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New Phoenix Center Study Shows That Net Neutrality Proposals Would Hurt Consumers, Content Providers, and Network Operators
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
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