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Jeffrey Eisenach
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Visiting Scholar and Director, Center for Internet, Communications, and
Technology Policy

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Research Areas:

Intellectual property, Innovation, Internet, Technology, Federal

Communications Commission, Telecommunications
Contact Info:
Jeffrey Eisenach is a visiting scholar at AEI. Eisenach has served in senior
positions at the Federal Trade Commission and the Office of Management and
@JeffEisenach
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Budget. At AEI, he focuses on policies affecting the information technology sector,
innovation, and entrepreneurship. Eisenach is also a senior vice president at NERA
Economic Consulting and an adjunct professor at the George Mason University

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School of Law, where he teaches Regulated Industries. He writes on a wide range
of issues, including industrial organization, communications policy and the Internet,
government regulations, labor economics, and public finance. He has also taught at
Harvard University’s Kennedy School of Government and at the Virginia
Polytechnic Institute.
Learn more about Jeffrey Eisenach and AEI’s Center for Internet, Communications,
and Technology Policy.

Experience

Senior Vice President, NERA Economic Consulting, January 2013 – Present
Managing Director and Principal, Navigant Economics LLC, January 2010 –
January 2014
Adjunct Professor, George Mason University School of Law, 2000-Present
Vice President, Economic Club of Washington, 2011-Present

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Chairman, Empiris LLC, 2008-2010
Chairman, Criterion Economics LLC, 2006-2008
Chairman, The CapAnalysis Group LLC, 2005-2006; Executive Vice
Chairman, 2003-2005
President, The Progress & Freedom Foundation, 1993-2003
Adjunct Lecturer, Harvard University, John F. Kennedy School of Government,
1995-1999
Executive Director, GOPAC, 1991-1993
Adjunct Professor, George Mason University, 1989
President, Washington Policy Group Inc., 1988-1991
Director of Research, Pete du Pont for President Inc., 1986-1988
Adjunct Professor, Virginia Polytechnic Institute and State University, 1985,
1988
Executive Assistant to the Director, Office of Management and Budget, 19851986
Special Adviser for Economic Policy and Operations, Office of the Chairman,
Federal Trade Commission, 1984-1985
Economist, Bureau of Economics, Federal Trade Commission, 1983-1984
Instructor, University of Virginia, 1983-1984
Special Assistant to James C. Miller III, Office of Management and
Budget/Presidential Task Force on Regulatory Relief, 1981
Research Associate, AEI, 1979-1981

Education
Ph.D., economics, University of Virginia
B.A., economics, Claremont McKenna College

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Keynote Presentation: GSMA Ministerial Programme at Mobile
World Congress 2016
Barcelona, Spain
22 February 2016
Hosted By: GSM Association (GSMA)
Mobile World Congress is the world’s largest gathering for the mobile industry,
organised by the GSMA, and held in the Mobile World Capital, Barcelona, on 22-25
February 2016. GSMA’s Ministerial Programme, held alongside Mobile World
Congress, provides a unique and exclusive platform for the top telecommunications
policymakers and industry leaders to discuss the most pressing issues affecting the
future of the mobile industry. On 22 February 2016, NERA Senior Vice President Dr.
Jeffrey A. Eisenach, Co-Chair of the Communications, Media, and Internet practice,
will deliver a keynote presentation during a session on New Regulatory Paradigms.
His remarks will be based on a new study prepared by NERA for GSMA, “A New
Regulatory Framework for the Internet Ecosystem,” which is co-authored by Dr.
Eisenach and NERA Associate Director Dr. Bruno Soria.
Learn more via the Ministerial Programme website.

  

 

GSMA Board

Constituted in 2003. the Board provides the membership with a stronger voice?
clearer direction, and faster decision making. The GSMA Board has 24 members re?ecting
the iargest operator groups and members from smaller independent operators with global

representation.

Jon Fredrik Baksaas
Cara-rot an. GSMA



 

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A new regulatory framework
for the digital ecosystem

Copyright 2016 GSM Association

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A NEW REGULATORY FRAMEWORK FOR THE DIGITAL ECOSYSTEM

The GSMA represents the interests of mobile operators
worldwide, uniting nearly 800 operators with more
than 250 companies in the broader mobile ecosystem,
including handset and device makers, software
companies, equipment providers and internet companies,
as well as organisations in adjacent industry sectors. The
GSMA also produces industry-leading events such as
Mobile World Congress, Mobile World Congress Shanghai
and the Mobile 360 Series conferences.

NERA Economic Consulting (www.nera.com) is a global
firm of experts dedicated to applying economic, finance,
and quantitative principles to complex business and legal
challenges. For over half a century, NERA’s economists have
been creating strategies, studies, reports, expert testimony,
and policy recommendations for government authorities
and the world’s leading law firms and corporations. We
bring academic rigor, objectivity, and real world industry
experience to bear on issues arising from competition,
regulation, public policy, strategy, finance, and litigation.

For more information, please visit the GSMA corporate
website at www.gsma.com

NERA’s clients value our ability to apply and communicate
state-of-the-art approaches clearly and convincingly,
our commitment to deliver unbiased findings, and our
reputation for quality and independence. Our clients rely
on the integrity and skills of our unparalleled team of
economists and other experts backed by the resources
and reliability of one of the world’s largest economic
consultancies. With its main office in New York City, NERA
serves clients from more than 25 offices across North
America, Europe, and Asia Pacific.

Follow the GSMA on Twitter: @GSMA

About the Authors
Dr. Jeffrey Eisenach is a Senior Vice President and Co-Chair of NERA’s Communications, Media, and Internet Practice. He is also an Adjunct
Professor at George Mason University Law School, where he teaches Regulated Industries, and a Visiting Scholar at the American Enterprise
Institute, where he focuses on policies affecting the information technology sector, innovation, and entrepreneurship. Previously, Dr.
Eisenach served in senior policy positions at the U.S. Federal Trade Commission and the White House Office of Management and Budget,
and on the faculties of Harvard University’s Kennedy School of Government and Virginia Polytechnic Institute and State University.
Dr. Bruno Soria is an Associate Director and Head of NERA’s Communications, Media, and Internet Practice in Europe. He is also Guest
Professor at the University of Barcelona, where he lectures on Telecommunications Economics. Previously, Dr. Soria served in a number
of senior positions in telecommunications economics, regulation and strategy, including at Telefónica, MCI WorldCom and The Boston
Consulting Group.
The views expressed are exclusively their own and do not necessarily represent those of the GSMA or any of its members, NERA Economic
Consulting, or any of the institutions with which they are affiliated.

 7
A NEW REGULATORY FRAMEWORK FOR THE DIGITAL ECOSYSTEM

Foreword
The ingenuity shown by the digital ecosystem
in responding to consumer demand, often in
unpredictable ways, never ceases to amaze.
New services, applications and technologies are
stimulating markets, empowering small businesses
and challenging the status quo.
The mobile industry contributes over $3 trillion to
the global economy annually, supporting 25 million
jobs and enabling growth across all sectors of the
economy. With 3.8 billion mobile users worldwide
today – and 700 million more expected to connect
by 2020 – one of our industry’s biggest challenges
is fostering the investment needed to deliver high
quality connections the world over.
This new report by NERA Economic Consulting
makes clear that telecoms regulations drafted for a
by-gone era have no place in today’s dynamic and
converged digital ecosystem where consumers face
an expanded array of competitive choice. Without
reform, markets will become further distorted and
investment will be put at risk.
The telecoms regulations in place today are largely
the same as those used to regulate 20th Century
technologies and markets. Our digital economy
deserves better. Not only do legacy regulations
impose costs on consumers and businesses, they
often frustrate the very public interest goals they
purport to address.

Now is the time for a regulatory reset. With 4G
deployments expanding and 5G technology under
development, governments and industry are already
considering the shape of Smart Cities and the
network-enabled Internet of Things. These new
technologies will bring about vast complex networks,
new service providers and innovative business
models.
We cannot allow tomorrow’s technologies to be
stifled by yesterday’s regulations. Policymakers need
to take a fresh look at their regulatory approach
to reflect changes in technologies and markets.
The future will require a more technology-agnostic
and flexible approach, where unnecessary legacy
regulations are discarded and where everyone can
compete on a level playing field.
Governments and the mobile industry have a shared
interest in connecting everyone and everything to a
better future. This will require continued investment
and innovation from the private sector. This will also
require a fundamentally new approach to regulation
of the digital ecosystem by policymakers.
We hope the ideas in this report contribute to a
constructive debate and serve as a call to action.
We have little doubt that countries that choose
to modernise regulations to reflect market and
technology realities will reap real benefits in terms
of increases in infrastructure investment, consumer
choice and economic growth.
Sincerely,

John Giusti
Chief Regulatory Officer, GSMA

Foreword  

3

 8
A NEW REGULATORY FRAMEWORK FOR THE DIGITAL ECOSYSTEM

Executive summary
The GSMA commissioned this study to contribute to the current debate
about the implications of technological and economic convergence for
regulation of the digital ecosystem. It has three primary objectives: first,
to describe the competitive dynamics of the modern digital ecosystem
as they relate to public policy in general and government regulation in
particular; second, to describe why these changes challenge existing
regulatory frameworks and require significant reforms; third, to lay out a set
of principles to guide policymakers and regulators as they adapt regulation
to sweeping changes in the digital economy.

Digitisation has created rapid technological progress
and growth, which has generated tremendous
benefits for consumers. Prices for digital services
are falling rapidly, more than three billion people
are now connected to the internet, and the mobile
revolution is rapidly bringing connectivity to even
the remotest areas. Three key characteristics of the
digital ecosystem are responsible for this progress:
modularity, economies of scale and scope, and
dynamism.
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services are made up of complementary inputs
(applications, communications, content and
devices) that work together in many different
combinations to produce value and give
consumers an unprecedented array of choices.
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effects) allow new and improved products and
services to be made available to consumers
at constantly falling prices (or even for free).

Technological advances can also make their way
into the marketplace extremely quickly, which
constantly advances the pace of innovation.
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both new and existing companies have powerful
incentives to invest and innovate, and therefore
compete to create new products, enter new
markets and apply new technologies to make
existing services cheaper and better.
While digital convergence has benefited consumers,
it also creates regulatory challenges. For example,
the complexity of digital ecosystem markets
increases regulatory uncertainty, and the rapid
pace of change makes regulation become quickly
obsolete. Growing innovation and rapid entry by new
competitors in digital ecosystem markets increase
the costs and likelihood of regulatory distortions by,
for example, deterring entry or skewing the path of
technological progress.

If regulatory policies and institutions fail to adapt to changing markets,
markets can become distorted in ways that harm competition, slow
innovation, and ultimately deprive consumers of the benefits of
technological progress.

4

  Executive summary

 9
A NEW REGULATORY FRAMEWORK FOR THE DIGITAL ECOSYSTEM

Today, outdated regulatory policies are creating
harm in at least two specific ways:
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market convergence has accelerated in pace,
broadened in scope and deepened in impact,
market distortion is also increasing because
of disparities in the way different sectors are
regulated. In particular, legacy regulation of
communications services and service providers is
far more intrusive and prescriptive than regulation
of other elements of the digital ecosystem.
Regulatory discrimination takes two main forms,

substantive and procedural. Both forms can harm
competition and reduce consumer welfare.
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prescriptive, ex ante regulatory regimes —like
those traditionally governing communications
markets—are no longer effective in the face of
rapid innovation. In many cases, as competition
increases, the need for such regulation has
disappeared altogether. The persistence of such
outdated rules not only harms competition
and slows innovation, but also fails to achieve
regulatory objectives.

Policymakers all over the world are now recognising these challenges and
working to implement reforms that will protect competition and consumers
without impeding social and economic progress.
In doing so, policymakers should apply three
specific principles:
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rather than based on structure or technology.
That is, regulation should be designed to achieve
its objective in the most efficient way (i.e., to be
‘cost effective’), without regard to technologies,
industry structures, or legacy regulatory regimes.
Regulatory policies and institutions designed
around obsolete definitions of products and
markets need to be replaced with more holistic
approaches and should be implemented by
institutions with both the jurisdiction and
expertise to consider all the alternatives.
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dynamic and complex, regulation also needs
to be flexible. It needs to accommodate rapidly
changing markets and technologies and create
enough regulatory confidence for companies
to take risks. In general, performance-based
approaches are superior to prescriptive, ex ante
rules. Simply put, static regulation needs to be
replaced by dynamic regulation.
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digital ecosystem imply that regulatory polices
need to be rethought from the ground up. In many
cases, intense competition in the digital ecosystem
means that regulation is no longer needed,
or can be significantly scaled back. In other
areas, such as privacy and cyber security, new

regulatory challenges are emerging. Regulatory
reform discussions should follow a bottom-up
approach that takes entirely new approaches into
consideration - and is willing, where appropriate,
to jettison old ones.
A new regulatory framework based on these
principles will be inherently market- and technologyneutral, because it will apply to all elements of the
digital ecosystem. It will also be cost-effective,
because it will achieve regulatory goals and
objectives at the lowest possible cost. Finally,
it will be flexible because it will allow markets
and technologies to evolve while preserving and
enhancing regulators’ ability to achieve their
functional objectives. Most importantly, the new
regulatory framework proposed here is designed
to ensure that consumers can continue to enjoy the
benefits of technological progress and be protected
by well-designed regulation.
The study concludes by applying the above
principles to six areas of regulation and regulatory
policy that are actively being considered around
the world: access regulation, removal of barriers to
entry and exit, privacy and data protection, merger
review, spectrum policy, and universal availability
and affordability. The resulting recommendations,
while necessarily general in nature, show that the
challenges being faced by policymakers can be
solved by developing pragmatic solutions based
on the analytical framework and policy principles
in this study.

Executive summary  

5

 10
A NEW REGULATORY FRAMEWORK FOR THE DIGITAL ECOSYSTEM

II. Static regulation of dynamic markets
The second primary challenge facing regulation of
the digital ecosystem is the inability of prescriptive,
ex ante regulatory regimes to keep pace with the
dynamism of digital products and markets.
Traditional ex ante regulatory approaches typically
seek to specify not just the objectives being sought,
but the means by which they are to be achieved.
For example, environmental regulations may specify
the particular technology used to reduce emissions,
workplace safety regulations may impose detailed
engineering specifications, or consumer protection
rules may specify the use of a specific type of
safety device. In the telecommunications arena,
regulations often specify the technology that must
be used for particular wireless services, describe
in detail how infrastructure providers satisfy ‘open
access’ requirements to make their systems available
to competitors, or identify categories of business
conduct that may be considered discriminatory in
advance.
The downsides of such prescriptive approaches are
well documented, including regulatory complexity,
inflexibility in the face of diverse circumstances
(i.e., forcing a ‘one-size-fits-all’ solution) and lack of
adaptability over time.36 As noted above, all of these
effects are exacerbated in digital ecosystem markets.
The traditional regulatory process has been unable
to keep pace with market developments in the
digital ecosystem on numerous occasions:

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the FCC would intervene in relations between OTT
providers and ISPs has persisted for more than a
decade. The Commission’s prior efforts to regulate
have twice been overturned by the courts. There
is a significant possibility the new rules, issued in
March 2015, will also be overturned by the courts –
but not until at least 2016.37
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SMS roaming came into effect at a time when
mobile operators were on the brink of losing a
third (or more) of the market for out-of-state
services to a combination of OTT providers (like
WhatsApp) and public Wi-Fi—that is, when
the rationale for such regulations was about to
evaporate.38
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universal internet access have lagged behind
technological change. Regulators continue to
subsidise outdated technologies and incumbent
providers while underemphasising or ignoring new
approaches, including wireless.39
These examples are not intended to suggest that it
is always unnecessary or inappropriate to regulate
the digital ecosystem, or even that ex ante rules
are never optimal. But the evidence suggests that
regulatory intervention should move away from
prescriptive, ex ante rules wherever possible.

36. See e.g., Roger Sherman, 2008, Market Regulation, Pearson, 686. See also U.S. Office of Management and Budget, Circular A-4, 2003, Regulatory Analysis, https://www.whitehouse.gov/sites/default/files/omb/
assets/regulatory_matters_pdf/a-4.pdf. (“Performance standards … are generally superior to engineering or design standards because performance standards give the regulated parties the flexibility to achieve
regulatory objectives in the most cost-effective way.”)
37. See Bret Kendall, 4 August 2015, “Appeals Court to Hear Arguments over FCC’s Net Neutrality Rules”, Wall Street Journal.
38. See Appendix C.
39. See e.g., International Telecommunications Union, Broadband Commission, September 2013, The State of Broadband 2013: Universalizing Broadband, 60-62, http://www.broadbandcommission.org/documents/
bb-annualreport2013.pdf (hereafter Broadband Commission 2013).

Designing a new regulatory framework  

31

 11

AMERICAN ENTERPRISE INSTITUTE

CYBERSPACE POLICY AT HOME AND ABROAD:
THE AGENDA FOR 2016 AND BEYOND
INTRODUCTORY REMARKS:
JEFFREY EISENACH, AEI

KEYNOTE ADDRESS:
RON JOHNSON, CHAIRMAN, SENATE HOMELAND SECURITY
AND GOVERNMENTAL AFFAIRS COMMITTEE (R-WI)

PANEL 1: MEETING THE GLOBAL CHALLENGE TO A FREE
AND OPEN INTERNET
PANELISTS:
CLAUDE BARFIELD, AEI
GUS HURWITZ, AEI
ROSLYN LAYTON, AEI
SHANE TEWS, AEI
MODERATOR:
JAMES K. GLASSMAN, AEI

PANEL 2: RESTORING A MARKET-BASED APPROACH TO US
COMMUNICATIONS POLICY
PANELISTS:
RICHARD BENNETT, AEI

 12

BABETTE BOLIEK, AEI
MARK JAMISON, AEI
DANIEL LYONS, AEI
MODERATOR:
JEFFREY EISENACH, AEI

LUNCH ROUNDTABLE: A CYBER-ISSUES SMORGASBORD
PARTICIPANTS:
ARI RABKIN, AEI
BRET SWANSON, AEI
TOM SYDNOR, AEI

9:00 AM – 1:00 PM
THURSDAY, JANUARY 28, 2016
EVENT PAGE: http://www.aei.org/events/cyberspace-policy-at-home-and-abroadthe-agenda-for-2016-and-beyond/

TRANSCRIPT PROVIDED BY
DC TRANSCRIPTION – WWW.DCTMR.COM

 13

JEFFREY EISENACH: Now, let me ask folks to take their seats and we’ll get
started here pretty much on time.
My name is Jeff Eisenach and I am the director of AEI’s Center for Internet
Communications and Technology Policy. I want to welcome everyone here on this cold,
but happily not snowy morning in Washington, D.C., and glad everyone made it here
safely over some icy streets.
We’re here for half a day
y more or less to talk about Internet ppolicy
y issues at home
and abroad,, looking
g down the road this yyear and then looking
g down the road ppast what
will be a pprettyy important
p
date about a yyear from now when we have a change
g I
administration one way
y or another and all of the opportunities to affect U.S. policy that
come every four years in our political system.
I’m going to move as quickly as I can to our keynote speaker and then we’ll talk
more about the program after as we begin the next session.
Our keynote speaker today is someone we’re very proud to have with us. He has
been a friend of AEI down at attending some of our events out of town. He tells me this is
his first time to AEI headquarters. And I mentioned it will probably be his last time at this
AEI headquarters because we’re hopefully moving sometime this spring to a fabulous
new facility up on Mass Ave.
Senator Johnson is the chairman of the Senate Homeland Security and
Governmental Affairs Committee as well as chairman of the Senate Subcommittee on
European and Regional Security Cooperation. And as a result, he is at the center of the
debate, which is getting, happily, increasing attention about the importance of U.S. cyber
policy in general and cybersecurity in particular to our national security interest, to our
economic interests, and to America’s national interests broadly defined.
Here at AEI, about two years ago, we began a project to develop a global Internet
strategy for the next administration. Our first initial report growing out of that effort will
be released in mid-June, and we’re looking forward to that.
Our belief is that America’s not winning in the cyber environment, that we’re
unprepared as a matter of defense and inactive and ineffectual as a matter of offense and
that that applies across the board. Whether you’re talking about diplomacy or military
preparedness or law enforcement, everywhere you look we’re on defense and in retreat in
the cyber environment. That doesn’t have to be the case. We think that can be turned
around and that’s our overall objective.
Senator Johnson has been a leader on these issues. He has focused not only on the
cyber issues but on ISIS and terrorism. He is an entrepreneur and a businessman. He

 14

founded his own business in Wisconsin in 1979 sleeping on a cot and running machine
tools and was elected in 2010.
And I have to just say before – my last comment, Russ Feingold, who he defeated
in 2010 for a seat in the U.S. Senate, was one of the most pleasant members of the U.S.
Senate ever and an extremely funny guy and one half of an iota to the right of Bernie
Sanders, so while we did a trade I think in getting a very pleasant guy to replace him, we
certainly got somebody with much more sound ideas.
And, Senator Johnson, we’re delighted to have you here. Thank you. (Applause.)
SENATOR RON JOHNSON (R-WI): Thank you, Jeff. I appreciate that. I’ve got
a great deal of respect for AEI. I think you – again, there are a lot of good think tanks
here in town with fabulous scholars, but – I shouldn’t really say this but you’ve got good
a stable as anybody. That’s probably the best way to do it.
And when you come and speak before a group like this, it’s a little intimidating. I
mean, my own background, as Jeff was talking about, is I’m an accountant by education,
plastics manufacturer by vocation. So I read the information from scholars from, you
know, a place like AEI and I learn from you. So, you know, what can I tell you?
Let me – before I get into the subject matter of cyber threats against this nation,
let me give you some good news. I think the greatest thing we’ve got going for this
country politically is that as Americans we share the same goal. I don’t care where you
are on the political spectrum, we all want a safe, a prosperous and secure America. We’re
concerned about each other. There’s not one political party that has a monopoly on
compassion. We all want every American to have the opportunity to build a good life for
themselves and their family.
My approach, being a United States senator, really dates back to my approach in
business. I did a lot of negotiating in business. I didn’t sit down at the negotiating table
and start arguing. You know, what I would do in those negotiations is I would first lay
out all the areas of agreement. And that technique allowed me to develop a relationship, a
level of trust with my negotiating partners so when it came to the areas of disagreement,
it was just a whole lot easier finding common ground.
So that’s how I’ve conducted myself as United States senator. It’s definitely how
I’ve conducted myself as chairman of the Senate Committee on Homeland Security and
Governmental Affairs.
Let me just give the example of – you know, what I did is we first started – as I
first started this chairmanship, reached out to the former chairman, now my ranking
member, Senator Tom Carper, who – let’s face it. You know, Tom wants a whole lot
more government than I want, so we’re kind of far apart in the political spectrum, but
he’s a person of integrity and we do agree that what government we have should be
effective, efficient, and accountable.

 15

on empowering consumers, not empowering edge providers, making sure we have room
for the next Facebook. It was about making sure consumers were protected.
And we need to remember that lesson of antitrust law, right, that competition
policy means that the rules that we make should protect competition, not competitors.
Companies need to be able to innovate in order to be competitive. If we require T-Mobile
to give everybody exactly the same service that AT&T and Verizon give everybody, then
it’s going to fail because T-Mobile does not have the scale of AT&T and Verizon. And so
forcing them to do the same thing as AT&T and Verizon gives them one hand – forces
them to compete with one hand tied behind their back. And Sprint is learning this. TMobile, in order to compete, needs to be able to offer something different, to be able to
reach those consumers that are not being well served by the traditional broadband model.
The FCC, I think is – now that it’s sort of stepping up and displaced the Federal
Trade Commission as the primary competition authority in this area, it needs to make
sure that it’s learned those lessons that the FTC learned over the years, which is that
competition really flourishes when regulators allow experimentation and intervene only
in instances where they see that a company has market power and is exploiting the
market power in a way that’s actually harming consumers.
MR. EISENACH: Daniel, thank you, and to all the panelists. So I’ve got one
round of follow up questions and I have just sort of a lightning round and then we’ll
probably turn it over to the audience. But – so let me start, Richard, with you, and I think
– you know, I frankly, you know, have been a – I think a techno optimist when it comes
to the pace of technological change, you know, particularly in the network space, which I
think is, you know, broadly ignored. People think about the Moore’s Law and
microprocessors or software change, rapid improvements in software, numbers of new
apps or whatever, or devices. They don’t think about it so much as the – in the network
space, and your recent paper I think hits on that, which I’d recommend to everyone.
But as optimistic as, you know, I tend to be, I didn’t think 5G was coming in
2017. I thought it was coming later. And I guess I still don’t have an easy time making
concrete what it is, right? So both – probably of less interest is how it works, but that’s of
interest, but of greater interest is what will it do. And I know you’re following it more
closely anyone in this room, so, you know, how’s 5G going to change things starting next
year?
MR. BENNETT: Well, it’ll be like the rollout of 4G was where, you know, it was
– it didn’t take place in all locales at the same time. It didn’t take place at the same rate
everywhere. The United States was a world leader in the deployment of 4G, which has
really helped our mobile economy and the economy as well.
But yeah, well, I believe that the announcements from Verizon and some other
companies have indicated that they are going to start the rollout in 2017. How extensive it
is, it kind of remains to be seen. But from a technology standpoint, there’s actually still
some debate over what the content of 5G is going to be, but, you know, there’re a couple

 16

of ideas that are fairly clear, which is that it will add some features to the radio access
network that allow for the use of higher frequencies. And so there’s the millimeter wave
and above and higher frequencies are pretty much unencumbered by incumbent uses.
And there’s enormous amounts of bandwidth there, so that’s the goal that probably drives
it, more than anything else, is gigabit capacities at the radio level. And then, that actually
will force some reexamination of certain aspects of the IP – Internet Protocol stack to
operate on mobile devices at those high speeds.
It’s going to, I think, force a reexamination – you know, the Internet protocols are
like 35 years old and which is, you know, how many generations, like 10 generations in
Moore’s Law time, 20 generations in Moore’s Law time. So they really are due for a
reexamination and there are a lot of good technical ideas that have been forwarded about
how to change the way the TCP and IP, a way the Internet works at that level so that it’s
more robust and more secure.
And a lot of us in the engineering community think that the cybersecurity issues
really aren’t solvable within the context, TCP, IP, the way people would like them to be.
There were always going to be bailing water on security as long as they’re reliant on
protocols that are fundamentally insecure, were never meant to be secure – were, in fact,
designed for their transparency because in a research environment, you want to be able to
examine a network and see everything that’s going on.
When you’re in a commercial setting, you clearly don’t want that. You want to be
able to see nothing of what’s going on except when you have permission. So there’s that.
So yeah, I mean, I think that’s the potential.
But the fly in the ointment there is that the allocation of those 5G, those high
frequencies – well, let me see, who’s the agency that does that? (Laughter.) How friendly
have they been towards innovation and network technologies recently? I mean, that’s –
you know, they’re in a position to essentially cede the leadership in 5G to other countries.
Because – especially Korea, Japan, and certain parts of Western Europe will really – their
feelings are really hurt about the United States being the world leader in 4G because
those other countries, you know, when 2G and 3G were the norm, they could take great
pride in the fact that they had better mobile networks than the U.S. did.
And I, you know, they’re really eager and it’s just a point of national pride
actually, you know, just as those of us in Denver are always happy when the Broncos win
the Super Bowl – (laughter) – as frequent as that is, I know, they want to be the leaders –
you know, the technology leadership is really important in Korea, especially, and also in
Japan, the rest of East Asia.
MR. EISENACH: Well, thanks for that and we can come back to all these issues
I’m going to raise here during Q&A.
Babette,
Bab
a ette,, yyou talkedd aabout
bout the role of permissionless
p
innovation. I think yyou usedd
that term. But the Open Internet Order andd tthe
he other kindd ooff ways in which the FCC is

 17

g
getting
g more engaged
g g in the innovative pprocess,, I jjust wantedd to ggive
ive yyou an opportunity
pp
to kind off ta
talk
lk
k a little bit about
aabout that. Andd yyou know,, do yyou reallyy see,, you
y know,,
administrative process,
p
, the regulatory
g
y overhang,
g, the threat off regu
regulation,
g lation,, as a meaningfu
meaningful
f l
inhibitor of innovation or is it just something out on the horizon to worry about?
MS. BOLIEK: I think it is a meaningful inhibitor because we’ve already had data
that it can be incredibly meaningful. I myself, back in the day when it was 2G and it was
awesome, I looked at the mobile phone network as it’s moving to 3G as well. Some of
you may not realize, but mobile phones have had a special place in our regulatory world.
It started out as sort of people didn’t know what to do with that as regulators, and it came
into different regulatory pockets than what was Ma Bell at the time.
Some of you might even know that mobile in and of itself took a long time to be
approved. In fact, the technology was there long before we got the first licenses. And so
the FCC finally, when it allowed them to come – so talk about inhibiting innovation, it’s
literally permission to even exist in the first instance, as what you’re looking at with 5G
and, of course VoIP looked at it as well.
So that’s the first threshold permission. And then, when it was regulated, the FCC
was actually pretty open to having competition being a soft regulator, having use it as
antitrust does to say that competition itself will regulate these providers. So we know that
it probably should only be one, but we’re going go out on a limb and we’re going to
authorize two. So that was their big innovation.
But it worked in some ways. The problem is no one wrote the memo to the states
and the states were still regulating mobile like Ma Bell. In other words, mother, may I, to
the regulator, which meant we had to file tariffs. We had to perhaps get permission for
our different power sources. Of course, putting cells on – cell towers up any place was
always controversial.
So we had a lot of innovation on the state level, and then some states were very
sort of laissez-faire. So we have this wonderful comparison of what happens when you do
basically a net neutrality where you controlled wholesale prices, wholesale access and
also did some price regulation of consumers, like we’re seeing with – look at usage
pricing, et cetera.
You got not good results – definitely not good for consumers, not good for
innovation. In fact, the whole goal of regulating wholesale prices was to get more
operators out there, more different business plans out there. They would, you know,
wholesale the infrastructure not have to make that input, and yet they would be able to
innovate. That did not happen. The moment those regulations went away, it exploded. It
exploded. Not only the operators, but operators being in joint ventures where their joint
venture partner had complete control over the business model. In other words, the
wholesale market that regulators had hoped for only happened when they relieved the
wholesale regulation.

 18

So innovation can be inhibited by the regulator, has been inhibited. That process
arguably slowed down innovation in the mobile market by many years. We see similar
stories that happened with Ma Bell itself not being allowed to go into Internet access and
cable took the lead because it was more lightly regulated. Now, arguably, we have sort of
an off-sided market power with cable being ahead arguably because they were more
lightly regulated.
So we have evidence. And that’s in some ways why I’m concerned, because we
definitely have seen this before.
MR. EISENACH: Thank you.
Mark, you’re an economist, but you spend a lot of time studying administrative
g
y design
g when it comes to pparticularly
y regulation
g
process and the design, regulatory
of
h qquestions
i
that’s
h
bbeen bbatted
d bback
k and
d fforth,
h you
communications services. Andd one off the
know,, I guess
g
ever since the U.S. went down this roadd w
with
ith the Interstate Commerce
i i and
d 1887 was the
id
d p d regulatory
h
Commission
thhe wisdom
g l
y agencies
g i andd jjust the
off iindependent
whole concept
p off try
trying
yingg to separate
p
ppolicy
y ffrom ppo
politics
litics or implementation
p
off ppo
policy
licy
y from
f
hhe U.S. andd aroun
h world,
ld, does
d
h basic
b i
ppolitics. Both thinkingg about it in terms off tthe
aroundd tthe
he
that
concept still have chops? Does it still – does it still feel like the right thing to do? Or
ought we to be thinking, you know, that was an interesting experiment; maybe it worked
in the 20th century, but let’s get real politics is going to play a role and then we ought to
just accept it?
MR. JAMISON: Yeah. And I get some pushback from the World Bank and a few
others on this as well, but the data are very consistent on this. To the extent we can
measure independence, which we look at laws and we look at practices as well of
regulatory institutions, the more independent the agency, and also the more independent
the judiciary, the more investments you get. And it’s very simple when you stop and
think about it.
That the planning horizon for infrastructure is five, 10, maybe even 20 years in
some instances. When you get into the energy space, it gets even longer than that, and
water as well. The planning horizon for politics is the next election. And those two
worlds do not coexist very well. And so we impose between them this regulatory agency,
which by its design, we try to have it insulated as much as we can from politics, while
holding it accountable to the public values expressed through politics, but then also have
it deal with the investment environment as well, without being captured by it.
One think I’d remind people is that a regulation by an agency – we had regulation
without agencies for many, many years. We imposed an agency for a reason. But the
regulation had basically then three purposes. One was to deal with the market power
issue. These were monopolies in railroads, et cetera, and the role they played in the
economy meant that exercising monopoly power was going to be very bad. The other was
information. We needed expertise in the government to deal with whatever issues come
up, and so you have an expert agency to do that.

