What's stunning to me is seeing Ajit Pai and conservative interest groups citing the FCC's investigation into ISPs subsidizing certain types of data (a.k.a. zero-rating) as an innovation that burdensome regulation was inhibiting.
There's plenty of room for debate on what constitutes predatory pricing. But I think it's clear that when you drop the price for a product to zero, there's no longer an argument that you are attempting to fairly compete in that market. The only rational reason is to drive your competitors out of business.
Pai isn't interested in a competitive market; he's told us that much explicitly. He's interested in a market where the powerful have a free hand to consolidate that power into full-on monopoly. And he's right, consumers will see certain benefits -- like zero-rating -- while that consolidation is occurring. But then, afterwards, we'll be stuck relearning the lessons of Standard Oil and Pacific Bell all over again.
To play devil's advocate, there are plenty of businesses where companies sell loss-leaders in order to bring in customers, who then spend lucrative amounts of money on other things. Black Friday deals are one example. Mexican restaurants offering free salsa and chips is another.
On a larger scheme though, I agree that companies selling things at below-cost, can lead to anti-competitive outcomes that bankrupt any competitors without deep pockets. Uber's subsidized rides are an example of this. The WTO has rules against this when it comes to international trade. Perhaps it's time we adopted similar laws domestically as well.
Sure, but Mexican restaurants' salsa and chips isn't a separate industry. Offering free chips with dinner isn't an attempt to price people out of buying Tostitos at the grocery store.
It's one thing when you offer a subset of services within the same industry as a loss leader; it's another when you extend your reach to another industry and start pricing out existing companies to gain a foothold there.
> But I think it's clear that when you drop the price for a product to zero, there's no longer an argument that you are attempting to fairly compete in that market. The only rational reason is to drive your competitors out of business.
This statement is far too rigid. You probably don't mean it exactly as written. To illustrate, this would imply that Robinhood was not attempting to fairly compete in the brokerage market when it first launched.
Robinhood is an exception because their business is holding funds. When you hold funds, you can make interest off them. I guess the better way to say it is "when you drop the profit you receive from a product to zero".
Trying my hardest to keep an open mind, this argument is the closest I've seen to something even remotely sane, but I'm stumped in regards to the specific mechanism. I can think of two, and would love to hear if anyone can improve them:
(a) There's a house a mile away from the city. Right now, running a cable to it isn't worth it for the X$/mo they would pay for internet. Without net neutrality, Comcast will also get 20% of Amazon's revenue, and Netflix', and the investment starts to make sense. (My criticism: Those 20% will have to be added to Amazon's prices, considering their thin margins, and the customer could have just paid the total directly to Comcast, without all the harm to people not in their situation. Also: this argument rapidly loses plausibility for even a small cluster of, say, a dozen houses. If you want to life in a cabin in the woods, slow internet seems like the sort of trade-off it involves. You get clean air, in turn. Although that may be changing, as well).
(b) A simple trickle-down theory of network access: Comcast will make so much money, some of it just has to end up in network investment. (criticism: there really isn't a point at which a company will say "we have so much money, let's spend a little more on investments bound to cost us money")
It kinda makes sense for me, it increases the effective margin on services, so it could make an area that would otherwise be not cost effective for service, cost effective. Telcos only make expansions for areas that can generate an effective rate of return, if the density required to make a rate of return drops a wider area can be serviced.
I'm optimistic but not hopeful - we didn't have these kinds of services long enough to see if they would move the needle.. but I strongly suspect that they wouldn't, and would just line the pockets of the incumbent telcos.
For things like utilities I'm a big big big believer in regulated monopolies. It makes no sense from a cost perspective to have duplicated facilities rather than rate of return based financing.. and if you want universal access, you need that cross subsidization that was done before divestiture (high margin services subsidized low margin ones to ensure universal access).
In the end, the only way to have universal service is to have some sort of cross subsidization either from higher margin services the telco also sells, or from an external entity.
it's possible for Ajit Pai to have more than one objective. He may value universal access to networks but it is just as clear from his other statements that he values deregulation of big businesses because it benefits those businesses, social side effects be damned.
> there's no longer an argument that you are attempting to fairly compete in that market. The only rational reason is to drive your competitors out of business.
Wait. "Fairly compete" and "drive your competitors out of business" are opposite things now? How?
