[Below is the Introduction and Conclusion to this latest FSF Perspectives. A PDF version of the complete Perspectives is here.]

Introduction: The Internet of Bad Analogies

 

Last week, the blogosphere was abuzz with the news that Netflix and Comcast had signed a "mutually beneficial interconnection agreement." Although the companies did not disclose the terms of the deal, most assume that Netflix will pay to connect its servers directly to the Comcast network and stream content to Comcast customers more efficiently. Net neutrality proponents, already smarting from last month's D.C. Circuit decision, quickly condemned the agreement as a revolutionary and ominous milestone: one called it "water in the basement for the Internet industry." But when one strips away the rhetoric and engages in a more nuanced analysis than instant-punditry can provide, one sees much less cause for alarm.

 

Professor Tim Wu of Columbia Law School, who coined the term "net neutrality" a decade ago, expressed his concerns through analogy. In a short New Yorker blog post, he compared Comcast to a restaurant whose most popular dishes were made with fresh tomatoes, but whose service was inconsistent because of frequent tomato shortages. When the restaurant's tomato supplier offers to build a storage facility nearby to improve tomato supply, one might expect the restaurant to be thrilled. But because Comcast is the only restaurant in town serving tomato dishes, it instead demands money from the tomato supplier, knowing that otherwise the tomato supplier would go out of business.

 

If this analogy seems strained, it's because it is a poor representation of the Internet ecosystem. A diner pays the restaurant for his meal. Tomatoes are an input that the restaurant must secure to provide the finished product for the consumer. But the broadband consumer does not buy Netflix service from Comcast; he buys it directly from Netflix. Netflix must then make arrangements to get its streaming video from its servers to the consumer's broadband provider-which is a cost of doing its business. Professor Wu and other critics are not disgruntled Italian food patrons; they are more like sports fans who, after buying a stadium ticket, grumble that the venue charges rent to the beer vendor.

 

But even this analogy is imperfect. Internet policy is hard to examine by analogy, as anyone knows who has tried to explain the battle in the Supreme Court's Brand X decision between Justice Scalia's Internet-as-pizza-delivery metaphor and Justice Thomas's preferred Internet-as-car-dealership comparison. Rather than refracting reality through distorting lenses of other life experiences, it is better to discard such analogies and discuss in plain terms how Netflix does business and how the Comcast agreement affects its operations.

 

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 Conclusion: The Future of Internet Regulation

 

Because of the intense spotlight that commentators have placed on this agreement, it is possible that regulators will begin looking more closely at interconnection agreements and other negotiations between network operators. Traditionally, the Federal Communications Commission has focused primarily on the residential end-user broadband market, and to a lesser extent on commercial broadband access. But many net neutrality proponents have encouraged the Commission to turn its attention upstream in the Internet ecosystem as well. The D.C. Circuit's Verizon decision recognized that Section 706 of the Telecommunications Act gives the Commission at least some authority to "promulgate rules governing broadband providers' treatment of Internet traffic" and "how broadband providers treat edge providers." As Professor Christopher Yoo noted in an earlier Free State Foundation Perspectives piece, the scope of that authority is unclear, and there are good arguments to interpret it relatively narrowly. But concern in some circles about the effect of interconnection agreements on markets for Internet content and applications may lead the Commission to test the boundaries of the Verizon decision.

 

But there appears no justification at present for such a radical expansion of the Commission's mandate. Independently of the legal concerns that Professor Yoo and others have identified, regulatory interference with backbone providers, transit markets, and peering arrangements would simply be bad policy, especially absent strong evidence of a significant market failure. The markets for peering and transit are as robust and competitive as they come. Content providers can choose from a wide range of transit providers, some of which specialize in transit alone, while others provide a variety of complementary services as well. Some provide service only within a limited geographic area, while others operate across continents. These networks famously subsist on razor-thin margins. Transit prices have fallen, dramatically, every quarter and will continue to do so for the near future.

 

The Netflix deal shows that Comcast may be increasing its footprint in this space. While this step may not be as revolutionary as the blogosphere suggests, it may be somewhat evolutionary. Professor Wu and others are concerned that Comcast may leverage its position as a residential broadband provider to gain an unfair advantage in this upstream market. The robustness of the transit market, and the importance of uninterrupted transit to the functioning of the Internet overall, makes that unlikely. Antitrust law continues to oversee this space, as it does most of the American economy, and it is poised to combat abuses of market power that actually harm consumers. Though Cogent may disagree, Netflix and Comcast's decision to eliminate the middleman is not inherently anticompetitive and is likely welfare-enhancing because it gets services to consumers faster and with fewer potential interruptions.

 

We should expect this type of creative destruction in markets as dynamic as Internet service, where new innovations demand new and better ways to reach consumers. The agreement may be bad for Cogent and other less efficient providers wedded to the status quo, but it is consistent with an ecosystem that is rapidly changing in capability and complexity. To paraphrase Mark Twain, I suspect that rumors of the Internet's demise have been greatly exaggerated.  

 

* Daniel A. Lyons, an Assistant Professor of Law at Boston College Law School, is a Member of the Free State Foundation's Board of Academic Advisors. The Free State Foundation is an independent, nonpartisan free market-oriented think tank located in Rockville, Maryland.

 

A PDF version of the complete Perspectives is here.