Hazlett Participates in FCC’s Open Internet Roundtable

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Wheeler: Net May Be at Regulatory Inflection Point
Asks Whether ‘Terminating Monopolies’ Hold Key To Letting Startups Scale Up

10/02/2014
By John Eggerton

FCC chairman Tom Wheeler has at least raised the possibility that the Internet economy is at an “inflection point” at which the government needs to step in to insure the continuing ability of innovative startups to scale up at the pace of high-speed broadband.

That came in the FCC’s Thursday (Oct. 2) network neutrality forum on the economics of broadband, in this case mostly the economics of paid priority.

Wheeler, the self-described seeker of light over heat in the FCC’s series of net neutrality forums, proudly drew some of the latter with a provocative question to end the event.
Wheeler, something of a historian, asked whether the Internet economy was qualitatively different from the industrial economy because of the unprecedented ability of small players to scale up (the “garage to Google” model).

Panelist Nicholas Economides, professor of economics at New York University, agreed that it was a different economy because of how those who enter the market at low cost can scale up very quickly, and that that is why it is crucial to allow them to do that.
And being allowed to do that depends on the terminating monopoly, added Wheeler, a term for the ISPs who control the last mile connection to the home. Yes, said Economides, and that means no paid priority.

Jonathan Baker, American University professor, said he wasn’t sure it was such a difference in kind, but Wheeler pressed the point about the speed and velocity of the ‘net. Baker conceded that was definitely a difference,
Wheeler asked what economic model would preserve that ability to scale up.

The response of Tom Hazlett, Clemson Economics professor, was essentially: Dance with your date. He said the model is the one that has produced that Internet economy, which means the non-neutral net that included what Wheeler called “terminating monopolies,” which Hazlett called a prejudicial term, to say the least. He said the market already produces zero pricing — unpaid peering, for example — but those are outcomes, and should not be mandates.

Hal Singer, principal at Economists Inc. and senior fellow at the Progressive Policy Institute, said the Internet economy is special, and may need special treatment, but that does not translate to the radical position of zero pricing.

Christiaan Hogendorn, associate economics professor at Wesleyan University, pushed back a bit on Wheeler’s distinction. He said he thought there were analogies in the industrial revolution, where companies big and small could get unfettered access to the steam engine, railroads, electricity on a nondiscriminatory basis, which was not the case in many European countries at the time.
But Wheeler countered that that was only after regulations were imposed, then got to his action item. He said if the Internet was at the same inflection point or restructuring the economy, how do you make sure that transformative potential is preserved?

Hazlett said he hoped by not repeating the mistakes of the now-abolished Interstate Commerce Commission. Wheeler stopped there, bragging he had gotten more fire out of the group than in the previous three hours.

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MULTICHANNEL NEWS

FCC Forum: Economists Debate Paid Priority
Wheeler Presses For Distinction Between Paid/Unpaid Prioritization

10/02/2014
By John Eggerton

How many economists does it take to screw in a light bulb? None, the marketplace will take care of it. With that joke, plus an advisory that any e-mailed questions would be made part of the record, FCC Chief Economist Tim Brennan launched the FCC’s net neutrality forum on the economics of broadband, a roomful of economists as well as FCC Chairman Tom Wheeler and commissioners Jessica Rosenworcel and Michael O’Rielly.

Brennan talked about not wanting a debate, and wanting more light than heat from his panelists, echoing Wheeler’s preference for the forum, but he got a little of both, as the economists effectively divided along the lines of whether they thought priority was good or bad, a subject that dominated the discussion.

Weighing in against paid priority were Jonathan Baker, American University professor, and Nicholas Economides, professor of economics at New York University. Advocating for a more nuanced view of the economics of paid prioritization was Christiaan Hogendorn, associate economics professor at Wesleyan University.

Economides argued that paid prioritization allows ISP’s to create artificial scarcity so they can make more money, and if they can to that, they will. Users would not know whether a page loaded slowly because of the ISP or the content provider, he said, and would typically blame the content provider. Economides said given that ISPs have both market power and a terminating monopoly, they have the incentive and ability to make more money by creating artificial scarcity–congestion–both upstream and downstream. He said because of that, the FCC needed to impose strict network neutrality rules, and he saw no better way to achieve openness through competition.

Baker outlined a number of potential harms: ISP’s could raise rival’s costs or favor its own content, they could be gatekeepers and impose excessive charges for priority and they could degrade service quality to exploit their position as a terminating monopoly–the last line to the customer. He said a case-by-case approach was not sufficient to prevent such anticompetitive conduct because some of that conduct might be irreversible or costly to reverse.

Hogendorn said there were certain values, which he called spillovers, that go beyond the individual paid priority transaction and for which competition is not a solution, because they are in essence outside that present commercial transaction.

He used as an example a consumer watching a video about managing diabetes on WebMD. The appropriable benefits in terms of competition in a deal in which an ISP offered WebMD paid priority might have to do with ad revenues to WebMD or subscription service. The spillover benefits could include a healthier consumer, or an employer whose employee is absent less, or reduced government healthcare costs. None of those are represented in a competition model, but are very important to consider, he said.

On the other side were Tom Hazlett, Clemson Economics professor, John Mayo, professor of Economics at Georgetown; and Hal Singer, Economists Inc. and senior fellow at the Progressive Policy Institute.

Singer said he was not for all priority, but for a case-by-case approach to weeding out the bad prioritization rather than presumptively proscribing it.

Hazlett argues that the Internet has grown and burgeoned on a non-neutral path of paid priority and discrimination. Of the charge of artificial scarcity, he argued that many of the fast lanes are very productive and sought by content deliverers. He said suspicious of fast lanes is not necessarily based on empirical evidence.

FCC chairman Tom Wheeler broke into the discussion to press those economists to distinguish between paid priority, and unpaid, like prioritizing 911 calls, but there didn’t seem to be a clear line. (Wheeler has suggested that he does not think anticompetitive paid prioritization is commercially reasonable.)

Economides said he thought the 911 call could be handled under managed services, which don’t travel over the public Internet and the FCC provided a carve-out for in its 2010 network neutrality rules.

Hogendorn suggested that if the FCC requires a minimum level of service, which the current network neutrality rules proposal suggests could be combined with allowing commercially reasonable discrimination, that would not be so different from paid priority, with the FCC’s regulation comparable to money to a private firm.

Hazlett used the opportunity to put in a plug for paid priority, pointing out that Google speeds bits around the Internet on a priority basis and charges for that, arguing that is pro-consumer. Wheeler countered that Google is in the business of prioritizing service, like were ads show up in searches, but the issue was with the terminating monopolies–that would be the ISPs.

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