Democracy & Technology Blog Nothing to fear from pricing freedom for broadband providers

The airline would not let coach passenger Susan Crawford stow her viola in first class on a crowded flight from DC to Boston, she writes at Wired (Be Very Afraid: The Cable-ization of Online Life Is Upon Us).

Just imagine trying to run a business that is utterly dependent on a single delivery network — a gatekeeper — that can make up the rules on the fly and knows you have nowhere else to go. To get the predictability you need to stay solvent, you’ll be told to pay a “first class” premium to reach your customers. From your perspective, the whole situation will feel like you’re being shaken down: It’s arbitrary, unfair, and coercive.

Most people don’t own a viola, nor do they want to subsidize viola travel. They want to pay the lowest fare. Differential pricing (prices set according to the differing costs of supplying products and services) has democratized air travel since Congress deregulated the airlines in 1978. First class helps make it possible for airlines to offer both lower economy ticket prices and more frequent service. Which is probably why Crawford’s column isn’t about airlines.
For one thing, Crawford seems to be annoyed that the “open Internet protections” adopted by the Federal Communications Commission in 2010 do not curtail specialized services — such as an offering from Comcast that lets Xbox 360 owners get thousands of movies and TV shows from XFINITY On Demand. As the commission explained,

“[S]pecialized services,” such as some broadband providers’ existing facilities-based VoIP and Internet Protocol-video offerings, differ from broadband Internet access service and may drive additional private investment in broadband networks and provide end users valued services, supplementing the benefits of the open Internet. (emphasis mine)

Since XFINITY on Xbox is a specialized service similar to traditional cable television service, it doesn’t have to count towards the data usage threshold that applies to broadband Internet access services provided by Comcast. Netflix doesn’t want to be “shaken down” or pay “tribute” to get similar treatment, according to Crawford.
For the data usage threshold exemption to be provided at no charge to Netflix, however, Comcast would have to recover the cost and/or the value from somewhere else. Broadband providers invested nearly $65 billion in 2010 alone. FCC staff have estimated the cost of universal broadband availability is $350 billion for 100 Mbps or faster.
Neither taxpayers nor lenders are going to sustain this level of investment in the current economic and political environment. It will have to come from private investors, who have many options for managing their money and demand competitive returns on equity. Since specialized services share last-mile facility capacity with broadband Internet access services, they provide a valuable additional source of revenue for fueling investment in the network. The concept is the same as first class and economy class passengers sharing the cost of air travel.
Increasing broadband adoption is justifiably a major objective of FCC Chairman Julius Genachowski, who estimated that more than 100 million Americans (roughly 35% of U.S. households) could but did not have broadband in 2010 in part because they felt they could not afford it.
Making broadband universally affordable and preventing businesses from having the option to pay a first class premium to reach their customers (if they want) are not compatible goals. If anything, there is a need to reduce broadband prices, not subsidize Netflix sales. Broadband providers must be allowed to let customers who value their products and services pay more money so broadband providers will be in a stronger position to appeal to price-conscious consumers.
Kindle users, for example, pay for the content and get the wireless connectivity for free.
Crawford falsely claims that broadband is a “single delivery network — a gatekeeper — that can make up the rules on the fly and knows you have nowhere else to go.” She makes this untrue claim because “natural monopoly” is the classic legal justification for close government scrutiny and pervasive regulation.
The fact is that cable, telephone and mobile wireless providers all compete to offer similar broadband Internet access services. Fourth-generation wireless technologies being deployed now are believed to be capable of delivering peak download speeds of 100 Mbps or higher, comparable to DOCSIS 3.0 and Verizon’s FiOS service. There is no gatekeeper problem, only a desire on the part of some firms to seek political favors instead of undertaking the difficult and uncertain task of creating real consumer value.
Netflix’s success derives in large part because FedEx, UPS and the U.S. Postal Service did not rent out DVDs. Delivering video is a Comcast speciality, however, and Netflix has no obvious source of competitive advantage. That’s unfortunate, but a bailout would impose hidden costs on consumers in the form of high prices for broadband Internet access.
When government intrudes in the free market to perform a rescue of the type Netflix is seeking, it is picking winners and losers. Capricious government intervention frightens private investors and can lead to crony capitalism and corruption.
I’m not sure what Susan Crawford can do to avoid having to gate check her viola in the future. But not even she is advocating that Congress repeal airline deregulation so airlines are treated the same as telecommunications carriers again. Which is exactly what she is advocating for broadband.

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.