 19

But the third reason, and this is the one that’s actually the hardest is to keep the
politics out of the business decision-making. And that’s the hard part. And that’s why you
need the independent agency. Otherwise, you’ll end up with things like we had with
BTOP. With BTOP, you look at the stimulus bill, it said, we will provide subsidies for
broadband and a few other things based upon helping minorities, helping low income
rural areas. I think those were the primary ones.
But you look at the data, who got funded? Well, you got funded if you were from
a state that had a Democrat governor. You got funded if your area, your state had a
congressman or senator on a powerful committee, and if you were Native American. And
that’s what the data show. And it’s because the – there’s no insulation between the
politics and those decision-makings. And that’s where we don’t want to give up our
independence.
y qquestion for Daniel. So in
MR. EISENACH: Well,, that’s a pperfect lead-in to my
h – a yyear ago
hi time,
i , the
h ppresident,
id , to many
ih
g at this
y ppeople’s
pl amazement,, jjumped
p d with
the
b h ffeet iinto the
h net neutrality
li y ddebate.
b
Andd yyou know,, while sort of saying
y g sort of soto
both
i s an independent
p
regulatory
g
y agency,
g y, he made very
y clear what his
voce that of course it’s
d outcome was iin terms off Title
i l II. And
d iimmediately
di ly thereafter,
h
f , Chairman
h i
p f
preferred
g a,, yyou know,, much more light
g touch approach up until
Wheeler,, who had been indicating
h point,
i did 180 ddegree turnabout,
b
d I think
hi k was questioned.
i d I think Jon Sallet,
that
and
general counsel to the FCC, who we all know as a friend, kind of came under some fairly
hot questioning from Judge Tatel in the recent hearing on the net neutrality litigation
about exactly what had changed between the time Chairman Wheeler had one opinion
and the time he had the other opinion, other than the president’s Facebook appearance –
excuse me, YouTube appearance.
So the question I have for you is do you think that that issue is front and center in
the litigation? Opponents of the net neutrality rules are trying to use that issue as a lever
to reduce the degree of deference that the commission normally would enjoy in a decision
like this. Do you think that’ll be successful?
MR. LYONS: So yeah, I think it’s deeply problematic, right, for all the reasons
why – that Mark was highlighting earlier. What we want is for our agencies to be as
independent as possible. So that we have this like Aristotelian model of agency behavior
that we want our important issues to be made by this sort of aristocracy of gentlemen,
these people who are really well trained in these ideas, but are acting without personal
interest.
The difficulty is always how do you mind the minders, right? Agency oversight
can be done in one or two ways, through the political process or through judicial review.
The political process oversight is one that seems to have been brought down very heavily
here and has its own problems, which are starkly on display in this case. Right, so one of
the things I try to teach my administrative law class is we’ve delegated so much
substance to these agencies that we need to make sure that we maintain – we hold their

 20

From: Eisenach, Jeff 
Sent: Monday, March 02, 2015 3:54 AM
To: Mike ORielly; Erin McGrath

Cc: Robert McDoweli_ Prime, Mary:
Soria, Bruno

Subject: Dinner Wednesday

Mike and Erin --

As you know we are hosting a dinner Wednesday evening for a small group of friends. if you are able to join us, we

would love to have you - Mike, if you would be willing, we would invite you to make some remarks about recent and

upcoming to events in the U5.

l'm asking Mary Prime from HERA to forward the formal invitation.

Best,

Jeff

 

Jeffrey A. Eisenach, Senior Vice President NERA Economic Consulting
2024483029

This email and any attachments may be confidential or legally privileged. If you received this message in error or are not
the intended recipient, you should destroy the e~rnaii message and any attachments or copies, and you are prohibited
from retaining, distributing, disclosing or using any information contained herein. Please inform us of the erroneous
delivery by return e-mail. Thank you for your cooperation.

21

From: Mar}r Gurnan Prime <Mary.Prime@NERA.com>
Sent: Tuesday. March 03. 2015 10:53 AM

To: Mike 

Subject: NERA Dinner Confirmation: Wednesday, 4 March

I


i NERA



 

NERA Economic Consulting looks forward to hosting you for
an evening of Mediterranean and Catalan cuisine in
Barcelona's L?Eixample neighborhood?home of the

renowned Moderniste movement and architecture.

El Principal del Eixample
Carrer de Provenga, 286-288 Wednesday, 4 March 2015

03003 Barcelona
20.30

Click here for a map

 

 

Dinner will be hosted by Dr. Jeffrey Eisenash. Dr. Christian Dipponr and Dr. Bruno Soria, in
conjunction with their participation at the 2015 GSMA Mobile World Congress.

If your plans have Changed. please notify mary.prime@nera.oom.

To Ifyeu do n01 web to receive further emaits NERA Fconomic Consulting
iror-?I us. o-ease send ail Eli-ail Lo Goya 24. Eth Floor
and you wilt be removed 2iti'jU'l Main-:1, Spa 

22


Expens Practice Areas About Publications News 8. Events Careers 
I. it ..I 2 mm! .. Global Locations Contact 

 

The Economic Repercussions of Title II Reclassi?cation

06 February 2015 3mm 5?99!?
Senior Manager, Marketing Metia Relatiims

Recent industry developments indicate that soon Interner servnces Will be reclassrfied under Title ll of the Commurucations Ac: of Wei-Won. no

1934, as amended mos: recently the Telecommunications Act of 1996 *1 2'12 466 9131
fax: -1 202 466 3605


There is strong emdence that this rectassmcation have signi?cant ecmiomic competition. thwarting

innovation. and reducing ransom welfare In the United States NERA Economic Consuiting Senior Vice Presidents 

mom amemm this change will have on arooust

Internet ecosystem. Troy have applied rigorous ECONOMIC. analyses to litigati?n. and as amiice to governments. broadband and

mobile carriers. as well as other rnousny groups Related Experts
?r Cnnsoan Dippon

Dr. Drppon and Dr. Eisenach new puoiLshed on the economic reperurssions of net neutrality and Title II rectass'i?catlon

. . . . . 11' A new
We hope that you will find their thought leadership on these issues beneficial grven the Impact of this recent indu5try Gayelopment a my '59

Selected Publications .
Related Practices

?Ecogomic Reggrgiigs'?gs of applying TlIl? II IQ Internet Services,? 9 September By Dr. Dippon and Dr Jonathan Falli. Cumunk?mns- M94313- ?nd l?tEmEt

"Wh'i' Nat NeutralittMattars' Pretentino Consumers and Commotion tnmuoh Meaninoful Dean Internet Rules." testimony of Jeffrey
A. Eisenacl'i, before the Comniittee on the Judiciary, United States Senate. September 2014.

"in Search of a tampon; on ?guring [or Information Tech?ggy Markets: Recent Antitrust Development; in me gt} Sector," 17
November 2014. By Dr. with liene Knaole (Sorts of Wacntell, Lipton, Rosen 3. Kate.

 

"Mobile Wimless nggm?iaugg in the ?g and me Implications for Policy." 31 March ants. By Dr. Eisenach With Erik Bohlin and
Kevin W. Cave-5.

onsmner Demand for Mania PM 2mg; In the US: An Examination beyond the Mobile Phone.? 28 Fehmary am By Dr
Dippon.

For more information please contau Dr Dippon and Dr Eisenach directiy

Dr. tian

Senior Vice President and CoaCnair of Communications. Media. and lntemet Practice
+1 2W.i 456 9270

christiandiopgn?ggzamm

Dr. Jeffrey A Elsenagh
Senior Vice President and Co-Chair of Communicanons. Media, and Internet Practice

+1 202 466 902.9
[ef?eiswch@nor? 

i'ihout HERA.

NERA Economic Consulting Is a global ?rm of experts dedicated to applying economic. financo. and quantitative
principles to complex business and legal challenges For over half a century. NERA's economists have been creating Strategies.
studies. reports. expert mommy. and policy recommendations for government authorities and the world's leading law firms and
corporations. We tiring academic rigor, and real world indusn?y experience to bear on issues analog from compotition.
regulation, public policy. strategy. finance. and litigation.

NERA's clients value our ability to apply and communicate state-of?therart approaches cleany and our cornrtiitment to
oeiiver unbiased ?ndings. and our reputation for quality and indeperxience. Our clients reiy on the integrity and Skills of our
unparalleled team oi Economists and other experts backed by the resources and reliability of one of the wond's large5t atomic
consultancres. its main of?ce in New York City NEHA serves clients from more than 25 of?ces acmss North Artienca. Europe.
and Asia Pacific.

23

The Opinion Pages

Don’t Make the Internet a Public Utility
Jeffrey Eisenach, a former official with the Federal Trade Commission, is a visiting scholar and the
director of the Center for Internet, Communications and Technology Policy at the American Enterprise
Institute.
UPDATED FEBRUARY 5, 2015, 12:41 PM

Since its commercialization by the Clinton administration in the 1990s, the Internet has stood as a
monument to the success of American entrepreneurship and innovation, a testament to the power of free
markets largely unfettered by the dead hand of government regulation. The Federal Communications
Commission will try to end that later this month, upending two decades of bipartisan precedent by
declaring the Internet to be a “public utility.”
We know what public utilities are; economists call them “natural monopolies.” Water and gas pipes;
electricity distribution; bridges and tunnels. The Internet is not a monopoly. Wireline and wireless
carriers compete – and innovate – at a furious pace.
Utilities, on the other hand, operate where it makes sense to have just one provider, because the costs of
operating a second one are too high to justify the exercise. We regulate public utilities because they are,
by definition, monopolies – but the costs of regulation are high. Rather than business decisions being
made in the marketplace, they are contrived by politicians and bureaucrats who are, in turn, influenced
by the lobbying campaigns not just of the utilities but of everyone with a stake – customers, suppliers and
labor unions all get involved.
Any notion that such processes are “above politics” has been put to the lie by the F.C.C. itself, which has
allowed its net neutrality rulemaking to be turned into a political circus of the first order.
The result is that public utilities are among our least innovative, worst-performing industries. Search the
phrase “America’s aging infrastructure” and you will find dozens of articles and studies detailing lack of

 24

adequate investment in our bridges, gas pipelines, electricity transmission systems and other utilities.
Sixty-two percent of the gas mains in Washington, for example, are more than 50 years old.
Declaring the Internet a public utility is not necessary, and it will surely prove to be unwise.
Join Opinion on Facebook and follow updates on twitter.com/roomfordebate.
Topics: Internet, Technology, net neutrality

  Ht riil'n 1r nth?.-

 

From: Jeffrey Eisenach <events@aei.org>

Sent: Wednesday, January 21, 2015 4:40 PM

To: Matthew Berry

Subject: Save the date: Senator Thune and Tech Policy Experts Look Ahead to 2015

Mark your calendars: On Wednesday, January 23, Center for Internet, Communications, and Technology
Policy will convene a half-day conference to look ahead at the top tech policy issues of 20 5. The conference
will feature a keynote address by Senator John Thune and panel discussions in which AEI scholars and outside
experts will address issues ranging from cybersecurity to Internet governance and from municipal broadband to
incentive auctions. As tech policy issues move to the fore in the national debate, this conference will offer

unique insights into the year ahead.

The conference will begin at 12:30 pm. and adjourn at 5:00 with Senator Thune's remarks scheduled for
2:00 pm.

Invitations and further details to follow. Click here to RSVP.
I hope you can join us.

Sincerely,

Jeffreyr A. Eisenach

Director, Center for Internet, Communications, and Technology Policy
American Enterprise Institute

fli??lfd??l?l Emmy: rim Institute for Pooh? Fel'fcf Research

As:

Mm. 

 

From: Matthew Berry

Sent: Sunday, January 25. 2015 2:53 PM
To: Jeffrey Elsenach

Subject: RE: AEI Conference next week

Sounds good. See you on Wednesday.

 

From: Jeffrey Eisenach 
Sent: Saturday, January 24, 2015 12:53 PM

To: Matthew Berry

Subject: Re: AEI Conference next week

Matthew 

This is great news. The panel is on the FCC agenda for 2015, which you know better than any of us, so just pick the items
you think are of greatest interest. lam inclined to ask you to speak first, and to go for 10-12 minutes a mini speech, if
you like. Does that work?

Best,
Jeff

Jeff Eisenach
202-443-9029
@Jef?feisena ch

On Jan 24, 2015, at 11:10 AM, Matthew Berry <Matthew.Berry@fcc.gou> wrote:



Jeff,



Thanks for the invitation! I should be able to participate; ljust need to make sure that lcan move one meeting. I?ll let
you know by tomorrow morning.



a Any specific topics that you want me to cover?



All the best,

a Matthew



From: Jeffrey Eisenach [Jeffrey.Eisenach@AElprg]

Sent: Friday, January 23, 2015 5:53 PM

To: Matthew Berry

Subject: Conference next week



3? Matthew -



Sorry for the last-minute notice, but AEI is holding a conference next Wednesday on the tech policy agenda in 2015
and l?m wondering if you would be interested in speaking on a panel. The first panel in the conference, at 1:00 pm, is on

 

27

the FCC agenda for the year. You ceuld lead eff the panel, erJust be one of the panelists. The ether are
Richard Bennett, Babette Beliek, Daniel Lyons, and Gus Hurwita.
2}

See 


2? Best,



Jeff



Jeff Elsenach

2: 202-443-9029

a @Jeffeisenach

 

,?arucr. :5 20's '2 New 5 My:

ech policy 2015: The year ahead

 

 



Event Summary

 

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hay DitL'n failed to keep Dr: Wudnceda'j al AEI. SL'nulur John Thur-l: IR empty-July]
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Event Description

Please i:Jln Carnal and lur a 'Ut?Jl- ahead at the
rap Terh Thune [Ft $275 mil pretent a keynote :Idrleece m?rl pant-:r.
Ul' AEI stholars and uulsldu Elli-Flt el-IIz d-stuss ewes Ille 
km. and mun ripal bmarlhand. r'ytPr'qulrI-iy_ Internet gnaw-manure, ant! InrerJI-re annit: n1.

uo= 'y rrluw: [he iurL' 'nL- rmllOlldl dubalu. Lnli?L-rtllu: will offer 
m?l?hli 

 me rhe rnnuertarlcn an ?ting enumean I
Read Chairman Thune's prepared remarks here.

If you are unable to attend. we welmme you to watch the went live on this page. Full video
will lie posted within 24 Itnurs.

Agenda

12'30 AM
Reg?t'anon and Inl'lf?

12.45 
Opening remarks
Jeffrey Eiseneth. ALI

LSD PM

Regulatory :Itnumrn .tr tne I?t I nailing armn Tn 


Mark lamina-n PURE, Uni-rerun; nl l-Inrmn

F'a "lHI-blki

Richard Bennett_ AH

Matthew Berry FCC

Babette Balielt. AH

Gus Humitz. MI

Daniel Lyon: .36

15:2: PM

Keynote. dIStuSSI-Zal'l, and audience DEA

john Thune. Il': 'aemre 


an c-ngrenc fl! remmu

 

.anant policy; ?rotpr-rlr. for reform
Mud-er alu 
Richard Bennett. AFI

F'u'wl-L-la:

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REMARKS OF MATTHEW BERRY,
CHIEF OF STAFF TO FCC COMMISSIONER AJIT PAI
AT THE AMERICAN ENTERPRISE INSTITUTE
"TECH POLICY 2015: THE YEAR AHEAD"
WASHINGTON, DC
JANUARY 28, 2015
I was a bit surprised when the American Enterprise Institute asked me to speak about the FCC's
agenda for 2015. After all, I work in an office that doesn't set the agenda for the Commission. There is
only one man who does that now, and his name, of course, is Barack Obama. Yes, these days Orange Is
the New Black and Presidential YouTube videos are the new FCC Sunshine Notices.
Nevertheless, it's an honor to be with you today to discuss the FCC's activities for the upcoming
year. I wish I could predict that in 2015 the FCC will move forward in a bipartisan fashion, that we will
seek consensus, and that the input of every Commissioner's office will be valued. This, after all, is how
the FCC has traditionally operated.
But that hasn't been the case lately. Instead, the Commission is being run in an extremely
partisan and divisive manner. Consider the following statistic. In the last fifteen months, there have been
more party-line votes at FCC meetings than there were under Chairmen Martin, Copps, Genachowski,
and Clyburn combined. Time and time again, Republican offices have been willing to meet the
Chairman's Office more than halfway to reach consensus. But time and time again, our outstretched hand
of compromise has been slapped away.
The partisanship has manifested itself in other ways as well. The Chairman's Office has rejected
edits from Republican Commissioners, saying they would cross redlines, only to turn around and accept
those very same edits when offered by Democratic Commissioners. Draft items have been circulated
exclusively to Democratic Commissioners. And oftentimes, Republican Commissioners have been
denied the opportunity to vote on important items altogether as they instead have been released on
delegated authority at the Chairman's direction.
But it doesn't have to be this way at the Commission, and it shouldn't. For example, I had the
privilege of serving as the Commission's General Counsel under Kevin Martin. And while he, like any
Chairman, was subject to his share of criticism, no one can dispute that Chairman Martin was willing to
look past party labels. On high-profile items, he was willing to vote with members of the minority party
and against members of his own party. In fact, the Comcast-BitTorrent case that propelled us along the
path of net neutrality litigation was adopted by the Chairman and the two Democrats. (It's hard to
imagine any vote nowadays with a similar breakdown.) And Chairman Martin made a strong effort to get
a unanimous vote where possible. Indeed, some of you can probably remember the start of some
meetings being delayed for hours as the Commissioners sought to reach a bipartisan consensus.
As partisanship at the FCC has been on the rise, our independence has been in decline; you might
say it's like a see-saw. And that brings me to the most high-profile item on the FCC's agenda for 2015.
Unfortunately, it appears likely that the Commission will vote next month to impose heavy-handed Title
II regulation on our nation's broadband providers. But it should be obvious that most members of the
FCC don't actually believe that Title II regulation is a good idea. Rather, the FCC is heading down the
Title II path because of inappropriate interference by the White House in the Commission's deliberations.
Indeed, the FCC's flip-flop on Title II following the President's announcement brings to mind
France's Henry IV. To secure his throne in 1593, Henry renounced his Protestant faith and converted to
Catholicism. He explained his rationale with a line that since became famous: "Paris is well worth a

Mass." Now, to be sure, "the Portals is well worth Title II" doesn't have quite the same ring to it. But the
underlying point is the same.
The flip-flops aren't limited to the FCC. It's not much of a secret that the FCC has been trying to
convince companies to abandon their opposition to Title II. And we all know that the Commission has a
wide range of carrots and sticks at its disposal.
That's just one reason why Commissioner Pai strongly supports the request made by Chairman
Thune, Chairman Upton, and Chairman Walden for the FCC to release publicly the text of the Title II
order that will be circulated on February 5th. The American people should know whether the item doles
out any special regulatory favors to companies that have succumbed to the FCC's pressure. If there are
any Cornhusker Kickbacks or Louisiana Purchases in the order, that should come to light before, not
after, the vote. Indeed, the American people and the press should be able to examine every aspect of the
proposed rules in unvarnished form before the vote. They shouldn't have to rely on press releases and
blog posts written solely to whip up support for the item.
It is also important to emphasize that the Commission's vote in February will not be the end of
the fight over Title II. To paraphrase Winston Churchill, it will not even be the beginning of the end.
Rather, it will just be the end of the beginning. While advocates for free markets, the rule of law, and
common sense will likely lose at the Commission's February meeting, I believe that we are likely to
prevail in our long-run effort to preserve our nation's successful and bipartisan light-touch regulatory
approach to the Internet.
There are at least three routes to success. First, the Commission's Title II order could be vacated
in court. Second, Congress could pass legislation overturning the Commission's Title II regulation and
replacing it with compromise language for protecting the Open Internet. Or third, after the 2016
elections, a new FCC majority could reverse the Commission's decision. Notably, Title II opponents
need to win only one of these fights while Title II supporters must prevail in all three.
Furthermore, the longer that Title II regulation is in effect, the greater support there will be for
ending it. Title II supporters now have the luxury of being able to blithely claim that Title II regulation
won't depress investment in maintaining, improving, or expanding broadband networks, that it won't
raise costs, that it won't drive smaller providers out of business. To put it another way, they are claiming
that if you like your Internet, you can keep your Internet. But that assertion is about as credible as it was
for health care. So as the negative impacts of Title II mount, support for Title II will decline. Again,
envision a see-saw.
Now if Title II is the most important item on the Commission's agenda this year, our work on the
broadcast incentive auction is probably the second most important. And on that subject, too, there is
substantial cause for concern.
When it comes to spectrum auctions, we know what works. Keep the rules simple and don't
restrict participation. Let the market function. Just look at the success of the AWS-3 auction. There, the
Commission worked together in a bipartisan manner. We adopted simple rules. We didn't restrict
participation. And as Commissioner Pai has pointed out, the results speak for themselves. Over $44.8
billion in bids so far, an amount that far surpasses the most optimistic pre-auction projections.
Contrast that approach with how the Commission has handled the incentive auction. By
necessity, the incentive auction was always going to be more complicated than past auctions. But the
Commission has repeatedly made decisions that will make the auction far more complicated than it needs
to be. While some have analogized the incentive auction to a Rubik's Cube, the Commission is turning it
into a Rube Goldberg contraption. Why? The FCC is trying to pick winners and losers in the forward
auction. It is trying to pressure broadcasters into accepting below-market prices in the reverse auction.
And the proceeding is being handled in a nakedly partisan manner, with Republican input on matters
great and small rejected at every turn.

2

Fortunately, it is not too late for the Commission to get back on the right track, and the conclusion
of the AWS-3 auction gives us the chance to do just that. We have heard bipartisan calls recently for the
Commission to take a pause, to consider delaying the incentive auction, and to reexamine some of our
rules. This makes good sense for at least two reasons.
First, wireless carriers spent far more money than anticipated in the AWS-3 auction, and they will
need time to replenish capital prior to the start of the incentive auction. Having carriers bring plenty of
money to the table isn't a luxury; it's a necessity. If they don't, the auction will fail. And there are no
mulligans; the law only gives the FCC one chance to get this right.
Second, a pause will give us the opportunity to apply lessons from the AWS-3 auction to the
incentive auction. It's not too late to simplify the rules. It's not too late to open up participation. And
it's not too late to work together in a bipartisan manner rather than saying no to almost every suggestion
offered by a Republican Commissioner.
As Commissioner Pai has stated, a delay is in virtually everyone's interest. But I want to take a
minute to explain in particular why broadcasters interested in participating should support a pause. It's
simple. If broadcasters want to receive top dollar for their spectrum, then they are going to need wireless
carriers to come to the auction with as much money as possible. And that means providing carriers with
enough time in between the AWS-3 auction and the incentive auction to raise capital.
Moreover, I can't understand why broadcasters would want the auction to proceed under rules
designed to obtain their spectrum at below-market prices. If broadcasters don't mind being nickel-anddimed, then by all means they should want the Commission to continue full speed ahead. But if they
want the Commission to change course on such anti-broadcaster policies as dynamic reserve pricing, then
they should support a pause.
***
Net neutrality and the incentive auction are just two of the important items the FCC will be
addressing in 2015. From the IP Transition to municipal broadband, from the 5 GHz band to the
Universal Service Fund, the Commission's plate is more than full. And our office stands ready to work
on all of these issues in a constructive, bipartisan manner. But as the saying goes, it takes two to tango.
Given recent experience, I can't say that I'm expecting the Commission to suddenly stop
pursuing a narrow, partisan agenda and return to the center. But there are benefits to having low
expectations. As George Will put it, "The nice part of being a pessimist is that you are constantly either
being proven right or pleasantly surprised." I, for one, would certainly rather be pleasantly surprised by
the FCC in 2015.

3

From: Susan Fisenne 2'9
Sent: Tuesday, December 16, 2014 9:13 AM

To: Jeffrey Eisenach; Evelyn Smith
Ce: Robin Colwell; Erin McGrath; Amy Bender
Subject: RE: January 14 Event at AEI

Good morning Je?? and Evelyn,

Following up on my conversation with Evelyn yesterday afternoon regarding the
room availability on 1/14, we would like to move the date to the following
Wednesday, January 21SI . We would prefer to keep this as a iLulehtime event
and, as you suggest, cell it ?The FCC in 2015: A Conversation with
Commissioner Mike 0 ?Rie?y. The Commissioner will have around 15 minutes
of remarks on a to'picitopios not yet decided followed by 10-15 minutes of
Qsm.

Thanks so much and please don?t hesitate to call me if you have any questions!
Susan

Susan Fisenne

Con?dential Assistant

Office of Commissioner Mike O?Riell'y
Federal Communications Commission
DC 10554

(202.! 418-2301

u?r. ..-. 

 

From: Jeffrey Elsenach ailto:J . a ABLO 1
Sent: Monday, December 15, 2014 3:26 PM

To: Mike ORieIly

Cc: Susan Flsenne; Evelyn Smith

Subject: RE: January 14 Event at AEI

Copying Evelyn Smith at 

 

Jeffrey A. Eisenach, Visiting Scholar

 

on Int to un Poll
wwttechnolicvdailvxom
@JeffElsenach

202-448-9029

 

From: Jeffrey Eisenach

Sent: Monday, December 15, 2014 3:25 PM
Tn: 

Cc: 

Subject: January 14 Event at AEI

30

Mr. Commissioner --
Thanks for agreeing to speak at AEI on January 14.

In order to start marketing the event, we need guidance on two issues, subject and
format.

With respect to the subject, net neutrality is obviously top of mind, and I'd be delighted if
you would use the opportunity to lay out the case against Title II (and indeed against NN
regulation in general), and perhaps discuss whether a statutory resolution Is called for
(as I am hoping that will be in the mix by then). You could also go with a different topic,
or something broader. If you haven't decided, we can simply call it "The FCC in 2015: A
Conversation with Commissioner Mike D?Rielly."

Regarding format, the obvious choices are a standnup speech followed by or an
"interview" format {with the interviewer being your's truly). Let us know your
preference.

Lastly, we sometimes do a panel discussion following speeches, but that will depend on
topic. I think you decide to talk about net neutrality, we probably would use the
opportunity to pull some folks tOgether. But we'll need to have a pretty clear idea of the
topic before going in that direction, so if you haven't really decided we will likely forego
the panel.

I'm around if it's easier to chat. You can always get me on 202-448-9029.
Best,
Jeff

PS: I believe we are also talking about timing -- we have reserved a room for the entire
day, but obviously won't use all that. Would you like to do a lunch? Let us know.

 

Jeffrey A. Eisenach, Visiting Scholar

Centerf rI at mu ication a hnol lit:
Warsaw

@JeffEisenach

202-448-9029

 

3 1
leffrey Eisenach

@Jefl?Eisenach
jonuary 15. 2075 The Hill

Light at the end of the tunnel? Congress offers an
exit strategy on net neutrality

Economics. Technology and Innovation 

 

Struire rsroci:

Back in February 2014. when FCC Chairman Torn Wheeler announced that he intended to issue a Notice of Proposed
Rulemaking to write new net neutrality rules in the wake ofthe DC Circuit?s decision in Verizon v. FCC. the American
Enterprise Institutes Richard Bennett responded by warning that net neutrality could become "Wheeler?s Vietnam.?
Honestly, I thought then that the Vietnam analogy might be an overreach. Relying on Chairman Wheelers public statements
at the time. I wrote then that "while net neutrality advocates are chomping at the they may not get their way.?

circus that threatens not only to do real harm to the-Internet but also to destroy-whatever credibility remains in the-notion
that expert independent agencies can be insulated from crass political influence. Like Presidentiohnson, Chairman
Wheeler?s best intentions have been overwhelmed by forces beyond his control. Net neutrality has indeed become
?Wheeler?s Vietnam."

Yesterday. Congress offered him an exit strategy. The Chairmen of the Senate and House commerce committees. Sen.john
Thune and Rep. Fred Upton. announced that they will soon introduce legislation to clarify the Commission's net neutrality
authority and establish "unambiguous rules of the road that protect Internet users and can help spurjob creation and
economic growth." The two chairs invited Mr. Wheeler to work with them to craft the bill. He ought to take them up on the
offer.

How did we get where we are today? A year ago. when the current chapter of the net neutrality saga began. was persuaded
by the Chairman?s assurances that he intended to move ahead with a consumer welfare focused approach designed to
identify and prevent speci?c instances of harmful conduct. while avoiding onerous. one-size??ts all regulations. Onjanuary
14. 2014. in a biog reacting to the DC Circuit's decision. he wrote the following:

My strong preference is to [police net neutrality] in a common law fashion. taking account of and learning from
the particular facts that have given rise to concern. The preference is based on a desire to avoid both Type 
{false positives} and Type II {false negatives} errors. It is important not to prohibit or inhibit conduct that is
efficiency producing and competition enhancing. It also is important not to permit conduct that reduces
ef?ciency. competition. and utility. Including the values that go beyond the material.

The principles provide sufficient guidance to set expectations for both producers and consumers. If something
appears to go wrong in a material. not a trivial. way. the FCC will be available to use the totality of its authority
for adjudication and enforcement. It will look to the Open internet Order principles and it will examine the fees
in light ofthe principles.

When the NRPM was released in May. it appeared to follow through on this commitment to a light?touch approach despite
the protesters outside the Commission of?ces and hecklers inside the commission room itself. Even as left?wing interest
groups ramped up their lobbying. subsequent statements. including a thoughtful lune speech by FCC General Counsel
Jonathan Sallet. suggested that the ?light touch" approach was still on track. Privately. I was told by a number of
knowledgeable sources that the White House political team was "under control." and that intervention on that front wasn?t a
concern.

A lot of water has passed over the dam since then. First. net neutrality activists managed to turn what should bea
dispassionate. fact?based rulemaking process into adefocto plebiscite an exercise in mob rule in which the outcome is
determined (or at least affected) by which party proves capable of generating the most clickethrough electronic "votes" on
the "electronic comment ?ling system.? That ?5 the very antithesis of how independent agencies were intended to
work. and it is to no one?s credit that it has been given credence even encouraged by top level FCC of?cials.

Next came Netflix and the battle over Internet interconnection. In hisjanuary biog. Chairman Wheeler assured readers that
he was not "interested in presiding over a festival of rent seeking." And yet that is precisely what the Net?ix battle was all
about crony capitalism in which some companies [Net?ixi demand free stuff from other companies ilSPsi. ultimately at
consumers' expense. And while the FCC initially said it would stay out of this ?ght. it has since opened an investigation to
"collect information." and Net?ix iS still pushing the issue.

The final straw came in November with President Obarna's unprecedented. inappropriate intervention. in the form of a
YouTube video released when the President was. of all places. in China. As I said then. the political nature of the White
House?s intervention made "a mockery of any sense of independence or impartiality." Chairman Wheeler reacted the only
way he could. by asserting (against all appearances) that the FCC remains an independent agency am an independent
agency" was The exact quote}, and kicking the decision down the road a couple of months in order to create an impression
of separation.

But the pressure has proven too great. and last week in Las Vegas the Chairman appeared to capltuiate. signalling that he
will. indeed. propose a rule that would declare the Internet to be a 'Title ii service" a public utility.

I still think Chairman Wheeler started this process With the best of intentions. and that he believed ?as I also mistakenly
believed that he could guide it to a sensible outcome. But the politics of the thing have proven too strong. and the result 
if the three Democratic Commissioners indeed carry through on a party-line vote. as planned. at the FCC's February 26
meeting will be to prolong and escalate a battle that is neither wise nor necessary.

Senator Thune and Representative Upton have offered an alternative course a path towards a sensible policy backed by
statutory certainty. a path out of the net neutrality quagmire rather than deeper Into it. in the heavily polarized environment
that is todays Washington. it would be a remarkable act of leadership for Chairman Wheeler to join them in seeking a bi?
partisan. consensus solution.

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The Federal Colmuunicatious Commission is actively considering turning the inte 
across industry into a public utility by classifying it as a "Title 11" service under the
Communications Act of 19 34. Proponents of the idea. including President Dbalua. argue
that doing so is necessary to protect "the open Internet" and all the benefits it has
produced.

Ereryone is for preserving an open Internet. but replacing a competitive indu st ry with a
regulated utility is not the tray to do it. Broadband competition has produced a remarkably
innovative. dynamic market in which output and performance double. and prices are cut in
half. are 11' few years. You can't say that about public utilities.

The public utility model is a rcsponsa to
the problem of natural mo nopolr: In
some industries -- water. electricity and
natural gas distribution among them --
economies of scale are so strong that the
is 1.0. harm ilmle
such industries is not only inefficient
but. in. the lo ug run. unsustainable: In a
competitive market. the largest firm will
ultimately drive out the rest.

Different countries have dealt with the
natural monopoly problem in different
pays. much of the world.
governments owned everything from outer systems to railroads. airlines and telephone
networks. In the government oixnership ?as the exception rather than the rule:
gorernntent ran the Post Office. a few municipal utilities. and the Tennessee Valle?
Authority. but for the most part left industries in private hands. owrseen by public utility
commissions.

The downsides of both app roaches are well documented. First. and foremost. ?lien

gore lune It! ta ks 5 charge of allocating economic re source 5. politics inevitably comes into
play. Regulated firms want higher prices. customers lounr ones and suppliers. including
organized labor. have skin in the game as well. All of the affected interests have strong
incentives to "capture" the regulator through various forms of lobbying (or no r59 The
remedy -- forcing bureaucrats to navigate a forest of procedural requirements before
making any important decision can be worse than the disease. especially in industries
where speed and flexibility are important.

The upshot is that public utilities whether government otmed or not systematically
underperform industries that are subject to competition. One major issue is the lack of
political support for needed investment in the upkeep and modernization of existing
facilities. Search the phrase "America's aging infrastructure" and you ?ill find article after
article about our outmoded electricity grid. water systems still using lead pipes. and citizens
killed in natural gas explosions resulting from inadequate investment. For example. 195:!
Today reports That. on average. gas leaks cause property damage.  or death at least
once even: other day. In the last 10 years. gas explosions have killed 13 5 people. injured
over boo. and caused more than 32 billion in property damage. Sixty-tun percent of the
gas mains in l?t?ashington. DC are more than 50 years old.

