to the implications on which the staff’s analysis rests, if Comcast were to somehow “degrade” OVD content on the 25 Mbps networks so that it was delivered with characteristics of video content delivered over a 10-Mbps network, real-world, observed consumer preferences suggest it wouldn’t harm OVDs’ access to consumers at all. This is especially true given that OVDs often have a global focus and reach (again, Netflix has 65 million subscribers in over 50 countries), making any claims that Comcast could successfully foreclose them from the relevant market even more suspect.

At the same time, while the staff apparently viewed the broadband alternatives as “limited,” the reality is that Comcast, as well as other broadband providers, are surrounded by capable competitors, including, among others, AT&T, Verizon, CenturyLink, Google Fiber, many advanced VDSL and fiber-based Internet service providers, and high-speed mobile wireless providers. The FCC understated the complex impact of this robust, dynamic, and ever-increasing competition, and its analysis entirely ignored rapidly growing mobile wireless broadband competition.

Finally, as noted, Sallet claimed that the staff determined that merger conditions would be insufficient to remedy its concerns, without any further explanation. Yet the Commission identified similar concerns about OVDs in both the Comcast/NBCUniversal and AT&T/DIRECTV transactions, and adopted remedies to address those concerns. We know the agency is capable of drafting behavioral conditions, and we know they have teeth, as demonstrated by prior FCC enforcement actions. It’s hard to understand why similar, adequate conditions could not have been fashioned for this transaction.

In the end, while I appreciate Sallet’s attempt to explain the FCC’s decision to reject the Comcast/TWC merger, based on the foregoing I’m not sure that Comcast could have made any argument or showing that would have dissuaded the FCC from challenging the merger. Comcast presented a strong economic analysis answering the staff’s concerns discussed above, all to no avail. It’s difficult to escape the conclusion that this was a politically-driven result, and not one rigorously based on the facts or marketplace reality.

In Amazon, Antitrust & Competition, Broadband, Exclusionary Conduct, Federal Communications Commission, Google, Law & Economics, Market Definition, Merger Guidelines, Mergers & Acquisitions, Net Neutrality, Platforms, Regulation, Telecommunications, Wireless , , , , , , , , , , , , , , , ,
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Forbes commentary on Susan Crawford’s “broadband monopoly” thesis

Geoffrey Manne —  2 March 2013

Over at Forbes Berin Szoka and I have a lengthy piece discussing “10 Reasons To Be More Optimistic About Broadband Than Susan Crawford Is.” Crawford has become the unofficial spokesman for a budding campaign to reshape broadband. She sees cable companies monopolizing broadband, charging too much, withholding content and keeping speeds low, all in order to suppress disruptive innovation — and argues for imposing 19th century common carriage regulation on the Internet. Berin and I begin (we expect to contribute much more to this discussion in the future) to explain both why her premises are erroneous and also why her proscription is faulty. Here’s a taste:

Things in the US today are better than Crawford claims. While Crawford claims that broadband is faster and cheaper in other developed countries, her statistics are convincingly disputed. She neglects to mention the significant subsidies used to build out those networks. Crawford’s model is Europe, but as Europeans acknowledge, “beyond 100 Mbps supply will be very difficult and expensive. Western Europe may be forced into a second fibre build out earlier than expected, or will find themselves within the slow lane in 3-5 years time.” And while “blazing fast” broadband might be important for some users, broadband speeds in the US are plenty fast enough to satisfy most users. Consumers are willing to pay for speed, but, apparently, have little interest in paying for the sort of speed Crawford deems essential. This isn’t surprising. As the LSE study cited above notes, “most new activities made possible by broadband are already possible with basic or fast broadband: higher speeds mainly allow the same things to happen faster or with higher quality, while the extra costs of providing higher speeds to everyone are very significant.”

Even if she’s right, she wildly exaggerates the costs. Using a back-of-the-envelope calculation, Crawford claims that slow downloads (compared to other countries) could cost the U.S. $3 trillion/year in lost productivity from wasted time spent “waiting for a link to load or an app to function on your wireless device.” This intentionally sensationalist claim, however, rests on a purely hypothetical average wait time in the U.S. of 30 seconds (vs. 2 seconds in Japan). Whatever the actual numbers might be, her methodology would still be shaky, not least because time spent waiting for laggy content isn’t necessarily simply wasted. And for most of us, the opportunity cost of waiting for Angry Birds to load on our phones isn’t counted in wages — it’s counted in beers or time on the golf course or other leisure activities. These are important, to be sure, but does anyone seriously believe our GDP would grow 20% if only apps were snappier? Meanwhile, actual econometric studies looking at the productivity effects of faster broadband on businesses have found that higher broadband speeds are not associated with higher productivity.

* * *

So how do we guard against the possibility of consumer harm without making things worse? For us, it’s a mix of promoting both competition and a smarter, subtler role for government.

Despite Crawford’s assertion that the DOJ should have blocked the Comcast-NBCU merger, antitrust and consumer protection laws do operate to constrain corporate conduct, not only through government enforcement but also private rights of action. Antitrust works best in the background, discouraging harmful conduct without anyone ever suing. The same is true for using consumer protection law to punish deception and truly harmful practices (e.g., misleading billing or overstating speeds).

A range of regulatory reforms would also go a long way toward promoting competition. Most importantly, reform local franchising so competitors like Google Fiber can build their own networks. That means giving them “open access” not to existing networks but to the public rights of way under streets. Instead of requiring that franchisees build out to an entire franchise area—which often makes both new entry and service upgrades unprofitable—remove build-out requirements and craft smart subsidies to encourage competition to deliver high-quality universal service, and to deliver superfast broadband to the customers who want it. Rather than controlling prices, offer broadband vouchers to those that can’t afford it. Encourage telcos to build wireline competitors to cable by transitioning their existing telephone networks to all-IP networks, as we’ve urged the FCC to do (here and here). Let wireless reach its potential by opening up spectrum and discouraging municipalities from blocking tower construction. Clear the deadwood of rules that protect incumbents in the video marketplace—a reform with broad bipartisan appeal.

In short, there’s a lot of ground between “do nothing” and “regulate broadband like electricity—or railroads.” Crawford’s arguments simply don’t justify imposing 19th century common carriage regulation on the Internet. But that doesn’t leave us powerless to correct practices that truly harm consumers, should they actually arise.

Read the whole thing here.

In Antitrust & Competition, Broadband, Federal Trade Commission, Google, Justice Department, Platforms, Regulation, Regulatory Reform, Telecommunications, Wireless , , , , , , , , , ,
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