Where There Is...

Although network neutrality -- or Freedom Against Internet Restrictions, if you prefer -- grabbed many of the headlines this week, we’d like to highlight a September 4 speech by Federal Communications Commission Chairman Tom Wheeler entitled “The Facts and Future of Broadband Competition.”

To cut to the chase, Chairman Wheeler outlined an Agenda for Broadband Competition that establishes four principles for all of the FCC’s broadband activities.

As way of background, we checked in The Economist for a working definition of competition and found this:

The more competition there is, the more likely are firms to be efficient and prices to be low. Economists have identified several different sorts of competition. Perfect competition is the most competitive market imaginable in which everybody is a price taker. Firms earn only normal profits, the bare minimum profit necessary to keep them in business. If firms earn more than this (excess profits) other firms will enter the market and drive the price level down until there are only normal profits to be made.

The Economist further defines perfect competition as:

The most competitive market imaginable. Perfect competition is rare and may not even exist. It is so competitive that any individual buyer or seller has a negligible impact on the market price. Products are homogeneous. Information is perfect. Everybody is a price taker. Output will be maximized and price minimized.

The principles for the Agenda for Broadband Competition are:

I. Where competition exists, the FCC will protect it.

Chairman Wheeler said, “Our effort opposing shrinking the number of nationwide wireless providers from four to three is an example. As applied to fixed networks, the [FCC’s] Order on tech transition experiments similarly starts with the belief that changes in network technology should not be a license to limit competition.”

Interestingly enough, speaking at the Competitive Carriers Association conference in conjunction with CTIA's Super Mobility Week in Las Vegas, C Spire Wireless CEO Hu Meena said that regulators’ efforts to preserve four national wireless carriers – most recently by opposing Sprint’s acquisition of T-Mobile -- has set back the cause for competition in the U.S. wireless market. Meena said that "Sprint should have been able to move down the path toward acquiring T-Mobile" and that a combined company "would have provided an entity that wasn't a legacy Bell company, with enough scale, enough size and enough clout." He said working with that combined company would have allowed smaller carriers "to bring true competition to the marketplace as opposed to walking up to the FCC with a laundry list of items that we need to be competitive again." He indicated carriers have resorted to competing primarily on price and the "only innovation you see is how low our rates can go." Tough break, consumers.

Regarding the “tech transition experiments” the Chairman mentioned, the FCC released, on August 19, a Public Notice that outlines the process that will be used to award up to $100 million in rural broadband experiment support to bring next-generation voice and broadband service to high-cost areas of the country. Preserving and promoting competition is one of 10 principles for what many call the “IP Transition” in the Benton Foundation’s The New Network Compact: Making The IP Transition Work For Vulnerable Communities. The FCC’s Public Notice reminds applicants of antitrust laws which are designed to prevent anticompetitive behavior in the marketplace. Prohibited actions include: “actual or potential competitors may not agree to divide territories in order to minimize competition, regardless of whether they split a market in which they both do business, or whether they merely reserve one market for one and another market for the other.” In Benton’s report we highlighted, “Competition means deploying high-speed IP networks throughout the country and enabling many innovative, community-based broadband options. Policymakers should be wary of arguments that seek to advance IP networks and the IP transition merely by deregulating services at the expense of competition.”

“Communications policy has always agreed on one important concept: the exercise of uncontrolled last-mile power is not in the public interest. This has not changed as a result of new technology,” Chairman Wheeler said.

II. Where greater competition can exist, the FCC will encourage it.

The Economist notes, “Most markets exhibit some form of imperfect or monopolistic competition. There are fewer firms than in a perfectly competitive market and each can to some degree create barriers to entry. Thus firms can earn some excess profits without a new entrant being able to compete to bring prices down.”

Chairman Wheeler said, “The entire Open Internet proceeding is about ensuring that the Internet remains free from barriers erected by last-mile providers.” He goes on to note, “Counting the number of choices the consumer has on the day before their Internet service is installed does not measure their competitive alternatives the day after. Once consumers choose a broadband provider, they face high switching costs that include early-termination fees, and equipment rental fees. And, if those disincentives to competition weren’t enough, the media is full of stories of consumers’ struggles to get ISPs to allow them to drop service.” As Chairman Wheeler highlights, the United States Court of Appeals for the District of Columbia Circuit, even in striking down some Open Internet/net neutrality rules, upheld the FCC’s authority to maintain an open Internet to in order to limit the gatekeeper power of broadband Internet service providers, observing, “if end users could immediately respond to any given broadband provider’s attempt to impose restrictions on edge providers by switching broadband providers, this gatekeeper power might well disappear.” But users cannot respond by easily switching providers. As a result, even though there may be competition, the marketplace may not be offering consumers competitive opportunities to change providers, especially once they’ve signed up with a provider in the first place.