There is plenty of economic evidence that public utilities under-perform competitive
nmrkets. For example. a recent studyby economists at the Bureau of Economic Analysis
found that the output of the utility sector actually shrank by about two percent
annually between 1993 and 2010. Another. by Harvard?s Dale and others. shows
the utility sector actually contributed negatively to 11.5. productivity growth over the post-
World War II period

The broadband sector. by contrast. is growing and irmorating. literally. as fast as the
Internet itself. T. S. broadband connections are getting aster by more than a third
annually. and the amount of traffic carried is doubling every three years. Americans use
mo re data than in any other country except South Korea (and. by some measures. Japan].
The BEA studv ranks Broadcasting and among the top ten sectors in
terms of contributions to GDP growth. inuncdiatcly behind Information and Data
Processing Services and ahead of Computer Systems Design and Related Services.
Jorgenson ranks the sector sixth (out of more than 60} for contributions to producti't'ityr
grou'tlx.

These results don't prove that public utility regulation. in and of it self. causes slow growth.
but that' do demonstrate how fundamentally different broadband is from the industries we
treat as public utilities. We still generate electrons using the technology invented by
Michael Faraday in the 18205. and distribute it over the same old copper Hires {too often
literally the same wires}. The same is basically true for Water and gas. But broadband is
constantly evolving; the ?rst major fiber optic Verizon's is 1955 than a
decade old and the technology '5 already in its second major generation. Today's .rG LTE
uireless networl? left the drawing board less than five years ago at about the time the
FCC was issuing its last round of net neutrality regulations.

Competition isn't an option in every industry. but it is Working and producing great results
in the market for broadband. Promoting competition. not replacing it with a public utility
model. is the best way to preserve the economic and. social bene?ts of a free and open
Internet.



)1
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AEI scholars' statements on White H?use
intervention in the FCC's Open Internet
proceeding

The Edit-re

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share en the announcements fer lSPe and consumers alike.

Jeffrey Eisenach:

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From: Jeffrey Eisenach 
Sent: Tuesday, October 14, 2014 3:02 PM

To: Mike ORielly

Cc: Susan Fisenne

Subject: RE: Invite to AEI

Mike 

As promised, here are some potential near-tenn dates for a speech at AEI. Among these, 11120 and 12H both stand out
as good options. (I think the week of we should avoid the 11/21-26 Let us know if any of these work -- as
discussed, the topic is up to you, but obviously Net Neutrality is on everyone's mind.

Best,
Jeff

11f17: Breakfast possible, but we have to be out by 10:30. (although Mondays generain sees lower attendance).
11(20: Lunch possible ok

11I21: Breakfast ok, lunch ok (although Fridays generally sees lower attendance).

11I24: Breakfast ok, lunch ok (atthough Mondays generally sees lower attendance).

111?25: Breakfast ok, lunch ok.

IUZG: Breakfast ok, lunch ok.

12,!1: Breakfast ok, lunch ok (although Mondays generally sees lower attendance).

Jeffrey A. Eisenach. Ph. 1). . Vi I?ll-ting Scholar

Center. .Commu Rollo)?
)tiaibzcom

c?Eiscnach

202448-9029

 

From: Mike ORielly [Mike.ORleily@fcc.goy]
Sent: Friday, October 10, 2014 3:50 AM
To: Jeffrey Eisenach

Subject: RE: Invite to AEI

Jeff,

Many thanks for your email. I appreciate your kind words.

Sadly Courtney went on to another role in the communications space. Good for her and bad for me.

Let me circle back with you on your very generous offer. I'd love to make it may just be an issue oftiming.

All my best, mike

From: Jeffrey Eisemach [mallto?c?t??l?enaclLQ?AELow]
Sent: Friday, October 10, 2014 8:49 AM

To: Mike ORielly

Subject: Invite to AEI

35

Mike 
First, congratulations on the and thank you for your continuing service.

Second, I?ve bean sending emails to Courtney for a couple of weeks Inviting you to come give a speech at AEI -- and only
found out this morning that she's left you to go to lii'erizon. Oh my!

Anyway, we have waited much to long to have you over to AEI, but it occurred to us that sometime in the next few
weeks might be a pretty good time, especiallyF if you would like a chance to address the net neutrality proceeding.

Let me know if that would be of Interest, and if there are dates that might work. And. if either the topic or the timing
doesn't work, let us know and we'll figure something out. We would be very honored to have you.

All the best,

Jeff Eisenach

 

Jeffrey A. Elsenach. Visiting Scholar



@JeffElsenach

202-448-9029

From:
Sent
To:
Subject:

Jeffrey Eisenach <AEI@TechPoiicyDaily.come

Monday, October 20. 2014 1:59 PM

Matthew Berryr

Arthur Brooks on the Human Side of the Internet Economy

36

 

I wanted to be sure you saw AEI president Arthur Brooks' recent op-ed in the New York Times. "Start
Helping the Helpers." It's a great example of how the ethos of AEI's Center for lnternet.
Communications1 and Technology Policy is combining with Arthur's principled advocacy of human-
centered free enterprise to produce some new and powerful ideas.

 

Jeffrey A. Elsensch, Scholar

Center for lnternet. Commonications and Technology Policy
wwtechpolicydailycom

@Je?Elsenach

 

Jeffrey Eisenach 37

{In-Er n. 4

Sap-timber 23. 207-1 nude-3r 

There's nothing neutral about net neutrality

or;-



 

Llespite what you may have heard ne1 neutrality is not aooul protecting consumers from internal service
Frontiers II w0u cl not make Broadband more at-arlabie in rural America. or lower price: for small businesses And it
has to do With protecting free speech or oissenh ng soices Net neutrality is cr C-ny capitalism our 9 and simple- an
e-?fot?t by one gr-Jup of private intetests to enrich rtsell at the olanoth er group by using the crime: of the state.

For al the at me tell: about ?True if and 'common can't-age this is not complicated. 7he rules favored lJiil net neutraqu
advocates would ban or payments from one type of Duane-55 ?edge providers' to another type of busrness -
broac band 15% while placing no limrts on what ISPs charge consumers. It is easy to see why edge providers like Net?ut
woutd lobby for such rules but dif?cult to understand how they would benefit consumers or serve the public interest.

indeed. the arguments advanced try net neutrality advocates don?t Withstand even scrutiny Do broadband
providers enjoy too much market power are they ?monopolists'? Not according to the Federal Communltalion
which waxes eloquent about the strong performance of the broadband marketplace. citing the of
dollars Invested each year and the rapid Increase in speeds and performance. And while much Is made of consumers
limited choices the broadband marl-let ls actually less concentrated than the markets for search engines. socral networks.
and over-mastop video serurces: regulation of ISF's cannot be justi?ed on the basis of market power.

Diner argLimc-nts for regulation are rust as ?awed. For Example net neutrain advocates say that without new regulations.
iSF?s would discriminate against Internet start-ups. But such discriminatory pi'iong hasnt nccurr ed so far. and no one can
explain why wci ulcl want to impede the ongoing explosrori of innovative content and applications that makes their
services valuable in the first place - especially since such companies pose no competitive threat to the iSPs. Nor can anyan
cite an example of an American [as opptised to Chinese or Russian] a dissenting t-circe or limiting free speech
intact. to the est-ant that any firms in the Intemet eccis?ys'tern have :sSues md'i lree spec-i: h. it is the content providers like
'r'ouTurJE and Yahoo. who are under constant oresswe [Which this-y mostly and raudtitili.r i'e5istito take down "offenswe?
material

Finally there 5 the argument about fast lanes antl s!ow lanes Or in regulatc-ryjasgon. 'pa'cl priorrtitalion The simple reality
is tha: edge providers irite Net?r'r require priorittzatron for their servrces to t-ror It it 5 rust tne ?oa-o? oarl their don't like.

Wire lite-f to understanding net neutrality lies in the fact tr- at broadband i'SPs operate in when economists call a 
market. Grie- side consists of consumers who value access to content and applications: the other side con of content
and appracatiori providers who value twins the nets-pork to reach the customers Sucn markets are not unusual.
newsoapers for example senre both advertisers and subscribers The chalierlge for such firms :5 to set prices for each
In SUCP- a may ~15 to the need enough Veep EUEECTI Dtl?l'i
prices low. but they don't want too many ads because It would drn-e away readeu

The Fit 5 primary theory of net neutrality regulahoo is that the edge providers generate so much innovation and oth er
'eiiternal? benefits that they should he Subsidized by ihe othEr side rthat -s. oi; consumers] through a 1 me that forces
con5Lmers to pay ?00 percent of the costs of the network while edge prowders pay zero This is a line theory out there Is
not ascintilla of empirical etude-nce to support it Indeed. academic research suggests the external benefits generated by
tSP's Illi'r esirnents In broad band infrastructure are liker at lea st as large as the benefits from at the edge.

At the end of the clan. the one LinargLiable fact ahom net neutrality regulation is ihat edge prim-idem. big and small. and
those who fund them and mum 1r iJr'n the? success. have power lul economic interest in getting the FCC to guarantee free
access to the networks

Marry net neutrality supporters are no doubt SinCEre in heliewng regulation is. needed to "protect the open internet' and
there rs nothing illegal or even Immoral about wealthy and well-connected private comp antes seeking it: advance their
interests through the use of state power. But The rEsults can prove highly damaging In the case of net neutrality. the
danger Is that the dynamic pragmatic. businessandengineering-omen approach that has made the internet sucn a
remar?nahle success will be relalatecl by an statxc. bureaucratic. politicized regulator-1r regime not unirlie the one
that oversees the lFoslal semce

On the global front. a decision by the S. to embrace econormc and political control of the intei'riet would legitirriice the
efforts of tyrants e-rerysrimye it. impose far more represswe forms of statist intemenrron

From a consumer perspective. net neutrality regulation is ju st one more govern mentmin dated rip-off - aricther Few truck:-
out ol our pockets to sub5io?ire a politically in?uential iriteres: group. so. the neu time you near an aver-rhe-too video
pro-rider arguing for net neutrality. keep this in mind: tneres nothing neutral atunut r:

.-  4 - "1 -- 

38

Statement before the Senate Committee on the Judiciary
On “Why Net Neutrality Matters: Protecting Consumers and Competition Through
Meaningful Open Internet Rules”

Testimony of Jeffrey A. Eisenach, Ph.D.
Visiting Scholar
American Enterprise Institute
September 17, 2014

The views expressed in this testimony are those of the author alone and do not necessarily represent those of the
American Enterprise Institute.

 39

TESTIMONY
OF
JEFFREY A. EISENACH, PH.D.
BEFORE THE
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
September 17, 2014

Mr. Chairman and Members of the Committee, thank you for the opportunity to appear before
you at today’s hearing on “Why Net Neutrality Matters: Protecting Consumers and Competition
through Meaningful Open Internet Rules.”
I have had the opportunity to study communications, media and Internet policy issues over the
course of many years and in several capacities, including in my current positions as Director of
the American Enterprise Institute’s Center for Internet, Communications and Technology Policy,
Executive Editor of TechPolicyDaily.com, Co-Chair of NERA Economic Consulting’s
Communications, Media and Internet Practice, and adjunct professor at George Mason
University Law School, where I teach the course on regulated industries. I should note that while
my academic studies and my consulting practice often involve issues relating to Internet and
communications policies, I am appearing today solely on my own behalf, and the views and
opinions I express should not be attributed to any of the organizations with which I am affiliated.
My testimony today advances three main points. First, net neutrality regulation cannot be
justified on grounds of enhancing consumer welfare or protecting the public interest. Rather, it
is best understood as an effort by one set of private interests to enrich itself by using the power of
the state to obtain free services from another – a classic example of what economists term “rent
seeking.” Second, the potential costs of net neutrality regulation are both sweeping and severe,
and extend far beyond a simple transfer of wealth from one group to another. Third, legitimate
policy concerns about the potential use of market power to disadvantage rivals or harm
consumers can best be addressed through existing antitrust and consumer protection laws and
regulations.
To begin, net neutrality regulation cannot be justified as a means of enhancing consumer welfare
or advancing or protecting the public interest, and instead is best understood as a classic example
of rent seeking.1 This is particularly true of the more extreme flavors of net neutrality regulation
advanced by companies like Netflix, which would ban payments from companies like Netflix to
Internet Service Providers (ISPs) like AT&T.2
1

For a general discussion of the economic theory of rent seeking, see George J. Stigler, “The Theory of Economic
Regulation,” The Bell Journal of Economics and Management Science 2;1 (Spring 1971) 3-21.
2
For clarity, I will refer to this type of regulation as a “zero price rule,” as distinct from the less extreme versions
put forward in the FCC’s Open Internet Notice of Proposed Rulemaking, which would allow such payments so long

2

 40

As a general matter, government intervention in the marketplace can enhance economic welfare
only in cases of market failure, which may occur under two primary sets of circumstances: (a)
when a firm or group of firms can exercise monopoly power to raise prices, reduce quality or
prevent entry by rivals; or (b) when markets are characterized by externalities (such as pollution)
or public goods (such as national defense).3
Looking first at the monopoly power rationale for intervention, there is no basis for believing –
nor does the FCC assert – that net neutrality regulation can be justified by concerns about
traditional monopoly power.4 Indeed, the Commission’s Notice of Proposed Rulemaking waxes
eloquent about the strong performance of the broadband marketplace, citing the billions of
dollars invested each year and the rapid increases in performance that have come about as a
result.5 Such performance is not consistent with the “cozy duopoly” characterizations sometimes
advanced by net neutrality advocates. Nor is the structure of the broadband market a cause for
concern. Indeed, the broadband market is, if anything, less concentrated than many markets that
make up the Internet ecosystem: one need only think of the markets for search engines, social
networks and personal computer operating systems to realize that such markets are typically
served – at any given time – by a few firms rather than by the atomistic structures imagined in
introductory economics texts.
To be sure, broadband ISPs, like virtually all other firms in the Internet ecosystem, do possess a
certain type of market power, which is the power, derived from successful product
differentiation, to charge prices above marginal costs.6 But the existence of such market power
is hardly cause for pervasive regulation – rather, as the courts have recognized, it is both the
incentive to innovate and the reward for doing so, and hence the motive force behind growth and
prosperity in a modern economy.7 And while this sort of market power – combined with the
as they are “non-discriminatory” or “commercially reasonable.” I refer to this milder form of proposal as a “nondiscrimination rule.”
3
These are necessary conditions for government intervention to improve welfare, not sufficient ones. In addition, it
must be the case that it is possible to design and implement policies that, on net, create greater benefits than costs.
4
See Jerry Brito, et al, “Net Neutrality: The Economic Evidence” (April 12, 2010) (available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1587058) (expert declaration before the FCC of 21economists
and communications policy experts).
5
See Federal Communications Commission, In the Matter of Protecting and Promoting the Open Internet, Notice of
Proposed Rulemaking, GN Docket 14-28 (May 15, 2014) at ¶30.
6
Given the fundamental economic characteristics of high-tech markets in general and the markets that comprise the
Internet ecosystem in particular, the only firms we observe in the marketplace are those that have successfully
differentiated their products and thus have the capacity to charge prices above marginal costs; without such power,
they would be unable to earn a return on the large and risky typically needed to participate. Such investments may
take the form of R&D (e.g., developing software for a new application), producing content (e.g., making a movie or
creating a content aggregation service), or investing in infrastructure (e.g., building a broadband distribution
system). In each case, companies incur high fixed costs but, having done so, are able to produce additional units of
outcome at low marginal cost. See generally Jeffrey A. Eisenach, Broadband Competition in the Internet
Ecosystem, American Enterprise Institute (October 2012). For a layman’s explanation of the same phenomenon, see
Peter Theil, “Competition is for Losers,” Wall Street Journal (September 13-14, 2014) at C1.
7
See e.g., Novell, Inc. v. Microsoft Corp., 731 F.3d 1064, 1073 (10th Cir.2013) (“If the law were to make a habit of
forcing monopolists to help competitors by keeping prices high, sharing their property, or declining to expand their
own operations, courts would paradoxically risk encouraging collusion between rivals and dampened price
competition—themselves paradigmatic antitrust wrongs, injuries to consumers and the competitive process alike.
Forcing firms to help one another would also risk reducing the incentive both sides have to innovate, invest, and

3

 41

need for firms to collaborate with one another to create value – can create the incentive for firms
to deny access to their platforms as a means of obtaining or maintaining market power (as the
courts found Microsoft did in the case of Netscape and Java), such incentives are not unique to
broadband markets, and thus cannot justify discriminatory regulation of ISPs.
Another variant of the market power argument suggests that while big, established edge
providers might be able to fend for themselves against the ISPs, we need to look out for the little
guys, the new entrants who may be strangled in the crib as a result of discriminatory access fees.
What no one can explain, however, is why ISPs would want to discriminate against start-up edge
providers – the very firms that create the applications and content that draw consumers to
subscribe to broadband service in the first place. The reality is that to the extent ISPs engage in
efficient price discrimination, basic economic theory predicts they will offer startups – those
most sensitive to price – the lowest prices rather than the highest ones.8
Rather than being motivated by worries about market power, the FCC (like some other net
neutrality advocates) justifies its proposed regulations on the existence of externalities in the
Internet ecosystem.9 Specifically, the theory goes, innovation “at the edge” generates benefits
that are not reflected in the price system, and therefore deserving of subsidization – either in the
form of a zero price rule granting them free access to ISP’s services, or through a nondiscrimination rule designed to shift value away from ISPs and in favor of edge providers by
preventing broadband ISPs from engaging in efficient price discrimination.
Like other firms in the Internet ecosystem, broadband ISPs operate in what economists call a
“two-sided market.” On one side are consumers, who value Internet access; on the other are
providers of complementary products, like content, devices and applications, who value the
ability to use the network to reach their ultimate customers. Such markets are not unusual:
newspapers, for example, serve both advertisers and subscribers. The challenge for such firms is
to set prices for each customer group in such a way as to attract the optimal mix: Newspapers
need just enough advertisers to allow them to keep subscription prices low, but not so many as to
annoy readers and drive down subscribership.
The FCC’s primary theory of net neutrality regulation (embraced by the DC Circuit in Verizon v.
FCC) is that one side of the two-sided market served by ISPs (the “edge providers”) generates so
expand—again results inconsistent with the goals of antitrust. The monopolist might be deterred from investing,
innovating, or expanding (or even entering a market in the first place) with the knowledge anything it creates it
could be forced to share; the smaller company might be deterred, too, knowing it could just demand the right to
piggyback on its larger rival.”) For a discussion, see Jeffrey A. Eisenach and Ilene Knable Gotts, “In Search of a
Coetition Doctrine for Information Technology Markets: Recent Antitrust Developments in the Online Sector,” in
Communications and Competition Law: Key Issues in the Telecoms, Media and Technology Sectors (Alphen aan
den Rijn, The Netherlands: Kluwer Law International/International Bar Association series, forthcoming 2014).
8
Indeed, small/start-up edge providers – who have not yet achieved the scale necessary to justify building their own
content delivery systems – are most likely to benefit from the ability to purchase high quality delivery services from
ISPs. On the economic basis for – and beneficial effects of – competitive price discrimination, see e.g., David B.
Audretsch, William J. Baumol and Andrew E. Burke, “Competition Policy in Dynamic Markets,” International
Journal of Industrial Organization 19 (2001) 613-634 and Jonathan B. Baker, “Competitive Price Discrimination:
The Exercise of Market Power without Anticompetitive Effects (Comment on Klein and Wiley),” Antitrust Law
Journal 70 (2003), 643Ǧ654.
9
See NRPM at ¶43.

4

 42

much innovation and other “external” benefits that it should be subsidized by the other side (that
is, by consumers) through a rule that forces consumers to pay 100 percent of the costs of the
network while edge providers pay zero. This is a fine theory – but there is not a scintilla of
empirical evidence to support it. Indeed, a strong argument can be – and often is – made that the
external benefits generated by investment in broadband infrastructures are at least as great as if
not greater than the benefits associated with innovation at the edge.10 In short, the edgeprovider-innovation-externality rationale for net neutrality regulation is a naked emperor of an
argument if ever there was one.
Finally, some argue net neutrality regulation is needed to protect freedom of speech – that
without it, “alternative, non-profit and dissenting voices” will be consigned to “Internet slow
lanes.” 11 There are at least three problems with this theory. First, there is virtually no evidence
that ISPs have (or have incentives) to stifle dissenting or alternative views; indeed, as explained
above, the availability of diverse content on the Internet is what makes it valuable and causes
people to want to pay ISPs for broadband access in the first place. Second, to the extent
“censorship” is an issue, it implicates other types of Internet firms at least as much as (and likely
more than) ISPs. Third, and finally, it is simply not apparent that giving Netflix free use of
Comcast’s network has anything to do with protecting political speech.
When these rationales are stripped away, what is left is the obvious: Edge providers, big and
small, and those who fund them and profit from their success, have a powerful economic interest
in getting the government to guarantee them free access to the ISPs’ networks. Occam’s Razor
applies: when it doubt, the simplest explanation tends to be the correct one, and net neutrality is
no exception.
At this point in my testimony, I want to be emphatically clear that, in suggesting that net
neutrality is a battle over the allocation of economic rents, I am not impugning the integrity of
anyone involved in the process. Government intervention in markets – whether justified or
otherwise – invariably results in the redistribution of wealth, and the affected parties have every
right – even, arguably, an obligation – to look out for their own interests.12 That is the way our
democracy works and, to paraphrase Churchill, it is a terrible system…except when compared to
10

This point is acknowledged even by the strongest supporters of net neutrality regulation. See e.g., Robin S. Lee
and Tim Wu, “Subsidizing Creativity through Network Design: Zero-Pricing and Net Neutrality,” Journal of
Economic Perspectives 23;3 (Summer 2009) 61–76 at 67 (“Of course, for a given price level, subsidizing content
comes at the expense of not subsidizing users, and subsidizing users could also lead to greater consumer adoption of
broadband. It is an open question whether, in subsidizing content, the welfare gains from the invention of the next
killer app or the addition of new content offset the price reductions consumers might otherwise enjoy or the benefit
of expanding service to new users.”)(emphasis added). For a summary of more recent research indicating that net
neutrality regulation is likely to harm consumer welfare, see Comments of Justin (Gus) Hurwitz, Assistant Professor
of Law,University of Nebraska College of Law, GN Docket 14-28 (
11
See e.g., Testimony of Michael Copps Before the Committee on the Judiciary, July 1, 2014 at 12.
12
Nobel Prize winner Ronald Coase described the political dynamics of regulatory intervention in the market in his
famous 1959 article on the FCC’s approach to the allocation of broadcast licenses. See R.H. Coase, “The Federal
Communications Commission,” Journal of Law and Economics 2 (October 1959) 1-40 at 35-36 (“That [efforts to
exercise political influence over licensing decisions] should be happening is hardly surprising. When rights, worth
millions of dollars, are awarded to one businessman and denied to others, it is no wonder if some applicants become
overanxious and attempt to use whatever influence they have (political and otherwise), particularly as they can never
be sure what pressure the other applicants may be exerting.”).

5

 43

the alternatives. Nor do I mean any disrespect to the heartfelt views of those across the political
spectrum who worry about the need to protect free speech on the Internet and elsewhere. I share
their ultimate goals and objectives, even though I may not fully share their assessment of the
nature of the challenge, or the appropriate response.
But while there is nothing illegal or even immoral about private entities seeking to advance their
interests through the use of state power, the results can prove highly damaging, and ultimately
can be far more harmful than a simple transfer of wealth from one group to another. In the case
of net neutrality, the risk is that the intensely dynamic, pragmatic, business-and-engineeringdriven approach to building and running the most important “general purpose” technology in
history – the approach that has facilitated the remarkable growth of the Internet over the past two
decades – could be replaced by a static, bureaucratic, politicized regulatory regime, not only in
the U.S. but around the world.
There is no economic basis for a general rule forcing one side of the market, consumers, to bear
100 percent of network costs while the other side, the firms that benefit from the ability to
deliver content over the network, pay zero. Indeed, as the types and volumes of traffic carried
over the web change, one would expect pricing structures and other contractual terms to adjust
accordingly – as has been the case with peering and transit arrangements, which have adjusted
dynamically to the explosive growth of the Internet without regulatory intervention for nearly
two decades. Net neutrality regulation would at best inhibit, or at worst prohibit altogether, the
market’s ability to achieve such adjustments.
The costs of net neutrality regulation are directly related to the substantive standards imposed,
the extent of their application, and the means by which they are enacted and enforced. For
example, a rule that presumptively bans all forms of differentiated service offers could literally
cripple the ability of the Internet to adjust to the continued growth in the amount and types of
traffic, especially if it were extended to wireless ISP services, where differentiation is especially
important due to inherent limitations on bandwidth and other engineering concerns.
The specter of common carriage regulation is of particular concern. As others have noted, Title
II regulation would not ban price discrimination by ISPs. To the contrary, Title II specifically
envisions that prices should vary across different types of services and different types of
customers, just as – for example – postal rates do today. It may seem difficult to imagine
imposing on the Internet a public-utility-style rate setting process akin the Postal Regulatory
Commission; but can anyone doubt that if broadband were declared a Title II service, it would
not be long before the Commission would take comments on whether some types of services
should bear more of the costs of the network than others, leading inevitably to something closely
resembling the perennial scrum between first, second and third class mailers over who will pay
how much for junk mail, magazines, and so forth?
Even less intrusive approaches could have serious costs. Consider, for example, the comments
filed with the FCC by startup firm Syntonic, which develops innovative technologies that allow
content providers to make their content available to consumers over mobile networks without
charge. Such “sponsored data” plans shift the cost of bandwidth from consumers – especially
those less able to afford high-end data plans – to mobile wireless carriers and content providers,

6

 44

and are increasingly popular in both the U.S. and, to an even greater extent, in developing
countries.13 As Syntonic explains in its comments, “despite the fact that these alternative
business models increase consumer choice and help bring consumers the content they desire
more efficiently … opponents can use stringent net neutrality rules to impose homogeneity on
broadband markets and destroy even the most consumer-friendly alternatives to the status quo …
[showing] the danger of structural rules designed to protect edge providers rather than
consumers.”14
Adopting net neutrality regulation would also harm the cause of Internet freedom worldwide.
The Internet the most powerful and disruptive force for freedom in the world, threatening the
power of the state and setting literally billions of people free to learn, think, and decide for
themselves. It represents a fundamental threat to repressive, authoritarian regimes from Moscow
to Tehran, from Beijing to Caracas. By embracing the idea of state control of the Internet – both
economic and political – the adoption of net neutrality regulation by the U.S. would legitimize
the efforts of tyrants everywhere to impose far more repressive forms of statist intervention.
My last point, which I will make briefly because it has been so thoroughly addressed elsewhere,
is that legitimate concerns about the exercise of market power by ISPs (and other firms in the
Internet ecosystem) can readily be addressed through existing laws, including specifically the
Sherman Act, the Clayton Act and the Federal Trade Commission Act.15 These laws have
protected competition and consumers for well over a century, and have developed into a dynamic
and sophisticated body of economic doctrine and legal jurisprudence that is fully capable of
addressing the threat that Internet firms, whether ISPs or others, will use the market power
signified by their persistence in the marketplace for harmful purposes. Antitrust is not perfect,
but it is by far the best approach to addressing concerns about the business practices of
broadband ISPs.
* * *
Mr. Chairman and Members of the Committee, this completes my testimony. I look forward to
answering any questions you may have.

13

See Roslyn Layton, “IGF Highlights How Developing Countries Use Zero Rating Programs to Drive Internet
Adoption,” TechPolicyDaily.com (September 4, 2014) (available at
http://www.techpolicydaily.com/communications/igf-zero-rating-programs/)
14
See Reply Comments of Syntonic, Inc., GN Docket No. 14-28 (September 3, 2014) at 12-13.
15
See for a discussion see e.g., Brito et al and Eisenach and Gotts.

7

 45

'r
Experts Practice Areas About Publications News 3. Events Careers 

Glooar Locat-ans Contact Media Kit

 

Testimonyr on  Net Neutrality. hiatters: Proteet?tg Consumers and Cmupetition through Meaningft?
Open Internet Rules

1? September 2014

Dr. Jeffrey l-?L Eisenacb

on 1? September 2014, Dr. Jeffrey;r Elsenaeh. Senior Vice President and (Io?Chair of NERA's Communications, Media, and lntemet
Practice. delivered testimony before the Committee on the Judiciary United States Senate on ?Why Net Neutra?tyr Matters:
Protecting Consumers and Competition through Meaningful {lip-en Internet 

Downtoad' Testl?'l?l'ljf on Why Net Neutrality Matters:
Protecting Consumers and Competition through

 

 

TESTIMONY: Why net neutrality matters


Economics, Technology and Innovation
mediaservices@aei.org 202.362.5329

As the FCC prepares to review more than million comments that it received on its net neutrality
proposal. there can be no doubt that net neutrality and the future of Internet regulation is a hot button
issues. Net neutrality advocates posit that stricter regulation will keep the Internet free: but the reality is
that net neutrality regulation will not enhance consumer welfare or protect the public interest. In testimony
today before the Senate Committee on thejudiciary. jef?'ey Eisenach. director of AEI's Center for Internet,
Communications. and Technology Policy presents three main points on ?Why net neutrality matters":

"First. net neutrality regulation cannot hejustified on grounds of enhancing consumer welfare
or protecting the public interest. Rather. it is best understood as an effort by one set of private
interests to enrich itself by using the power of the state to obtain free services from another a
classic example of what economists term "rent seeking."

Second. the potential costs of net neutrality regulation are both sweeping and severe, and
extend far beyond a simple transfer of wealth from one group to another.

Third, legitimate policy concerns about the potential use of market power to disadvantage rivals
or harm consumers can best be addressed through existing antitrust and consumer protection
laws and regulations."

To read his full testimony. click here.
To read more on AEI scholars? work on net neutrality and other related issues, visit TechPoiicyDailycom.

To arrange an interview with Eisenach or another scholar. contact an AEI Media Services representative or
email mediaservicesi?e'laeiprg {332.862.5829}.

46

For help reaching an AEI
expert:

The American Enterprise Institute Media
Services Department is available to assist
reporters. editors. and producers 24! hours
a day: 365 days a year. AEI nasfuii service
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and a Readyfani in-iicruse studio.

To arrange an interview. caii the Media
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ntediasenn'cestc'Jaei. org.

click here farAEI's Guide to the Experts

47

HEARINGS & MEETINGS

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ABOUT THE COMMITTEE

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Why Net Neutrality Matters:
Protecting Consumers and
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Full Committee
Date: Wednesday, September 17, 2014
Time: 10:30 AM
Location: Hart 216

Related Files
Eisenach Attachment I
Eisenach Attachment II
Eisenach Attachment III
Eisenach Attachment IV
Leahy Record Sub 91714
Hatch Record Sub 91714
Burnham Responses 91714
Livier Responses 91714
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Senator Patrick Leahy D (VT)
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Witnesses
Brad Burnham
Managing Partner
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 48

Ruth Livier
Writer, Independent Producer, And Actress
Pacific Palisades , CA
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The Honorable Robert M. McDowell
Former Commissioner, Federal Communications Commission
Partner, Wiley Rein LLP
Washington , DC
Download Testimony

Dr. Jeffrey A. Eisenach
Visiting Scholar
American Enterprise Institute Center for Internet, Communications and
Technology Policy
Washington , DC
Download Testimony

Nuala O'Connor
President And CEO
Center for Democracy & Technology
Washington , DC
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 49

 

From: Jeffrey Eisenach <Jeffrey.Eisenach@AEI.org>
Sent: Wednesday, September 03, 2014 9:36 AM
To: Nicholas Degani

Cc: Guro Ekrann; Gus Hurwitz

Subject: RE:

Thanks Nick. Look forward to seeing you next week.

 

Jeffreyr A. Eisenach, Visiting Scholar

Center for lnternet, Communications and Technology Policyr


@JeffEisenach

202-443-902 9

 

From: Nicholas Degani [NicholasDegani@fcc.gov]
Sent: Wednesday, September 03, 2014 9:34 AM
To: Jeffrey Eisenach

Cc: Guro Ekrann; Gus Hurwitz

Subject: Re:

Glad to join! Jonathan emailed the chiefs of staff for each of the Commissioners, which is how I was looped in. I'll reach
out to a few people to join as well, and l?m excited to have such a great event coming here!

Best,

-Nick D.

From: Jeffrey Eisenach

Sent: Wednesday, September 3, 2014 8:36 AM
To: Nicholas Degani

Cc: Guro Ekrann; Gus Hurwitz

Subject:

Nick --

We are delighted you can participate.

As you might imagine; putting together has been something of an adyenture. (Though Jonathan Loyy could not hai?J
been more helpful at every etage.)I Anyway, can you tell us how you learned of the conference? Is it being well
publicized within the 

Regardless, you should feel free to reach out to others there who might be interested -- as of now. we haye room for
additional FCC attendees all three days.

