At a hearing last Friday, House Judiciary Committee Chairman Bob Goodlatte told the FCC that it should abandon its effort to enforce net neutrality and allow the antitrust agencies—the Federal Trade Commission and the Department of Justice—to police it alone. Chairman Goodlatte suggested that the antitrust laws were sufficient to prevent discrimination, and that any FCC regulation would ultimately hurt consumers more than help them. The Chairman is incorrect.
Net neutrality is shorthand for the concept that all Internet traffic should be treated equally irrespective of the nature of the traffic. So the bytes that make up a 10KB email should be shuttled about cyberspace in the same unbiased way the bytes that make up a 10GB HD movie are. Broadband providers generally do not like the concept of net neutrality. Streaming a 10GB movie will use up a lot more bandwidth than a 10KB email. While vast, there is still a limit on the total amount of bandwidth available at any given point in time. Also, broadband providers charge end users for access. At least up until recently, a user who is streaming a 10GB represents the same revenue as the individual who sends the 10KB email but uses one millionth the bandwidth. Get enough of those high-use consumers on your system and you will crowd out the other paying customers who then cannot send their 10KB emails. Broadband providers have chosen several ways of dealing with the bandwidth hogs. Providers can charge end users more if they use more bandwidth. They also slow or impede the delivery of large files or entire classes of files to ensure capacity is never constrained. This slowdown could frustrate the high-use consumer who might switch to a more reliable service.
The proponents of net neutrality believe that broadband providers should not be the gatekeepers for the type of content any particular individual seeks. The Internet is a great free market of ideas and commerce, and these should flow with as little regulation as possible.
From a cultural and philosophical perspective, it’s hard to argue with the proponents of net neutrality. From an economic standpoint, it seems fairly clear that net neutrality promotes inefficiency. And it’s the latter that the antitrust laws are concerned with.
Bandwidth hogs are a form of free riders. Normally, consumers pay an amount that is correlated to what they consume. In the early days of the Internet, the technical structure of the Internet generally allowed consumers to consume as much as they want for a single price. If a resource has no capacity constraints, then one individual’s consumption of the resource will not affect another’s. If the resource has a capacity constraint, however, there may be a point at which a single user’s consumption will negatively affect another’s.* Larry Lessig of Stanford University recognized this potential problem with the Internet. He sees the Internet as a great “commons.” A commons is a public resource consumption of which is free to the members of the community. A classic commons would be a natural area owned by the government where any farmer could take its livestock to graze. A problem can occur because consumers are not required to pay directly for their consumption. (They may pay indirectly through taxes.) Since there is no immediate cost associated with consumption, they could take as much as they want with impunity. This is the tragedy of the commons: collectively, the members of the community are benefited from the collective ownership and stewardship of the commons; but individually, each is incentivized to consume as much of the commons as possible. The economic inefficiency occurs when an overconsuming consumer consumes more of the commons than he needs to obtain his optimal output. It can also occur where a disadvantaged consumer cannot consume enough to produce an economically optimal amount. The cure for the tragedy of the commons is regulating consumption or charging the user for access.
Overconsumption of a depleting asset reduces the amount of the asset available to others who may need it to reach their economically optimal output. If the two parties are competitors, the overconsumption can, theoretically, harm competition. Strategic overconsumption of a depleting asset can be a form of foreclosure—it can deprive a competitor of the ability to produce an economically optimal amount and so serves as an artificial capacity constraint that reduces total output of the market. To the extent a competitor must then seek higher priced inputs to achieve the same output, the competitor’s costs have been raised.
On the other hand, capacity on the Internet is a vast but ultimately depletable resource at any given point in time. (The depletion is transient. Once the file is downloaded, full capacity is restored.) In order to prevent overcrowding, the broadband providers impede the flow of this high bandwidth content. Doing so discourages the consumers that are using more of the bandwidth than anyone else, and allows low-volume, and therefore high-value (under the one-price-for-all model), customers the access they would want to remain on the service. By slowing these bandwidth hogs down, the broadband providers are in fact enforcing, although inartfully, an efficient allocation of bandwidth. Indeed, if the broadband providers charge either the content providers, the customers or both, the content provider best suited to provide content will bid the most for the most bandwidth, and the consumers to whom the added bandwidth has the most value will pay more, ensuring an efficient outcome.
