Three Important Points on Broadband Competition
Wednesday, March 20, 2019
Three Important Points on Broadband Competition
Benton Foundation Senior Fellow Jonathan Sallet's remarks at the Federal Trade Commission's hearing on Consumer Protection Issues in U.S. Broadband Markets
As the Federal Trade Commission considers the actions it can take to further broadband competition, I believe that it should consider three important points.
- The State of Competition: Few Americans Have Even Three Choices Among Fixed Broadband Providers
According to one set of measurements, the average download speed of fixed broadband providers in the United States in the second and third quarters of 2018 was 96.25 Mbps, and the average upload speed was 32.88 Mbps. But according to Federal Communications Commission data, at a download speed of 100 Mbps, 11% of U.S. census blocks had no access to broadband, more than one-third had only one choice of a fixed broadband provider, and 37% had access to only two[i] – and that FCC data overstates the presence of competition because even one household in a census block will count as demonstrating broadband presence in that census block, and two providers in the same census block will not necessarily reach the same customers. Even at lower download speeds, few census blocks contain three or more fixed broadband providers; at 50 Mbps the number is 21% and at 25 Mbps, the number is 28%.
Language here is important. There is a tendency to call the construction of new networks in a locality “overbuilding” as if it were an unnecessary thing; a useless piece of engineering.
But what some call “overbuilding,” the FTC should call by a more familiar term: “Competition.” New entrants may succeed, or they may fail, but antitrust views the ability to enter as critical to the restraint of market-power and the delivery of consumer benefits.
For example, a report by Analysis Group found material price declines associated with the presence of a third broadband provider and that “[e]ach additional competitor offering broadband in a higher speed category will increase the probability that other broadband providers in the market will offer broadband at those higher speeds by 17% on an annual basis.”[ii] Similarly, according to Molnar and Savage, quality increases are associated with the entry of a third and fourth broadband competitor.[iii]
The experience of individual municipalities provides more support. For example, the Federal Communications Commission found that the provision of municipal broadband in Chattanooga, Tennessee, led to lower rates, increased investment, and improved service from an incumbent broadband provider; that incumbent’s download speed increased from 8 Mbps in 2008, the year in which the Chattanooga municipal broadband network neared completion, to 106 Mbps in 2013.[iv] An order of magnitude larger.
Similarly, in Wilson, North Carolina, an incumbent cable company held rates in Wilson flat even as it raised rates in nearby areas for comparable offerings.[v] That company also increased its top-tier speed when the municipal broadband network began service because, it explained, “of the competitive environment.”[vi] By one measure, new competition saved residents more than one million dollars/year.
None of this is surprising. Indeed, it would be more surprising if increased competition did not deliver lower prices, greater output, and higher quality.
- The Federal Trade Commission Should Carefully Consider the Application of Section 5 to Broadband Conduct That Threatens to Harm Competition
A series of merger cases in the last decade illustrate the kind of harm that can arise in this sector. These harms include:
- Higher Interconnection Fees: In its review of the Comcast/TWC merger, the DOJ staff concluded that interconnection fees increase based on the size of a broadband provider and that higher interconnection fees “would raise the marginal cost of online video subscribers” and would also hamper new entry into local broadband/video markets.[vii] In the ATT/DirecTV merger, the Federal Communications Commission similarly found that “broadband Internet access providers have the ability to use terms of interconnection to disadvantage edge providers.”[viii]
- Data Caps: In its review of the AT&T/DirectTV merger, the Federal Communications Commission concluded that the integrated company, combining broadband provision with a very large video distributor, would have the incentive to hamper online video rivals by selective application of data caps on its own fixed broadband service. [ix]
- Contract Terms in Video Programming Agreements That Harm Downstream Rivals: In its review of the acquisition of Time Warner Cable by Charter Communications, the Department of Justice obtained a consent decree barring the merged company from using its bargaining leverage with video programmers to inhibit the flow of video content to online video distributors.[x] For example, the consent decree barred certain most-favored nation (MFN) clauses that permit the “cherry-picking” of contractual terms.