BesL

Jeff

 

Jeffrey A, Eisenach, Visiting Scholar
Center for InternetJ Communications and Technology Policy-:htt to it cict}


@Je?Eisenach

51

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 54

June 13, 2014
Hon. Fred Upton
Chairman
Energy and Commerce Committee
US House of Representatives
2125 Rayburn House Office Building
Washington, DC 20515
Hon. Greg Walden
Chairman
Communications and Technology Subcommittee
Energy and Commerce Committee
US House of Representatives
2125 Rayburn House Office Building
Washington, DC 20515
Re: Comments on Competition Policy in the Communications Market
Thank you for the opportunity to respond to your inquiry on an update of the Communications Act.
We, the undersigned scholars at the American Enterprise Institute's Center for Internet,
Communications, and Technology Policy replied – in our individual capacities – to your initial
request for comments on January 31, 2014.
Your latest inquiry asks the public to comment specifically on the question of competition in
communications markets. Because our initial reply outlined most of our views on the topic of
competition, we are resubmitting it here, along with two related papers: “Broadband Competition in
the Internet Ecosystem” and “In Search of a Competition Doctrine for Information Technology
Markets: Recent Antitrust Developments in the Online Sector.”
Events in the few short months since our previous submission have only served to reinforce our
observations of the marketplace and our confidence in our policy proposals.
Consider that just since January 2014:

• Facebook paid $19 billion for WhatsApp, a messaging service that now boasts some 500 million
users worldwide and which provides an alternative to traditional telecom text messaging services.
• Amazon launched Fire TV (an even more ambitious upgrade of its Amazon Video service),
partnered with HBO GO, and will soon reveal its own mobile device.
• Google announced it will likely build fiber optic broadband access networks in an additional 34
U.S. cities. Google has also said it is launching a new low-earth-orbit satellite constellation,
specifically devoted to broadband access.
• AT&T said it will extend its fiber optic broadband networks in 100 U.S. cities. AT&T also said it
would acquire DirecTV, a combination that could provide even more robust competition in the
video distribution market.

 55

• Verizon commenced the full replacement of copper wire telephone service in New York City with
advanced fiber optics.
• Comcast, Time Warner Cable, and other cable firms announced plans to dramatically expand their
use of Wi-Fi to cover ever larger areas with fast wireless access.
• Comcast and Verizon each signed agreements with Netflix, providing for direct connections
between their broadband networks and Netflix’s content delivery network. For Netflix, bandwidth
costs should go down, and performance should improve. Contrary to much of the commentary, the
interconnection and peering markets are wide and deep and, despite one high-profile stand-off, are
working well.
These developments show that competition is thriving in the multiple dimensions of the dynamic
Internet ecosystem. New investments in fiber, satellite, and wireless technologies show that
intermodal competition is alive and well. The number of options, and the capabilities of those
options, is increasing. The continued investments in networks, devices, and services by content and
software firms — and investments in content and software by network firms — show that the entire
market place is growing in diversity and dynamism.
We believe economic theory and evidence in the marketplace suggest competition is best served by
an open environment unfettered by prescriptive regulation of specific technologies and firms, by an
industry-specific regulator. The better path is to trust a more general watchdog to protect consumers
from harms on a case-by-case basis.
We remain at your service to discuss ideas and answer any questions you might have.

Respectfully,

Richard Bennett
Visiting Fellow

Gus Hurwitz
Visiting Fellow

Jeffrey Eisenach
Visiting Scholar

Roslyn Layton
Visiting Fellow

James Glassman
Visiting Scholar

Bret Swanson
Visiting Fellow

Bronwyn Howell
Visiting Fellow

  

From: Ajit Pai

Sent: Monday, April 28. 2014 10:34 AM
To: Jeffrey Eisenach

Cc: Lori Alexiou (Lori.Aiexiou@fcc.gov)
Subject: RE: NN

Hey Jeff,

Great to see you late last week! Look forward to following up with you soon (and cc?ing Lori}. FYI, we?re leaving for the
Cable Show tomorrow morning, and I?ll be physically out of the office until next Monday. Happy to chat on the phone

instead, ifthat makes it easier (and timelier).

Cheers,
Ajit

From: Jeffrey Eisenach 

 

Sent: Thursday, April 24, 2014 4:51 AM
To: Ajit Pal

Cc: Matthew Berry

Subject: NN

Ajit --

We (AEI folks) have been talking with Sallet about the NN NPRM. From what we can tell it's a lot better than we might
have feared -- but we don't want to lose track of the fact that it's a long way from the antitrust-based standard we would
prefer. And, we have read little about scope -- how far into the ecosystem does 706 now extend?

Anyway, if it wouicl be helpful to share thoughts with you and your team andfor offer you a venue or an outlet, we
would be happy to do so. We are fully engaged with media, etc. on the NN issue.

Hope ail is well -- I thinkl will see you Friday.
Best,

Jeff

 

Jeffrey A. Eisenach, Phil, Visiting Scholar
Center for lnternet. Communications and Teehnoloay Policy

 


@IeffEiscnaeh
202443-9029

 

From: Ajit Pal [Ajit.Pai@fcc.goy]

Sent: Tuesday, January 28, 2014 3:23 PM
To: Jeffrey Eisenach

Subject: RE: Guest Blog?

Hello Jeff,

56

Many thanks for your message.l i appreciate your kind offer to post on AElcleas and TechPolicyDaily.com. I would

normallyjump at the chance to put some commentary on the communications-related part of the SOTU online, but with

57

the upcoming Commission meeting, we are scrambling like the proverbial headless chickens over here. I suppose it
wouldn?t be as timely, but could we raincheck fora little while? Either way, I do think it w0uld be great to revisit some
of the E-Rate issues we explored last summer at AEI.

I?d love to grab lunch or coffee sometime. Are you around in early February? in the meantime, hope all?s well and talk
soon!

Cheers,
Ajit

From: Jeffrey Eisenach 
Sent: Monday, January 27, 2014 5:16 PM

To: Ajit Pai

Cc: Matthew Berry

Subject: Guest Blog?

Ajit 
I heard something on one of the Sunday shows suggesting the President may hit the "connect America" idea in the
SOTU. If so, or even if not, do you have any interest in doing a guest blog for Wednesday

morning? We would place it on both AEIdeas (the AEI blog) and TechPolicyDaily.com, and work to maximize exposure.

More broadly, I hope all's well. If you have time one of these days for lunch or a cup of coffee, it would be fun to get
together.

Best,

Jeff

 

Jeffrey A. Eisenach, Ph.o., Visiting Scholar

Center for Internet, Communications and Technology Policy


@JeffEisenach

202-448-9029

 

58

From: Jeffrey Eisenach <Jeffrey.Eisenach@AEI.org>
Sent: Wednesday, May 07, 2014 1:43 PM

To: Ajit Pai

Cc: Nicholas Degani

Subject: RE: Follow Up

Follow Up Flag: Follow up

Flag Status: Completed

 

Sorry -- Here's the link to the Bennett 
transition-[smog 123523383??3,pdf

 

Jeffrey A. Eisenach, Visiting Scholar

Center for Internet, communications and Iechnology Pong:


effEisenach

202-443-9029

 

From: Jeffrey Eisenach

Sent: Wednesday, May 2014 11:24 AM
To: a'it. ai or

Cc: nicholas.deoani@fcc.o0y

Subject: Follow Up

Ajlt and Nic --

Great to see you this morning. Richard Bennett?s Outlook paper on the IF transition is a great read, as is the Novell
decision, which is attached. Thanks for your thoughts  we'll be following things closely.

Best,

JEff

PS: Very sorry you'll be out of town Sept. 10-13 -- if you can make It back for Friday morning we'd love to have you
make "closing remarks" at the plenary session, around am.

 

Jeffrey A. Eisenach, Visiting Scholar


1' ll. 

@JeffEisenach

202?448-9029

59

Mobile Wireless Performance in the EU
and the US: Implications for Policy (*)
Erik BOHLIN
Chalmers University of Technology, Gothenburg, Sweden
Kevin W. CAVES
Economists Incorporated, Washington D.C., USA
Jeffrey A. EISENACH
NERA Economic Consulting; George Mason University Law School,
Arlington, VA, USA

Abstract: As recently as five years ago, markets for mobile wireless services in Europe
were performing on par with, or even better than, markets in the United States. Today,
there is broad agreement that the EU has fallen behind in at least some dimensions,
especially with respect to the deployment of next generation LTE networks. We assess
the divergence in performance, analyze its causes, and suggest policy changes that would
improve the performance of mobile wireless markets going forward. These include
regulatory harmonization of spectrum management, achieving efficient levels of
consolidation, and promoting investment and innovation through a focus on dynamic
competition.
Key words: spectrum management, performance, ecosystem, dynamic competition,
wireless markets.

ęå

here is broad agreement that the EU is lagging well behind the U.S.
in deployment of next generation wireless infrastructures (see e.g.
KROES, 2013a; GENACHOWSKI, 2012). 1 This paper evaluates
the divergence in performance, analyzes its causes, and suggests

(*)) The authors are g
grateful to GSMA for financial support
pp
and to Phillip
p Mantyh
y for research
assistance. The views expressed are their own, as is responsibility for any errors or omissions.
1 "Once, Europe led the world in wireless communication: now we have fallen behind. Europe
needs to regain that lead." (KROES, 2013a); "The U.S. has regained global leadership,
particularly in mobile. The U.S. leads the world in 3G subscribers by a wide margin, and we are
leading the world in deploying 4G mobile broadband at scale." (GENACHOWSKI, 2012).
st

Digiworld Economic Journal, no. 93, 1 Q. 2014, p. 35.

www.comstrat.org

 60

st

36

No. 93, 1 Q. 2014

policy changes that would improve performance going forward. It concludes
that EU regulatory policies have resulted in a fragmented market structure,
which is one of the factors that prevent carriers from capturing beneficial
economies of scale and scope and reduce the growth of the mobile wireless
ecosystem. The reforms suggested include improving coordination and
harmonization of spectrum management policies, permitting efficient levels
of consolidation, and incentivizing investment to promote infrastructurebased competition.

„

The diverging performance
of EU and U.S. mobile wireless markets

Prices and output
Data on prices and output shows that, on average, consumers in the EU
pay less per month for mobile wireless services than consumers in the U.S..
2012 average revenue per user (ARPU) in the U.S. is higher than in any EU
country: $69 per month compared with an EU average of $38.
While EU consumers pay less per month, U.S. consumers use mobile
services more intensely, spending more time on the phone and downloading
more data than in the EU. As shown in Figure 1, U.S. consumers use 901
voice minutes per month, more than five times the European average of 170
minutes.
Similarly, CISCO (2013) reports that mobile wireless data use per
connection in the U.S. is significantly higher than in the EU and projects U.S.
customers will use more than twice as much data per connection as
customers in the EU in 2013.
Thus, while U.S. consumers pay more per month than those in the EU,
they pay less per unit of usage. For example, MERRILL LYNCH (2012)
reports that average revenue per minute of voice usage in the U.S. is far
lower than in any European country, and less than a third of the European
average.

 61

Erik BOHLIN, Kevin W. CAVES & Jeffrey A. EISENACH

37

Figure 1 – Voice minutes of use per subscriber (2012)

Source: Merrill Lynch Global Wireless Matrix 4Q12 (hereafter, "Global Wireless Matrix")

Both U.S. and EU consumers have experienced a long-run secular
decline in revenue per connection. Average revenue per connection (ARPC)
in the EU has fallen by 45 percent since 2000, from over $40 per month to
just over $22 per month at the end of 2012, while ARPC in the U.S. fell by 18
percent, to $45, over the same period. However, U.S. consumers tend to
connect more devices to the network per subscription than in the EU. As a
result, as shown in Figure 2, ARPU in the U.S. is actually increasing, while
revenue per subscriber in the EU continues to decline.
The divergence between EU and U.S. performance in recent years is
likely explained in part by the more rapid expansion of the mobile wireless
ecosystem in the U.S., spurred by the more rapid and extensive deployment
of LTE. The widening of the gap between U.S. and EU ARPU (beginning in
2010) coincided with introduction of the first 3G enabled iPad and with the
initial deployments of LTE networks (primarily in the U.S.). Analysts note that
in the U.S. especially, "continued traffic growth from additional usage and
multiple devices is encouraging users towards more expensive plans, which

     
 

Internet Communication 5 Technology Co ntrihuto rs

Net neutrality forecast: Clear tomorrow,
stormy weather ahead

hstetTrey Eisenach

January 29 2014 6:00 am

 



Sir/"1 Dy Ettlterste?:

tags: FCC. net neutrality. Wheeler

4: 6+1 a 3 ta er

Since it was commercialized and privatized by the Clinton Administration in the mid-1990s, the
Internet has operated with a minimum of government involvement. Apart from the occasional
antitrust suit (Microsoft comes particularly to mind). technology companies have been left largely free
to invest. innovate and develop new business models. Even in the traditionally regulated
telecommunications sector. the legacy regulator the Federal Communications Commission has.
until recently. taken a hands of? approach to broadband services.

The results have been nothing short of amazing. More than 2.4 billion people use the Internet
worldwide. and the number is growing nearly 10 percent annually. The U.S. which has taken the
most market-oriented approach of any country dominates the information technology market. with
eight of the top ten Internet destinations (including Apple Facebook and Google) and the worlds
best Internet infrastructure. especially for mobile' More than half of the world's 46 subscribers live in
the US.

The Internet, in other words. is a free market success story and the US. istne star.

All that success ultimately wasn't enough. however. to keep the FCC from seeking to extend its
regulatory reach from the old legacy telephone networks onto the Internet. Starting a decade ago.
the Commission began considering "net neutrality" rules that would impose 20th Century style
common-carrier regulations on broadband ISPs. Adopted in 2010. the rules go far beyond
broadband. effectiver limiting the ability of content and application providers to compete against
each other by partnering with to deliverfaster. better Internet connections

On January 14. the DC Circuit handed down a decision in ?v'erizon's lawsuit challenging the rules 
I said immediately following its release. the decision has both short and long-term implications for the
future of internet regulation. In the short run. the court overturned the FCC's prohibition on
?discriminatory? tread "customized"] Internet service contracts between on the one hand. and
content and application providers on the other. In so doing. the Court reset the regulatory bar back
to the largely unregulated pre-Zoto status quo. For those who believe the Internet works best
without undue regulatory interference. that's great news.

But there was also a dark side to the court's decision. While ruling that the Commission does not
have authority to pursue the specific regulatory approach it adopted in 2010. the court seemed suggest an alternative legal approach which. if adopted by the Commission in the
future. would likely pass legal muster "Just do it this way." the court seemed to say. "and the
Internet is yours to regulate however you want."

Needless to say. net neutrality advocates are chomping at the bit.

They may not get their way. The FCC's level-headed Chairman Tom Wheeler. wasted no time
issuing a comment? in the form of a blog posted on the Commission's web site declaring that while
the court decided that FCC has the authority to regulate broadband networks. he has a "strong
preference" for doing so in a "common law fashion taking account of and learning from the particular
facts" of each case He "it is important." he said that regulation not "prohibit or inhibit conduct that is
efficiency producing and competition enhancing." That doesn't sound like a recipe for re-imposing
the sorts of sweeping regulationsthe courtjust overturned.

Chairman Wheeler's comments suggest an FCC takeover of the Internet in the short run is pretty
unlikely. But while chairmen come and go. statutory authority is forever. For those who value
internet freedom. the expansive authority apparently granted to the FCC by the DC Circuit's decision
will hang as a dark cloud on the horizon for a long time to come.

TechPolicyDaily.com

62

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The nature of wireless competition
by: Jeffrey Eisenach
Follow @JeffEisenach
January 6, 2014 6:00 am
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tags: competition, wireless

I was in Ottawa, Canada, recently speaking at an International Institute of
Communications conference where much of the discussion was focused on the
government’s populist campaign against the Canadian mobile wireless industry.
Incredibly, the government is running television ads – at taxpayer expense – attacking
Canadian carriers for high prices and poor service. The ads would be tough to justify
even if they were true, but in reality Canadians get more value for their mobile wireless
dollars than anywhere in the world, with the possible exception of the U.S.
After the speech, I paid a visit to the offices of the Canadian Radio-Television and
Telecommunications Commission (CRTC), whose role roughly parallels that of our
Federal Communications Commission. There, I met with a dozen or so professional staff
to discuss the state of competition in the Canadian wireless market and proposals the
CRTC is considering (at the behest of the government) to expand mobile roaming
regulation. The specifics of that conversation were “off the record,” and I’ll leave them
that way.
I will share one aspect of our discussion that had nothing to do with Canada
specifically, but rather went to the nature of competition in wireless markets and the
arguments for and against sharing requirements. Specifically, someone asked, under
what circumstances does it make sense to build out multiple infrastructures, especially
in sparsely populated areas, when one network could do the job? Why not share?
It’s a perennial question, and a tough one. Natural monopolies do exist, and

Research: Beyond net
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June 14, 2016 2:58 pm

Event: An American Strategy
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Freedom, Security, and
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Publication: Center for
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and Technology Policy:
Selected Articles on
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June 7, 2016 4:00 pm

Op-ed: Europe’s cyber “right
to be forgotten”
June 7, 2016 11:21 am

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 duplication is sometimes inefficient. In those cases, some form of either public utility
regulation or even public ownership may make economic sense.
So why not share mobile broadband networks? In urban areas, demand is clearly
sufficient to justify overlapping networks – but what about rural areas (an especially
big issue in Canada)? Why not have Rogers build out one county, TELUS the next, and
so on, and then let other carriers “roam” on their networks at some reasonable price?
Put differently, once a carrier has built a network in such a place, how can one justify
not allowing other carriers’ customers to use it – again, for some reasonable price?
My response to this perfectly reasonable question was to explain how the U.S. ended
up with the world’s first large-scale LTE deployment, and, today, with the most

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competitive 4G market anywhere.
The idea for LTE originated with NTT in Japan in 2004, but Verizon Wireless (for whom I
do some consulting work) was the key early adopter, announcing in 2007 that had
embraced the standard, and then, in 2009, that it planned to undertake a nationwide
rollout. The decision was widely and correctly seen at the time as a risky one: Naysayers
argued it was an idea whose time would never come (perhaps because they thought
Wi-Max, backed by Google, Intel, Clearwire, and Sprint, was a better technology) or,
even if LTE was the right idea in the long run, that Verizon was pushing the envelope
too far too fast.
But Verizon continued to invest large amounts of both time and money in building the
LTE ecosystem, getting standard setting bodies to approve the necessary standards,
regulators to make available the necessary spectrum and equipment makers to design

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and manufacture the right network equipment and handsets. In December 2010, it
became the first carrier to roll out a major LTE deployment, even as some observers

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were predicting the technology wasn’t ready for prime time. As we all know now, those

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doubts were misplaced.

July 2016

Today, three years from initial deployment, Verizon’s LTE network covers roughly 90
percent of U.S. households – a point Verizon has been making in television ads that
compare its LTE network coverage maps to the relatively sparse (but rapidly
expanding) footprints of its competitors.
This brings us back to the question of mandatory roaming and infrastructure sharing.
Such regulations would do away with “map differentiation,” since all carriers would, by
definition, cover the same territory. And therein lies the rub: The ability to advertise its
wider LTE coverage, and by so doing attract more customers willing to pay higher
prices, is the reward for the risk-taking, entrepreneurship and investment responsible
for Verizon’s first-mover advantage. A binding requirement to share (and the FCC’s
2011 data roaming order comes pretty close to imposing one) would reduce if not
eliminate the incentives for such behavior.
My point is simply that there is more to mobile wireless competition than meets the
eye. It’s not about the static efficiency gains associated with economizing on
infrastructure costs in sparsely populated areas, but rather about the innovations – the
new and better products and services of all sorts – that come from dynamic
competition between large, complex and constantly evolving platforms and
encompasses platform innovations of all sorts, such as AT&T’s successful gamble on the
iPhone and T-Mobile’s recent innovations in pricing plans. Dynamic competition is one
phenomenon regulators will never be able to mimic or manufacture, but we can hope
that, over time, they will learn how to avoid mucking up the works.

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From: Jeffrey Eisenach <Jeffrey.Eisenach@AEI.org>

Sent: Wednesday, December 11. 2013 11:45 AM

To: Mike O'Rielly

Subject: Economists Letter re: Communications Competition
Attachments: Economists Letter to Chairman Wheeler Final 121113.pdf

Commissioner O'Rielly:

Attached please find a letter that's just been sent off to Ehainnan Wheeler (and filed in half a dozen dodreis). In it, a
broad based group of economists describes the current state of competition in communications markets and the
Implications for some key policy issues facing the Commission. If you or your staff have questions or would like further
information, please feel free to contact me or any of the authors.

Sincerely,

Jeff Eisenach

Jeffrey a. Visiting Scholar



@Je??Eisenach

202-448-9029

December 1 1, 2013

Hon. Tom Wheeler

Chairman

Federal Communications Commission
445 12th Street S.W.

Washington, DC 20554

Re: Economic Evidence on Competition in Communications Markets and Implications for
Key Policy Issues

Dear Chairman Wheeler:

Congratulations on your con?rmation as Chairman of the Federal Communications Commission.
As economists who study and write about communications policy and regulation,I we agree with
your comment during your con?rmation hearing that ?the role of the FCC has evolved from
acting in the absence of competition to dictate the market, to promoting and protecting
competition with appropriate oversight.? The economic evidence on this point is clear: in all but
a few areas, communications networks no longer have the characteristics of natural monopolies,
and should no longer be regulated as public utilities. Indeed, the convergence of the
communications sector into the dynamic, intensely competitive Internet ecosystem is now
virtually complete.

We write because we believe these economic facts have important implications for some of the
key challenges facing you and the Commission in the months and years ahead.2

To begin, the emergence of robust competition does not obviate the need for consumer-welfare-
focused, economically-informed antitrust oversight where residual monopoly power remains.
Further, in areas such as consumer protection, public safety, spectrum management, and
universal service, government involvement whether by the Commission or by other appropriate
state or Federal agencies will continue to be appropriate. Even in these areas, however,
economic analysis and market-based approaches can lead to better policy outcomes. The
question, in other words, is not whether there is a role for government, but what speci?c policies
should be pursued to maximize consumer welfare now and in the future.

This letter addresses this question in three parts. First, we summarize the economic evidence
with respect to the overall competitiveness and performance of the communications sector.
Next, we discuss the implications of the current competitive landscape for three major areas of
policy: regulation of IP networks and interconnection; vertical issues, including net

 

None of us have been compensated by any client for participating in this effort.

2 Each of us shares the overall views and primary conclusions expressed herein, though as individuals we each
reserve the right to use different wording or characterize particular points differently and, of course, to change our
opinions on the basis of new facts which may present themselves in the future.

72

neutrality; and spectrum policy. Third, we offer a few broader observations about the
importance of allowing markets to supplant regulation in de?ning the future of the
communications sector.3 References to a sampling of studies that provide empirical support for
the conclusions below are attached.

The Communications Sector ls Vigorouslv Competitive

In August 1999, Chairman William Kennard released a Draft Strategic Plunfar a New CC for
the Century. Its ?rst sentence reads as follows: ?In five years, we expect U.S
communications markets to be characterized predominately by vigorous competition that will
greatly reduce the need for direct regulation.?

The economic evidence that communications markets are now ?vigorously competitive? is
incontrovertible. The vast majority of Americans have access to multiple high speed broadband
providers, multiple sources of digital video, and multiple providers of mobile wireless services.
Communications firms have invested hundreds of billions of dollars in wireline and wireless
networks (satellite as well as terrestrial), resulting in dramatic improvements in the capacities
and capabilities of America?s communications networks. American wireless networks are
unarguably the most advanced in the world, and more than 85 percent of U.S. households are
passed by wireline networks capable of download speeds in excess of 100 Mbps. Competition in
all of these markets is dynamic and intense. In many areas of the United States, less than one
third of all households are still connected to the traditional wireline telephone infrastructure 
the ?natural monopoly? the FCC was created to regulate.4 Three of out of four households,
on the other hand, have broadband Internet connections, which have been virtually exempt, up
until new, from economic regulation.

Most importantly, the communications sector has new converged so thoroughly with the rest of
the lntemet ecosystem that it has become dif?cult to draw clear boundaries. Where does a
content delivery network stop and the ?telecommunications infrastructure? begin? What is a
?telecommunications service? in a world in which more traf?c travels over Skype and FaceTime
than over the Public Switched Telephone Network? How much monopoly power does a wireless
carrier have in a world in which consumers? choices are driven at least as much by devices,
operating systems and applications ecosystems as by coverage and pricing plans? None of the
markets that make up the Internet ecosystem ?ts the model of atomized, commoditized ?perfect
competition? described in introductory economics textbooks but all of them, communications
no less than the others, are ?vigorously competitive.?

 

3To ensure compliance with the Commission?s rules, we are ?ling this letter as an ex parte comment in the
following proceedings: WC Docket No. 12-263; WC Docket No. 12~269; GN Docket No. 09-191; WC Docket No.
07-52; GN Docket No. 10-127; and, GN Docket No 12?353.

4 For example, reports that fewer than 15 percent of homes in Florida and Michigan are still connected to the
Verizon reports that only about one million {out of 17 million) homes in its footprint are connected to
copper. We acknowledge that there are pockets of the country where residents have limited choices in wireline
broadband networks capable of achieving speeds in excess of 6 Mbps. But with the coming advances in wireless and
satellite broadband services, the opportunity for any targeted exercise of market power is remote. Rather than
regulating carriers who have deployed high-speed networks in those areas, a better approach is to create a regulatory
climate in which entrants are encouraged to expand their networks.

73

POTS-style Interconnection Regulation Should Not Be Imposed on IP Networks

One serious threat to continued innovation and dynamism in the communications sector is the
potential for public-utility style regulation to be imposed on IP networks in the form of
mandatory interconnection requirements.

Economic theory predicts that the incentive issues associated with interconnection among
traditional telephone networks are unlikely to be present in IP-based networks, and these
theoretical predictions are supported by two decades of empirical evidence: Since its inception
in the 19903, the modern commercial Internet has functioned remarkably well without mandatory
interconnection requirements. There are virtually no signi?cant instances of traf?c being blocked
or delayed as a result of failures to interconnect. At least equally important, the peering and
transit regime has responded to changing market and technological conditions through
continuous, transformational change.

The success of the lnternet?s voluntary interconnection regime stands in stark contrast to the
distortionary, in?exible regulatory regimes that have governed interconnection in the POTS
world. Simply put, regulators lack the information necessary to set ef?cient interconnection
prices and the ?exibility to adjust them in the face of changing market conditions, leading to
inef?cient market structures, misallocated investment, arbitrage schemes, and regulatory
gamesmanship.

Allowing even ?weak form? interconnection mandates to spill over onto the Internet would
distort market outcomes and limit innovation. Moreover, since the Internet is global in scope and
scale, any interconnection mandate imposed by the U.S. would invite involvement by
international regulators, many of whom would surely welcome U.S. support for the principle of
regulating interconnection of networks.

In summary, both economic theory and a large body of real-world experience demonstrate that
the potential costs of prophylactic imposition of mandatory IP interconnection are very high,
while the bene?ts likely are non?existent.

Vertical Practices Should Be Addressed on a Case-bv-Case Basis

The Open Internet Order applies an ex ante approach to the regulation of vertical conduct by
effectively prohibiting priority delivery arrangements. A better approach would be to permit new
forms of contracting, and to police any abuses after the fact.

High tech industries, including those that make up the Internet ecosystem, have several
characteristics -- including high rates of investment and large ?xed costs, product
differentiation, network effects, multi-sidedness and strong complementarities which tend to
make economic analysis of particular business practices highly fact dependent: The effects of a
particular practice are intrinsically dependent on the circumstances of the market at issue.
Moreover, because market circumstances in the IT sector are constantly evolving, even conduct

74

that is harmful at one point may, a few years or even months later, be ef?ciency-enhancing and
pro-competitive.

The upshot of these economic realities is that ex ante regulation of vertical conduct blanket
prohibitions on certain types of business practices necessarily will yield a high incidence of
Type II error: The well-intentioned but counterproductive prohibition of conduct that is actually
welfare-enhancing. Accordingly, such regulations including the Open Internet Order are
very likely to generate greater costs than bene?ts. The economic evidence is clear: Vertical
practices, whether in the broadband space or in other areas access to content and
programming) should be policed on a case-by-case basis, not through prescriptive regulations or
categorical bans on particular forms of conduct.5 Indeed, the Commission has correctly tolerated
vertical integration and market-based contracting in the cable television industry, recognizing
that the ef?ciencies ounveigh the costs relating to potential discriminatory acts, which can be
mitigated with expost review of any claimed abuses. The same types of tradeoffs are at issue for
the Internet. While we recognize that the Open Internet Order is before the courts, we hope you
will take these considerations into account in thinking about how, if it is upheld, the Order is
enforced or, if it is not, how best to proceed.

The Commission Should Continue to Expand the Role of Markets in Allocating Spectrum

A dozen years ago, a group of 37 ?concerned economists? (including some of us) submitted a
?ling in the Commission?s secondary markets proceeding urging the Commission ?to adopt
market-oriented rules opening the radio spectrum and capturing its full potential for society.?5
We continue to support the expansion of market-based mechanisms for the allocation and
reallocation of spectrum and urge the Commission to redouble its efforts in this regard.

The market-oriented spectrum policy reforms adopted by the Commission over the course of the
past two decades have generated enormous bene?ts for consumers, and are one of the main
reasons the U.S. now has the world?s most advanced mobile wireless services. Market-based
spectrum allocation has allowed spectrum to ?ow away from inef?cient uses to more highly
valued ones and thus made possible the explosive growth of mobile broadband.

While not all of us felt that the incentive auction mechanism was the best or only choice for
reallocating spectrum from broadcasting to mobile broadband, we all support the principle
(embodied in the incentive auction mechanism) of voluntary exchange leading to ef?cient
reallocation, and we all agree with the goal of transferring spectrum from the in?exible broadcast
licensing regime to the far more ?exible, secondary-market?friendly regime that governs mobile
broadband. We urge you to make the success of the incentive auction a top priority.

 

5 See Comments ofJerty Brita et ai, Net Neutrality: The Economic Evidence, tn the Matter of Preserving the
Open inter-net (GN Docket 09-191; April 10, 2010) (available at

1753}.

5 See Comments of3? Concerned Economists, tn the Matter of Promoting Efficient use ofSpeetrum Through
Etimtnation oanrriers to the Devetapment of Secondary Markets Docket 00-230, February 7, 2001) {available
at 1 2460886}.

75

In that context, it has been suggested that the auction be used to try to affect the structure of the
mobile wireless market, either by restricting participation by some ?rms or by providing
arti?cial advantages to others. We do not believe the Commission can, through economic
analysis or otherwise, accurately predict the most efficient structure of the market for mobile
wireless services (which may depend, for example, on the extent to which the wireless and
wireline broadband markets converge); and we note that the use of eligibility restrictions and
similar rules in prior auctions has resulted in delays and market distortions. By imposing such
restrictions, prior auction policy has presumed that ?more carriers are always better,? despite the
growing importance of economies of scale in providing wireless networks and the growing
demands on wireless networks from bandwidth-intensive applications. Economic research has
shown such restrictions can be harmful, and the Commission should refrain from imposing such
rules in the incentive auction.

More generally, we reiterate the advice proffered by our 37 colleagues more than a decade ago:
The Commission should ?seek not to create secondary markets directly but instead to institute
rules permitting such markets to emerge,? ?relax? restrictions on the use of radio spectrum by
both current licensees and new entrants,? and ?eliminate all wireless license requirements
unrelated to interference or anti-competitive concentration.?

The Internet Should Not Become a ?Regulated Industrv?

In closing, we return to a theme introduced above - the convergence of the communications
sector with the Internet ecosystem.

As a veteran of the telecommunications policy arena, you know more than most about the
political economy of regulation: the pressures brought by various interest groups to use
regulatory means to achieve private ends; the bias thereby created in favor of regulatory
expansion; the inherent cumbersomeness of the regulatory process; the inertia and in?exibility of
regulations once put in place.

In the mid-1990s, the Clinton Administration elected to privatize the operation and governance
of the Internet and to refrain from imposing industry specific regulation on broadband. These
choices. combined with a series of decisions by the Commission over the course of many years
the three Computer Inquiries, the Broadband Over Cable Order) have allowed the
evolution of the Internet ecosystem to be guided largely by market forces. Very few economists
new challenge the wisdom of this course, or question the tremendous bene?ts it has created in
economic terms and for the larger public interest.

The choices now before the Commission, including but by no means limited to the issues
discussed above, will determine whether the internet continues to be guided by market forces or,
alternatively, whether the results of free interaction between consumers and producers will be
supplanted by the preferences of regulators, using a regulatory system designed for a different
industry in a different time. From an economic perspective, the costs of ailowing the interact to
be transformed into a ?regulated industry? would be tremendous.

76

77

We appreciate your attention to these thoughts, and wish you every success in your tenure as

Chairman.

Respectfully,

Robert D. Atkinson
Information Technology and Innovation Fndn.

Kevin W. Caves
Navigant Economies

Robert W. Crandall
Brookings Institution

Wayne Crews
Competitive Enterprise Institute

Everett Ehrlich
ESC inc.

Jeffrey A. Eisenach
American Enterprise Institute

Gerald Faulhaber
Wharton School, University of 

c: Hon. Mignon Clyburn
Hon. Michael O?Rielly
Hon. Aj it Pai
Hen. Jessica Rosenworcel

Af?liations listed for identi?cation purposes only.