Obviously, most businesses, ideally, want to be so successful so that their competitors go out of business - as long as the market is more or less zero-sum game, one always go in hand with the other.
> ...as long as the market is more or less zero-sum game, one always go in hand with the other.
This statement derives from pure propaganda. It has almost never played out that way in history. What almost always actually happens is that once a business gets large enough, it has the power to force all of its competitors into bankruptcy or buy them out and then it gets monopoly power. Once it has monopoly power, anything goes.
There are so many examples of this just in American history up until Teddy Roosevelt busted the trusts. Even after that, there are a ton of examples of businesses being allowed to get way too close before the government got around to breaking them up.
If you want to see the clearest example what happens in an entirely unregulated free market -- look at the internet. The internet has, thus far, been almost entirely unregulated and it has the lowest barrier to entry of almost any business ever. It takes almost no capital to start an internet startup -- just the knowledge and some free time. And yet, Google has near monopoly power over search. Facebook has near monopoly power over social media. Amazon is nearing monopoly power over internet retail. In each case, they haven't wielded their enormous power in the marketplace, largely for fear of public backlash leading to regulation. If there was no threat of regulation, you could sure bet they would.
>And yet, Google has near monopoly power over search. Facebook has near monopoly power over social media. Amazon is nearing monopoly power over internet retail
Absolute nonsense. These players have large market shares but that is not anything close to a monopoly. Bing, Walmart, and Twitter are just 1 second away.
Here is a rule of thumb, if you can change companies in less than 5 minutes without getting dressed, they have nothing close to a monopoly.
The reason they haven't "wielded their enormous power" is because people can so easily switch. That's not a problem monopolies or near monopolies have (see Comcast for an example of near monopoly behavior).
It's worse than that. There is no such thing as an impenetrable firewall between the public and the private sphere.
It's one of the areas where libertarian idealism doesn't quite work in the real world. I can't think of a way to limit the political influence of business without limiting the size and financial leverage of individual businesses. A libertarian society that fails to do this will not remain libertarian for long, since suitably large corporate entities will become the state.
Why compete at all when you can just write your own laws and tap the public treasury?
The reason why large corporate entities becoming the state is less of a problem than the actual state is because of competition.
I called the cops three times in my life (Romania), the first two times I was told "not my job" (public drunkness instances), the third time someone's life was actually in danger. They told me they're going to show up... half an hour later, I had to leave the place; they hadn't showed up. (And they never called me back, so they probably never bothered.)
I cannot fire them for that. I cannot tell them "I want to hire another company". That is the problem I have with the state. I actually don't want to bother with defending myself - I am more than willing to pay someone else to do it for me. But if the state claims to do that, I cannot go to the competition when they don't do their job.
I understand why a corporate entity being the state sounds appealing -- the theory that you at least _can_ go to another company seems really appealing on its face.
But in reality, there is no difference.
What you're missing here is that in a monopoly situation there is no competition. You can't go hire another company. You can tell the monopoly you want to hire another company until you're blue in the face, but they don't care. They know you don't actually have the option, because there is no other company to hire.
You can try to start another company, but in a monopoly situation, the monopoly can always out compete you. They can simply drop prices in your small area of competition below you (or to zero) until you go out of business. Even if people hate the monopoly, they often won't be able to afford your higher prices.
And if you look at history, when companies achieve monopoly power, they do often essentially usurp the power of the state, up to and including coercive force. Look at the history of unionization attempts in the mining industry, particularly in the Appalachians here in the US. In the late 1800s and early 1900s, union attempts were often suppressed with privately hired military force -- or with the state's military hired out as a private military force.
And there's another level, corporate entities as state are worse, in many respects than an inefficient or corrupt democratic state. With a democratic state, it's still, ostensibly, answerable to the people. If you can organize enough of a popular response against it at the polls and in street protests, you can change it. A corporate entity is answerable to its owners and stockholders. It's an oligarchy. When it becomes the state, it becomes the worse kind of dictatorship and your only choice is revolution.
How do you compete with a corporate entity that has become the state?
Getting back to net neutrality: you also have the concept of a natural monopoly.
