Ehrlich: Few ISPs Does Not Equate To Uncompetitive Market Results

The fact that there are relatively few broadband competitors does not necessarily mean the market is not producing results similar to a conventionally competitive market.

That was an observation of Everett Ehrlich, senior fellow at the Progressive Policy Institute, in comments to the House Energy & Commerce Committee, which is collecting input in its ongoing review of the communications law and regulation.

Ehrlich said that the allegation that the broadband market is uncompetitive and needs otherwise intrusive regulation—network neutrality regs or common carrier treatment—is based on those small numbers, but does not hold up for a couple of reasons.

He said that unlike traditional monopolists, broadband providers don't face ever-rising costs of production as their output expands. Instead, because fixed and wireless broadband have high fixed costs, they seek to increase output—subs, to amortize those costs. That, he says, "is the opposite of the behavior economists associate with oligopoly or, more generally, excessive market power."

The second reason that the raw number of providers does not tell the whole competitive story, he suggests, is that the behavior of companies not technically in that category "often have the same result as do the behaviors of companies that are inside-the-lines."

In this case, the edge providers who are an inextricable part of the equation. "[C]onnectivity providers [ISPs] create value that is usurped by downstream competitors [apps, services and content creation] who claim a larger share of the integrated value 'pie' of the broadband experience."

He points out in a paper released by PPI Friday that "device manufacturers such as Apple, content providers such as Viacom, service providers such as Google or eBay – have profit margins, both on sales and assets – that are six-to-eight times the margins of companies that provide the Internet."

He argues that if profit margins are an indicator of market power, the issue is more with those downstream companies than service providers. "When Verizon innovates, Apple and Facebook gain in value and capture the value created," he says. "Thus, simply looking at 'how many providers' there are in broadband won’t explain the results we see in markets."

Ehrlich says that behavior should guide policy, both negative outcomes like price discrimination, but more fundamentally whether the market is producing outcomes expected from a competitive market—speeds improving "reasonably," affordability given the costs (whcih will include the cost of recovering that high fixed initial cost), is it drawing investment, and are broadband profits reasonable.

Ehrlich's conclusion is that the market is producing those outcomes, and is thus competitive.

John Eggerton

Contributing editor John Eggerton has been an editor and/or writer on media regulation, legislation and policy for over four decades, including covering the FCC, FTC, Congress, the major media trade associations, and the federal courts. In addition to Multichannel News and Broadcasting + Cable, his work has appeared in Radio World, TV Technology, TV Fax, This Week in Consumer Electronics, Variety and the Encyclopedia Britannica.