Robert W. Hahn
University of Oxford

Kevin A. Hassett
American Enterprise Institute

Steve Pociask
American Consumer Institute

Ha] J. Singer
Navigant Economics

Timothy J. Tardiff
Advanced Analytical Consulting Group

Leonard Waverman
Berkeley Research Group

Dennis L. Weisman
Kansas State University

78

ATTACHMENT
Selected Academic References

K. Caves, ?Quanti?dng Price?Driven Wireless Substitution in Telephony,? Telecommunications
Policy 35 (2011)

R. Crandall, J. Eisenach and A. Ingraham ?The Long-Run Effects of Copper-Loop Unbundling
and the Implications for Fiber,? Telecommunications Policy 37 (2013)

E. Ehrlich, J. Eisenach and W. Leighton, ?The Impact of Regulation on Innovation and Choice in
Wireless Communications," Review ofNetworlt Economics (2010)

J. Bisenach, Theories of Broadband Competition (American Enterprise Institute, 2012)

J. Eisenach and H. Singer, ?Avoiding Rent-Seeking in Secondary Market Spectrum
Transactions,? Federal Communications Law Journal 65;3 (2013)

G. Faulhaber, R. Hahn and H. Singer, ?Assessing Competition in U.S. Wireless Markets: Review
of the FCC's Competition Reports,? (with) Fed Communications Law Journal 64 (2012)

G. Faulhaber and DJ. Farber, ?Innovation in the Wireless Ecosystem: A Customer?Centric
Framework,? international Journal of Communications 4 (2010)

Thomas W. Hazlett and Dennis L. Weisman, ?Market Power in U.S. Broadband Services.?
Review of Industrial Organization, 38:2 (2011)

R. Litan and H. Singer, The Need for Speed: A New Framework for Telecommunications Policy
for the 215! Century (Brookings Press, 2013)

Glen 0. Robinson and Dennis L. Weisman, ?Designing Competition Policy for
Telecommunications.? The Review of Network Economics, 7:4 (2008)

Timothy J. Tardiff, ?Reregulation or Better Deregulation?: Economic Evaluation of Recent FCC
Competition Actions,? Presented at the Advanced Workshop in Regulation and Competition,
32nd Annual Eastern Conference (May l6, 2013)

Dennis L. Weisman, ?Principled? Approach to the Design of Telecommunications Policy.?
Journal ofCompetiton Law Economics, 6:4 (2010)

79

Avoiding Rent-Seeking in Secondary
Market Spectrum Transactions
Jeffrey A. Eisenach 
Hal J. Singer†
TABLE OF CONTENTS 
I.  INTRODUCTION ............................................................................... 262 
II.  SECONDARY MARKETS AND EFFICIENT SPECTRUM USE ............... 265 
A.  Rent-Seeking and the Case Against Administrative Allocation 265 
B.  The Emergence of Market-Based Mechanisms for
Spectrum Reallocation .............................................................. 267 
C.  Secondary Markets in Practice................................................. 271 
III. A CASE STUDY: RENT-SEEKING BEHAVIOR IN THE
VERIZON WIRELESS - SPECTRUMCO PROCEEDING ........................ 280 
A.  The Competitors ....................................................................... 282 
B.  The Ideological Opponents ....................................................... 285 
C.  The Aftermath ........................................................................... 288 
IV.  THE COSTS OF RENT-SEEKING AND RECOMMENDATIONS
FOR REFORM ................................................................................... 289 
A.  The Costs of Rent-Seeking in Secondary Spectrum Markets .... 290 
B.  Proposals for Reform................................................................ 294 
V.  CONCLUSIONS ................................................................................. 296 

  Jeffreyy A. Eisenach is a Managing
g g Director at Navigant
g
Economics LLC, a Visiting
g
Scholar at the American Enterprise Institute, and an Adjunct Professor at George Mason
University Law School.
† Hal J. Singer is a Managing Director at Navigant
g Economics LLC.
Although
g authors were engaged by Verizon in relation to the SpectrumCo transaction,
the views expressed here are exclusively their own and are not informed by any confidential
information from the transaction. They are grateful to Kevin W. Caves, Anna Koyfman, and
Chris Holt for research assistance.

- 261 -

 80

262

FEDERAL COMMUNICATIONS LAW JOURNAL

Vol. 65

I. INTRODUCTION
The power to allocate spectrum to specific uses and assign licenses to
specific users is the power to distribute wealth.1 Recipients of desirable
spectrum assignments, sometimes from the Federal Communications
Commission (“FCC” or the “Commission”) and sometimes directly from
Congress, have benefited handsomely over the years, and it is widely
recognized that millions, if not billions, of dollars have been spent on rentseeking—that is, on lobbying and similar activities designed to secure
advantageous outcomes in spectrum allocation decisions.2 Such is the
nature of government-administered markets.
Beginning in the late 1950s, academics and, eventually, policymakers
recognized that spectrum would more likely be put to its highest value use
if it was allocated by markets rather than politicians and civil servants.3 The
spectrum reform consensus that developed over the course of the next five
decades called for the creation of flexible usage rights that allow spectrum
to be used for any (legal and non-interfering) purpose, the use of auctions
to assign licenses to initial licensees, and the development of secondary
markets to allow users to exchange spectrum freely.4 In the early 1990s,
these recommendations began to be adopted as policy, starting with the use
of auctions to distribute newly released spectrum into the market and, later,
with the development of secondary markets.5 The emergence of a
secondary market for spectrum has resulted in billions of dollars in trades
and likely improved consumer welfare significantly, relative to the
alternative of continued, command-and-control style regulation.6

1.
In the parlance of spectrum policy, spectrum is “allocated” to a use and “assigned”
to a user. For example, certain bands are “allocated” for mobile communications services,
and the right to use those bands is then “assigned” (in the form of licenses) to specific users.
We will sometimes use the term “allocate” to refer to both steps, and similarly will use
“reallocate” to refer to the process of both repurposing spectrum (from one use to another)
and to transferring usage rights among licensees.
2.
See Anne O. Krueger, The Political Economy of the Rent-Seeking Society,
64 AM. ECON. REV. 291, 291-93 (1974) (explaining that because of quantitative restrictions
on spectrum allocation, rent-seeking is competitive and can generate large licensing fees).
3.
See EVAN KWEREL & WALT STRACK, FCC, AUCTIONING SPECTRUM RIGHTS 2
(2001), available at http://wireless.fcc.gov/auctions/data/papersAndStudies/aucspec.pdf
(“An economically efficient licensing mechanism would assign licenses to parties that value
them most highly, minimize wasteful private expenditures to obtain spectrum, foster
(economically) efficient spectrum use and increase competition with existing spectrumbased services with minimum delay and cost to the government.”).
4.
Promoting Efficient Use of Spectrum Through Elimination of Barriers to the Dev.
of Secondary Mkts., Notice of Proposed Rulemaking, FCC 00-402, paras. 2-3 (2000)
[hereinafter 2000 NPRM], available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/
FCC-00-402A1.pdf.
5.
Id. at para. 2.
6.
Id.

 81

Issue 3

RENT-SEEKING IN SECONDARY MARKETS

263

The emergence of a robust secondary market for the spectrum used
for mobile voice and, more recently, mobile broadband is perhaps the
single biggest success story of the spectrum reform movement.7
Commercial Mobile Radio Service (“CMRS”) licenses provide for a
substantial degree of flexibility, allowing licensees to use technologies
(e.g., CDMA, GSM, Wi-Max, LTE) and offer services (e.g., text messages,
voice, web browsing, mobile video) of their choice in the geographic and
frequency range they desire.8 Thus, to cite a prominent example from 2011,
Qualcomm was able to sell spectrum it had been using to provide
commercially unsuccessful mobile television service to AT&T, which will
use it for two-way mobile voice and data, thereby helping to alleviate the
“spectrum crunch” that has come about as a result of the emergence of
smart phones and mobile data services.9
In addition to flexible rights, the success of secondary markets
depends on the ability of market participants to engage in transactions
quickly, at relatively low cost, and with a reasonable degree of certainty.10
Under FCC rules adopted in the mid-2000s, most secondary market
transactions were granted “fast track” treatment, resulting in a significant
reduction in the time required to obtain approval.11 Many transactions
involving CMRS spectrum, however, remain subject to “special” public
notice and comment procedures, including those in which a current licensee
has foreign ownership or seeks to acquire additional, overlapping spectrum.
This practice arguably serves as a de facto invitation for the sorts of rentseeking behavior that plagued the old “command and control” system.12
Pursuant to section 310(d) of the Communications Act of 1934 and
FCC rules, an acquiring firm must file applications for assignment of
licenses with the Commission, asking for permission to consummate the
transaction.13 Typically, opposition parties (including competitors, trade
7.
John W. Mayo & Scott Wallsten, Enabling Efficient Wireless Communication:
The Role of Secondary Spectrum Markets, 22 INFO. ECON. & POL’Y 61, 62 (2010).
8.
Jeffrey A. Eisenach, Spectrum Reallocation and the National Broadband Plan,
64 FED. COMM. L.J. 87, 123 (2011). The specific spectrum bands subject to flexibility and
eligible for secondary market rules have varied over time. Unless otherwise noted, we refer
to licenses for spectrum used for mobile radio service and subject to flexibility and trading
as “CMRS” licenses.
9.
App’n of AT&T Inc. & Qualcomm Inc. for Consent to Assign Licenses &
Authorizations,
Order,
FCC
11-188,
paras.
4-5
(2011),
available
at
http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-11-188A1.pdf.
10. Eisenach, supra note 8, at 119-23.
11. Mayo & Wallsten, supra note 7, at 64.
12. Id.
13. 47 U.S.C. § 310(d) (2012); see, e.g., 47 C.F.R. §§ 1.2111, 73.3597 (2012); App’n
of Cellco P’ship d/b/a Verizon Wireless & SpectrumCo LLC for Consent to Assign
Licenses, WT Docket No. 12-4 (filed Dec. 16, 2011) (seeking consent to assign 122
Advanced Wireless Services licenses to Verizon Wireless from SpectrumCo); see also
App’n of Cellco P’ship d/b/a Verizon Wireless & Cox TMI Wireless, LLC for Consent to
Assign Licenses, WT Docket No. 12-4 (filed Dec. 21, 2011) (seeking consent to assign
thirty Advanced Wireless Services licenses to Verizon Wireless from Cox Wireless).

 82

Before the
Federal Communications Commission
Washington, D.C. 20554

In the Matter of
Special Access for Price Cap Local Exchange
Carriers;

WC Docket No. 05-25

AT&T Corporation Petition for Rulemaking
To Reform Regulation of Incumbent Local
Exchange Carrier Rates for Interstate Special
Access Services

RM-10593

DECLARATION
OF
KEVIN W. CAVES AND JEFFREY A. EISENACH

March 12, 2013

 83

CONTENTS
I. 

INTRODUCTION AND SUMMARY..............................................................................1 

II. 

QUALIFICATIONS ..........................................................................................................3 

III. 

THE EXISTING ECONOMIC EVIDENCE DOES NOT SUPPORT
INCREASED REGULATION..........................................................................................4 

A. 
B. 
C. 
D. 
IV. 
A. 
B. 
C. 
V. 

Market Concentration Evidence Does Not Demonstrate Lack of Competition ............... 5 
Evidence on Market Entry Does Not Demonstrate Lack of Competition ........................ 9 
Pricing Data Does Not Demonstrate Lack of Competition ............................................ 12 
Evidence on Rates of Return Does Not Demonstrate Lack of Competition .................. 13 
VERIZON’S VOLUNTARY DISCOUNT PLANS ARE PRESUMPTIVELY
EFFICIENCY-MOTIVATED, NOT ANTICOMPETITIVE......................................14 
Verizon’s Voluntary Discounts Facilitate Economic Efficiency ................................... 16 
Verizon’s Voluntary Discounts Do Not Require Large Share Commitments ............... 20 
The Market Power Required by Economic Theory Does Not Exist .............................. 24 
THE COMMISSION SHOULD NOT REGULATE BEFORE COMPLETING
ITS DATA COLLECTION AND ANALYSIS ..............................................................25 

A. 
B. 
VI. 

The Data and Analysis Now Underway Can Provide Important Insight into the
Competitive Dynamics of High-Capacity Markets ........................................................ 25 
Premature Regulation would be Costly and Difficult to Reverse .................................. 26 
CONCLUSIONS ..............................................................................................................28 

 84

I.
1.

INTRODUCTION AND SUMMARY

We have been asked by Verizon1 to provide our opinion with respect to certain

economic issues raised in comments submitted in response to the Commission’s FNPRM.2 In
preparing this declaration, we have reviewed selected comments and declarations filed in
response to the FNPRM as well as previous filings in these proceedings. Materials relied upon
are referenced specifically below.
2.

Our declaration focuses on the competitive dynamics of markets for high capacity

and special access services, the proposals from some commenters, including Level 3 and tw
telecom, to proscribe certain terms and conditions under which special access services are
offered by incumbent providers, and the potential for the Commission’s data collection and
econometric modeling efforts to enhance the Commission’s understanding of the state of
competition.

For ease of exposition, we sometimes refer to those advocating pre-emptive

regulation as “regulation advocates.”
3.

We reach three primary conclusions.

First, the available evidence strongly

indicates that the market for high capacity services is competitive and becoming more so. The
regulation advocates’ arguments, which rely primarily if not exclusively on simplistic measures
of market structure, do not demonstrate either that traditional market power (the power to raise
and sustain prices significantly above competitive levels) or exclusionary market power (the

1

In addition to Verizon Wireless, the Verizon companies participating in this filing are the regulated,
wholly owned subsidiaries of Verizon Communications Inc. (collectively, “Verizon”).
2
In the Matter of Special Access Rates for Price Cap Local Exchange Carriers AT&T Corporation Petition
for Rulemaking to Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access
Services, Report and Order and Further Notice of Proposed Rulemaking, WC Docket No. 05-25 & RM-10593, FCC
12-153 (Dec. 18, 2012) (hereafter FNPRM).

 85

Telecommunications Policy 37 (2013) 262–281

Contents lists available at SciVerse ScienceDirect

Telecommunications Policy
URL: www.elsevier.com/locate/telpol

The long-run effects of copper-loop unbundling and the
implications for fiber
Robert W. Crandall a,b, Jeffrey A. Eisenach b,c,n, Allan T. Ingraham b
a

Brookings Institution, 1775 Massachusetts Ave, NW, Washington, DC 20036, USA
Navigant Economics LLC, 1200 19th Street, NW, Suite 850, Washington, DC 20036, USA
c
George Mason University Law School, 3301 Fairfax Drive, Arlington, VA 22201, USA
b

article info

abstract

Available online 15 March 2013

Policies mandating unbundling of copper telecommunications networks have now been in
place for more than 15 years, and it is thus becoming possible to study their long-run effects.
This paper reviews the existing evidence on the effects of copper unbundling, and presents
new empirical results based on regression analyses of broadband penetration in OECD
countries from 2001 to 2010. The results show that the long-run effect of copper unbundling
on household broadband penetration rates is negative, a finding which is consistent with
previous research, including with research suggesting that copper unbundling has slowed
the deployment of FTTP infrastructures, especially in Europe. Based on an analysis of the
similarities and differences between the unbundling of copper networks and fiber networks,
the paper concludes that mandated unbundling of fiber networks would likely deter
deployment of Next Generation Access networks (NGAs).
& 2012 Elsevier Ltd. All rights reserved.

Keywords:
Broadband
Copper
Fiber
NGA
Unbundling

1. Introduction
It has now been more than 15 years since Hong Kong imposed the first network unbundling requirement on an
incumbent telephone company.1 Since then, unbundling of copper-based networks has become a staple of telecommunications regulatory policy throughout much of the developed world. Unbundling played a central role in U.S. telecom
policy for several years, beginning with the Telecommunications Act of 1996. Europe followed suit in 1998,2 and while
implementation was phased in over time, nearly all European states now have some form of copper unbundling
requirement. Similarly, unbundling has been adopted – albeit in different forms and flavors – in most developed Pacific
Rim countries, including Australia, Japan, New Zealand and South Korea.
With the deployment of fiber-to-the-premises (FTTP) infrastructures, regulators are now considering whether to extend
unbundling regulations to these new next generation access (NGA) fiber-optic networks, and if so, how. A few nations have
already adopted fiber unbundling rules, the issue is now front and center in Europe and Asia, and it has even become a
topic of discussion in the U.S., which decided in 2003 not to require fiber unbundling.3

n
Corresponding author at: Navigant Economics, 1200 19th Street, NW, Suite 850, Washington, DC 20036 USA. Tel.: þ1 202 448 9029; fax: þ1 202 973
2401.
E-mail addresses: rcrandall@brookings.edu (R.W. Crandall), jeff.eisenach@naviganteconomics.com (J.A. Eisenach),
allan.ingraham@naviganteconomics.com (A.T. Ingraham).
1
See Office of the Telecommunications Authority, Hong Kong Government (1995).
2
See European Commission (1998, 2000). As discussed below, a few European states had adopted unbundling requirements prior to the EC’s
adoption of unbundling as an EU-wide policy.
3
See Federal Communications Commission (2003).

0308-5961/$ - see front matter & 2012 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.telpol.2012.08.002

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R.W. Crandall et al. / Telecommunications Policy 37 (2013) 262–281

263

The premise in this paper is that fifteen years of experience with copper unbundling can and should inform the debate over
whether to unbundle fiber. The conclusions are, first, that the available empirical evidence shows that copper unbundling has
likely reduced, and certainly has not improved, consumer welfare; and, second, that to the extent the issues associated with fiber
unbundling differ from those associated with copper, the differences weigh against mandating fiber unbundling.
The first section below discusses the theoretical basis for mandatory unbundling, describes some of the implementation issues
regulators have confronted in adopting and enforcing unbundling regulations, and advances a four-part framework for assessing
implementation issues associated with unbundling. It also explains the theoretical basis for the hypothesis that unbundling might
increase broadband penetration in the short run (by lowering retail prices) but reduce it in the longer-run (by deterring
investment).
The following section briefly reviews the literature on the effects of copper unbundling, and then summarizes new
empirical results derived from OECD panel data over a ten-year period (from 2001 to 2010). The quantitative evidence is
most consistent with the hypothesis that unbundling has had little or no effect on broadband penetration in the short run,
but has reduced penetration in the long run.
The last section of the paper explains why unbundling of fiber networks is likely to lead to results no better than, and in
all likelihood worse than, the effects of copper unbundling. First, and importantly, the copper networks that were
unbundled for the most part had already been built when unbundling rules were applied, so that the effects of unbundling
on investment were minimized. Second, fiber unbundling poses significant engineering and network design issues above
and beyond those associated with copper which could raise costs and increase the likelihood of regulatory error. Third, the
competitive benefits of unbundling are likely smaller today than when copper unbundling was first adopted due to
increased intermodal competition from cable and wireless. Taken together with the evidence on copper unbundling, these
factors suggest that mandatory fiber unbundling is unlikely to improve economic welfare.

2. Theories of network unbundling
Throughout most of the 20th century, telecommunications services were provided by a single carrier, either owned by the
government or privately owned and regulated as a public utility. By the 1970s, it became clear that competition was possible in at
least some parts of the network. Competition developed first in consumer premises equipment and long-distance services, and, to
a limited extent, fixed-wire local telecommunications in core areas of major cities.4 For the most part, however, competition in
local fixed-wire, mass-market voice communications remained impractical in the era of plain old telephone service because of the
prohibitive cost of duplicating any significant portion of the established incumbent’s copper network.
By the early 1990s, technologies and markets had evolved further to the point where competition became feasible for many
aspects of local communication services. Network unbundling was advanced as a means of permitting competition in the
replicable portions of the network, even if particular network elements (for example, the last mile of twisted-pair copper) still
could not economically be replicated. Unbundling forces owners of non-competitive network elements to grant competitors
access to their monopoly facilities at regulated wholesale prices. By mandating resale, regulators seek to preserve the economies
of scale or density associated with monopoly telecommunications networks, while at the same time achieving the low prices,
differentiated choices and rapid innovation generated by retail competition. On the other hand, the practical challenges of
implementing unbundling policies are formidable, and the potential for unintended harm is significant. There is an extensive body
of literature exploring all of these issues in great detail; below is a brief summary of the major arguments.

2.1. The theoretical case for network unbundling
The case for unbundling assumes, first, that some aspects of the market for telecommunications services – for example, ISP
services – are potentially competitive, while others – for example, the last mile connection to individual premises – cannot
economically be replicated. If the last-mile monopolist is permitted to do so, it may under certain circumstances seek to foreclose
competition in the competitive aspects of the market by denying competitors access to the local loop, or by charging a prohibitive
price.5 Unbundling seeks to head off such anticompetitive behavior by forcing access to the non-replicable portions of the
network at efficient prices.6
The economic benefits of unbundling, if successfully implemented, fall into three broad categories. First, in the most
static sense, unbundling should result in lower retail prices (relative to the prices charged by an unregulated monopolist)
simply as a result of forcing the network monopolist to charge less than the monopoly price for the non-replicable portions
of its network. Second, in the medium- and long-run, it is hoped that competition in the market for the replicable aspects
of the service will result in lower costs (and thus prices), beneficial product differentiation, and increased innovation, while
the avoidance of uneconomic network duplication reduces total costs. Third, assuming technological or economic factors
make it possible over time to replicate ever more network elements, unbundling is hypothesized to create a ladder of
4
5
6

See eg., Brock, 2002.
The incentives of even a monopolist to restrict competition in this way are fact-dependent. See eg., Farrell and Weiser (2003).
For an overview of the arguments, see generally, Organization for Economic Co-operation and Development (2003).

 87

264

R.W. Crandall et al. / Telecommunications Policy 37 (2013) 262–281

investment that facilitates the ability of entrants to duplicate incumbents’ network facilities and thus expand the realm of
infrastructure-based competition.7
Thus, at least in theory, unbundling could result in lower prices, increased product differentiation, more rapid
innovation and – if entrants succeed in climbing the ladder of investment – increased levels of investment and more
competitive markets as measured by infrastructure-based competition.8
The size of the potential benefits from unbundling are directly related to the proportion of total revenues that is
amenable to competition, and the extent to which competition in the replicable portions of the market results in lower
costs, more choice, more rapid innovation, or greater potential for competitive entry. Thus, while communications
regulators had considered the use of unbundling policies in the context of voice services alone, the emergence of
broadband services (that is, DSL) in the mid-1990s strengthened the case for unbundling, for at least three reasons:
(1) the revenues subject to competition increased, as broadband ISP services were replicable; (2) the potential benefits
from product differentiation and innovation were expected to be greater in the innovative, differentiated broadband
market than in the mature, commoditized market for voice telephony;9 and, (3) the emergence of technological
convergence and new last-mile technologies might allow entrants to replicate previously un-replicable network elements
(for example, through the use of wireless local loop technologies in place of twisted pair copper), ultimately increasing
intermodal competition.10
2.2. Challenges and potential costs
The potential costs of unbundling come in two forms. First, it is increasingly recognized that forced sharing of fixed
assets – whether in the form of intellectual property, such as patents, or infrastructure, such as telecommunications
networks – generally reduces incentives for competitors to invent and deploy competing platforms.11 More broadly, open
access requirements can tip the competitive balance between platforms, either horizontally (for example, providing cable
networks a competitive advantage over copper ones) or vertically (for example, giving producers of complementary
products a competitive advantage in the battle over economic rents from investments in successful Internet platforms),
leading to inefficient resource allocation and harming consumer welfare.12 Thus, it can be argued that broad-based sharing
requirements should be avoided altogether except in the context of case-by-case competition enforcement.13
In practice, the benefits of unbundling also depend on the ability of regulators to create and implement efficient
regulatory regimes. The challenges of doing so can be grouped into four specific tasks: (1) design; (2) pricing; (3)
enforcement; and, (4) adaptation.
Design refers to both the need to determine which network elements are non-replicable (and thus appropriately
subject to unbundling) and the requirement to put in place various operational mandates necessary to implement network
sharing. Virtually all copper unbundling regimes require the incumbent to make available the last-mile local loop and to
allow entrants access to the wire center in order to connect their equipment (that is, a digital line signal access multiplexer,
or DLSAM) to the subscriber’s line (collocation). In many cases, however, regulators have gone further, either requiring line
sharing (that is, allowing the entrant to lease only the portion of a line’s bandwidth needed to provide unregulated data
services, leaving the incumbent to continue providing voice service, at regulated prices),14 or forcing the incumbent to
provide other elements thought to be necessary for entrants to compete, as in the case of the FCC’s unbundled network
element platform or UNE-P.15 In some cases, regulators may conclude that the need for unbundling varies by geography,
with some markets (for example, less densely populated areas) subject to more extensive requirements than others.16
7

See Cave and Vogelsang (2003), Cave (2004) and Cave (2006).
For an enthusiastic discussion of the benefits of unbundling, see (Benckler, 2010).
9
For a discussion of the role of product differentiation in telecommunications markets, see Greenstein and Mazzeo (2006). In practice, while there
are a few different options for installing DSLAMs and other equipment and in the design of the DSL service, entrants and the incumbent generally install
virtually the same equipment and offer the same broadband services over the incumbent’s copper-loop. Competition is thus limited primarily to price
and to various branding-related differentiators.
10
In the early days of copper-loop unbundling, incumbents may have had a first-mover advantage because they had engineered the underlying
copper plant and had long-lived customer relationships with virtually every potential DSL subscriber. On the other hand, it has been alleged that the
incumbents were reluctant to use this advantage to promote the new DSL broadband services aggressively because these services could compete with
high-margin business services, such as T1 or frame-relay services. Thus, one hypothesized benefit of local-loop unbundling was that it might induce entry
from firms that would promote DSL more aggressively than the incumbents.
11
See, for example, Weiser (2003) and Robinson and Weisman (2008).
12
See, for example, Renda (2010).
13
See Eisenach (2011) and Hovenkamp (2011). For example, antitrust together with intellectual property is often a better vehicle for addressing such
problems as interconnection and the lack of neutrality in networked communications. Regulatory solutions have tended to go too far, requiring
interconnection and sharing even when doing so inefficiently diminishes investment incentives.
14
Many entrants are not interested in obtaining the entire loop because they must then replicate the incumbent’s local voice switching facilities to
deliver low-valued local voice/data services. European Competitive Telecommunications Association (ECTA) (2009) reported in its latest broadband
scorecard (for the 3rd quarter of 2009) that entrants leased a total of 30.7 million lines in the EU-27, of which 7.4 million were in the form of line
sharing. See ECTA (2009). (hereafter ECTA Scorecard (2009)).
15
For a discussion of UNE-P, See Federal Communications Commission, (2005) in which the FCC removed switching from the list of unbundled
network elements and thus effectively eliminated the UNE platform (hereafter UNE-P remand order).
16
See, for example, OECD (2010)
8

 It?! 

 

Au tho rs
Alan Roth

Anne Veigle
Anthony Jones
Diane Holland
Jasamyn Roberts
Jon Banks

Ram Dhingra
Kevin Rupy

Mary Sc hultz
Patric Brogan
Portia Krebs
Robert Mayer
Tom Boroka
UBTelec om Events
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Walter Mc Connic 

Archives

USTELECOM

88

Who We Ale Issues Broadband Industry Events SI. Education News

Home 3- Blog 

Eisenach Paper Examines Broadband
Competition

Anne ?v'eigle
?125.201 2

The notion that broadband servic es share similar competitive and economic haracteristic with the information
technology sector is ?increasingly apparent." according to economist Jeffrey Eisenach in a new paper.
?Broadband Competition in the Internet Ecosystem.? But despite this 'rapidly emerging consensus," broadband
services remain subject to a =starkly different and increasingly anachronistic regulatory regime" compared to other
lT industries. Eisenach said.

As Eisenach has said previously, including in remarks on a UBTele-com webcast. it is not possible to distinguish
meaningfully between the competitive characteristics of broadband markets and other IT markets. Therefore there
is no basis for ?asymmetric regulatory treatment," according to the paper. Broadband markets are shaped by
complex interactions between market-speci?c factors on both the supply and demand sides.

?t?et- prescriptive regulation has made initial inroads into the lntemet ecosystem with the asymmetric
application of "open lntemet" rules to broadband providers. Meanwhile the legacy of traditional
telecommunications regulation remain in place ?at the Federal Communications Commission and state public
utility commissions and risk being extended to broadband. Eisenach urges replacing this framework with a pro-
competition. antitrust-based approach to broadband competition policy.

Patrick Brogan. UBTelec om ?v'ice President of industry Analysis. praised Eisenac h's paper for its indepth look at
the competitive dynamics of the broadband industry. "Traditional economic approaches focused on horizontal
competition and market concentration fall short in fully capturing the competitive dynamic in broadband markets."
Brogan said. 'This paper goes beyond the typical superficial analysis and delves deeply into the competitive
forces affecting broadband providers from throughout the ecosystem of networks, devices. applications. and

ontent."

?The paper provides an informative explanation of the structure-perfomiance paradox. in which relatively
concentrated industries may exhibit strong competitive outc omes?such as output growth and rapid innovation."
Brogan said. ?Jeff Eisenac h's work. along with Jonathan Ballet's work on the Broadband ?v'alue Circle'i? provides
critical input to the question of competitiveness and value creation in broadband markets as we migrate from the
legacy switched network to broadband lntemet networks."