A natural monopoly is something where there is an intrinsic barrier to competition. In the case of telecom there is a natural monopoly over last mile connectivity because it makes zero economic sense to create more than one or two redundant last mile connectivity networks. It would also be an eyesore. Imagine huge sprawling bundles of wires or constant digging everywhere.
So for telecoms like Cox, Comcast, etc. you have a double whammy: they are natural monopolies and competition is also restricted by a state over which they have achieved regulatory capture.
These companies are monopolies, plain and simple, and if they can leverage that monopoly they can effectively shut down the Internet as a venue for entrepreneurship.
If by "become the state" you mean "is supplying state-like services" (like defense), you compete by creating another company supplying the same services. We have dozens of private defense companies in Romania.
If you mean "is preventing others from supplying the same services"... if it does that by using force, we're no worse off than now. If it does that by enticing people to sign bad agreements... I can't say I like the idea, but I'm not seeing it as a big deal long-term.
> In the case of telecom there is a natural monopoly over last mile connectivity because it makes zero economic sense to create more than one or two redundant last mile connectivity networks
And yet, I have one ISP that put up 7 km of fiber optics, that have been stolen several times, in order to get my business. (I live in the country side.) I had another ISP that put up 15 km of regular cable for the same reason. (I no longer use them because at some point I had 3 ISPs and I was trying to cut costs. I honestly regret that now that I'm making a lot more money.)
One is in kind of an equilibrium, where the costs of a product or service are included as part of the good. Consumers can choose the product that makes legible the costs and labor that went into it. Some suppliers will win, others will lose, but it's based on transparent pricing, which markets function best with.
The other only sustains low prices through some exogenous means. It could be a VC dumping money to subsidize a product until all other competitors are gone and network effects take over. It could be a company taking revenues from one profitable product line and investing them to subsidize other product spaces where competitors have to rely on making money from the explicit pricing.
On the surface they're similar, in that one company has consumers choosing their product over another's.
The difference is what will happen down the line to consumers. In one situation any bad behavior can be quickly corrected by the market.
The other is the image of Comcast charging you for a boot stamping on your face forever, even though you never asked for the boot and have requested half a dozen times that they stop the boot stamping on your face service.
You can be the best at what you do by improving yourself or you can be the best at what you do by making sure nobody else can even do it in the first place.
The problem with zero rating is that it is unlikely that new players will end up getting zero rated. So we're not talking about established players being really good at using less bandwidth or something, we're talking about established players having entirely different rules than newcomers.
Perhaps it is time to split up companies - FB + WhatsApp, Google + YouTube, Microsoft + LinkedIn and add your own little favorite here.
If the tech sector tends to move towards natural monopolies and cannot generate its own competition, the competition has to be foisted on it. It is a better alternative than the consolidation of so much power into the hands of such a small group of people.
Although, frankly speaking, it is probably a bit too late. At this rate, large tech companies generally, and the megacorps in particular, are probably going to have a "Let them eat cake" [1] moment over the coming months, and the consequences will be worse than the mere breakup into smaller entities.
[1] I have heard that it is an invented anecdote. Necessity is the mother of invention, and there has been a clear need to express how out of touch certain groups of society can become sometimes. Cue the ostrich-like response of company employees to genuinely troubling complaints against privacy issues on these forums.
I see the problem being that if net neutrality disappears it gives the internet companies good reason to slow down the internet generally so that the content providers need to purchase the speed ups. Investment in general network throughput will reduce profit from fast lane sales and so big companies will reduce investment in their networks outside of fast lanes. Cost flows down the tree. We are already paying for the internet... does it make sense to pay twice? This is why I think no consumer should be for the axing of the net neutrality rules. In general this is bad for everyone. Its like creating an energy market... It leads to people reducing generation capacity and prices sky rocketing while service/quality reduces. Good for the ownership class bad for humanity.
As far as I can see energy markets work well in Europe. It started in Norway as far as I know (not exactly the bastion of free markets) then spread across Scandinavia and down to Continental Europe.
How it works in Norway is that all power producers sell their power on an exchange where before 12 each day they specify the volume they will produce depending on the price for each hour the next day. All bids are compared to see who will produce how much. Price your power too high you don't get to sell any power, price too low you loose profits.
