Shifting Costs to Consumers Not as Innocuous as Some Claim

    WASHINGTON, March 6 /PRNewswire-USNewswire/ -- A new study released
 today by the Phoenix Center finds that "Network Neutrality" regulation that
 blocks broadband service providers and Internet content providers from
 certain types of service agreements could mean higher prices for consumers,
 reduced product development by content providers, and less investment by
 network operators. According to the study, Internet regulation that
 forecloses service agreements between broadband service providers and
 Internet content providers, thereby requiring consumers to arrange for all
 services and service upgrades, "may increase the full price of broadband
 access, and consequently reduce the amount of broadband purchased.
 Importantly, this broadband access price increase will affect all broadband
 customers -- not simply those that might be interested in purchasing new,
 bandwidth-intensive services."
     The study, using a simple economic model rooted in the established
 literature of "transaction cost" economics, warns that network neutrality
 proposals which effectively prohibit contracts between broadband and
 content providers would also "eliminate the potential for efficient,
 voluntary, welfare-improving market transactions." The Paper notes that
 this outcome would be akin to prohibiting Amazon.com and other online
 merchants from saving customers' money by making bulk shipping arrangements
 with UPS or the U.S. Postal Service. The Paper also notes that for these
 businesses, "ancillary yet important services (like shipping) are often
 bundled with the sale of a final product because it is more efficient for
 those services to be procured by the firm selling the product rather than
 obtained individually by the consumer." Network neutrality proposals would
 prevent similar cost-saving measures from being passed through to broadband
 Internet consumers for services like streaming video.
     In addition, the Paper explains that while these network neutrality
 proposals are designed to benefit and protect Internet content and
 application firms, these proposals could in fact harm that industry, as it
 may "reduce the output of competitive content providers, and raise prices
 for consumers." Further, the regulation could shift sales from independent
 content providers to the broadband network's content affiliate, in direct
 conflict with the proposed regulation's theoretical goal of preventing
 anti-competitive behavior.
     Phoenix Center President Lawrence J. Spiwak said network neutrality
 proposals that block content providers and network operators from entering
 agreements regarding the nature of broadband services could limit the
 networks' ability to meet the requirements of innovative new services. "The
 growing capacity demands of video on the Internet, coupled with the
 pernicious increase of spam and viruses, threaten an on-line traffic jam,"
 Phoenix Center President Lawrence J. Spiwak said. "To maximize bandwidth,
 operators need the flexibility to meet the different needs with different
 types of services. But many network neutrality proposals mandate rigidity."
 Equally as important, adds Spiwak, "such flexibility will likely be crucial
 for mobile broadband content, where content and applications may need to be
 customized for particular customer equipment, carriers, and service
 packages."
     "It is rare to see a business asking the government to prohibit it from
 contracting with a core input supplier. Proposals to do so in the name of
 network neutrality provide compelling evidence that the neutrality debate
 remains primarily an emotional and undisciplined one," George S. Ford,
 Chief Economist and primary author of the study, said. "The goal of
 neutrality is not well served by a rule that prohibits businesses from
 making life simpler and cheaper for the consumer while doing little to curb
 alleged anticompetitive potentials."
     Phoenix Center Resident Scholar Thomas M. Koutsky adds, "The Phoenix
 Center's research has repeatedly demonstrated the inherent potential for
 unintended consequences from rigid, bright-line network neutrality rules.
 The concept of network neutrality, which itself is evolving, seems better
 served by a flexible framework that can adapt in the rapidly changing
 environment of broadband communications."
     Phoenix Center Policy Paper No. 28, Network Neutrality and Foreclosing
 Market Exchange: A Transaction Cost Analysis, may be downloaded free from
 the Phoenix Center's web page at:
 http://www.phoenix-center.org/pcpp/PCPP28Final.pdf.
     The Phoenix Center is an international, non-profit 501(c)(3)
 organization that studies broad public-policy issues related to governance,
 social and economic conditions, with a particular emphasis on the law and
 economics of telecommunications and high-tech industries.
 
 

SOURCE The Phoenix Center