10 Reasons To Be More Optimistic About Broadband Than Susan Crawford Is
by Geoffrey Manne & Berin Szoka
Susan Crawford thinks she sees the future of the Internet—and it isn’t pretty: Cable companies monopolizing broadband, charging too much, withholding content and keeping speeds low, all in order to suppress disruptive innovation.
Wireless can’t compete because of sheer physics—and an AT&T/Verizon duopoly will mirror the cable monopoly, anyway. The Internet will increasingly resemble cable itself: a limited bundle of “channels” chosen by cable companies. Facebook and Google might be strong enough to cut deals to stay in the “basic tier,” but new entrants will be shut out. So will cable TV alternatives like Netflix. Only regulating broadband like a public utility can avoid this dire future. Or better yet, just have government deliver the service.
Crawford’s become the unofficial spokesman for a budding campaign to reshape broadband. Her speech Thursday night at the New America Foundation provides a good introduction to her new book, Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age.
But there are many reasons to think the Internet’s future will be brighter than she fears, and that her preferred, government-run future wouldn’t turn out so well. Here are just ten:
- Broadband isn’t like electricity. Crawford frequently invokes FDR’s rural electrification efforts. Like electricity, she considers high-speed Internet a fundamental need—specifically, symmetrical 100+ mbps cable or fiber. But unlike electricity, consumer preferences for broadband vary remarkably, and consumers want much more from their networks than the equivalent of simply turning on a light. Like so many of her generation, Crawford struggles to understand computers that don’t look like desktops—and assumes that wireless devices necessarily fit in your hand. Economist Ev Ehrlich calls her attitude “broadband effetery”: the presumption that “this is what ‘the right people’ want, and you should want it, too.” It’s one thing to say we should all want electricity, but quite another to insist we must use the Internet the way Crawford herself does.
- Providing broadband isn’t like delivering electricity. Crawford calls broadband a “dumb” pipe for “moving bits from Point A to Point B”—just like electricity. She worries about vertically integrated network providers intervening in the flow of bits. But the Internet isn’t so simple. There’s a heated debate ongoing at the FCC over regulating the “IP Transition” — replacement of outdated telephone networks with all-IP infrastructure. Smartly managing such networks facilitates services and quality improvements unavailable today, but it means broadband networks are becoming considerably more than just “dumb pipes.” Even Crawford’s “dumb” electrical networks are slowly getting smarter—and less “neutral.”
- The public utility model doesn’t work well for dynamic services. Electric utilities deliver plain vanilla service. They’ve struggled to innovate, failing to deliver broadband over power lines and taking years to roll out smart grid technologies. The same is true for railroads. The nationwide fiber network Crawford calls for sounds like long-standing dreams of high-speed rail. But the reality would probably look a lot more like Amtrak: slow, grossly over-budget, heavily subsidized, and unable to compete with more nimble competitors. And let’s not forget that Crawford herself notes the perils of regulatory capture at the FCC and local regulators. Her idealized network may not be what consumers want anyway, and many may choose options that elites like Crawford look down their noses at: Bolt Bus is to Amtrak as 4G iPads are to Crawford’s high-speed fiber.
- Crawford paints too-rosy a picture of government-run broadband. Some municipalities have built wi-fi and fiber networks, but none has been the success Crawford claims. The wi-fi schemes mostly fizzled. Google originally had planned to wire San Francisco and Mountain View with public wi-fi, but ultimately rolled out service only in the area around its own offices in Mountain View (population 75,000). Even that network is plagued with reliability issues. (Google plans a second network in New York, but again, only in the Chelsea neighborhood around its office). A few muni-fiber schemes claim success, but even with heavy capital subsidies, service is expensive and the systems will break even only if take-up rates increase dramatically or if taxpayers foot the bill. As a London School of Economics report notes, “subsidising the deployment of superfast broadband to reach 92% of households would generate only £0.72 of consumer surplus for every £1 of subsidy”—not obviously a good investment. Or as Charles Kenny, a Fellow af the New America Foundation itself, writes in his study, Superfast: Is It Really Worth a Subsidy?, “[t]his paper suggests fiber to the home may be no more worthy of subsidy than Concorde.” And how much easier would government surveillance or censorship be if government actually ran the networks?
- Competition isn’t over. Crawford sees broadband as a natural monopoly, with economies of scale making competition impossible. Well, Google doesn’t seem to agree. Its Kansas City fiber network isn’t just a stunt; Google expects it to make money. AT&T is eager to replace its outdated switched networks with all-IP ones. This will bring U-Verse (45-75 mbps) to nearly a third of the country. Most importantly, wireless services can check the power of wireline. One study predicts that, “By 2015, more U.S. Internet users will access the Internet through mobile devices than through PCs or other wireline devices.” As Crawford herself acknowledged at Thursday’s NAF event, explaining why she would probably block a cable/wireless merger, each currently has an incentive to build new infrastructure to draw customers from the other. That’s called competition. Even full-length video streaming, supposedly the unassailable lynchpin of the “cable monopoly,” is well within the technical capacity of wireless: Consumers increasingly prefer to watch such videos on phones and tablets, and mobile video now comprises the majority of all mobile traffic. While doubtless some of this traffic flows over wi-fi, some of it doesn’t, and 4G download speeds and advanced devices clearly facilitate increasing wireless/wireline competition.