Among the buyers on this market are power resellers that sell to consumers. As a consumer I can buy from any reseller regardless of my grid provider. This makes resellers highly competetive and a consumer only pay a few cents above the exchange price per KWh (depending on contract and the type add ons the manage to sell you)
The grid owner charge a fix connection fee together with a per KWh fee. My guess is that both fees are regulated.
I guess the markets in other parts of Europe work quite similar. It is hard to know what the prices would be if the market was not in place but energy production has in the last few years gone from being very lucrative to be much lower margins.
This is not an argument against net neutrality though. Only wanted to point out that energy markets can and do work.
One important thing to note that this is not in any definition a "free" market. IIRC producers cannot directly sell to consumers, grid providers cannot easily set up new power plants, the pricing is done in a VERY regulated way...basically the whole system is set up to be competitive not free. This distinction is something which I feel is often lost.
> The grid owner charge a fix connection fee together with a per KWh fee. My guess is that both fees are regulated.
Your guess is correct, and it's the basic equivalent of net neutrality. In essence, European energy markets moved to net neutrality when they were liberated. Before, the local utility "owned" the customer, and in turn got to decide where to buy (and/or produce themselves) the energy they sold to the customer. Their monopoly power was restrained by being publicly owned, or by being required to keep prices close to those charged by publicly-owned utilities.
Energy is slightly different in that it is almost a true commodity, so people rarely cared ("almost", because some consumers have since chosen to pay more for renewables)
Energy markets are carefully modelled and designed - there is a whole history and industry of consultants[1] and companies[2] behind it. Also the systems evolve independently in different countries with cross-pollination.
The internet doesn't have the same national boundaries, nor such a limited scope.
If net neutrality dies completely, Apple will take its 1/4 Trillion and buy a cable/phone company. Google likely will too. It's cheaper than having their customers balkanized all over the place and having to pay monopoly rates to be allowed to connect to them.
Honestly yes, this is likely to happen, because the alternative of the telecoms making their own android phones that use their own ad networks and web search and bleeding out the internet giants with pure market power is too much of an existential threat without their own carrier for negotiation purposes.
Then we would have massive cash-out days for all the holders of carrier companies. Maybe these new subsidiaries of the frightful 5 would actually compete with each other? Or the ones that don't stumble in the transition at least.
But of course we could have a totally different regulatory environment in 4 years.
this could very well happen, and it raises the spectre of a truly bad outcome: permanently balkanized networks. "GoogleNet" and "AppleNet" and "VerizonNet" and no affordable interconnections between them. In other words, the end of the internet as we know it.
"Every year, the internet gets a little less fair" might not apply to every locale. USA is not all of the internet, it's important but not even very big.
If ISP BigCo's break it seriously, USA will start to falling behind the world (internet connectivity is already not great), notice that, and probably fix something.
Frankly, these journalists are part of the problem. Pulling up their publishing history, all you see them writing about is Amazon, Facebook, Google, and Microsoft.
In that type of PR environment, it is hard to see other startups rising up unless they raise massive amounts of money which gets them PR. Every year the bar gets higher and you never see them writing about new and exciting companies working on interesting projects on a consistent basis. In the end, most of these tech writers are not journalists, but ghostwriters for the big tech titans.
I don't think so. The big companies are "interesting" (if you consider news interesting) because they have so many attachment points: many products, many customers, often multiple modes of interaction, including second-order ones like tax.
While on the other hand, there are a large number of small companies, typically with one or two products, each of which reaches a small number of people. Quasi-stochastically they get a little mention in the major press, which perhaps helps them a bit.
Snapchat, google, FB became big deals before they were written up much, if at all. They made it to the popular press because they had become big deals.
Frankly I haven't seen an article in the NYT be successful for any startup I have followed. Perhaps it happens in the specialty press (travel or fashion) which are really just specialty journals whose "articles" have always been what is now called "native advertising"
They became big because of the non-stop PR they keep getting. These companies came up in a fair level playing field in the 90s and early 2000s. The article correctly outlines that. However, it is now a self-fulfilling cycle. They get users, they get more PR, they get more users, they get more PR, they get more users. Repeat. They then use that power to also, in parallel, lobby to crush startups.
The editorial coverage is part of the problem. This very journalist and others like him, share the blame.