Blog

 

89

AEI ECONOMIC STUDIES

BROADBAND COMPETITION
IN THE

INTERNET ECOSYSTEM

JEFFREY A. E ISENACH
October 2012

A M E R I C A N

E N T E R P R I S E

I N S T I T U T E

 90

AEI ECONOMIC STUDIES

BROADBAND COMPETITION
IN THE I NTERNET E COSYSTEM

JEFFREY A. E ISENACH
October 2012

AMERICAN

ENTERPRISE

INSTITUTE

 91

Acknowledgments

I am grateful for comments and suggestions from Rob Atkinson, Patrick Brogan,
Kevin Caves, Larry Downes, Everett Ehrlich, Joseph Fuhr, Shane Greenstein, Robert
Kulick, Jonathan Sallet, Nick Schulz, Howard Shelanski, Hal Singer, Scott Wallsten,
Dennis Weisman, and several anonymous commenters. Partial support for an earlier version of this paper was provided by Verizon Communications. All views
expressed, and any remaining errors, are solely the responsibility of the author.

iii

 92

Foreword

I

n this paper, Jeff Eisenach tackles the important and
timely debate surrounding the regulation of Internetbased communications. Broadband service providers
are currently treated differently from other information technology industries in that they are subject to
increasing levels of ex ante regulation by the Federal
Communications Commission (FCC). Other Internet
sectors are subject to ex post treatment under standard antitrust laws. The discrepancy is justified by
claims that broadband is somehow crucially different
from the remainder of the Internet ecosystem and as
a result requires special regulatory practices.
The FCC outlined its rationale in the December
2010 Open Internet Order; however, its authority to
implement the order is currently being challenged in
court. Verizon Wireless appealed FCC’s “data roaming”
rules, which would impose new open-access regulations on broadband service providers, and last month
the FCC presented oral arguments defending its rules.
In a similar case, the DC Court of Appeals will
pass judgment next year on the “net neutrality”
rules, which would prohibit broadband providers
from engaging in business practices that are both
common and legal in other industries. The outcomes of these cases will help answer the question

at the heart of the issue: will more regulation improve
broadband networks?
The case for heavier government regulation is
often justified on the grounds that competition in
broadband markets operates differently from competition in other Internet markets. Many believe
that broadband is a monopoly, but in this paper,
Eisenach argues the other side and makes a convincing case that this assumption is simply not true.
He analyzes the core characteristics of broadband
networks—dynamism, modularity, network effects,
and multisidedness—which are remarkably similar
to other information technology industries. His
analysis effectively dismantles the claim that broadband deserves asymmetric regulatory treatment and
suggests that modern antitrust principles should be
applied instead.
Applying the proper
pro regulatory framework is crucial since a failure to do so can stifle the incentives to
innovate with broad implications for the entire economy. It is my hope that this paper will help identify
the appropriate policies that will encourage competition among broadband service providers.
—Aparna Mathur, AEI Economic Studies Editor

v

 93

Executive Summary

L

ike the other information technology (IT) markets
that comprise the Internet ecosystem, broadband
communications services are characterized by rapid
innovation, declining costs, product differentiation,
competitive price discrimination, network effects,
and “multisidedness.” Broadband Internet service
providers (ISPs) make large sunk cost investments
and seek to differentiate their products so that they
can earn economic returns on those investments.
They seek to assemble or participate in systems that
create value for consumers and do so by choosing both
the platforms they join and the products with which
they interconnect. They experience both supply-side
economies of scale and scope and demand-side externalities that create powerful incentives to increase volumes by maximizing system openness, but as with
other IT firms, these incentives do not always outweigh the costs of interoperability. In short, like other
IT markets, broadband (1) is characterized by rapid
innovation, high sunk costs, and declining average
costs (dynamism); (2) functions as a complementary
component in modular platforms (modularity); and
(3) is subject to demand-side economies of scope and
scale (network effects).
Despite these similarities, broadband is treated differently from other IT industries when it comes to
competition policy: competition in the rest of the IT
sector is subject to scrutiny under antitrust laws,
while broadband is regulated by the Federal Communications Commission (FCC). Indeed, the FCC is
currently in court defending its authority to impose
“net neutrality” regulations prohibiting broadband
ISPs from engaging in business practices that are both
presumptively legal and commonplace in other
industries. In the wireless arena, the FCC asserts its
authority over the electromagnetic spectrum to
impose economic regulation on wireless ISPs. And

the commission’s recent decision to extend the $9 billion “universal service” program (heretofore limited to
telephone services) to broadband promises to impose
de facto price controls on broadband ISPs that participate. In short, while other elements of the “Internet
ecosystem”—applications, content and devices—
receive ex post treatment under the antitrust laws,
broadband ISPs are subject to ex ante regulation.
Broadband is regulated differently from other IT
markets in part because it is analyzed differently.
Although important unsettled questions remain about
how best to police competition in such markets, it is
generally agreed that analysis of such markets should
deemphasize the traditional “structure-conductperformance” paradigm and assess the consequences
of potentially harmful conduct on a case-by-case basis.
Thus, high levels of concentration in IT markets such
as handsets, operating systems, search engines, and
social networks are not regarded as signals of market
power (or at least not market power sufficient to justify ex ante regulation), but the FCC often still utilizes
anachronistic measures of concentration to justify regulation of broadband markets.
One asserted rationale for asymmetric treatment is
the notion that broadband networks are uniquely at
the “core” of the Internet while content, applications
and devices are at the “edge.” This metaphor is at best
misleading, and in any case does not justify differential policy treatment. To the contrary, for purposes of
competition analysis, it is no longer possible to distinguish meaningfully between the competitive characteristics of broadband markets and other IT
markets, and accordingly, there is no basis for asymmetric regulatory treatment. Accordingly, ex ante
oversight of competition by the FCC should be
replaced by the same ex post enforcement framework
that applies to the rest of the Internet ecosystem.
1

 94

1
Introduction

I

t is increasingly apparent that markets for broadband communications services share many of the
“high-tech” characteristics found in other information
technology (IT) markets, including rapid innovation,
declining costs, product differentiation and competitive price discrimination, network effects, and “multisidedness.”1 These characteristics have important
implications for competition analysis, including the
need for increased focus on market dynamism and
vertical relationships among market participants, a
reduced emphasis on traditional structural presumptions, and increased reliance on case-by-case analysis.
Some scholars suggest competition in IT markets
is so naturally intense, or that the risks of policy error
are sufficiently high, that enforcers should apply a
reduced level of antitrust scrutiny.2 Others argue that
IT markets are in some respects more prone to market failure than more traditional markets and hence
deserve enhanced scrutiny.3 The Federal Communications Commission’s (FCC’s) December 2010 Open
Internet Order seems to endorse an extreme form of
the latter view.4 While the FCC presented a cursory
“structural” assessment of the broadband market,5 it
ultimately concluded that the conduct it sought to
deter does “not depend upon broadband providers
having market power with respect to end users”6
and, in fact, that the “broad purposes of this rule . . .
cannot be achieved by preventing only those practices that are demonstrably anticompetitive or harmful to consumers.”7 Instead, the FCC determined
that ex ante regulation of broadband providers’ conduct in the “Internet ecosystem”8 was justified based
on arguments associated with network effects and
multisidedness—theories that, it concluded, suggest
that broadband Internet service providers (ISPs)
might “set inefficiently high fees to edge providers”9
or “withhold or decline to expand capacity.”10

The FCC’s acknowledgement that broadband
markets have become integrated with the overall
Internet ecosystem is reflective of a rapidly emerging
consensus.11 However, its decision to impose price
controls and preemptively ban certain conduct, and
to do so without finding that the conduct at issue
was harmful to consumers, is not easily squared with
mainstream academic opinion, which widely agrees
that competition oversight of IT markets should be
case-specific, narrowly tailored, and grounded in a
concern for consumer welfare.12
As this is written, the FCC’s authority to implement the Open Internet Order is being challenged in
litigation before the US Court of Appeals for the DC
Circuit.13 Even if the challenge is successful, however, the FCC might assert its authority to impose ex
ante rules on broadband services through a variety of
means. For example, the agency imposes various regulations on wireless ISPs, based at least in part on its
authority over the electromagnetic spectrum,14 and,
its recent expansion of the Federal Universal Service
Fund—heretofore limited to supporting voice communications services—would subject broadband
ISPs receiving support from the new Connect America Fund to de facto price regulation.15 Moreover,
even if the Open Internet Order is overturned, the
FCC might well attempt to revisit its prior decisions
declaring that broadband is not a telecommunications service and hence not subject to the FCC’s core
authority over common carriers. As recently as 2010,
the FCC’s general counsel issued a memorandum
stating that it could declare broadband a Title II
“communications service,” subject to the full array of
common carrier rules designed for monopoly
providers of traditional telephone service.16
The central thesis here is that the expansion of ex
ante FCC regulation over broadband markets is
3

 95

AEI ECONOMIC STUDIES

inconsistent with both academic consensus and market
reality. To the contrary, the convergence of broadband
with other IT markets argues for a convergence at the
policy level as well: if it is no longer possible to distinguish meaningfully between the competitive characteristics of broadband markets and other IT markets, the
basis for asymmetric regulatory treatment—for ex ante
regulation of broadband services and ex post
antitrust scrutiny of other IT markets—is impossible
to sustain. Further, if the choice is between applying
modern competition principles to broadband and
subjecting the rest of the Internet ecosystem to FCCstyle regulation, the former course is far superior to
the latter.
In this context, this paper examines the market
for broadband services through the lens of the literature on competition in IT markets. I conclude that
the competitive dynamics17 of broadband markets
are now substantially similar to those in other sectors
of the Internet ecosystem and that competition
oversight of broadband markets should therefore be
brought into conformity with the ex post, case-specific
approach applied to other IT markets. This discussion is organized around three sets of characteristics
that distinguish competition in IT markets from
competition in more traditional ones: dynamism,
modularity, and network effects.
By dynamism, I refer to what is sometimes called
“innovation competition” or “Schumpeterian competition.” It is the idea that firms compete primarily by
creating new and better products, as opposed to
“static competition,” in which firms compete to
charge the lowest price for a homogenous and
unchanging commodity. Markets characterized by
rapid innovation are often associated with high rates
of capital spending (for R&D and capital expenditures), economies of scale and scope, “competitive
price discrimination,” and product differentiation.
Modularity refers to what some have called “mix and
match” competition: the ability to assemble bundles of
complementary products from different suppliers, and
the interoperability (for example, the existence of standards or of a technology “platform”) that makes it possible to do so. Providers of complementary products in
4

such markets must cooperate to make their products
work together, but they also compete for the economic
rents generated by a successful platform, including by
seeking to become “customer facing.”
Third, network effects are present in markets where
the value of a product or service to each customer is
affected by the number of other customers who use
it, as with telephones and fax machines, for example.
Multisided markets represent a particular form of
network effects, in which some types of consumers
attach value to the presence of other customer types,
such as when stock exchanges compete for both listings and investors or newspapers compete for both
readers and advertisers. Both phenomena represent
what can also be referred to as demand-side complementarities or, to be more specific, demand-side
economies of scale (network effects) and demandside economies of scope (multisidedness).
Taken together, these characteristics cause the
competitive dynamics of IT markets to differ from
the competitive dynamics of more traditional ones.
They help to explain, for example, why IT markets
are often relatively concentrated yet typically exhibit
high levels of rivalry and strong performance. All
three sets of characteristics are present in broadband
markets, which despite being relatively concentrated, evidence falling prices, rising output, rapid
innovation, and few apparent instances of anticompetitive conduct.
The remainder of this paper is organized as follows. Section 2 briefly discusses the “structureperformance paradox,” finding that, like many other
IT markets, the broadband market exhibits both (a)
relatively high levels of concentration by traditional
metrics, and (b) strong performance in terms of output expansion, innovation, and other metrics. Section
3 describes the broadband market from the perspective of the three themes I described—dynamism,
modularity, and network effects—and shows how the
economic phenomena associated with these concepts
affect the competitive dynamics of broadband markets, causing them to behave like IT markets. Section
4 outlines some specific implications of this analysis
for competition oversight of broadband markets,

 96

THEORIES OF BROADBAND COMPETITION
Jeffrey A. Eisenach†
Draft
June 20, 2011

† Managing Director and Principal, Navigant Economics, and Adjunct Professor, George Mason University Law
School. The author is grateful for comments and suggestions from Kevin Caves, Everett Ehrlich,, Robert Kulick,,
g , Dennis Weisman and several anonymous
y
pp for this research
Jonathan Sallet,, Hal Singer,
commenters. Partial support
was provided
p
byy Verizon Communications. All views expressed, and any remaining errors, are solely the
responsibility of the author. Further comments and suggests are welcomed. Please do not quote without permission.
© 2011 Jeffrey A. Eisenach.

Electronic copy available at: http://ssrn.com/abstract=1868381

 97

Abstract
Like the other information technology (IT) markets that comprise the Internet ecosystem,
markets for broadband communications services are characterized by rapid innovation, declining
costs, product differentiation and the potential for competitive price discrimination, network
effects, and “multi-sidedness.” Broadband ISPs make large, sunk cost investments and seek to
differentiate their products in order to be able to earn economic returns on those investments.
They seek to assemble and/or participate in systems that create new value for consumers, and do
so by picking and choosing both the platforms in which they participate and the products with
which they interconnect. They experience both supply-side economies of scale and scope and
demand-side externalities that create powerful incentives to increase volumes by maximizing
system openness, but, as with other IT firms, these incentives do not always outweigh the costs
of interoperability.
This paper examines the competitive dynamics of broadband through the lens of the economic
literature on competition in IT markets. It concludes that broadband markets are shaped by three
sets of characteristics that distinguish competition in IT markets from competition in more
traditional ones. Like other IT markets, broadband: (1) is characterized by high sunk costs,
declining costs, and rapid innovation (dynamism); (2) functions as a complementary component
in modular platforms (modularity); (3) is subject to demand-side economies of scope and scale
(network effects). It is generally agreed that these characteristics have important implications for
competition analysis, including increased focus on market dynamics and on “vertical”
relationships among market participants, reduced emphasis on traditional structural
presumptions, and the need to assess efficiency and competitive effects of various forms of
conduct on a case-by-case basis.
One implication of this analysis is that the central metaphor used in the analysis of
communications markets today – the notion that broadband networks are uniquely at the “core”
of the Internet while content, applications and devices are at the “edge” – is at best misleading,
and in any case does not justify differential policy treatment. To the contrary, for purposes of
competition analysis, it is no longer possible to distinguish meaningfully between the
competitive characteristics of broadband markets and other IT markets. Accordingly, there is no
basis for asymmetric regulatory treatment – for ex ante regulation of broadband services and ex
post antitrust scrutiny of other IT markets. The unavoidable conclusion is that competition
oversight of broadband markets should be conformed to modern antitrust principles.

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PLEASE DO NOT QUOTE WITHOUT PERMISSION
Electronic copy available at: http://ssrn.com/abstract=1868381

 98

Contents
I. 

Introduction ........................................................................................................................1 

II. 

Broadband Competition: The Structure-Performance Paradox .................................6 
A. 
The Structural Presumption .................................................................................... 8 
B. 
The Performance Paradox ..................................................................................... 13 

III. 

Broadband Competition in the Internet Ecosystem .....................................................21 
A. 
Dynamism ............................................................................................................. 23 
B. 
Modularity............................................................................................................. 33 
C. 
Network Effects and Multi-sidedness ................................................................... 46 
D. 
The Competitive Dynamics of Modern Broadband Markets ................................ 55 

IV. 

Implications for Competition Policy ..............................................................................56 
A. 
General Principles ................................................................................................. 57 
B. 
Vertical Issues ....................................................................................................... 65 
C. 
Horizontal Issues ................................................................................................... 68 

V. 

Conclusions .......................................................................................................................70 

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 99

I. INTRODUCTION
It is increasingly apparent that markets for broadband communications services share
many of the “high-tech” characteristics found in other information technology (IT) markets –
including rapid innovation, declining costs, product differentiation and the potential for
competitive price discrimination, network effects, and “multi-sidedness.”1 It is generally agreed
that these characteristics have important implications for competition analysis, including the
need for increased focus on market dynamism and on “vertical” relationships among market
participants, a reduced emphasis on traditional structural presumptions, and increased reliance on
case-by-case analysis.
Some scholars suggest competition in IT markets is so naturally intense, or that the risks
of policy error are sufficiently high, that enforcers should apply a reduced level of antitrust
scrutiny.2 Others argue that IT markets are in some respects more prone to market failure than
more traditional markets, and hence deserve enhanced scrutiny.3 The Federal Communications

1

The general notion that telecommunications has “converged” with other “New Economy” sectors such as the
Internet and computer software is of course not new. See, e.g., Joseph Farrell and Philip J. Weiser, “Modularity,
Vertical Integration, and Open Access Policies: Towards a Convergence of Antitrust and Regulation in the Internet
Age,” Harvard Journal of Law & Technology 17;1 (Fall 2003) 85-134 at 87 (“As the Internet, computer software,
and telecommunications (‘New Economy’) industries converge, affected firms will increasingly seek clear and
consistent legal rules.”); Michael K. Powell, “The Great Digital Broadband Migration,” in J.A Eisenach and R.J.
May, eds., Communications Deregulation and FCC Reform: Finishing the Job (Kluwer Academic Publishers,
2001) 11-21 at 15-16 (“Computer systems working in parity with communications have spawned the Internet and
the advanced networks we see today that fully integrate satellites, telephones, wireless devices, broadcasting and
cable over fiber-optic, broadband, and wireless networks. The result is what we now call convergence.”); and,
Richard A. Posner, “Antitrust in the New Economy,” Antitrust Law Journal 68 (2001) 925-943 at 925 (“I shall use
the term the ‘new economy’ to denote three distinct though related industries. The first is the manufacture of
computer software. The second consists of the Internet-based businesses (Internet access providers, Internet service
providers, Internet content providers), such as AOL and Amazon. And the third consists of communications services
and equipment designed to support the first two markets.”)
2
See, e.g., Geoffrey A. Manne and Joshua D. Wright, “Innovation and the Limits of Antitrust,” Journal of
Competition Law & Economics 6;1 (2010) 153-202; Robert W. Crandall and Clifford Winston, “Does Antitrust
Policy Improve Consumer Welfare? Assessing the Evidence,” Journal of Economic Perspectives 17;4 (Fall 2003) 326; and Daniel F. Spulber, “Unlocking Technology: Antitrust and Innovation,” Journal of Competition Law &
Economics 4;4 (2008) 915-966. For a brief summary of the debate, see David Evans, “The Middle Way on Applying
Antitrust to Information Technology Industries,” Competition Policy International (November 2009).
3
See, e.g., Carl Shapiro, “Exclusivity in Network Industries,” George Mason Law Review 7 (Spring 1999) 673682; F.M. Scherer, “Technological Innovation and Monopolization,” John F. Kennedy School of Government
(October 2007) (available at http://ssrn.com/abstract=1019023); Mark Cooper, “The Importance of Open Networks

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 100

2
Commission’s (FCC’s) recent Open Internet Order seems to represent an endorsement of an
extreme form of the latter view.4

While the Commission briefly analyzed the market from a

traditional “structural” perspective,5 it ultimately declined to base its net neutrality regulations on
a finding of traditional market power, stating instead that the conduct it sought to deter does “not
depend upon broadband providers having market power with respect to end users,”6 and, in fact,
that the “broad purposes of this rule…cannot be achieved by preventing only those practices that
are demonstrably anticompetitive or harmful to consumers.”7

Instead, the Commission

determined that ex ante regulation of broadband providers’ conduct in the “Internet ecosystem”8
was justified based on arguments associated with network effects and multi-sidedness – theories
which, the Commission concluded, suggest that broadband ISPs might “set inefficiently high
fees to edge providers,”9 or “withhold or decline to expand capacity.”10
The Commission’s acknowledgement that broadband markets have become integrated
with the overall Internet ecosystem is reflective of a rapidly emerging consensus.11 However, its
decision to impose price controls and preemptively ban certain conduct, and to do so without

in Sustaining the Digital Revolution,” in T. Lenard and R. May, eds., Net Neutrality or Net Neutering: Should
Broadband Internet Service be Regulated? (Progress & Freedom Foundation 2006) 107-161, esp. 126-132.
4
See Federal Communications Commission, In the Matter of Preserving the Open Internet and Broadband
Industry Practices, Report and Order (GN Docket No. 09-191, WC Docket No. 07-52 (December 23, 2010)
(hereafter Open Internet Order). See also Federal Communications Commission, In the Matter of Preserving the
Open Internet and Broadband Industry Practices, Notice of Proposed Rulemaking (GN Docket No. 09-191, WC
Docket No. 07-52 (October 22, 2009) (hereafter Open Internet NPRM).
5
Open Internet Order at ¶ 32-34.
6
Open Internet Order at ¶ 32.
7
Open Internet Order at ¶ 78.
8
Open Internet Order at ¶ 53 (“Promoting competition throughout the Internet ecosystem is a central purpose
of these rules.”)
9
Open Internet Order at ¶ 25; see generally ¶¶ 24-28.
10
Open Internet Order at ¶ 29; see generally ¶¶ 29-20. While rejecting a traditional market power analysis, the
Commission did embrace a theory of exclusionary market power based on based on raising rivals’ costs. See ¶¶ 2123.
11
For example, the National Broadband Plan Report specifically concludes that broadband markets are part of a
“broadband ecosystem.” See Federal Communications Commission, Omnibus Broadband Initiative, Connecting
America: The National Broadband Plan (March 2010) at xi (“Policymakers, including the FCC, have a broad set of
tools to protect and encourage competition in the markets that make up the broadband ecosystem: network services,

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 101

3
justifying its action on the basis of traditional antitrust principles, is not easily squared with
mainstream academic opinion, where it is widely agreed that competition oversight of IT markets
should be case-specific, narrowly-tailored and based on traditional frameworks of analysis.12
While certainly noteworthy, the Open Internet Order is far from the only instance in
which broadband regulation diverges from modern antitrust practice.

As discussed further

below, despite a broad consensus that the long-presumed relationship between market
concentration and performance is far more tenuous than previously assumed – and, in dynamic,
innovative markets, non-existent – the FCC and other regulators continue to rely heavily on
structural presumptions as a justification for ex ante regulation of communications services of all
kinds. Thus, communications regulation differs from competition oversight of other markets in
substance as well as in form.
The central thesis here is that the convergence of broadband (and, more broadly,
communications services in general) with other IT markets argues against applying traditional
telecommunications regulation to broadband.

If it is no longer possible to distinguish

meaningfully between the competitive characteristics of broadband markets and other IT
markets, the basis for asymmetric regulatory treatment – for ex ante regulation of broadband
services and ex post antitrust scrutiny of other IT markets – is impossible to sustain. Further, if
the choice is between applying modern competition principles to broadband, or subjecting the
rest of the Internet ecosystem to FCC-style regulation, the former course is far superior to the
latter.

devices, applications and content.”) (available at http://www.broadband.gov/download-plan/) (hereafter NBP
Report); see also id. at 15.
12
See, e.g., Jerry Brito, Martin E. Cave, Robert W. Crandall, Larry Darby, Everett Ehrlich, Jeffrey A. Eisenach,
Jerry Ellig, Henry Ergas, David J. Farber, Gerald R. Faulhaber, Robert W. Hahn, Alfred E. Kahn, Wayne A.
Leighton, Robert E. Litan, Glen O. Robinson, Hal J. Singer, Vernon L. Smith, William E. Taylor, Timothy J.
Tardiff, Leonard Waverman, and Dennis Weisman, “Net Neutrality Regulation: The Economic Evidence” (April 12,
2010) (available at SSRN: http://ssrn.com/abstract=1587058).

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 102

4
In this context, this paper examines the market for broadband services through the lens of
the literature on competition in IT markets. It concludes that the competitive dynamics13 of
broadband markets are now substantially similar to those in other sectors of the Internet
ecosystem, and that competition oversight of broadband markets should therefore be brought into
conformity with the ex post, case specific approach applied to other IT markets. The discussion
is organized around three sets of characteristics that distinguish competition in IT markets from
competition in more traditional ones: Dynamism; Modularity; and, Network Effects.
By dynamism, I refer to what is sometimes called “innovation competition” or
“Schumpeterian competition.” It is the idea that firms compete primarily by creating new and
better products, as opposed to “static competition,” in which firms compete to charge the lowest
price for a homogenous and unchanging commodity. Markets characterized by rapid innovation
are often associated with high rates of capital spending (for R&D and/or capital expenditures),
economies of scale and scope, “competitive price discrimination” and product differentiation.14
Modularity refers to what some have called “mix and match” competition – the ability to
assemble bundles of complementary products from different suppliers, and the interoperability
(i.e., the existence of standards, or of a technology “platform”) that makes it possible to do so.
Markets where modularity is present sometimes make mischief with traditional economic
notions of “vertical” and “horizontal” relationships: producers may be both “upstream” in the
sense of providing inputs to “customer facing” retailers, and “downstream” in the sense of
selling both their own products and the products of their “competitors” directly to customers.

13

I use the term “competitive dynamics” to refer broadly to “how competition works” – i.e., to the ways in
which technology, institutional structures, demand conditions, and other salient market characteristics are related to
industry structure, competitive outcomes and market performance.
14
Antitrust authorities have sought to address some of these issues through the concept of “innovation
markets,” as described in Department of Justice/Federal Trade Commission, Antitrust Guidelines for the Licensing
of Intellectual Property (April 6, 1995) at 10-13.

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 103

5
While such firms must cooperate to make their products work together, they also compete for the
economic rents generated by a successful platform.
Third, network effects are present in markets where the value of a product or service to
each customer is affected by the number or nature of other customers who use it, as, for example,
with telephones and fax machines. Multi-sided markets represent a particular form of network
effects, in which some types of consumers attach value to the presence of other customer types,
such as when stock exchanges compete for both listings and investors, and newspapers compete
for both readers and advertisers. Both phenomena represent what can also be referred to as
demand-side complementarities or, to be more specific, demand-side economies of scale
(network effects) and demand-side economies of scope (multi-sidedness).15
Taken together, these characteristics cause the competitive dynamics of IT markets to
differ from the competitive dynamics of more traditional ones.

They help to explain, for

example, why IT markets are often relatively concentrated, yet typically exhibit high levels of
rivalry and strong performance.

All three sets of characteristics are present in broadband

markets, which, despite being relatively concentrated, evidence falling prices, rising output, rapid
innovation, and few apparent instances of anticompetitive conduct.
The remainder of this paper is organized as follows. Section II discusses the “structureperformance paradox,” examining the broadband services market from the traditional perspective
of structural characteristics like concentration ratios and barriers to entry, and performance
measures like price changes and rates of new product introduction and innovation, and
concluding that, like many other IT markets, the broadband services market exhibits (a)

15

Somewhat confusingly, the term “platform” is often used to describe markets characterized by either
modularity or demand-side economies. In each case, a “platform” consists of a set of institutional arrangements that
permit the exploitation of complementarities on the supply side (i.e., between complementary goods), the demand
side (i.e., between complementary customers or customer groups), or both. As discussed below, there is a

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 104

6
relatively high levels of concentration by traditional metrics, and (b) strong performance in terms
of output expansion, innovation, and other metrics. Section III describes the broadband services
market from the perspective of the three themes described above – Dynamism, Modularity, and
Network Effects – and seeks to explain how the economic phenomena associated with these
concepts affect the competitive dynamics of broadband markets, causing them to behave “like IT
markets.” Section IV outlines some specific implications of this analysis for competition policy
as it relates to broadband markets, concluding overall that the dynamism and complexity of
broadband markets, and their interrelatedness with other elements of the Internet ecosystem,
argue strongly against the sort of industrial-policy-oriented, ex ante regulation of the type
practiced by the FCC. Section V provides a brief conclusion.
II. BROADBAND COMPETITION: THE STRUCTURE-PERFORMANCE PARADOX
In a 1999 article on competition in the computer industry, Tim Bresnahan took note of an
interesting paradox arising out of Andy Grove’s description of the computer industry. Grove
argued that the industry had shifted from a “vertical” to a “horizontal” structure (see Figure 1).
The new “mix and match” model, he said, comprised of independent competitors at each of
several layers (e.g., Dell and Hewlett-Packard selling computers, Microsoft and Apple selling
operating systems, etc.) was more competitive than the previous structure, in which vertically
integrated firms (e.g., IBM and DEC) competed to sell the entire “stack” of complementary
products and services. As Bresnahan noted, Grove was “hardly alone. Almost all market

burgeoning academic literature on platforms and platform competition, though many of the results are not easily
generalized to real world situations.

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 105

Before the
Federal Communications Commission
Washington, D.C. 20554
____________________________________
)
)
)
International Comparison and Consumer
)
Survey Requirements in the Broadband
)
Data Improvement Act
)
)
A National Broadband Plan for
)
)
Our Future
)
Deployment of Advanced
)
Telecommunications Capability to All
)
Americans in a Reasonable and Timely
)
Fashion and Possible Steps to Accelerate
)
Such Deployment Pursuant to Section 706 )
of the Telecommunications Act.
)
____________________________________)
In the Matter of

GN Docket No. 09-47

GN Docket No. 09-51

GN Docket No. 09-137

SUPPLEMENTAL DECLARATION OF
ROBERT W. CRANDALL, EVERETT M. EHRLICH, JEFFREY A. EISENACH, AND
ALLAN T. INGRAHAM REGARDING THE BERKMAN CENTER STUDY (NBP PUBLIC
NOTICE 13)
MAY 10, 2010

 106

CONTENTS
I. 

INTRODUCTION..............................................................................................................1 

II. 

THE EMPIRICAL ANALYSES OF UNBUNDLING CONTAINED IN THE
DRAFT REPORT WERE WITHDRAWN FROM THE FINAL REPORT ...............4 

III. 

THE REMAINING EMPIRICAL EVIDENCE SHOWS UNBUNDLING
REDUCES BROADBAND PENETRATION .................................................................7 

IV. 

CONCLUSIONS ..............................................................................................................14 

 107

I.
1.

INTRODUCTION

On February 15, 2010, the Berkman Center for Internet and Society submitted a

report entitled Next Generation Connectivity: A Review of Broadband Internet Transitions and
Policy from Around the World (“Final Report”) to the Federal Communications Commission
(FCC),1 as part of the Commission’s Omnibus Broadband Initiative. An earlier draft of this
report (the “Draft Report”) had been submitted to the FCC in October 2009, and the FCC had
solicited comments on the draft.2 The FCC received a number of critical responses to the Initial
Report, including the Declaration of Robert W. Crandall, Everett M. Ehrlich, and Jeffrey A.
Eisenach (“Crandall-Ehrlich-Eisenach”), which was filed November 16, 2009.3

The Final

Report attempts to respond to these comments. Specifically, Annex 4.14.1, entitled “Follow-up
Note on Estimating the Impact of Unbundling on Internet Penetration Rates,” contains a partial
response to the empirical analyses presented in the Crandall-Ehrlich-Eisenach critique.
2.

One of the central issues addressed in the Draft Report was whether empirical

evidence supports the notion that “unbundling” policies have increased broadband penetration
in other nations. The Draft Report contained a partial review of the empirical literature on this
question, and also conducted a number of cross-country regression analyses. It concluded that

1

Next Generation Connectivity: A Review of Broadband Internet Transitions and Policy from Around the
World (February 15, 2010) (available at: http://cyber.law.harvard.edu/pubrelease/broadband/) (hereafter, Final
Report).
2
Next Generation Connectivity: A Review of Broadband Internet Transitions and Policy from Around the
World,
October
2009
(Draft)
(available
at
http://www.fcc.gov/stage/pdf/Berkman_Center_Broadband_Study_13Oct09.pdf) (hereafter, Draft Report).
3
Declaration of Robert W. Crandall, Everett M. Ehrlich and Jeffrey A. Eisenach Regarding the Berkman
Center Study (NPB Notice 13), GN Docket 09-51 (November 16, 2009) (hereafter, Crandall-Ehrlich-Eisenach)
(available at http://fjallfoss.fcc.gov/ecfs/document/view?id=7020348482). The curriculum vitae of Drs. Crandall,
Ehrlich and Eisenach were attached to the Crandall-Ehrlich-Eisenach declaration. Allan T. Ingraham, Ph.D. is a
Director at Navigant Economics, LLC. Since the Crandall-Ehrlich-Eisenach declaration was filed,, Dr. Eisenach
has changed
Economics LLC.. We are ggrateful to Kevin
g affiliation and is now a Managing
g g Director at Navigant
g
Caves and Andrew Card for research assistance, to several commenters for helpful suggestions, and to Verizon
Communications for support. The opinions expressed here are our own, as is responsibility for any remaining
errors.

 108

-2-

the empirical evidence demonstrated that “unbundling had a positive and significant effect on
levels of [broadband] penetration.”4

The Draft Report referred to its conclusion that “‘open

access’ policies … are almost universally understood as having played a core role … in most of
the high performing countries” as its “most surprising and significant finding.”5
3.

Crandall-Ehrlich-Eisenach, based on a more complete review of the existing

literature, a careful analysis of the Draft Report’s econometric analyses, and additional, original
econometric analyses based on an expanded data set, concluded that “the weight of the evidence
demonstrates that mandatory unbundling has reduced broadband penetration and deterred
investment in broadband telecommunications infrastructure….”6
4.

The Final Report acknowledges the Crandall-Ehrlich-Eisenach declaration, and,

apparently in response to this critique, omits the language in the Draft Report asserting there is
empirical support for unbundling. However, rather than conceding that the empirical evidence
actually weighs against unbundling, the Berkman authors say they no longer “believe that

4

Draft Report at 115 (“Our conclusion is that unbundling had a positive and significant effect on levels of
penetration; that this effect was somewhat larger, more statistically significant, and more robust than previously
thought; and that some of the ambiguity in prior studies can be attributed to the large influence that Switzerland's
experience had in dampening the observed effect of unbundling.”)
5
Draft Report at 11. On the basis of its econometric results, the Draft Report also claimed to have
established a tie between unbundling policies and economic growth. See Draft Report at 117 (“While unbundling
does not explain the entire growth differential, then, it appears to have a statistically significant, robust, effect, of
about 1% per year of effective enforcement. In any given year, such an effect may not be considered significant.
However, if our analysis is correct, then adding unbundling could, over a decade after introduction, add 10%
penetration points. When one recalls that the World Bank study, described in Section 2.5 above, found that a 10
point increase in penetration per 100 translated into 1.21% growth in GDP, and that total GDP growth in the United
States between 1997 and 2008 averaged 2.8%, one might consider the long term benefits to growth caused even by
increasing penetration by 1 per 100 every year, over and above the effect of all other influences, to be an effect
worth considering. This of course assumes that there are no other positive spillovers from high penetration, not
captured by GDP growth.”).
6
Several other commenters also offered criticisms of the Draft Report’s empirical analysis, including New
Zealand telecommunications economist Bronwyn Howell. See Bronwyn Howell, Comments to the Federal
Communications Commission, Washington D.C. on Broadband Study Conducted by the Berkman Center for
Internet and Society NPB Public Notice # 13 (November 13, 2009) (available at
http://fjallfoss.fcc.gov/ecfs/document/view?id=7020348357).

 109

Before the
Federal Communications Commission
Washington, D.C. 20554

In the Matter of
Preserving the Open Internet
Broadband Industry Practices

)
)
)
)
)

GN Docket No. 09-191
WC Docket No. 07-52

NET NEUTRALITY REGULATION: THE ECONOMIC EVIDENCE

APRIL 12, 2010

Electronic copy available at: http://ssrn.com/abstract=1587058

 110

CONTENTS
I.

INTRODUCTION ................................................................................................................1

II. THE ECONOMIC EVIDENCE DOES NOT SUPPORT A FINDING OF
SYSTEMATIC MARKET FAILURE ................................................................................2
A. Regulation Is Not Justified on the Basis of Market Power.........................................4
B. Regulation Is Not Justified on the Basis of Network Externalities or
“Spillover Effects” in the Markets for Content, Applications or Services ...............10
III. THE PROPOSED REGULATIONS WOULD BAN BENEFICIAL
PRACTICES AND OTHERWISE HARM ECONOMIC WELFARE .........................20
A. Most of the Conduct that Would Be Prohibited Is Presumptively Welfare
Enhancing .................................................................................................................20
B. The Reasonable Network Management and “Managed Services” Criteria
Would Not Protect Consumer Welfare.....................................................................22
C. Enacting the Proposed Regulations Would Raise Regulatory Risk and Harm
Investment and Innovation .......................................................................................24
IV. CASE-BY-CASE APPLICATION OF EXISTING STANDARDS IS THE
BEST APPROACH ............................................................................................................25
V. CONCLUSION ...................................................................................................................29

Electronic copy available at: http://ssrn.com/abstract=1587058

 111

I.
1.

INTRODUCTION

As economic scholars, professors and practitioners who have studied, taught, and

written about regulation of telecommunications, the Internet, and broadband networks in
general, and about net neutrality regulation in particular, we are submitting this declaration to
provide the Commission with our shared assessment of the economic evidence as it relates to
the “net neutrality” regulations proposed in Commission’s Notice of Proposed
o
Rulemaking
Regarding Preserving the Open Internet and Broadband Industry Practices (the “NPRM”). 1
2.