- Things in the US today are better than Crawford claims. While Crawford claims that broadband is faster and cheaper in other developed countries, her statistics are convincingly disputed. She neglects to mention the significant subsidies used to build out those networks. Crawford’s model is Europe, but as Europeans acknowledge, “beyond 100 Mbps supply will be very difficult and expensive. Western Europe may be forced into a second fibre build out earlier than expected, or will find themselves within the slow lane in 3-5 years time.” And while “blazing fast” broadband might be important for some users, broadband speeds in the US are plenty fast enough to satisfy most users. Consumers are willing to pay for speed, but, apparently, have little interest in paying for the sort of speed Crawford deems essential. This isn’t surprising. As the LSE study cited above notes, “most new activities made possible by broadband are already possible with basic or fast broadband: higher speeds mainly allow the same things to happen faster or with higher quality, while the extra costs of providing higher speeds to everyone are very significant.”
- Even if she’s right, she wildly exaggerates the costs. Using a back-of-the-envelope calculation, Crawford claims that slow downloads (compared to other countries) could cost the U.S. $3 trillion/year in lost productivity from wasted time spent “waiting for a link to load or an app to function on your wireless device.” This intentionally sensationalist claim, however, rests on a purely hypothetical average wait time in the U.S. of 30 seconds (vs. 2 seconds in Japan). Whatever the actual numbers might be, her methodology would still be shaky, not least because time spent waiting for laggy content isn’t necessarily simply wasted. And for most of us, the opportunity cost of waiting for Angry Birds to load on our phones isn’t counted in wages — it’s counted in beers or time on the golf course or other leisure activities. These are important, to be sure, but does anyone seriously believe our GDP would grow 20% if only apps were snappier? Meanwhile, actual econometric studies looking at the productivity effects of faster broadband on businesses have found that higher broadband speeds are not associated with higher productivity.
- She wildly exaggerates cable’s profitability. Cable companies simply don’t, as Crawford claims, “reap profit margins of 95 percent.” In fact, their margins are very small when you consider their massive capital costs: As our colleagues Matt Starr and Will Rinehart note, “Comcast… has averaged just a 4.5% ROIC [return on invested capital] over the last five years. Time Warner Cable’s 5-year average is -1.3%. Compare those with Apple (32%) or Google (16.1%).”
- Vertically integrated content distribution isn’t the menace she claims. Most of all, Crawford fears vertically integrated “gatekeepers” using their power over content to artificially constrain the range of content available and competitors’ ability to deliver it (think Netflix). If content is so valuable and powerful, why don’t content companies just engage in such abuse on their own? Somehow the distribution network’s ownership of content transforms “content is king” into “distribution is king.” Crawford spends 200 pages of her book on this, specifically the NBCU/Comcast merger. But she never really explains the complex dynamics of this market and ultimately fails to demonstrate that integrated content distribution is a singular brand of evil. The harms she suggests are merely speculative, and she offers no evidence to demonstrate that Comcast has actually acted to foreclose competition.
- “Independent” content isn’t dead. Specifically, Crawford fears that Comcast’s control over content will kill “independent” programming—diversity of content. But there’s a trade-off between quantity and quality; and there’s no easy way to prioritize one over the other. Moreover, by “independent” she means “not affiliated with a distribution network,” which amounts to a preference for ABC’s “The Bachelor” (owned by Disney) over NBC’s “The Biggest Loser” (owned by Comcast). Both “The Voice” on NBC and “Survivor” on CBS were developed by the same independent producer. But how likely is it really that Comcast would refuse to distribute “Survivor,” or forego the licensing fees and withhold “The Voice” from competing distributors? The incentives are complex, but that is exactly the point: The market’s complexity makes it impossible to draw the simplistic conclusions that Crawford does.
There’s nothing wrong with Crawford’s impulse — her sense that something’s in need of fixing. But intuition is a poor guide for policy-making. If government does have a role, it should be only when rigorous analysis suggests more good than bad will come of it, weighing the realities of both market failure and government failure.
So how do we guard against the possibility of consumer harm without making things worse? For us, it’s a mix of promoting both competition and a smarter, subtler role for government.
Despite Crawford’s assertion that the DOJ should have blocked the Comcast-NBCU merger, antitrust and consumer protection laws do operate to constrain corporate conduct, not only through government enforcement but also private rights of action. Antitrust works best in the background, discouraging harmful conduct without anyone ever suing. The same is true for using consumer protection law to punish deception and truly harmful practices (e.g., misleading billing or overstating speeds).
A range of regulatory reforms would also go a long way toward promoting competition. Most importantly, reform local franchising so competitors like Google Fiber can build their own networks. That means giving them “open access” not to existing networks but to the public rights of way under streets. Instead of requiring that franchisees build out to an entire franchise area—which often makes both new entry and service upgrades unprofitable—remove build-out requirements and craft smart subsidies to encourage competition to deliver high-quality universal service, and to deliver superfast broadband to the customers who want it. Rather than controlling prices, offer broadband vouchers to those that can’t afford it. Encourage telcos to build wireline competitors to cable by transitioning their existing telephone networks to all-IP networks, as we’ve urged the FCC to do (here and here). Let wireless reach its potential by opening up spectrum and discouraging municipalities from blocking tower construction. Clear the deadwood of rules that protect incumbents in the video marketplace—a reform with broad bipartisan appeal.
In short, there’s a lot of ground between “do nothing” and “regulate broadband like electricity—or railroads.” Crawford’s arguments simply don’t justify imposing 19th century common carriage regulation on the Internet. But that doesn’t leave us powerless to correct practices that truly harm consumers, should they actually arise.