The Uneconomics of Data Cap Price Regulation and Legislation — Part 14 Broadband Internet Pricing Freedom Series

December 20, 2012

The latest attempts to subvert the competitive success of the current free market broadband Internet to advance the fantasy of abundance uneconomics and cost-less Internet commons is the New America Foundation’s (NAF) white paper entitled: “Capping the Nation’s Broadband Future? Dwindling competition is fueling the rise of increasingly costly and restrictive Internet usage caps;” and Senator Wyden’s proposedData Cap Integrity Act” to have the FCC effectively price regulate broadband usage and ban traffic discrimination a la “net neutrality.”

In a nutshell, the NAF paper argues competition, usage-based pricing and the profit motive ill-serve the broadband Internet consumer; thus the Government should prohibit the market-pricing model of broadband data caps.

In a nutshell, Senator Wyden’s proposed legislation argues that broadband usage and tiered pricing harm consumers by discouraging Internet use, discriminating against high-bandwidth services, and inhibiting innovation because ISPs make money on heavy broadband usage. Thus the Government should price regulate competitive broadband companies to prevent extraction of “monopoly rents.”

NAF Paper

The paper’s fatal flaws are first its uneconomic hostility to the profit motive that fuels free market competition, and second, the paper’s fact-challenged and un-supported premise that the U.S. broadband market is “woefully uncompetitive.”

I. The paper’s implicit uneconomic assumptions are clear from the way the authors gerrymandered the frame of the analysis. First, the paper’s foundational presumption, that broadband pricing should be based on marginal cost and not the total cost of providing broadband service, exposes uneconomic “abundance economics” thinking that magically assumes someone else will pick-up one’s tab, not the reality of market economics. Second, the paper assumes paying for a good or service by usage or value received is inherently unfair or wrong, when in fact it is one of the most fair, widely-accepted and well-understood of all economic principles. Third, the paper assumes that Wall Street expectations of future profitability from broadband companies is somehow wrong or unfair to consumers, when our American capitalist economy supplies most all market goods predicated on capital markets and competition for capital. Fourth, the paper holds revenue growth per subscriber and revenue growth in general as bad, when it ignores the economic reality of broadband consumers getting more speed, usage, quantity, choices, services, and value for the money. Fifth, the paper assumes economic motives of broadband companies are nefarious, and not the way free market competition naturally works to ensure supply meets demand and risk matches reward. Finally, the obvious underlying message of this analysis is that any system that requires economic mechanisms to manage outcomes harms consumers, when economic mechanisms are essential to continue providing the service consumers demand and want constantly improved.

II. The paper also explicitly asserts that the U.S. broadband market is “woefully uncompetitive” in order to justify their government price regulation of broadband. The authors ignore obvious well-known facts and information that they know would kneecap their case for no broadband usage caps.

First, the U.S. has the most competitive broadband market in the world, because no other nation has two ubiquitous national wire line broadband networks (telco and cable), or four ubiquitous national wireless broadband networks (Verizon, AT&T, Sprint, and T-Mobile.) Second, the state of broadband competition is not “dwindling;” on the contrary it has intensified greatly over the last several months. The Verizon-Cable transaction laid the foundation for cable becoming a potential fifth wireless broadband provider via WiFi and a Verizon MVNO deal. T-Mobile has gained a very substantial amount of spectrum from AT&T, cable companies, and from buying Metro PCS. Softbank is buying Sprint which is giving Sprint a massive multi-billion infusion of capital, and which has already enabled Sprint to buy Clearwire and become “the largest U.S. spectrum holder.” The FCC just approved a repurposing of DISH satellite spectrum for terrestrial wireless retail use nationally. And Google is signaling it is poised to expand Google Fiber to more cities.

With all these obvious pro-competitive developments in the last several months alone, how can the NAF credibly claim that broadband competition is “dwindling” or “woefully un-competitive?”

Senator Wyden Legislation

Like the NAF paper, Senator Wyden’s Legislation shares an implicit hostility to a free market broadband Internet. It ignores that the U.S. broadband market is fully competitive and not capable of extracting “monopoly rents.” It ignores that usage-based pricing is a normal, accepted and commonplace pricing method in the U.S. economy.

If the Open Internet was Net Neutrality 2.0, then it appears that Data Caps Integrity is angling to become Net Neutrality 3.0. Like the versions before them, Data Caps regulation or legislation is “a solution in search of a problem.”

In sum, context and perspective are necessary to evaluate the uneconomic premises of the NAF paper and Senator Wyden’s Data Cap legislation. True to form of Internet commons proponents, their materials are full of clever turns of phrase and standard demonization of broadband companies, business and profit.

Their bottom line problem, however, is that their economic analysis is uneconomic.

* * * * * *

Broadband Internet Pricing Freedom Series

Part 1: “Netflix’ Glass House Temper Tantrum Over Broadband Usage Fees”

Part 2: “Netflix Uneconomics”

Part 3: “Debunking the Carping Over Broadband Usage-Pricing”

Part 4: “Is Netflix the AOL of Web Streaming?”

Part 5: “Consumer Groups Advocacy Hypocrisy”

Part 6: “Leaf Vision and Broadband Usage Caps”

Part 7: “Broadband Pricing is Naturally Evolving to Tiers”

Part 8: “Obsolete Analysis Will Doom DOJ’s Antitrust Probe of Cable”

Part 9: “Video: Scott Cleland Discusses Netflix’ DOJ Complaint”

Part 10: “SCOTUS Indecency Ruling’s Effect of Net Neutrality”

Part 11: “U.S. Net Neutrality Movement in Retreat”

Part 12: “FCC Creates Abundant Uncertainty”

Part 13: “The Real Motive behind Opposition to Broadband Usage Pricing”

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