Last week, Professor Susan Crawford authored an op-ed entitled What’s Good for Verizon and AT&T Is Terrible for American Consumers. While Professor Crawford’s emotional argument is a bit scattered, her depiction of an industry in transition provides a useful foundation for discussing the future of broadband in the United States.
First, Professor Crawford argues that wireless broadband is a “commodity,” and one that consumers are increasingly using as a substitute for traditional “voice” and “texting” services. This substitution is arguably true and, as such, we should therefore expect to see broadband providers increasingly employing and experimenting with a variety of pricing plans in an effort to better match their service offerings with this evolving consumer demand. However, contrary to Professor Crawford’s admonitions, this pricing experimentation is not bad for consumers: with pricing flexibility, the data hogs will pay more so those desiring limited connectivity can pay less. Indeed, these changes in the pricing behavior of the broadband providers are not a conspiracy by the evil corporation, but simply reflect the underlying changes in technology and consumer preferences.
Another likely consequence of the “commoditization” of data service is a reduction in the number of underlying network providers. Economic theory tells us that higher concentration is an expected consequence of commoditization in an industry where the provision of service requires enormous capital investments. Fewer competitors is rarely seen as a good thing, but economic forces aren’t typically interested in such judgments. The underlying economic and financial realities of the industry will determine how many competitors survive, and the realities are not trending favorably to a greater number of competitors. However, economic theory also says that fewer competitors may not be “terrible” for consumers. Indeed, to the contrary, commoditization typically leads to more intense price competition which presumably even Susan Crawford would agree is a good thing. Also, given current spectrum exhaust (a point totally ignored by Professor Crawford), fewer wireless broadband competitors in particular is likely to lead to higher service quality, more innovative services and potentially lower service prices as the per-firm allotment of the scarce resource rises.
Professor Crawford also argues that we “should be talking about fiber networks that enable rich clouds of nomadic activity and commodity devices that can access those networks and any content or application they want.” I’m not sure where Dr. Crawford has been lately, but the expansion of fiber and mobility is about all the industry is talking about and investing in these days. Despite rates of profitability far below the average for large U.S. companies (say, the S&P 500), broadband providers, including Verizon and AT&T, have among the highest capital expenditures in the country. And despite an unfavorable regulatory climate, broadband providers are today deploying fiber and advanced wireless networks in an effort to improve the quality of mobile broadband services, and in part to alleviate capacity shortages caused largely by the government’s failure to increase the allocation of spectrum to the sector.
Perhaps Professor Crawford is right that we need policies that incent carriers to act more quickly in their efforts to push fiber deeper into their networks. Such policies work, however, only when the policies make this investment more profitable, not less. As the U.S. National Broadband Plan recognized, “[p]rivate capital will only be available to fund investments in broadband networks where it is possible to earn returns in excess of the cost of capital. In short, only profitable networks will attract the investment required.”
Yet, strangely, Professor Crawford has long advocated policies that are outright hostile to private sector investment. For example, Professor Crawford was a staunch advocate of Network Neutrality. Despite all of Professor Crawford’s wonderful platitudes about the need for a “free and open Internet”, the hard fact is that the FCC’s net neutrality rules turned out to be little more than price regulation aimed at shifting profits from the network providers to “over-the-top” firms like Google. These new rules also force consumers to bear the full cost of network upgrades and expansion, since the broadband providers are precluded from allowing applications providers to shoulder part of the cost. And while many application providers are attempting to circumvent this rule and help fund network improvements, such efforts are being challenged by those—like Professor Crawford—who are hostile to market solutions for inefficient outcomes. Professor Crawford’s op-ed also strongly suggests that broadband services should be price regulated at the retail level. Experience reveals that letting regulators set retail prices for broadband services is a sure-fire way to curb investment in broadband infrastructure.
Without question, the broadband marketplace, both fixed and mobile, is in transition. The modern communications carrier is moving from a multi-service provider to a purveyor of connectivity and data transmission. Revenues from the data commodity must be sufficient to offset lost revenues from services like voice and texting, which are disappearing. The future is profoundly uncertain. If broadband networks are to be built, maintained and improved, then providers must be allowed to experiment with a variety of pricing and service options in an effort to find a business plan that makes the provision of communications network financially viable. At this critical juncture, regulation is more likely to make things worse than better.