Recent paper argues that antitrust law could effectively protect Internet value in the absence of net neutrality rules.
When the U.S. Federal Communications Commission (FCC) vacated its 2015 Open Internet Order, net neutrality advocates warned that the decision would diminish the value of the Internet. They predicted that the FCC’s retreat would allow broadband providers such as Comcast and AT&T to discriminate against Internet content providers—also known as “edge” providers”— in pursuit of higher profits.
In a recent paper, A. Douglas Melamed and Andrew W. Chang compare the net neutrality and antitrust approaches to Internet governance and argue that net neutrality might not be necessary to preserve Internet value after all.
Melamed and Chang concede that harmful broadband provider conduct is still possible. Some broadband providers can block or harm edge providers if they so choose—particularly, large broadband providers or a group of providers that might discriminate against the same edge providers.
Broadband providers’ ability to price their services significantly above their marginal costs demonstrates these providers’ market power over consumers and edge providers, Melamed and Chang argue. Moreover, if broadband providers diminish the value of their platforms through discriminatory conduct, consumers have little capacity to curb that behavior, as the costs of switching to another broadband provider can be quite high.
Melamed and Chang note that despite their substantial market power, profit-maximizing broadband providers will generally want to make their services attractive to consumers, and restricting access to valuable edge providers likely will not be profitable.
In situations where a broadband provider can profit from contracting with certain edge providers to favor them over other edge providers, antitrust enforcement can help considerably. Melamed and Chang argue disfavored edge providers are likely to report to antitrust enforcers or courts about any “blatant conduct” that smacks of anti-competitive alliances, “such as refusing to deal” with them to create market power for favored edge providers. Additionally, consumers would probably catch more “subtle conduct” that harms competitors, like broadband providers slowing processing speeds for disfavored providers’ content.
Not all discriminatory conduct by broadband providers will be prohibited under antitrust law, however.
Melamed and Chang explain that the antitrust approach differs from FCC regulation in that it does not rely on bright-line rules. Whereas net neutrality categorically bans all discriminatory conduct by broadband providers, antitrust law finely targets anticompetitive behavior on “a case-by-case basis.” Thus, antitrust law will not keep a party from benefitting from relationships with edge providers if these connections are efficient and do not harm competition.
Possible examples of efficient discriminatory conduct would include broadband providers giving affiliated edge providers a leg up in the market by offering them a “fast (or otherwise superior) distribution channel.” According to Melamed and Change, this behavior would not violate antitrust law because it “can be characterized as failing to help” unaffiliated edge providers rather than actively disadvantaging them.
When enhancing the value of all providers on its platform is possible, however, choosing to benefit only a few would not make much sense to profit-maximizing broadband providers looking to amp their services’ consumer appeal, Melamed and Chang write.
They also contend that some kinds of efficient discriminatory conduct that would be prohibited under net neutrality regulation might actually be economically beneficial.
For example, a broadband provider might engage in price discrimination by charging higher prices to consumers who frequently use content providers like Netflix, which are more costly to distribute. Similarly, a broadband provider may directly charge Netflix higher prices for distributing its content.
By charging higher prices to “those most able to pay,” broadband providers could charge “lower relative prices for new or fragile edge providers” and thereby encourage value-enhancing variety in the market.
Because net neutrality regulation would have prohibited discriminatory conduct of any kind, these potential gains would not have been realized under the Open Internet Order, argue Melamed and Chang.
Melamed and Chang note that net neutrality’s bright-line approach would simplify enforcement significantly, which in turn would lower “transaction and enforcement costs” and enable more consistent application. But because net neutrality would also bar efficient behavior, broadband providers might try “to conceal violations” or find less economically effective ways of working around the regulations.
By contrast, the “complexity of the legal and factual issues” and “substantial” magnitude of antitrust remedies—whether they are injunctions or damages—make enforcement much more difficult. Although these hurdles could lead to under-enforcement, Melamed and Chang suggest that their severity also makes antitrust law “rather effective in deterring anticompetitive conduct.”
Melamed and Chang argue that although there may be some unforeseen gaps in antitrust law’s protection of the Internet, regulation that is narrower than net neutrality might suffice to supplement the antitrust provisions. Moreover, the added gains of efficient discriminatory conduct under an antitrust regime may make the loss of more rigid net neutrality protection easier to bear. Most importantly, however, under the careful watch of antitrust law, the Internet may not be in as much danger as net neutrality advocates fear.