The Federal Trade Commission Gets in on Network Neutrality

As widely reported, Federal Trade Commission (FTC) Chair Deborah Platt Majoras announced that the FTC will look at network neutrality. In the same paragraph, however, she also expressed her doubts on the need for network neutrality legislation. That, combined with her choice of forum (Progress and Freedom Foundation’s Aspen Summit; PFF is a vigorous opponent of NN), the FTC’s natural bias toward post-conduct remedies rather than prophylactic regulation, and Majoras’ decision to sign off on the Adelphia transaction without considering the voluminous evidence collected by the FCC make me suspect that the FTC will conclude that Congress should take no action and that antitrust solves everything.

A bit more analysis below.

For those not totally up on the way the federal government works, the Federal Trade Commission (FTC) has jurisdiction over consumer protection and antitrust. It shares some jurisdiction with the Department of Justice and has some limited shared jurisdiction with the Federal Communications Commission (FCC). The FTC is an independent agency (it reports to Congress, not the President) with a 5 member Commission, no more than three of whom can be from the same political party. The President nominates the Commissioners and may designate one as the Chair, but the President cannot fire a Commissioner. While this gives the FTC (and other independent agencies, like the FCC or the FDA) a certain level of independence from day-to-day political management by the President, the President is careful to select folks who will follow his preferences.

So it is no surprise that the current Chair, Deborah Majoras, takes a narrow view of anti-trust and expresses great reluctance for regulations that might “interfere with the market.” While the FTC has, to its credit, been vigorous in areas like consumer privacy and enforcement of existing consumer protection regulations, it has significantly paired back its anti-trust and regulatory efforts to promote competition.

This view got expressed last winter when the FTC approved the purchase of Adelphia cable and swap of cable systems by Time Warner and Comcast. A read through Majoras’ separate majority statement refusing to impose a condition requiring access to regional sports programming (a condition ultimately adopted by the FCC) shows a philosophy consistent with that advocated by opponents of network neutrality. The Adelphia statement acknowledged the potential for Comcast and Time Warner to abuse their increased market power to stifle competition by blocking the sale of regional sports network programming to competitors, but concluded (based on theory rather than empircal evidence) that refusing to sell sports programming would cost Time Warner and Comcast more money than its worth (a conclusion contradicted by the FCC, which made its determination on the basis of the companies’ actual revenue records and contracts rather than on the basis of theory). Majoras and the rest of the Republican majority promised to “be vigillant” about Comcast’s and Time Warner’s behavior on a going forward basis, and reassured the public that if they ever saw incontrovertible proof of abuse of market power, they would investigate it.

Majoras basically echoed this view at her appearance at the Progress and Freedom Foundation Aspen Conference, where she announced her belief that we probably didn’t need NN regulations and that “over regulation” of the market could cause serious harm. Despite her apparent conclusion that this was so obvious that everyone should agree despite what economic theory tells us about the behavior of profit-maximizing firms with limited competition, Majoras promised to set up a task force to confirm her conclusion that we need no network neutrality regulations beyond antitrust. Actually, I think she said they would investigate, but the confirmation was pretty well implied by her preface and the setting. (Clue for reading tea leaves, you don’t announce regulatory initiatives at Progress and Freedom Foundation events, just like you don’t announce media mergers at the Free Press National Conference for Media Reform.)

Needless to say, the PFF folks were thrilled by this development. And why not? They have consistently maintained that legislating network neutrality would be a disaster for the internet and that antitrust provides all the right tools for enforcement. (You can read the PFF “Skeptics Primer on Network Neutrality” here.) I by contrast, I don’t think antitrust does nearly enough to protect internet users from abuse by the cable/telco duopoly.

Art Brodsky did an expert job ripping Majoras’ speech to shreds. Briefly, Majoras network neutrality speech suffers from the same willful blindness about the state of the real world and the entirely predictable behavior of profit-maximizing firms that have both consumer lock-in and lack of competion on their side that permeates PFF’s work. Sure, Adam Thierer of PFF, an expert in the field ideologically motivated to show the market works and living in one of the most competitive broadband environments in the U.S., can take the time to negotiate directly with competing providers and press them for better terms, but that doesn’t describe 99.9% of the rest of the country. (Although his “excellent adventure” put me in mind of my own “Excellent Adventure in Phone Competition some years back, but I’m an expert too.)

Oddly enough, as I have explained elsewhere, cable (and telco) companies make the decisions about exercising market power by betting on the reactions of 99.99% of normal people, not on the oddball ideologically motivated ”outliers“ like Adam and myself.

When predicting how companies will act, I prefer to go on the reality that most people accross the country face limited choices for broadband (2 or fewer), have an imperfect ability to detect discrimination against desired content, and lack the time, resources, knowledge and presence of competitors in the market to engage in the kind of multi-day negotiation that Adam describes as ”proof“ of a competitive market.

Oddly enough, when cable companies and phone companies make decisions about how to exploit market power, they discount the outliers like Adam and myself and rely on the lock-in effects that make most people grumble rather than switch. This is why Verizon and BellSouth can continue to charge customers a uiversal service fee for DSL even though the government no longer collects USF fees on DSL by redesignating it a ”supplier charge.“ In a competitive market with informed consumers and no associated switching costs, people know that the government stopped collecting the USF fee, get miffed, and switch to a rival service that passes the savings along. In the real world, most people don’t read their phone bill, don’t know the difference between a ”universal service fee“ and a ”supplier fee,“ and are very unlikely to go through the hassle of switching providers (including hours spent on the phone, days without connectivity, even more time waiting for service guys to show up, then rejiggering your equipment, then notifying all your contacts that you changed email addresses, and other hassles). So while maybe the clever Adam Thierer or the ideologically motivated Harold Feld will call and negotiate with the provider, or switch to someone else, the average customer won’t.

Which, when you come down to it, is why I’m progressive not Libertarian. I think we need rules that reflect the real world and anticipate predictable results (balancing always for costs that may make positive results unsustainable). Libertarians feel that as long as it is theoretically possible for a consumer to negotiate and switch providers, then itr is the responsibility of consumers to do so and paternalistic to prevent them from having the option by imposing regulation.

I’ll grant my approach is messier and has the danger of manipulation by incumbents (what free marketers like to call ”agency capture“). But the world is a messy place and getting the snot kicked out of me by incumbents directly because they have unregulated market power does not strike me as a better bargain than risking ”excessive” regulation. Like any useful tool, regulation has the potential for great good and the potential for great harm if misused. But to refuse to regulate where necessary to produce the desired public policy of freedom of expression, economic expanison, and continued innovation — because I have this ‘regulation bad’/’no regulation=free market’/’free market=good’ tautology hard wired into my head — represents a triumph of ideology and theory over empiricism and common sense.

(O.K., that last is waaay to long and geeky to be a standard sound bite, but I gotta be me.)

Stay tuned . . .