- Input Foreclosure: In its Comcast/NBCU decision, the Federal Communications Commission concluded that the integrated company could disadvantage downstream or online video rivals by withholding or raising the cost of its video programming.[xi]
An important question for the FTC is to consider the extent to which Section 5’s prohibition on “unfair methods of competition” reaches beyond the scope of the Sherman Act. To take just one example, Section 5 reaches invitations to collude even where there is no agreement reached (the existence of which is a requirement of Section 1).
- The Federal Trade Commission Has the Tools to Advance Broadband Competition
Commissioner Chopra has suggested that the FTC consider the use of rule-making to establish the application of Section 5’s competition standard on a prospective basis.[xii] Indeed, I believe that the broadband sector meets key criteria enunciated by Commissioner Chopra:
- An extensive enforcement record exists from both merger and regulatory proceedings involving the FTC, the DOJ, and the Federal Communications Commission; and
- There is little, if any, reason to believe that private antitrust litigation has or will shape the conduct of the industry.
Rather, given the history of bi-partisan agreement that some kind of limits should be placed on the ability of broadband providers to limit the competitive efforts of firms that use broadband to reach consumers (even as debate continues about the content of those limits), the FTC would be able to draw on a long and extensive record, in addition to whatever specific findings might be generated by a Section 6 report, as it considers the content of rules.
At the same time, the FTC rightly places considerable importance on its role as a competition advocate. For example, it has argued for the removal of state licensing laws that have unduly limited access to professions on the ground that such restrictions “can impose real and lasting costs on both American workers and American consumers.”[xiii]
Now, the FTC should advocate for the repeal of state laws that limit the ability of municipalities to authorize entry of new broadband providers. This is not to say that every municipality should take such a step; merely that given the state of wireline broadband competition, consumers would benefit when municipalities can decide what forms of broadband competition would be helpful to their consumers and their labor force.
The research that I noted above suggests, as does competition theory generally, that a third or fourth broadband competitor delivers lower prices and higher quality. And it is always important to remember that the benefits do not come only to the customers of the new entrant; competition inevitably induces incumbents to lower their prices, invest in their networks, and improve their services for the benefit of their customers as well.
Consider, for example, the variety of public-private models that are proliferating:
- Most familiar perhaps are the cases of municipal electrical utilities or rural electric coops that are able to take advantage of network economies to provide broadband.
- In addition, municipalities like Ammon, Idaho, have established open-access networks that are available for companies to use to deliver broadband service; under the Ammon model the municipality itself does not deliver service to the end-user; several internet service providers compete over the Ammon network.
- On the Eastern Shore of Maryland, Kent County has constructed fiber linking governmental buildings; that fiber is available to private companies (and one is now in operation) to construct extensions from the county’s fiber network that reach residences, lowering the cost of investment. Again, the county is not the service provider.
- Earlier this month, the city of Tacoma, Washington, took a big step towards a new plan for use of its municipal broadband network under which it would lease its network to a private broadband provider to improve and operate its broadband service to residents and businesses. Two potential private partners have committed to net neutrality, to provide substantially lower-cost services to low-income residents, and to upgrade the system to gigabit speeds within three years, among other public-service commitments.
As a competition advocate, it is important that the FTC enter the debate against state laws that force consumers to bear the higher prices and lower quality that antitrust tells us come from restrictive barriers to entry. This is not a new idea. In 2005, then-Commissioner Leibowitz told local governmental officials that it “was wrong to stifle competition in this manner”, saying that “local governments have long been laboratories of experimentation. If they want to give their residents affordable Internet access, they should be allowed to try without being foreclosed by federal or state laws”.[xiv] That was right then, and it is right now.
Thank you for the opportunity to appear today.
Jonathan Sallet is a Benton Senior Fellow. He works to promote broadband access and deployment, to advance competition, including through antitrust, and to preserve and protect internet openness. He is the former-Federal Communications Commission General Counsel (2013-2016), and Deputy Assistant Attorney General for Litigation, Antitrust Division, US Department of Justice (2016-2017).
[i] Communications Marketplace Report, GN Docket No. 18-231, WT Docket No. 18-203, MB Docket No. 17-214, MB Docket No. 18-227, IB Docket No. 18-251, Adopted Dec. 12, 2018, ¶186.