In our shared opinion, the economic evidence does not support the proposed

regulations; to the contrary, it strongly suggests that the regulations, if adopted, would reduce
consumer welfare in both the short and long run. We base this opinion on three overarching
conclusions.
First, as a general matter, regulation can improve economic
welfare only in the face of market imperfections, such as market
power, externalities, or information asymmetries. While the
markets at issue in this proceeding are characterized by product
differentiation, high fixed costs and other deviations from the
textbook model of “perfect competition,” the evidence provides
no support for the existence of market failure sufficient to warrant
ex ante regulation of the type proposed by the Commission.
Second, the practices that would be banned under the NPRM are
likely, in most circumstances, to be welfare-enhancing. While it
is possible to construct theoretical models in which economic
welfare might be harmed, there is virtually no empirical evidence
that such harm has occurred or is likely to occur in the future.
Thus, it is extremely likely that the regulations proposed in the
NRPM would harm consumers and competition and reduce
economic welfare.

1

Federal Communications Commission, In the Matter of Preserving the Open Internet and Broadband
Industry Practices, Notice of Proposed Rulemaking (GN Docket No. 09-191; WC Docket No. 07-52, October
p
2009) (hereafter “NPRM”). Each of us shares the overall views and primary conclusions expressed
herein even
though
g as individuals we might
g characterize pparticular ppoints somewhat differently.
y Dr. Eisenach,, whose effort in
g its ppreparation
p
pp
by Verizon Communications, is the only signatory who was
coordinating
was supported
compensated for participating in this declaration.

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Third, to the extent potentially welfare-reducing conduct does
emerge, such practices are amenable to a variety of case-by-case
remedies under existing law and regulation. There is no need, in
other words, for the Commission to throw the welfare-enhancing
baby out with the anticompetitive bathwater.
3.

The remainder of this declaration is organized as follows. In Section II we

summarize the economic evidence as it relates to market failure in the markets at issue, and
explain why none of the theories advanced in the NPRM (or any other theories of which we are
aware) constitute a valid basis for the proposed rules. In Section III, we summarize the primary
ways in which the proposed rules would reduce economic welfare by banning beneficial
practices. In Section IV, we briefly explain the basis for our opinion that a case-by-case
approach, based on empirical economic analysis of the consumer welfare consequences of
specific practices in particular circumstances, is superior to the ex ante regulation proposed in
the NPRM. Section V presents a brief summary of our conclusions.
II.

THE ECONOMIC EVIDENCE DOES NOT SUPPORT A FINDING OF SYSTEMATIC MARKET
FAILURE
4.

The NPRM proposes that broadband Internet access service providers

(“broadband ISPs”) be prohibited from preventing users from (i) “sending or receiving the
lawful content of the user’s choice,” (ii) “running the lawful applications or using the lawful
services of the user’s choice,” (iii) “connecting to and using on its network the user’s choice of
lawful devices;” or, (iv) “depriv[ing] any of its users of the user’s entitlement to competition
among network providers, application providers, service providers, and content providers;”2
and, further, that they be required to (v) “treat lawful content, applications, and services in a

2

NPRM at ¶92. As we discuss further below, each of these requirements would be is “subject to
reasonable network management;” “subject to exceptions for the needs of law enforcement, public safety, national
and homeland security authorities;” and, subject to an exemption for “managed services.”

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nondiscriminatory manner.” 3

By “nondiscriminatory,” the Commission means “that a

broadband Internet access service provider may not charge a content, application, or service
provider for enhanced or prioritized access to the subscribers of the broadband Internet access
service provider [but] this rule would not prevent a broadband Internet access service provider
from charging subscribers different prices for different services.”4
5.

In support of these restrictions, the NPRM advances two primary theories of

market failure. First, it implies (but does not conclude) that broadband ISPs may have market
power, which could cause them to discriminate in their pricing among or between providers of
content and applications, or simply to restrict output or charge supra-competitive prices.
Second, it posits that network externalities or “spillover effects” might distort ISPs’ incentives,
causing them to charge higher-than-optimal fees to content or applications providers. 5
6.

The economic evidence demonstrates that the proposed regulations are not

justified under either set of theories. With respect to market power, the evidence demonstrates
that broadband markets are highly competitive and rivalrous, and hence not generally
susceptible to the types of anticompetitive conduct discussed in the NPRM. 6 As for theories
associated with network externalities and spillover effects, the underlying literature is, at best,
highly stylized, speculative, and heavily dependent on assumptions for which there is no
empirical basis.

3

NPRM at ¶105.
NPRM at ¶106. The NPRM also proposes a sixth “transparency” principle (see NPRM at ¶¶118-132).
Our comments focus on the first five principles and, in particular, the non-discrimination principle. This should not
be taken as an indication, however, that we believe the economic evidence necessarily supports “transparency”
regulation.
5
See generally NPRM at ¶¶7-8.
6
The relevant geographic market for broadband markets depends on the issue being addressed. For
purposes of foreclosure analysis, for example, the appropriate market definition may be either national or
international, while in other contexts the relevant geographic market is likely local (see, e.g., Federal Trade
Commission, Broadband Connectivity and Competition Policy, FTC Staff Report (June 2007) at 156 (hereafter
FTC Report).
4

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A.

Regulation Is Not Justified on the Basis of Market Power
7.

The NPRM describes three discrete theories of harm based on market power: (i)

broadband ISPs with market power “may have an incentive to raise prices charged to content,
application, and service providers and end users;”7 (ii) broadband ISPs, “particularly [those]
with market power, may have the incentive and ability to reduce or fail to increase transmission
capacity … in order to increase the revenues obtained from content application, and service
providers or individual users who desire a higher quality of service;” 8 and, (iii) broadband ISPs
with market power which are vertically integrated might “make it more difficult or expensive
for end users to access services competing with those offered by the network operator or its
affiliates.” 9
8.

As a preliminary matter, it is noteworthy that the NPRM’s first two theories of

harm (i.e., that broadband ISPs with market power might harm economic welfare by raising
prices and/or restricting output) do not appear to distinguish between upstream and downstream
market power – that is, they postulate that broadband ISPs might raise prices or restrict output
with respect to either consumers, on the one hand, or content, applications and service
providers, on the other. Yet, the proposed regulations would do nothing to restrain downstream
pricing since, under the proposed non-discrimination rule, both differential and discriminatory
pricing to “subscribers” apparently is permitted. 10

7

NPRM at ¶70 (emphasis added).
NPRM at ¶71 (emphasis added).
9
NPRM at ¶63 (emphasis added); see also n. 146.
10
We define differential pricing as charging different prices for different services, e.g., charging one price
for “Internet access service” and a different price for “Premium Internet access service.” We define “price
discrimination” as charging different prices to different consumers for the same service. See e.g., Dennis Weisman
and Robert Kulick, “Price Discrimination, Two-Sided Markets and Net Neutrality Regulation,” (March 2010)
(available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1582972).
8

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9.

It is also striking that the NPRM never concludes that broadband ISPs have

market power, and, indeed, only once strongly implies it: At paragraph 7, the Commission
finds that “In many parts of the United States, customers have limited options for high-speed
broadband Internet access service;” 11 and, at paragraph 73, it implies there is a terminating
access monopoly issue, such that “even if there is competition among broadband Internet access
service providers, once an end-user customer has chosen to subscribe to a particular broadband
Internet access service provider, this may give that broadband Internet access service provider
the ability, at least in theory, to favor or disfavor any traffic destined for that subscriber.” 12 In
all other cases, the Commission’s references to ISP market power are purely hypothetical.
10.

The NPRM’s failure to examine empirically whether broadband ISPs have

market power is difficult to understand, since the issue of market power is central to any
meaningful assessment of the impact of the proposed rules. 13 For example, if broadband ISPs
do not possess significant power over prices, they cannot set prices above cost or constrain
output to either upstream or downstream consumers. If they do not possess the ability to
exclude rivals, they cannot plausibly protect or extend their “monopolies” in neighboring
markets by raising their rivals’ costs through discrimination. Moreover, as we discuss below,
many of the stylized empirical models cited by the Commission for the existence of network
externalities or spillover effects assume the existence of monopoly (or, at least, Cournotbehaving duopoly) in the broadband market. Thus, the existence of market power is, in our

11

NPRM at ¶7 (emphasis added).
NPRM at ¶73. The NPRM does not use the words “terminating monopoly.” Indeed, the word
“monopoly” appears only once, at ¶25, in a reference to “the era of monopoly-provided telephone service.”
13
See e.g., Robert Hahn, Robert Litan and Hal Singer, “Addressing the Next Wave of Internet Regulation:
The Case For Equal Opportunity,” Georgetown Center for Business and Public Policy (January 2010) at 19
(“Perhaps the most jarring comment in the NPRM is the notion that market power and vertical integration (that is,
affiliation with content providers) would merely exacerbate the alleged anticompetitive effects of allowing such
contracting; these factors are not considered by the Commission to be necessary conditions for the challenged
conduct (charging a positive price for QoS) to generate anticompetitive effects.”)
12

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opinion, a necessary (but not sufficient) condition for concluding that the proposed regulations
would benefit consumers or contribute to economic efficiency.14
11.

The evidence before the Commission, however, demonstrates that broadband

ISPs, in general, do not possess significant market power vis-à-vis pricing or exclusion, nor do
they behave like Cournot duopolists.
12.

First, as a preliminary matter, the modern market for broadband services is a far

cry from the statutory monopoly that formed the basis for the Carterphone regulations, which
some net neutrality supporters see as a precedent for the regulations proposed in the NPRM.15
Indeed, there is a widespread consensus today that broadband service in most areas of the
United States is not a natural monopoly. As the Justice Department concluded in an ex parte
filing in this matter:
Between the ongoing deployment of wireline broadband
networks, the geographic expansion of wireless broadband
services (hopefully spurred by the availability of additional
spectrum to broadband wireless services), and increased
transparency, the Department is hopeful that the vast majority of
American households will benefit from significant competition in
their local broadband markets. Put differently, most regions of the
United States do not appear to be natural monopolies for
broadband service. 16

14

See, e.g., Jon M. Peha, “The Benefits and Risks of Mandating Network Neutrality, and the Quest for a
Balanced Policy,” International Journal of Communication 1 (2007), 644-668, at 652 (“The previous section
showed that the technologies for discrimination … can be beneficial to users. In this section, we show how a
network operator has incentive to use the same technologies to the detriment of users, if and only if it has sufficient
market power.”) (emphasis added).
15
See NPRM at ¶25.
16
U.S. Department of Justice, Ex Parte Submission, In the Matter of Economic Issues in Broadband
Competition and A National Broadband Plan for Our Future, GN 09-51 (January 5, 2010) at 28 (emphasis added)
(hereafter DOJ Ex Parte). See also Declaration of Marius Schwartz, Exhibit 3 to Comments of AT&T, GN Docket
09-191 and WC Docket 07-52 (January 14, 2010) (hereafter Schwartz Declaration) at 28 (“First, economic logic
implies that a broadband provider’s incentive to engage in anticompetitive discrimination is much weaker than was
true for the monopoly Bell system. It is well known that the type of price regulation applied to the Bell system will
bias a monopolist to integrate into adjacent services that require access to the core monopoly service and stifle
competition in those services. The vertically integrated AT&T was very tightly regulated in its prices for the
monopoly local phone service (which reportedly were close to marginal cost or lower), but less so for its longdistance and other services. That created strong incentives to restrict competitors’ access to the monopoly service in

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13.

Further, the fact that the number of broadband ISPs in each market falls short of

the textbook idea of atomistic competition is not an indication of market failure, and certainly
does not constitute a basis for regulation. As the Department of Justice’s ex parte filing
explains,
In markets such as this, with differentiated products
subject to large economies of scale (relative to the size of the
market), the Department does not expect to see a large number of
suppliers. Nor do we expect prices to be equated with incremental
costs. If they were, suppliers could not earn a normal, riskadjusted rate of return on their investments in R&D and
infrastructure. 17
Thus, there is no basis for concluding, simply based on industry structure, that the broadband
ISP market is in any way deficient or amenable to improvement by regulation.
14.

In fact, the evidence demonstrates that the vast majority of consumers have two

or more choices of broadband ISPs, 18 that broadband ISPs engage in intense rivalry to capture
and retain consumers, 19 that levels of innovation and technological innovation are high, and that
new entry is occurring in the form of both fixed and mobile wireless services. 20 Similarly,

order to boost its own sales of those adjacent services. Such strong foreclosure incentives cannot be extrapolated to
today’s broadband carriers.”)
17
DOJ Ex Parte at 7.
18
See, e.g., Declaration of Michael D. Topper, Attachment C to Comments of Verizon Communications
and Verizon Wireless, GN Docket 09-191 and WC Docket 07-52 (January 14, 2010), at Attachment B (hereafter
Topper Declaration) (showing that 97 percent of households in Verizon’s service territory have both Verizon
broadband and cable modem service available).
19
See, e.g., Schwartz Declaration at 32 (providing examples of comparative advertising claims by
broadband ISPs); at 33 (providing examples of technology upgrades in response to competitors); at 34 (providing
examples of price competition and customer switching behavior). See also Jeffrey A. Eisenach, “Broadband in the
U.S. – Myths and Facts,” in Australia’s Broadband Future: Four Doors to Greater Competition (Melbourne:
Committee for Economic Development of Australia, 2008) 48-59 at 53-54 (providing examples of competitioninduced innovation).
20
See, e.g., Robert C. Atkinson and Ivy E. Schultz, Broadband in America, Columbia Institute for TeleInformation (November 2009) (hereafter CITI Report) at 7 (Finding that, by 2013-14, “In addition to several
wireless broadband choices, the majority of American homes will have the choice of two wired broadband
services.”); see also FTC Report at 9 (“There is evidence that the broadband Internet access industry is moving in
the direction of more, not less, competition, including fast growth, declining prices for higher-quality service, and
the current market-leading technology (i.e., cable modem) losing share to the more recently deregulated major
alternative (i.e., DSL).”); see also Declaration of Gary S. Becker and Dennis W. Carlton, Attachment A to

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recent research has failed to find the existence of supra-competitive profits by broadband
ISPs; 21 to the contrary, by standard measures of profitability, applications, content and service
providers are far more profitable than cable and telephone companies. 22
15.

Most recently, based on an analysis of Form 477 data, the Commission found in

its National Broadband Plan that facilities-based broadband ISPs compete on the basis of
investment and service quality, 23 and that while data limitations prevent a robust conclusion,
there is some evidence that “monthly prices are lower when more wireline providers are in a
census tract.” 24
16.

Thus, virtually all of the available evidence suggests that broadband ISPs do not

have significant market power in most markets.25 Moreover, the evidence demonstrates that

Comments of Verizon Communications and Verizon Wireless Comments of Verizon Communications and Verizon
Wireless, GN Docket 09-191 and WC Docket 07-52 (January 14, 2010) at 5 (“[A]vailable evidence suggests that
there is substantial and growing competition in the provision of broadband access services. As discussed below,
data indicate that (i) multiple broadband Internet access providers are available in nearly all geographic areas; and
(ii) a variety of firms are in the process of deploying new broadband access services.”)
21
Thomas W. Hazlett and Dennis L. Weisman, “Market Power in U.S. Broadband Services,” George
Mason University Law and Economics Research Paper Series 09-69 (November 2009) at 31 (“We find no credible
basis to believe that broadband providers, despite their relatively few numbers, are currently exercising market
power.”)
22
See Larry F. Darby, “Facts About Market Power and Profits in the Internet Space,” American Consumer
Institute (October 8, 2009) (“Readers will be interested in different comparisons, but the data make clear that,
according to each of these measures, operators of broadband networks (Comcast, Time Warner, AT&T and
Verizon) earn relatively modest returns compared to other major companies both inside and outside the Internet
sector. Indeed, in each case, returns are below the average for firms in the S&P 500 index and substantially below
those posted by other firms in the Internet Value Cluster. For example, Google’s profit margin is 2-3 times greater
than earned by network providers and twice the average rate for S&P 500 firms.”) (available at
http://www.theamericanconsumer.org/2009/10/08/facts-about-market-power-and-profits-in-the-internet-space/).
23
Federal Communications Commission, Connecting America: The National Broadband Plan (March
2010) at 38 (“The presence of a facilities-based competitor impacts investment. Indeed, broadband providers
appear to invest more heavily in network upgrades in areas where they face competition…. So, for example,
available cable speeds are higher in areas in which cable competes with DSL or fiber than in areas where cable is
the only option. DSL and fiber show similar results. Available speeds are even higher where three wireline
providers compete (e.g., where a cable over-builder is also present).”). Hereafter, National Broadband Plan.
24
National Broadband Plan at 39.
25
We do not exclude the possibility that broadband ISPs could possess market power in certain
geographic markets, and recommend that the Commission (or other enforcement authority) include a finding of
market power as a key element in a case-by-case approach to policing anticompetitive behavior in Internet-related
markets. However, as we discuss below, localized market power would not in general create the potential for
exclusionary behavior by broadband ISPs relative to content and applications providers.

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broadband markets are becoming more, not less competitive, suggesting that any residual
market power which may exist in the market for broadband ISP services is transitory. 26
17.

The NPRM also suggests that broadband ISPs may have the ability to raise

rivals’ costs or otherwise deter entry and, in cases where they are vertically integrated into
content, applications and/or services, might have incentives to discriminate against competing
content, applications or service providers. Again, however, there is virtually no empirical
evidence that broadband ISPs possess such market power, or that they would have an incentive
to use it. Indeed, market power in the access market is a necessary (but not sufficient) condition
for the ability to engage successfully in such anticompetitive practices. 27
18.

Similarly, the NPRM’s concern about a terminating access monopoly problem is

entirely hypothetical. While it is conceivable that a broadband ISP could seek to raise prices to
content, applications and service providers above the competitive level, a competing broadband
ISP would have incentives to undercut those prices, and as a result, offer a broader array of
content which would allow them to attract more customers. 28 Moreover, at least some of the

26

See, e.g., National Broadband Plan at 41 (“The ongoing upgrade of the wireless infrastructure is
promising because of its potential to be a closer competitor to wireline broadband, especially at lower speeds. For
example, if wireless providers begin to advertise, say, 4 Mbps home broadband service, wireline providers may be
forced to respond by lowering prices of their broadband offerings. This could be true even if wireless services are
more expensive, especially if the service is also mobile.”)
27
See e.g., Hahn, Litan and Singer at 11-12 (“In the absence of significant market power in the access
market, it is unlikely that a BSP would have the ability to engage in anticompetitive discrimination. Indeed, a
necessary condition for adverse welfare effects in nearly every economic model of vertical foreclosure is that the
firm in question has market power—that is, the ability to raise price above competitive levels or exclude rivals.
When a firm lacks market power, vertical restraints cannot in theory be motivated by anticompetitive reasons, and
are therefore more likely motivated for efficiency reasons.”) See also Schwartz Declaration at n. 51 (“[I]t is far
from evident that any individual broadband provider could, even if it tried, have any realistic chance of
monopolizing a market for content or applications.”); see also C. Scott Hemphill, “Network Neutrality and the
False Promise of Zero-Price Regulation, Yale Journal on Regulation (2008) 135-179, at 156-7 (“As a general
matter, then, a content provider is not very vulnerable to exclusion by an access provider that controls only a small
part of the content provider's audience. That strategy can no more succeed than if a single computer manufacturer,
such as Dell, had tried to shut down Netscape by refusing to carry the Netscape browser.”)
28
See Topper Declaration at 62 (“As evidenced by the high churn rates of wireline and wireless
broadband providers, consumers can and do switch providers when faced with more attractive options, and this
competitive discipline deters providers from charging ‘inefficiently high’ prices.”)

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institutional characteristics of the market for traditional telephone services (including retail price
regulation) that resulted in concerns about the terminating access monopoly are not present in
the market for broadband. 29 As of now, broadband ISPs do not charge terminating access
charges, and there is no basis for believing, in the absence of any empirical data whatsoever,
that the terminating monopoly problem would lead to access charges above the efficient level.
19.

In summary, the proposed regulations cannot be justified on the basis of market

power in the market for broadband ISP services. As we explain further below, even if market
power exists in some geographic markets, or if there is a potential for exclusionary conduct in
some particular instances of vertical integration, these situations would best be addressed
through a case-by-case approach, rather than through sweeping ex ante bans on conduct that is
likely, in most cases, to be welfare enhancing. 30
B.

Regulation Is Not Justified on the Basis of Network Externalities or “Spillover
Effects” in the Markets for Content, Applications or Services
20.

The second set of market failure theories advanced by the NPRM relates to

network externalities and spillover effects, i.e., to the proposition that Internet technologies
generate economic benefits which are not fully internalized by the price system, and that
charges on providers of content, applications and/or services would lead to under-production of
these products and services. 31 In general, these theories rely on a two-sided markets analysis,
and suggest that broadband ISPs might have incentives to set fees on content, applications, or

29

See Jerry Brito and Jerry Ellig, “A Tale of Two Commissions: Net Neutrality and Regulatory
Analysis,” CommLaw Conspectus 16;2 (2007) at 26-31.
30
See, e.g., FTC Report at 7 (“The balance between competing incentives on the part of broadband
providers to engage in, and the potential benefits and harms from, discrimination and differentiation in the
broadband area raise complex empirical questions and may call for substantial additional study of the market
generally, of local markets, or of particular transactions. Again, further evidence of particular conduct would be
useful for assessing both the likelihood and severity of any potential harm from such conduct.”)
31
A related thesis is that the Internet is a “general purpose technology,” which produces external benefits
which are not captured by private market actors. See NPRM at ¶64.

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service providers “too high” relative to the socially optimally level, while setting prices to
downstream consumers “too low.” In support of these theories, the NPRM cites articles by
Nicholas Economides, 32 Robin S. Lee and Tim Wu, 33 and Barbara van Schewick. 34 In addition,
as part of its comments in this proceeding, Google submitted two declarations, one by Professor
Economides 35 expanding on his prior work, and citing a co-authored paper with Joacim Tåg, 36
and a second by Christiaan Hogendorn. 37
21.

The existing literature on network externalities, spillovers and two-sided markets

does not provide support for the proposed rules, for two primary reasons. First, the economic
literature on these topics is in a very early stage of development, 38 and is therefore speculative,
highly abstract and theoretical, and lacking in empirical support.39

Second, the limited

empirical research that is available suggests there is a stronger basis for believing the proposed
regulations would harm consumer welfare than for believing they would improve it.

32

Nicholas Economides, “‘Net Neutrality,’ Non-discrimination and Digital Distribution of Content
Through the Internet,” I/S: A Journal of Law and Policy for the Information Society 4;2 (2008) 209-233.
33
Robin S. Lee and Tim Wu, “Subsidizing Creativity Through Network Design: Zero-Pricing and Net
Neutrality,” Journal of Economic Perspectives 23;3 (Summer 2009) 61–76.
34
Barbara van Schewick, “Towards an Economic Framework for Network Neutrality Regulation,”
Journal on Telecommunications and High Technology Law 5 (2007) at 385-86 (discussing the Internet as a
“general purpose technology” and concluding that “measures that reduce the amount of application-level
innovation have the potential to significantly harm social welfare by significantly limiting economic growth.”)
35
Nicholas Economides, “Why Imposing New Tolls on Third-Party Content and Applications Threatens
Innovation and Will Not Improve Broadband Providers’ Investment,” Appendix A to Comments of Google Inc. GN
Docket 09-191 and WC Docket 07-52 (January 14, 2010).
36
Nicholas Economides and Joacim Tåg, “Net Neutrality on the Internet: A Two-Sided Market Analysis”
(Rev. May 2009) (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1019121).
37
See Christiaan Hogendorn, “Spillovers and Network Neutrality,” Appendix B to Comments of Google
Inc. GN Docket 09-191 and WC Docket 07-52 (January 14, 2010).
38
This point is conceded even by net neutrality supporters. See, e.g., Economides and Tåg at 6 (“Despite
a considerable literature discussing the rights and legal issues of net neutrality and its abolition, the literature on
economic analysis of this issue is thin.”) and at 32 (“[T]he economics literature on net neutrality regulation is still
in its early stages.”).
39
See, e.g., Christopher S. Yoo, “Network Neutrality, Consumers, and Innovation,” The University of
Chicago Legal Forum (2008) at 184-5 (“[T]he stylized nature of the assumptions on which exemplifying theories
tend to be based limit them to identifying what can happen and prevent them from providing any insight into the
likelihood that the effects they identify will actually come to pass. Absent empirical support, exemplifying theory
cannot provide the broad policy inferences needed to support ex ante categorical prohibitions. In other words, the
mere fact that a particular practice may be harmful under certain circumstances does not justify banning that
practice categorically.”)

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22.

The existing literature consists primarily of two types of research: (i) stylized,

abstract theoretical models that do not closely resemble real-world markets; and (ii) speculative
“discussion papers” that proffer hypotheses and suggestions for potential research, but do not
contain rigorous analysis. Neither of these types of studies provides a basis for concluding that
the proposed rules, or any similar rules, would have a net positive effect on consumer welfare,
either in the short run or the long run.
23.

The existing theoretical literature on network and spillover effects in two-sided

markets represents a preliminary effort to isolate and understand the effects of particular market
characteristics or policy parameters, holding other factors constant, as a first step towards a
more complete understanding of real world markets that exhibit these characteristics.
24.

Because of their highly stylized nature, the predictions of such theoretical models

are extremely sensitive to underlying assumptions, in two senses. First, such models are, by
nature, based on simplifying assumptions that abstract from the institutional complexities of the
actual marketplace. Indeed, one purpose of theoretical modeling is to explore the robustness of
various models to underlying assumptions (i.e., to assess the extent to which a model’s
predictions are sensitive to the application of alternative, “more realistic,” assumptions), so as
eventually to develop models that capture as many of the salient characteristics of the real world
as mathematical technique and human comprehension will permit, and which, ideally, are
amenable to meaningful empirical assessment.
25.

The theoretical literature on network and spillover effects in two-sided markets

has not reached this stage. For example, the leading theoretical paper cited by Professor
Economides in his declaration is Economides and Tåg, which presents a model of network
effects in two-sided markets based on a large number of simplifying assumptions, including (for

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example) (i) that content providers’ revenues are strictly proportional to their number of
visitors, (ii) that there is neither innovation nor competition in the market for content provision,
and (iii) that the value of the network to consumers is a strict multiple of the number of content
providers from which they can choose.

None of these assumptions is realistic: Content

providers’ revenues are a function of many factors other than the number of visitors, the Internet
content market is nothing if not competitive and innovative, and the value of an additional
content web site to consumers is almost surely decreasing in the number of web sites. 40
26.

Moreover, the Economides and Tåg model depends on the imposition of

arbitrary constraints on the model’s structure. For example, in order to be able to achieve a
unique mathematical solution, the authors impose conditions which (as Caves demonstrates)
imply that the profits of platform providers (i.e., phone and cable companies) significantly
exceed the profits of content and applications providers (i.e., search engines, online merchants,
etc.), an assumption for which there is no apparent empirical basis. 41
27.

Moreover, the model does not appear to have been tested for its robustness to

these assumptions. Hence, even if the model showed an unambiguous gain from the imposition
of net neutrality regulation (and, as discussed below, it does not), the only thing the
Commission could reasonably infer from that finding is that net neutrality regulation would

40

This list is by no means exhaustive; as in any theoretical model, the model is designed to capture only a
few aspects of “the real world,” with the rest being captured by “simplifying assumptions.” Two other noteworthy
aspects in which the Economides and Tåg model differs from reality are (a) it assumes that broadband ISPs are
either monopolists or Cournot duopolists and (b) it assumes that regulation takes the form of prohibiting ISPs from
charging content providers any access fees, whereas the proposed rules appear to ban only fees on “enhanced or
prioritized” access. See NPRM at ¶106. Arguably, however, the distinction is one of degree: The effect of the
proposed non-discrimination rule would be to impose a zero-price rule (for upstream prices) on all ISP services
except “basic Internet access.”
41
Specifically, under conditions that Economides and Tåg impose on their model, it can be shown that the
ratio of content provider profits under net neutrality to platform operator profits under net neutrality must be strictly
less than 0.4. See Kevin W. Caves, “Modeling the Welfare Effects of Net Neutrality Regulation: A Comment on
Economides and Tåg” (March 2010) (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1585254).

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increase economic welfare in the imaginary world of the Economides and Tåg model – not in
the real world.
28.

A second way in which such models rely on assumptions is in their choice of

parameter values.

In general, economic models involving price discrimination (including

models of two-sided markets) do not generate unambiguous results: Discrimination is not, in
general, “always harmful” or “always beneficial.” 42 The same holds for models of two-sided
markets, where the welfare effects of different outcomes typically depend on the values
assumed for various parameters, such as the magnitudes of upstream and downstream demand
elasticities, and the size and nature of network effects. 43
29.

Again, the Economides and Tåg paper provides an instructive example. As the

authors forthrightly admit, the paper’s key results – that net neutrality regulation might improve
social welfare – hold only “for some parameter values.” 44 Specifically, for net neutrality
regulation to be welfare enhancing, it must be true that “a content provider values an additional
consumer more than a consumer values an additional content provider” 45 – but, as Caves points
out, not more than five times as much. 46 In addition, it must true that consumers and content
providers are “jointly…sufficiently differentiated,” meaning that the product of a variable
describing the degree of the differentiation in consumers’ valuation of Internet access, and
another variable describing the degree of differentiation in content providers’ fixed start up

42

See, e.g., Hal R. Varian, “Price Discrimination and Social Welfare,” American Economic Review 75;4
(September 1985) 870-875 (demonstrating, in general, that price discrimination increases economic welfare when it
results in increased output).
43
See e.g., Weisman and Kulick.
44
See Economides and Tåg at 1 (“When access is monopolized, for reasonable parameter ranges, net
neutrality regulation (requiring zero fees to content providers) increases the total industry surplus as compared to
the fully private optimum at which the monopoly platform imposes positive fees on content providers. However,
there are also parameter ranges for which total industry surplus is reduced.”) (emphasis added).
45
See Economides and Tåg at 14.
46
See Caves at 6.

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costs, must fall within a certain range, which in turn depends on other parameters of the
model. 47 The problem with such assumptions is not just that there is no empirical basis for
choosing particular numerical values, but that the variables themselves lack any clear empirical
analog in the real world. 48
30.

Indeed, as even strong proponents of net neutrality regulation acknowledge, 49 the

results of virtually all of the various theoretical models of net neutrality are dependent on
assumptions about parameter values for which there is little or no empirical basis. The lack of
an empirical foundation is nowhere more clear than with respect to the argument that imposing
fees on content providers should be prohibited since the result might be to reduce investment
and innovation in content – irrespective of the acknowledged fact that doing so could both
reduce investment in networks and result in higher prices to downstream consumers (and hence
lower broadband adoption). Lee and Wu, for example, who make the case for net neutrality
regulation based on the benefits of “subsidizing content,” concede that
Of course, for a given price level, subsidizing content comes at
the expense of not subsidizing users, and subsidizing users could
also lead to greater consumer adoption of broadband. It is an open
question whether, in subsidizing content, the welfare gains from
the invention of the next killer app or the addition of new content
offset the price reductions consumers might otherwise enjoy or
the benefit of expanding service to new users. 50
31.

Just as striking (and admirable) is the candor of Harvard economist Glen Weyl,

whose authoritative paper on two-sided markets has won plaudits even prior to formal
publication. In response to an email query from Commission staff, Weyl responded:

47

See Caves at 6; see also Economides and Tåg at 15 (Assumption 2).
See Caves at 6 (“[I]t is quite difficult to imagine how one might quantify this differentiation
empirically, let alone establish that it is sufficiently large, either in absolute or relative terms.”)
49
See Economides and Tåg at 6-8, summarizing the results of several models yielding “ambiguous”
results.
50
See Lee and Wu at 67 (emphasis added).
48

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I don’t know how much of a help I can be in answering your
query [whether content providers paying for access will maintain
their current quality of content] as I really have no empirical data
to support any assertion I make, but perhaps I can provide a little
bit of conceptual clarity about what elasticities are likely to
matter, even if I don’t know their magnitudes. 51
Having “no empirical data” to support “any assertion I make” is fine for an academic, especially
when he or she is forthright in identifying what follows as academic theorizing rather than
demonstrated results. For the Commission to impose regulations on the basis of such theorizing,
of course, is a different matter. 52
32.

This brings us to the second primary class of existing research on net neutrality,

network externalities and spillover effects, which consists of “discussion papers” (published or
otherwise) that raise various issues and pose various hypotheses for further research, but do not
apply rigorous methods (theoretical or otherwise) to achieve conclusive results. One example
is the paper is by Lee and Wu, which is cited by the Commission for the proposition that
broadband ISPs might be better off collectively if they did not charge content providers for
access to subscribers, but that each broadband ISP acting individually might nevertheless have
an incentive to levy fees, thus making things worse for all ISPs (and reducing economic

51
Memorandum from Chuck Needy to Marlene Dortch, February 12, 2010, Ex Parte Submission in
Docket 09-191 (Email from Glen Weyl to Chuck Needy, January 29, 2010) (emphasis added). Weyl’s email goes
on to identify some key empirical estimates and suggests that “it would be feasible with a little hard work to get a
sense of them.” See also E. Glen Weyl, “A Price Theory of Multi-Sided Platforms” (October 2009; forthcoming,
American Economic Review) (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1324415) at 35 (“On
the theoretical side, much remains to be done to understand pricing in networks more generally. For example my
approach so far allow only extremely stylized models of competition of limited direct empirical relevance.”)
52
See Weisman and Kulick at 26-28 (reviewing the literature on two-sided market structures and
concluding that “There is no basis for presuming that regulatory intervention to alter the price structure in such
markets would prove to be welfare-enhancing. Put differently, regulatory intervention that alters the relative prices
paid by the upstream and downstream sides of the market cannot be justified on grounds that it enhances economic
welfare.”); see also Schwartz Declaration at 21-23 (providing further examples of the stylized assumptions typical
of the two-sided markets literature and concluding, “In sum, the theoretical analysis of two-sided markets — while
offering insights — is not yet settled, is quite complex, and the results are highly sensitive to conditions about
which regulators are likely to have highly imperfect information.”)