The two most obvious antitrust statutes one could use to fight discrimination are the Robinson-Patman Act and Section 2 of the Sherman Act. The Robinson-Patman Act prohibits a seller from discriminating in price of the same product to two similarly situated purchasers if it harms competition. Broadband providers typically sell to end consumers. Consumers could choose between faster, and slower, delivery speeds, and pay different amounts. But those delivery speeds would likely be viewed as different products under RP. Also, the purchasers are end users, so it is unclear whether one could state a harm to competition. As such, stating a cause of action may be difficult. Alternatively, broadband providers could charge content providers for speedier delivery. So long as broadband providers offer those same deals to similarly situated content providers, the broadband providers would argue that there is in fact no discrimination under RP. If the broadband providers did not charge content providers, and merely impeded traffic from some targeted content providers, the broadband provider would argue that there was no sale and therefore no violation. Also, the FTC has not brought a RP claim in decades. Private parties could bring a suit—and often do. But the argument that the FTC can enforce net neutrality through its RP powers is a stretch.
A second might be through Section 2 of the Sherman Act which prohibits unilateral exclusionary conduct that creates or enhances monopoly power. In order to state a claim under Section 2, among others, one would have to show that the activities complained of were in fact exclusionary—designed to exclude competition rather than enhance efficiency—and that they in fact harmed competition in a relevant antitrust market.
At first blush, the broadband providers and content providers don’t compete. One sells content, the other passes that content to customers. But a good number of broadband providers are also in the content delivery business. Comcast, for example, not only provides broadband services, but it also delivers movies through its cable channels, on-demand services, as well as applications that allow users to stream video to their tablets, handhelds and computers. The disadvantaged content provider may be able to show that its content was being delayed deliberately by the vertically-integrated broadband/content provider, and that this delay had a material effect on the disadvantaged content provider’s ability to provide services in the relevant market that includes its content. Netflix would first have to show that it competes with Comcast. They also would have to show consumers dropping Netflix for Comcast’s services. (That showing would be complex in a market where consumers can access content in multiple formats which themselves can vary in price, scope and availability over time.) They would then have to show causality—that they lost sales to Comcast because of the discrimination and that those lost sales resulted in users paying Comcast higher prices or that Netflix lost revenue or otherwise was harmed and perhaps even had to exit the market. Showing the effect on price is particularly complex given the byzantine pricing structure that exists in the cable markets and low marginal cost of the products being delivered.**
In response to such an argument, the broadband/content provider would likely re-characterize the disadvantaged content provider’s antitrust claim as being a “refusal to deal” and that, absent an actual refusal to deal on any terms, the disadvantaged content provider’s claim fails. Competitors are generally not required to deal with other competitors. The courts recognized an exception to this principle early in the history of the Sherman Act for “essential facilities.” If a business possessed a facility essential to competition, a competitor could seek a court order requiring the business to grant access to the facility to the competitor. The business did not have to provide favorable rates to the competitor nor did the competitor have to provide optimal access. Indeed, the business can provide significantly suboptimal access and still be deemed to be dealing with the competitor. See Loren Data v. GXS. So long as consumers can download content even if it is at maddeningly slow rates, the monopolist broadband provider will likely not have violated the antitrust laws.
Also, antitrust provides no solution at all if the disadvantaged provider does not compete with the broadband provider. A cable company may slow VPN traffic because it uses too much bandwidth. If the broadband provider doesn’t sell VPN functionality, then the discrimination does not harm competition.
An antitrust solution to traffic discrimination would ultimately only address situations where a broadband provider is impeding traffic to gain an advantage in a market in which it competes and has in fact done very well in that market in terms of market share. And even then, cases like Trinko may in fact limit the availability of that solution.
Ultimately, antitrust addresses only, and even then only potentially, one narrow permutation of traffic discrimination. It cannot ensure that all traffic will flow in the same unbiased way through cyberspace. Antitrust is therefore inadequate to obtain universal traffic neutrality. The FCC, with its broader, infinitely more flexible, mandate to protect the public interest, is better suited to secure any desirable cultural and philosophical goals of universal traffic neutrality. Indeed, within that flexible mandate one could envision a situation where the FCC allows some discrimination to deal with the overconsuming free riders, or whatever other social or economic result may be appropriate. In any event, just because the FCC can regulate the Internet does not foreclose the FTC and DOJ, or any private party, from pursuing their own cause of action if the activities violate the antitrust laws.
Antitrust may play a role at the fringe of net neutrality. It is by no means a complete answer.
* In effect, this is a negative network effect. A product has positive network effects if the value of the product increases with the number of users. A product has negative network effects if the value of the product decreases with the number of users.
** The argument that strategic overuse is exclusionary may not be available here because it is the maverick content provider that’s hogging the bandwidth. The incumbent is not overconsuming an asset to foreclose the maverick’s access to an input the maverick needs to compete. One can also question whether foreclosing access to a costless input can ever be anticompetitive. In such a situation, the parties that rely on the commons as a critical input are not internalizing the cost of the input. Both parties, including the disadvantaged competitor, are in a sense free riding off the entity that “owns” the commons whether that entity is ultimately the government or taxpayers.