Initially, yes, then networking effect and shrewd business practices (ensuring barriers to entry) ensure that they stay on top. I mean petroleum to power cars was a great, cheap product when it started as was the incandescent lightbulb. Coal was far more price effective than wood / steam turbines by a long shot. Yet we still use them 100+ years later. Why? Because the people that produce those technologies don't want to go out of business and they do everything their war chests will allow to make sure that won't happen.
I'm big on the free market, laissez faire, and deregulation. As with many topics that incite so much handwringing in congress (health care being another great example), many of the problems would likely solve themselves if regulations protecting giant corporations from competition were done away with. If it were possible for startup telecom companies to compete with the big 3, then the competition in telecom would likely enforce net neutrality on its own.
In other words, we are spending a lot of time and effort debating the wrong problems here.
No system is perfect, but I will always lean towards less is more when it comes to regulation.
> If it were possible for startup telecom companies to compete with the big 3
One reason to regulate markets is to preserve a competitive environment where this is possible. Big, dominant players in a market want less competition, not more, and left on their own they find ways to prevent it.
Look at how Microsoft used the Windows monopoly, for example, to eliminate competition in office suites and web browsers. They made it technically difficult for customers to use other products, they pressured vendors into selling Microsoft's products over others', they used their OS monopoly to give them a technical advantage in applications that ran on it, they distorted open standards to lock in their products ('embrace, extend, extinguish'), etc. It took a government lawsuit to open the web browser market and even that was too late for the competition, who were out of business. (The office suite market never again had competition until maybe the online suites now, and I don't know how much market share they have.)
> competition in telecom would likely enforce net neutrality on its own
I don't see why that particular outcome would be likely. Plenty of industries do things, sans regulation, that are bad for consumers and that consumers don't like. Look at the fraud in the financial industry, for example, or the privacy problems in IT products, or all the nightmares of the health insurance industry.
Maybe I shouldn't have been so generally anti-regulation in my initial post; I am specifically referring to regulation that exists solely to protect large corporations and their monopolies - these do seem to be more common at the state and local level.
Is it too much regulation, or not acting on the trust busting regulations we already have that prevents newcomers? In the case of telecoms, it is hard to imagine a startup being able to pay the entry costs of building infrastructure, which are extremely substantial, and then offer lower prices. Granted, the situation also suffers from telecoms striking monopoly deals with municipalities, so if that could be prevented it would help too.
A few months ago there was a story about starting an ISP on Hacker News [1] and the comments section was about how hard it is to start one. What if these rules allow someone to build a new ISP and take some of the advertising profit from some of the big companies like Google ? Google can afford to lose some money and perhaps it could improve the ISP competition in the US.
Also reading about the general history of the Internet, even though initial work was done by DARPA, it did not become the world wide network until commercial interests ( and free market capitalism ) took over [2]. This is not the narrative in the featured article.
> it did not become the world wide network until commercial interests ( and free market capitalism ) took over
It was literally world-wide before that, but if you mean that it boomed: Yes, commercial businesses helped a lot, and so did others:
Free, open source software such as the World Wide Web, the entire protocol stack (IP, TCP/UDP, DNS, etc.), SMTP, POP, IRC, *nix/BSD, Mosaic ... let's give credit where it's due!
The personal computer revolution and all that went into it. Normal people were just getting their first computers in the 1990s. No point in Internet access without a client machine.
Telecommunications innovations such as PPP, modems, etc, which allowed data connections over phone lines.
Also, not all the commercial business was 'free market capitalism'; one big one that helped the Internet starting in 1995 was a predatory monopoly.
> Google can afford to lose some money and perhaps it could improve the ISP competition in the US.
Comcast revenue per user is >$1500/year, Google revenue per user is <$100/year. No amount of transferring money from Google to ISPs is going to change the way the ISP market works. But it would certainly change how the markets for over-the-top services work -- and not in a good way.
There's plenty of room for debate on what constitutes predatory pricing. But I think it's clear that when you drop the price for a product to zero, there's no longer an argument that you are attempting to fairly compete in that market. The only rational reason is to drive your competitors out of business.
Pai isn't interested in a competitive market; he's told us that much explicitly. He's interested in a market where the powerful have a free hand to consolidate that power into full-on monopoly. And he's right, consumers will see certain benefits -- like zero-rating -- while that consolidation is occurring. But then, afterwards, we'll be stuck relearning the lessons of Standard Oil and Pacific Bell all over again.