Does Broadband Consolidation Threaten the Open Internet?

Incumbent firms enjoy a privileged position in the market thanks to past and ongoing government assistance

Timothy B. Lee -- Writer with Ars Technica

We saw in my last post that the distinctive economic character of roads mean that they're almost never fully private. Although it might make sense for some roads to be managed by private firms, a fully private system of roads is unlikely to be either possible or desirable. The dangers of rent-seeking are simply too great.

A few commenters astutely observed that many of the same points apply to other transportation and communications systems. Take, for example, the cables that connect each of our homes to our local cable and telephone companies. As with the roads, these cables likely could not have been installed without extensive government help. But whereas most roads are owned and operated by governments, phone and cable services have traditionally been offered by regulated private monopolies.

In a new article for National Affairs, I describe the half-century struggle to come up with a workable regulatory scheme for this industry, which straddles the line between public and private. Until 1984, communications services were provided by a nationwide monopoly, the old AT&T. After AT&T was broken up, we had seven heavily-regulated local telephone monopolies plus a competitive market for long-distance phone service.

As cable television became more popular, policymakers spied an opportunity to bring competition to the portions of telecommunications markets that were still monopolized. In 1996, they allowed the phone and cable incumbents to enter each other's markets, while relaxing some regulations on the incumbents.

The result has been a de facto duopoly in wired communications services, including high-speed Internet access. In most parts of the country, you can subscribe to broadband services offered by your local phone company or your local cable company, and that's about it. (Wireless options also exist, but they're significantly slower and more expensive.) This is obviously an improvement over the communications monopoly that existed 30 years ago, but it's far from ideal.

Moreover, the incumbents are gradually consolidating. While we're still a long way from the monopolies of the 1970s, the growing power of the largest incumbents--Comcast, AT&T, Verizon, and Time Warner are the largest--is beginning to threaten the Internet's decentralized structure. In particular, there's a risk that the incumbents will use their role as a broadband provider to undermine providers like Netflix and Hulu that threaten their lucrative video subscription businesses.

There's a lot more detail about the problem and what can be done about it in the article, but here I want to address an objection I've gotten from some libertarians: that the regulations I advocate constitutes government meddling in the free market. I think this criticism gets things backwards.

To return to our freeway example, suppose the government privatized I-95 and the new owner jacked up tolls from Philadelphia to Washington DC to $100. This would be a restriction of my freedom to travel. And while this mobility tax would formally be collected by a private company, the government is still ultimately responsible for it, since the private company's monopoly power ultimately comes from the government. Requiring that the road operator charge reasonable fees is a way of reducing the distortionary effects of government policy on the economy, not increasing it.

The situation with broadband incumbents is more subtle, but the basic principle is the same. Incumbent firms enjoy a privileged position in the market thanks to past and ongoing government assistance. Therefore, if broadband ISPs place arbitrary limits on their customers' Internet use -- for example, blocking access to Netflix -- this is a restriction on customers' freedom. And the government bears a share of responsibility for it. Minimizing government interference with the free market is a worthwhile goal, but it can't be accomplished merely looking at individual policies in isolation. Sometimes, as with the 1984 breakup of AT&T, it also requires remedial steps to remedy the distortionary effects of past government policies.