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welfare). 53 This is an intriguing notion, which may well be worthy of both more rigorous
theoretical modeling and, if testable hypotheses, an appropriate methodology, and the necessary
data can be identified, empirical investigation. As researchers, we appreciate the value of
intriguing theories, and hope that this one (and many others associated with this topic) will be
fully pursued in the academic arena. Again, however, from the perspective of public policy, we
do not believe that the Commission should make public policy decisions on the basis of
imaginative theories that have not yet been formally modeled, let alone empirically
demonstrated. 54
33.

Similarly, the Economides and Hogendorn declarations, and the Van Schewick

article (as it relates to the spillover effect of “general purpose technologies”), 55 as well as the
bulk of the advocacy literature on these topics, are lacking in both theoretical rigor and

53

NPRM at ¶¶68-9 (citing Lee and Wu, and stating “This dynamic raises a collective action problem:
Although it might be in the collective interest of competing broadband Internet access service providers to refrain
from charging access or prioritization fees to content, application, and service providers, it is in the interest of each
individual access provider to charge a fee, and given multiple providers, it is unlikely that access providers could
tacitly agree not to charge such fees.”)
54
See Lee and Wu at 70-71. The authors state that “it seems implausible that Internet service providers
have appropriate incentives to price according to the social optimum,” and describe several reasons why they
believe this to be the case, including that “it might be individually optimal for one provider to defect and charge
positive fees to content providers, although if all content providers charged such fees, the outcome would be worse
than had all providers refrained from doing so.” (Emphasis added.) On the implications of this thesis, see also
Hahn, Litan and Singer at 17 (suggesting that “[t]he Commission appears to be proposing a regulatory ‘work 
around’ for BSPs to escape antitrust scrutiny. According to its logic, if BSPs could somehow coordinate in the
setting of prices for QoS, they would choose a zero price according to the NPRM; yet competition among BSPs
drives them to set an inefficiently positive price. (Of course, if the jointly profit́maximizing price for QoS were
zero, and if net neutrality allowed BSPs to achieve that allegedly optimal solution, then BSPs would favor net
neutrality regulation! Alas, they do not.) Again, this basis for intervention is purely theoretical and is not
recognized in regulatory economics as a solid basis for intervention.”) See also See Schwartz Declaration at 25
(“But no evidence has been offered that the supply of Internet content is deficient relative to that of broadband
infrastructure, nor are there strong reasons to believe that this pattern would hold if charges to content providers
were implemented.”)
55
See also Frischmann and Van Schewick at 423-6, and n. 168 for a discussion of general purpose
technologies (“GPTs”). GPTs are technologies which generate externalities associated with their ability to increase
productivity across industries. There is a theoretical argument for subsidizing research in and/or deployment of
such technologies (though the practical obstacles to doing so effectively are formidable). Further, it is plausible
that the Internet is a GPT. (See, e.g., National Broadband Plan at 29.) However, even if the Internet is a GPT, and
even if the practical obstacles to creating efficient subsidy programs could be overcome, what would still not be
clear is why it would make sense to subsidize some aspects of the Internet value chain (content, applications, etc.)
at the expense of others (e.g., infrastructure).

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empirical support. 56 For the most part, these contributions contain the appropriate caveats,
arguing that net neutrality regulation “might” improve social welfare “if” certain criteria are
satisfied, or (alternatively) that unregulated markets “may” experience various forms of market
failure. 57 Again, as researchers we value these and similar contributions, as the proffering of
hypotheses and expression of informed opinion is an important part of the process of gaining a
better understanding of these complex markets – even if we disagree with most or all of their
hypothesized conclusions. The important point, however, is that the Commission should not
mistake speculation, conjecture, hypothesis and argument for rigorous analysis, empirical
evidence, or proof.
34.

Finally, and perhaps most important, for all of the hypothesizing and discussion

of how models based on network externalities and spillover effects provide support for net
neutrality regulation, there is at least as much support for the opposite proposition. 58 It is

56

For another example, see Inimai M. Chettiar and J. Scott Holladay, Free to Invest: The Economic
Benefits of Preserving Net Neutrality, New York University Institute for Policy Integrity, Report No. 4 (2010), at
9-10. As Weisman and Kulick point out (at 19), “The authors of this study fail to account for the fact that in twosided markets with network externalities, price discrimination actually would serve to mitigate the market failure
that creates this positive network externality.”)
57
See, e.g, Hogendorn Declaration at 12 (“ISPs were to prioritize or degrade service for certain
applications, certain websites, etc., there could be a reduction in both types of network effects. The question is
whether an individual ISP would have incentives that do not align with social incentives. There are two reasons this
might happen.”) (emphasis added); see also Van Schewick at 329 (“This paper also highlights important limitations
of the ‘one monopoly rent’ argument, demonstrating previously unidentified exceptions that may be quite common
in the Internet context, showing how exclusion may be a profitable strategy even if the excluding actor does not
manage to drive its competitors from the complementary market, and proving that competition in the primary
market may be insufficient to remove the ability and incentive to engage in exclusionary conduct.”) (emphasis
added); see also Economides Declaration at 1 (“Broadband providers insist that imposing these new charges will
greatly improve network investment, and thus these charges are beneficial. I argue that this is not the case. Possible
higher revenues from discrimination may simply be returned to shareholders and not invested.”) (emphasis added).
58
For example, Economides and Tåg (at 7) acknowledge that models that use different assumptions yield
different results. For example, they note that a paper by Cheng, Bandyopadhyay and Guo finds that consumer
surplus may increase when content providers pay access fees, and explain that “The reason why the consumer
surplus may increase is that it is always the more profitable content provider that pays for access and hence, gets
preferential treatment. This benefits consumers of the more profitable content provider because congestion is
reduced. However, it means a loss for consumers of the less profitable content provider that does not pay for
preferential access, since there is an increase in the congestion costs.”); see also Mark A. Jamison and Janice A.
Hauge, “Getting What You Pay For: Analyzing the Net Neutrality Debate,” (April 2008) (available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1081690) at 2 (“When only a single transmission speed is

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remarkable, for example, that the only robust result of the Economides and Tåg model – the
only result that applies under all parameter values – is that consumers are always made worse
off by net neutrality regulation. 59
35.

To summarize, the evidence before the Commission demonstrates that broadband

ISPs do not have generalized market power, and thus provides no support for the proposed
regulations based on any traditional theory of market failure.

Moreover, the speculative

theories and stylized models put forth as potential justifications for regulation in the absence of
market power provide no empirical – that is, no real world – foundation for concluding that the
proposed regulations would increase rather than harm consumer welfare.
36.

In 2007, the FTC declared that, “to date we are unaware of any significant

market failure or demonstrated consumer harm from conduct by broadband providers.” 60 In our
opinion, it remains the case there is no evidence, empirical, theoretical, or otherwise, to
contradict this finding. If anything, the market for broadband services has continued to exhibit
rapid innovation and increasing competition. Accordingly, there is no economic basis for a
finding of market failure in the markets at issue.

offered by the network provider, some low-value content providers choose to not produce because their potential
advertising revenue would not cover their content production costs and their fixed costs. However, when a
premium transmission speed is offered, some low-value sites that did not produce under the single speed scenario
find it profitable to purchase the premium speed and so choose to enter the market. This results in an increase in the
amount and diversity of content available for consumers. We consider this increase in the variety of content on the
network to constitute innovation on the edges, which raises the value of the network.”).
59
See Economides and Tåg at 31 (“Comparisons between outcomes under the private equilibrium with
two-sided pricing and the private equilibrium under net neutrality regulation indicated that a removal of net
neutrality regulation would lead to a lower subscription price for consumers, but less content available due to an
increase in fees to content providers. Content providers are worse off in the aggregate, while consumers are better
off.”).
60
See FTC Report at 11. See also e.g., Gerald R. Faulhaber and David J. Farber, “The Open Internet: A
Customer-Centric Framework,” Exhibit 1 to Comments of AT&T, Inc. in GN Docket Nos. 09-157, 09-51
(September 2009) at 1 (“Despite many colorful predictions about what evil doings ISPs might do in the future, we
find that during ten years of experience without network neutrality regulations, there are just two incidents (the
tiresomely familiar Madison River and Comcast cases) of any actual misbehavior by broadband ISPs. Two
incidents – both remedied without the prescriptive rules proposed here - is not empirical evidence, nor are the many
lurid but unrealized nightmare scenarios.”); see also Schwartz Declaration at 4 (“Beyond these a priori objections,
and perhaps most important, is the striking lack of evidence for the postulated harms.”)

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III. THE PROPOSED REGULATIONS WOULD BAN BENEFICIAL PRACTICES AND OTHERWISE
HARM ECONOMIC WELFARE
37.

While there is no evidence of systematic market failures that might be remedied

or ameliorated by the proposed rules, there is substantial basis for believing that the proposed
regulations would harm competition, slow innovation, and reduce consumer welfare. 61 These
likely harms are a function of the facts that (i) many of the practices that would be banned by
the proposed regulations are presumptively welfare enhancing, (ii) the proposed “carve outs” for
reasonable network management and “managed services” do not provide a basis for
distinguishing between beneficial practices and harmful ones; and (iii) the litigation and
regulatory uncertainty created by the regulations would slow innovation and have other
unintended consequences.
A.

Most of the Conduct that Would Be Prohibited Is Presumptively Welfare
Enhancing
38.

Given the vagueness of the proposed “reasonable network management” and

“managed services” exceptions, it is somewhat difficult to predict precisely which forms of
conduct would be prohibited under the proposed regulations. However, one effect of the
proposed non-discrimination rule is predictable and clear: To the extent the rule prohibits
broadband ISPs from levying positive fees on upstream customers such as content providers, the

61

See, e.g., FTC Report at 11 (“Policy makers also should carefully consider the potentially adverse and
unintended effects of regulation in the area of broadband Internet access before enacting any such regulation.
Industry-wide regulatory schemes – particularly those imposing general, one-size-fits-all restraints on business
conduct – may well have adverse effects on consumer welfare, despite the good intentions of their proponents.
Even if regulation does not have adverse effects on consumer welfare in the short term, it may nonetheless be
welfare-reducing in the long term, particularly in terms of product and service innovation. Further, such regulatory
schemes inevitably will have unintended consequences, some of which may not be known until far into the future.
Once a regulatory regime is in place, moreover, it may be difficult or impossible to undo its effects.”); see also
Michael L. Katz, “Maximizing Consumer Benefits from Broadband,” Attachment B to Comments of Verizon
Communications and Verizon Wireless Comments of Verizon Communications and Verizon Wireless, GN Docket
09-191 and WC Docket 07-52 (January 14, 2010) (hereafter Katz Declaration) at 15 (providing examples of the
unintended negative consequences of regulation and concluding “It is well documented that even well-intentioned
regulations can impose significant costs and often have harmful unintended consequences.”)

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upshot would be to raise prices to downstream subscribers and ultimately reduce broadband
adoption – precisely the opposite of what the Commission is seeking to accomplish through its
National Broadband Plan. 62

Unlike the conjectural benefits of “subsidizing content,” the

substantial economic benefits of increased broadband adoption have been demonstrated in
numerous empirical studies. 63
39.

In addition to the direct effect of raising prices for broadband access above

competitive levels, the proposed regulations would limit or proscribe (to a somewhat
unpredictable degree) a variety of business practices that presumptively contribute to economic
efficiency, 64 promote competition, 65 foster innovation, 66 increase investment, 67 promote product

62

See, e.g., Hemphill at 171-173 (discussing consumer benefits of positive pricing by network providers;
see also Schwartz Declaration at 3 (“[P]ositive fees to content providers would result in lower prices to broadband
consumers, advancing the Commission’s goal of expanding broadband penetration and use especially among
economically disadvantaged groups.”)
63
See e.g., Robert W. Crandall and Hal J. Singer, “The Economic Impact of Broadband Investment,”
(February 2010); see also Mark Dutz, Jonathan Orszag, and Robert Willig, The Substantial Consumer Benefits of
Broadband Connectivity For U.S. Households, Internet Innovation Alliance, (July 2009); Robert Crandall, William
Lehr, and Robert Litan, “The Effects of Broadband Deployment on Output and Employment: A Cross-sectional
Analysis of U.S. Data,” The Brookings Institution: Issues in Economic Policy No. 6 (2007); Robert E. Litan, Great
Expectations: Potential Economic Benefits to the Nation From Accelerated Broadband Deployment to Older
Americans and Americans with Disabilities, New Millennium Research Council (2005); and, Austan Goolsbee,
“The Value of Broadband and the Deadweight Loss of Taxing New Technology,” Contributions to Economic
Analysis & Policy 5;1 (2006). By contrast, we are not aware of any rigorous empirical analyses of the benefits of
“subsidizing content.”
64
See, e.g., Schwartz Declaration at 12-13 (noting that upstream pricing of QoS may be efficient because
“[a] content provider is likely to be in a much better position than end users to know what performance
requirements are needed for its service to work well [and] the transactions costs of contracting for such
arrangements are likely to be much lower when dealing with a content provider than with a host of end users.”)
65
See e.g. Jamison and Hauge at 2.
66
See e.g., Crandall and Singer (2010) at 51-53 (discussing negative impact of net neutrality regulation on
innovation and investment in both networks and Internet content); see also Schwartz Declaration at 2 (“Such
payments can enable valuable and mutually beneficial arrangements, for example, by allocating scarce network
capacity efficiently and avoiding the need for costly overbuilding, and by funding network enhancements desired
by particular content providers.”); see also Katz Declaration at 13-15 (noting that the rules would, by design, freeze
the current structure of the Internet in place and concluding that “it would not be in consumers’ interest to ossify
the Internet.”) and at 30 (“[A] policy that triggered capacity investment in lieu of capacity management would be
inefficient. Because a managed network can provide greater levels of service for a given amount of investment in
physical infrastructure than can an unmanaged network, a managed network provides services at a lower unit cost.
A second fundamental flaw with the argument that a policy that blocks network management can promote
investment is that such a policy might actually reduce the overall amount of capacity investment. Restrictions on an
operator’s management of its network will prevent the operator from producing as much output as possible from
any given amount of physical plant and equipment. Because the physical plant cannot be used efficiently, the cost

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differentiation and consumer choice, 68 and enhance consumer welfare. 69 Yet, depending on
how they are enforced, the proposed rules could, for example, inhibit content providers’ ability
to enter into mutually beneficial (and economically efficient) exchanges with broadband ISPs;
and, more broadly, limit the ability of all firms in the Internet value chain to engage in unilateral
conduct, or to enter into contracts that would contribute to economic efficiency by reducing
risk, lowering transactions costs, creating disincentives to opportunistic behavior, ensuring
product quality, or creating consumer choice through product differentiation.70
B.

The Reasonable Network Management and “Managed Services” Criteria Would
Not Protect Consumer Welfare
40.

The proposed rules would allow broadband ISPs to engage in “reasonable

network management,” 71 and create an exception for “managed services.” 72 While any relief

of capacity per unit of output is higher. These higher costs reduce the operator’s net return on investment and,
consequently, the operator may invest less in physical capacity.”)
67
See Larry F. Darby, “The Informed Policy Maker’s Guide to Regulatory Impacts on Broadband
Network Investment,” American Consumer Institute (2009) at 2 (“There is no reasoned, factual and analytical basis
for concluding that network neutrality rules will not impact the rate of investment in existing broadband networks.
Some rules will have more impact than others, but any rule that constrains the ability of firms to pursue business
activities that may increase shareholder value will almost certainly affect their allocation of cash to different uses,
including domestic network investment.”); see also Schwartz Declaration at 20 (“Claims that charges to content
providers should be opposed because they would reduce incentives to invest in the edge either expressly or
implicitly minimize the importance of incentives for investment in network infrastructure with no justification.”);
see also Katz Declaration at 59 (“Free Press recently released a report in which the author claims to demonstrate
that network neutrality regulations do not meaningfully harm investment incentives. Scrutiny of the study,
however, reveals that it is fatally flawed and offers no such demonstration.”).
68
See e.g., Benjamin E. Hermalin and Michael L. Katz, “The Economics of Product-Line Restrictions
with an Application to the Network Neutrality Debate,” Information Economics and Policy 19;2 (2007) 215-248, at
236 (“[C]onsumers have fewer applications available to them as a consequence [of net neutrality regulation].”); see
also Everett M. Ehrlich, Jeffrey A. Eisenach, and Wayne A. Leighton, “The Impact of Regulation on Innovation
and Choice in Wireless Communications,” Review of Network Economics 9;1 (2010).
69
See e.g., Katz Declaration at 11, describing the direct consumer benefits of traffic prioritization (“The
fact that customers pay for the ability to differentiate between traffic in managing their own internal networks
demonstrates that users want and value such differentiation.”)
70
See generally Christopher S. Yoo, “Beyond Network Neutrality,” Harvard Journal of Law and
Technology 19;1 (Fall 2005) 1-77; see also Ehrlich, Eisenach and Leighton at 48 (“By making it more difficult to
manage the risk of innovation and entry, prohibitions on network management would … slow innovation and
reduce consumer choice, the opposite of what proponents of such regulation say they desire.”).
71
NPRM at ¶135 ff.
72
NPRM at ¶148 ff.

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from otherwise harmful regulations is better than none, these criteria are not founded in sound
economic analysis and would not ensure that consumer welfare is protected.
41.

Network management – i.e., traffic prioritization – benefits consumers and

enhances economic efficiency by allowing ISPs to ensure the quality of Internet applications
that require faster and more reliable delivery, such as video conferencing, interactive online
gaming, and remote health care. Regulations that limit the ability of broadband providers to
engage in such network management, without producing compensating benefits, would reduce
economic efficiency and consumer welfare.
42.

The regulations as proposed do not contain a consumer welfare standard, but

instead offer a vague and ultimately circular definition, in which “reasonable network
management” is defined as “reasonable steps to maintain the proper functioning of their
networks.” 73 Such ambiguity is neither necessary nor constructive: Broadband ISPs should be
permitted to engage in business practices generally, and network management practices in
particular, that do not harm consumer welfare. Further, the burden of proof, in competitive
markets such as the ones at issue here, should be on the Commission to demonstrate that a
particular network management practice would harm economic welfare, not on broadband ISPs
to prove it is beneficial.

73

See NPRM at ¶140 (“Finally, we propose that broadband Internet access service providers may take
other reasonable steps to maintain the proper functioning of their networks. We include this catch-all for two
reasons. First, we do not presume to know now everything that providers may need to do to provide robust, safe,
and secure Internet access to their subscribers, much less everything they may need to do as technologies and usage
patterns change in the future. Second, we believe that additional flexibility to engage in reasonable network
management provides network operators with an important tool to experiment and innovate as user needs
change.”); see also Katz Declaration at 4 (“Network management can facilitate more efficient use of capacity and
can protect consumers from harmful traffic and applications. However, the proposed rules would create an
uncertain regulatory environment that would discourage efficient network management. For example, the proposed
rules allow for ‘reasonable’ practices without defining reasonable. Moreover, any definition of reasonable would
almost certainly either be vague or would draw bright lines that in important instances lead to outcomes that
harmed consumer welfare….”).

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43.

Similarly, the NPRM’s discussion of managed services contains no suggestion

that any exceptions to the proposed regulations for such services (however they ultimately are
defined) would be tied to a substantive economic welfare standard. Indeed, there is no basis for
believing that the exceptions suggested in the NPRM – for telemedicine, smart grid applications
and eLearning – are based on any type of either technical or economic analysis. 74 Thus, the
managed-services exemption, as proposed in the NPRM, is completely untethered from any
concept of consumer welfare or economic efficiency. Indeed, to the extent the managedservices exemption served as a regulatory safe harbor for “nascent” services, it risks actually
discouraging the widespread adoption and commercialization of new and innovative services –
which, by the very virtue of their success, would grow out of the regulatory safe harbor that
made them possible in the first place, and hence find themselves subjected to costly or even
prohibitive regulation. 75
C.

Enacting the Proposed Regulations Would Raise Regulatory Risk and Harm
Investment and Innovation
44.

The proposed regulations are ambiguous and poorly drafted. As noted above, the

NPRM provides no practical guidance as to what the Commission would consider to be
“reasonable” network management, or what services would be deemed to fall within the
“managed services” exception, 76 but these are only two of many uncertainties companies would
face if the rules were adopted. For example, the proposed regulations fail to provide a practical

74

See NPRM at ¶150. It is not at all clear why eLearning applications, for example, would be more likely
to “require or benefit from enhanced quality of service rather than traditional best-effort Internet delivery” than,
say, online gaming or corporate video conferencing.
75
See Katz Declaration at 44 (“Even if the Commission does create a managed services exception, there is
a very real danger that this policy will impose service qualifications that result in the rules’ becoming a form of
success tax.”)
76
See Katz Declaration at 4 (“Although it is vital to the promotion of consumer welfare that network
providers continue to be permitted to develop and offer their own services that may be thought of as managed or
specialized, the NRPM’s managed services exception is vague and unworkable. Moreover, it cannot reasonably be
expected to substitute for the sound analysis that is missing from the NPRM.”)

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means of distinguishing between content, applications and service providers, on the one hand,
and “subscribers” (many of whom also generate content), on the other. 77

To the extent

regulatory uncertainty prevents parties from engaging in efficiency-enhancing conduct, or
entering into efficiency-enhancing contracts, or increases the risks that such conduct or
contracts will be voided (or even penalized) by subsequent Commission decisions, firms are less
likely to engage in the investment or innovation that such conduct and contracts would
otherwise have enabled. 78
IV.

CASE-BY-CASE APPLICATION OF EXISTING STANDARDS IS THE BEST APPROACH

45.

In paragraph 103 of the NPRM, the Commission identifies the challenge before

it with respect to banning discrimination as follows: “The key issue we face is distinguishing
socially beneficial discrimination from socially harmful discrimination in a workable
manner.” 79 In the accompanying footnote 226, the Commission suggests that, by “workable,” it
means a rule that would “limit how network operators can discriminate in a manner that
[1] prevents them from fully exploiting market power in ways that seriously harm users, and
[2] does not prevent them from using discrimination in ways that greatly benefit users.”80
Based on these passages, the Commission appears to recognize the tension between what
economists refer to as “Type I” and “Type II” error (i.e., between a rule that deters too little

77

See Katz Declaration at 41 (“What if a broadband Internet access service provider required content,
application, or service providers to become subscribers in order to receive enhanced or prioritized access? Would
the broadband Internet access service provider then be allowed to charge them different prices for different
services? If not, whom could it charge?”)
78
See, e.g., FTC Report at 11 (“Industry-wide regulatory schemes – particularly those imposing general,
one-size-fits-all restraints on business conduct – may well have adverse effects on consumer welfare, despite the
good intentions of their proponents. Even if regulation does not have adverse effects on consumer welfare in the
short term, it may nonetheless be welfare-reducing in the long term, particularly in terms of product and service
innovation.”)
79
See NPRM at ¶103.
80
See NPRM at n. 226 (citing Peha at 645). Note the reference in this quotation to market power, the
existence of which, as noted above, the Commission neither asserts nor demonstrates, and which, as we explained
above, does not generally exist in the markets at issue.

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harmful behavior, and one that deters too much beneficial behavior); and, further, to
acknowledge (correctly) that the ultimate objective is to minimize the combined welfare losses
associated with both types of errors.
46.

The Commission proposes further to adjudicate the key question of which

practices constitute “reasonable network management” (and are hence permitted) through a
“case-by-case” approach, stating that “the novelty of Internet access and traffic management
questions, the complex nature of the Internet, and a general policy of restraint in setting policy
for Internet access service providers weigh in favor of a case-by-case approach.” 81

This

approach, too, is sensible, as it suggests that the Commission recognizes that distinguishing
between beneficial behaviors and harmful ones is likely to be both analytically difficult and
factually complex.
47.

However, the Commission proposes to apply its case-by-case approach in a

prohibitive rather than permissive fashion: That is, all “discriminatory” behavior that is not
found to be permitted (on a case-by-case basis) would be banned. As we have explained above,
the conduct potentially covered by the proposed regulations is far more likely to be beneficial
than harmful. Accordingly, the Commission’s proposed approach is precisely the reverse of
what the economic evidence supports, and virtually guarantees far more Type II error than is
consistent with economic efficiency and consumer welfare.82

81

See NPRM at ¶134.
See, e.g., Weisman and Kulick at 22 (“There are two strong reasons to believe that, at this point in time,
specific regulation of vertical integration by ISPs into the Internet content space will be subject to substantial Type
I error. First, monopoly power in one market is a necessary condition for anticompetitive effects in almost all
models of anticompetitive vertical integration. As discussed above, competition is becoming increasingly intense in
the ISP market and there is scant evidence that, as a general matter, broadband providers possess true monopoly
power. Second, ISPs generally serve regional markets whereas content markets are often national or
international…. On the other hand, at this point in time, there is little risk of Type II error.”)
82

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48.

While we agree that a case-by-case approach to enforcement is appropriate for

the conduct and issues addressed in the NPRM, 83 the Commission should adopt a permissive
rather than a prohibitive approach: Conduct should be considered permitted unless, after a casespecific adjudication of the facts, it can be shown to be harmful, on net, to economic efficiency
and consumer welfare. 84

That is, rather than being presumptively unlawful, network

management practices and other “discriminatory” behavior should be presumptively lawful.
49.

In assessing the lawfulness of specific conduct, the Commission should apply

existing, generally agreed-upon standards for the evaluation of market power, market failure,
and consumer welfare – standards such as those implicit in the FTC-Department of Justice
Merger Guidelines, 85 the Office of Management and Budget’s Circular A-4, 86 the FTC’s Policy
Statements on and Deception 87 and Unfairness, 88 and, more broadly, the pro-competition, proconsumer doctrines that have developed under the Sherman Act and other antitrust statutes.89

83

See Katz Declaration at 36 (“Case-by-case application of antitrust laws is the best way to deal with
concerns that, in some circumstances, network management can be used to harm competition. Such an approach is
the only way to block the use of these practices when they harm competition and consumers while at the same time
ensuring that service providers can engage in these practices in the many instances where they benefit consumers
and promote competition and the achievement of other public-interest goals.”)
84
See Ehrlich, Eisenach and Leighton at 48 (“On their face, the existing proposals would presumptively
prohibit a wide range of business practices. Indeed, taken at face value, they would appear to prohibit a wide
variety of practices about which even regulation advocates have expressed no concerns. Moreover, the only
limiting principle regulation advocates concede is technical feasibility, a standard which effectively precludes a
weighing of benefits against costs to maximize consumer welfare.”)
85
See U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines (rev.
April 8, 1997) (available at http://www.justice.gov/atr/public/guidelines/horiz_book/hmg1.html).
86
See Office of Management and Budget, Circular A-4, Regulatory Analysis (September 17, 2003)
(available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf).
87
See Federal Trade Commission, FTC Policy Statement On Deception, Appended to Cliffdale Associates,
Inc., 103 F.T.C. 110, 174 (1984) (available at http://www.ftc.gov/bcp/policystmt/ad-decept.htm).
88
Federal Trade Commission, FTC Policy Statement On Unfairness, Appended to International Harvester
Co., 104 F.T.C. 949, 1070 (1984) (available at http://www.ftc.gov/bcp/policystmt/ad-unfair.htm) see also15 U.S.C.
§ 45(n).
89
See generally Brito and Ellig at 7-37; see also Joseph Farrell and Philip J. Weiser, “Modularity, Vertical
Integration, and Open Access Policies: Towards a Convergence of Antitrust and Regulation in the Internet Age,”
Harvard Journal of Law and Technology 17;1 (Fall 2003) at 134 (“In developing its regulatory strategy for new
environments such as broadband where price regulation is absent, the FCC should define more clearly when to
restrict a firm’s conduct — for instance, only after exclusionary conduct is demonstrated, where it seems probable,
or where it would do the most harm. Antitrust enforcers normally address exclusionary conduct by a single firm

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50.

Beyond recommending that the Commission give weight to these general

substantive standards, we do not make specific recommendations for how the Commission
should go about implementing a case-by-case approach. 90 We do note, however, that a number
of parties have recommended various aspects of such approaches. For example, Professor
Neuchterlein (among many others) recommends application of antitrust law by the traditional
antitrust enforcement agencies; 91 Drs. Hahn, Litan and Singer suggest applying “existing FCC
procedures for resolving discrimination in other contexts”; 92 and, Google and Verizon jointly
recommend creation of technical advisory committees to ensure the Commission’s assessments
of individual business practices are grounded in a sound technical understanding. 93 Others have
pointed out that any concerns about the adequacy of competition can best be addressed by
taking steps to promote competition (e.g., by increasing the amount of spectrum available for
licensed use). 94 We offer these examples not because we have concluded any of them represent
the best or only approach supported by the economic evidence, but rather as a demonstration
that there are viable alternatives to the prohibitive ex ante regulations proposed in the NPRM.

only ex post, once such conduct has been proven. Regulators, by contrast, often act to avoid vertical competitive
harms before they occur, but do not always explain how their actions fit with ICE or antitrust policy more
generally. The FCC must provide such an explanation if it decides to impose an open access requirement on
broadband platforms.”) (emphasis added).
90
Professor Kahn qualifies his approval of the case we make here for non- or de-regulation of Internet
access by emphasizing the principle that forbearance from direct economic regulation transfers responsibility for
the public interest to competition protected by the antitrust laws. In particular, in the present context, he would
emphasize the prohibition of unfair methods of competition (or unfairly exclusionary practices) as defined in
Section 5 of the Federal Trade Commission Act, preferably exercised in cooperation with the antitrust agencies.
91
See Jonathan E. Nuechterlein, “Antitrust Oversight of an Antitrust Dispute: An Institutional Perspective
on the Net Neutrality Debate,” Journal on Telecommunications and High Technology Law 7 (2009) 20-65.
92
See Hahn, Litan and Singer at 20.
93
Google and Verizon Joint Submission on the Open Internet, GN Docket No. 09-191; WC Docket No.
07-52 (January 14, 2010). As the Commission notes in the National Broadband Plan, evaluating competition in
application and content markets is particularly challenging. See National Broadband Plan at 52 (“Applications,
content and the services they enable are bundled, sold, priced and monetized in many different ways. The nature
and intensity of competition in applications and content varies tremendously and must be evaluated on a case-bycase basis.”)
94
See, e.g., Faulhaber and Farber at 33.

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V.
51.

CONCLUSION

The regulations proposed in the NRPM are unsupported by the economic

evidence. There is no economic evidence, even in the abstract, of generalized market power or
systematic market failure in the markets at issue. There is no economic basis for believing the
practices at issue are reducing economic efficiency or consumer welfare. There is no empirical
evidence whatsoever that consumers have been harmed in the past.
52.

There is strong economic evidence that the regulations would inhibit, or prohibit,

efficiency enhancing conduct, thereby reducing competition, slowing innovation, deterring
investment and ultimately reducing consumer welfare.
53.

To the extent the types of conduct addressed in the NPRM may, in isolated

circumstances, have the potential to harm competition or consumers, the Commission and other
regulatory bodies, including the Federal Trade Commission, have the ability to deter or prohibit
such conduct on a case-by-case basis, through the application of existing doctrines and
procedures. Hence, the approach advocated in the NPRM is not necessary to achieve whatever
economic benefits may be associated with prohibiting harmful discrimination on the Internet.

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Respectfully submitted,

Jerry Brito, J.D.
Mercatus Center, George Mason University

Alfred E. Kahn, Ph.D.
National Economic Research Associates

Martin Cave, D.Phil.
Warwick Business School, University of
Warwick

Wayne A. Leighton, Ph.D.
Francisco Marroquín University

Robert W. Crandall, Ph.D.
The Brookings Institution
Larry F. Darby, Ph.D.
American Consumer Institute and George
Mason University Law School

Robert Litan, Ph.D.
The Brookings Institution and the Kaufman
Foundation
Glen O. Robinson, J.D.
University of Virginia

Everett M. Ehrlich, Ph.D.
ESC Company

Hal J. Singer, Ph.D.
Navigant Economics LLC and Georgetown
University School of Business

Jeffrey A. Eisenach, Ph.D.
Navigant Economics LLC and George
Mason University Law School

Vernon L. Smith, Ph.D.
Chapman University, Economic Science
Institute

Jerry Ellig, Ph.D.
Mercatus Center, George Mason University

William Taylor, Ph.D.
National Economic Research Associates

Henry Ergas
Economist

Timothy J. Tardiff, Ph.D.
Advanced Analytical Consulting Group

David Farber
Carnegie Mellon University

Leonard Waverman, Ph.D.
Haskayne School of Business, University of
Calgary

Gerald R. Faulhaber, Ph.D.
Wharton School, University of Pennsylvania
Robert W. Hahn, Ph.D.
University of Manchester and
University of Oxford

Dennis L. Weisman, Ph.D.
Kansas State University
*Affiliations listed for identification purposes only.