III. Where meaningful competition is not available, the FCC will work to create it.

The Economist notes,

The least competitive market is a monopoly, dominated by a single firm that can earn substantial excess profits by controlling either the amount of output in the market or the price (but not both). In this sense it is a price setter. When there are few firms in a market (oligopoly) they have the opportunity to behave as a monopolist through some form of collusion. A market dominated by a single firm does not necessarily have monopoly power if it is a contestable market. In such a market, a single firm can dominate only if it produces as efficiently as possible and does not earn excess profits. If it becomes inefficient or earns excess profits, another more efficient or less profitable firm will enter the market and dominate it instead.

“Incentivizing competition is a job for governments at every level,” declared Chairman Wheeler. “Working together, we can implement policies at the federal, state, and local level that serve consumers by facilitating construction and encouraging competition in the broadband marketplace.”

Here Wheeler pointed to two FCC initiatives: expanding unlicensed spectrum and lifting state restrictions on municipal broadband.

Earlier this year, Andrew Jay Schwartzman wrote Unlicensed Spectrum: The Challenge and the Opportunity for Benton’s Digital Beat blog. In that article he points to the success the FCC has had creating and expanding bands of spectrum which are made available for unlicensed use. Unlicensed use, particularly for Wi-Fi, has enabled a proliferation of consumer devices such as garage door openers, remote controls, baby monitors and wireless speakers. There are also innumerable vital industrial and scientific applications using unlicensed spectrum. The inherent tension, however, is between those who want even more spectrum to be set aside for unlicensed use and incumbent industries, such as wireless phone companies, that prefer the widest possible use of the current system of exclusive licenses. Schwartzman concludes, “Expanding unlicensed uses of spectrum is a politically charged endeavor, but it seems as if the promise of unlicensed technology makes the effort worthwhile.”

On the municipal broadband front, you may recall our earlier article, Cities Seek FCC Help to Expand Broadband, which looked at how Chattanooga (TN) and Wilson (NC) simultaneously petitioned the FCC to pre-empt laws in their states that ban the cities from expanding their high-speed Internet networks. Schwartzman followed up on that article just this past week with an analysis of whether the FCC has the legal authority to preempt those state laws.

IV. Where competition cannot be expected to exist, the FCC must shoulder the responsibility of promoting the deployment of broadband.

“We cannot allow rural America to be behind the broadband curve. Our universal service efforts are focused on bringing better broadband to rural America by whomever steps up to the challenge -- not the highest speeds all at once, but steadily to prevent the creation of a new digital divide,” Chairman Wheeler said in his September 4 speech. “Americans living in urban areas are three times more likely to have access to high-speed broadband than Americans living in rural areas. As bandwidth needs increase, we cannot tolerate the broadband digital divide getting larger.”

In some parts of the country, there is only one choice for home Internet. In others, there are none. Daryl Myers, a resident of Whatcom County, Washington, decided to go public with his story after nearly two years of frustrating negotiations for Internet with local providers and officials. Joshua Bleiberg, a research analyst at Brookings, notes that in rural areas only 62 percent of homes have high-speed access as compared with 73 percent in suburban areas. He says McDonald’s is uniquely situated to provide Internet access to these Americans:

• McDonald’s has over 12,000 restaurants with free Wi-Fi (out of 14,200+ McDonald's in the U.S.) and other companies provide the same kind of service. The locations are spread throughout the entire country. It’s not possible to be in the United States and farther than 107 miles from a McDonald’s. Most people live much closer to the fast food chain.
• The Wi-Fi in McDonald’s is fast. According to Open Signal, McDonald's Wi-Fi has faster download speeds than any other large open public network.
• There are nearly as many McDonald’s with free Internet as public libraries (15,000). Critically, the chain often keeps their restaurants open after libraries close.

Past getting fries with your Wi-Fi, Brookings’ Darrell West testified before Congress that several policy reforms could extend the benefits of Internet access to numerous Americans.

• More flexible rules for the mobile sector
• Incentive auctions to re-allocate scarce spectrum
• Fees for unused spectrum
• Improved Infrastructure

Chairman Wheeler began his speech saying, “My goal is not to criticize, but to recognize that meaningful competition for high-speed wired broadband is lacking and Americans need more competitive choices for faster and better Internet connections, both to take advantage of today’s new services, and to incentivize the development of tomorrow’s innovations.” Realizing that as bandwidth increases, competitive choice decreases in the U.S., “The question with which we as Americans must wrestle is whether broadband will continue to be responsive to competitive forces in order to produce the advances that consumers and our economy increasingly demand.”

We look forward to tracking the answer to that question in the months and years ahead and, as always, we’ll see you in the Headlines.

[For more on reaction to Chairman Wheeler’s speech, see Washington Responds to FCC’s Wheeler on Broadband Competition]