[ii] Dan Mahoney and Greg Rafert, “Broadband Competition Helps to Drive Lower Prices and Faster Download Speeds for U.S. Residential Consumers,” Analysis Group Whitepaper, pp. 1, 12-23, (Nov. 2016), available at https://www.analysisgroup.com/globalassets/content/insights/publishing/b....
[iii] Gabor Molnar and Scott J. Savage, “Market Structure and Broadband Internet Quality,” The Journal of Industrial Economics, Mar. 2017, p. 101.
[iv] City of Wilson, North Carolina Petition for Preemption of North Carolina General Statute Sections 160A-340 et seq., and The Electric Power Board of Chattanooga, Tennessee Petition for Preemption of a Portion of Tennessee Code Annotated Section 7-52-601, WC Docket Nos. 14-115 and 14-116, Memorandum Opinion and Order, para. 51, (adopted Feb. 26, 2015)(“Chattanooga and Wilson Order“), citing Petition of the Electric Power Board of Chattanooga, Tennessee, Pursuant to Section 706 of the Telecommunications Act of 1996, for Removal of Barriers to Broadband Investment and Competition, WC Docket No. 14-116, 28 (filed July 24, 2014), and Netflix, Inc. Comments, WC Docket Nos. 14-115 and 14-116, at 6-7 (filed Aug. 29, 2014).
[v] Chattanooga and Wilson Order, para. 52, citing Christopher Mitchell and Todd O’Boyle, “Carolina’s Connected Community: Wilson Gives Greenlight to Fast Internet,” at 9-11 (Dec. 2012), http://ilsr.org/wp-content/uploads/2012/12/wilsongreenlight.pdf.
[vi] Chattanooga and Wilson Order, para. 54, citing Brandon Hill, Time Warner, AT&T Win Big, N.C. Gov Won’t Veto Anti-Municipal Internet Bill, DailyTech, May 22, 2011, http://www.dailytech.com/Time+Warner+ATT+Win+Big+NC+Gov+Wont+Veto+AntiMunicipal+Internet+Bill/article21696.htm.
[vii] Nicholas Hill, Nancy L. Rose, Tor Winston, “Economics at the Antitrust Division 2014–2015: Comcast/Time Warner Cable and Applied Materials/Tokyo Electron,” Review of Industrial Organization, Vol. 47, Issue 4, p. 429 (Dec. 2015).
[viii] Applications of AT&T Inc. and DIRECTV for Consent to Assign or Transfer Control of Licenses and Authorizations, MB Docket No. 14-90, Memorandum Opinion and Order, para. 217 (adopted July 24, 2015)(internal quotation omitted).
[ix] Applications of AT&T Inc. and DIRECTV for Consent to Assign or Transfer Control of Licenses and Authorizations, MB Docket No. 14-90, Memorandum Opinion and Order, para. 213 (adopted July 24, 2015).
[x] United States v. Charter Communications, Inc. et al, Civil Action No.: 16-cv-00759, pp. 5-6 (filed Sept. 9, 2016).
[xi] Applications of Comcast Corporation, General Electric Company, and NBC Universal, Inc., for Consent to Assign Licenses and Transfer Control of Licensees, Memorandum Opinion and Order, paras. 60-109, 144-46, (adopted Jan. 18, 2011).
[xii] Comment of Federal Trade Commissioner Rohit Chopra (September 6, 2018), https://www.ftc.gov/system/files/documents/public_statements/1408196/chopra_-_comment_to_hearing_1_9-6-18.pdf.
[xiii] Federal Trade Commission, “FTC Staff Report Examines Ways to Improve Occupational License Portability Across State Lines,” Sept. 24, 2018, available at https://www.ftc.gov/news-events/press-releases/2018/09/ftc-staff-report-examines-ways-improve-occupational-license.
[xiv] Jon Leibowitz, Commissioner, Federal Trade Commission, Remarks at the National Association of Telecommunications Officers and Advisors (NATOA), 25th Annual Conference, Washington, D.C., Sept. 22, 2005, p. 7, available at https://www.ftc.gov/sites/default/files/documents/public_statements/municipal-broadband-should-cities-have-voice/050922municipalbroadband.pdf.
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