BEFORE THE FEDERAL TRADE COMMISSION
|In the Matter of: Competition and Consumer Protection in the 21st |
Hearing #10: Competition and Consumer Protection Issues in Broadband Markets
Docket No. FTC-2018-0113
Comments of the R Street Institute
The R Street Institute (“R Street”) filed comments with the Federal Trade Commission (“FTC” or “Commission”) last August in response to the Commission’s request for public insight into competition and consumer protection issues in broadband markets. R Street’s Tom Struble was also a panelist during the Commission’s public hearing on the topic, where he spoke about some of the policy implications raised by technological and economic developments in broadband markets and the Internet ecosystem writ large. These comments summarize and expand upon R Street’s prior commentary to offer three suggestions to the Commission for its future work overseeing U.S. broadband markets.
First, the Commission should reflect upon its history overseeing broadband and related high-technology markets, with particular focus on its 1996 staff report on “Competition Policy in the New High-Tech, Global Marketplace” and its 2007 staff report on “Broadband Connectivity Competition Policy.” After reflecting on these reports, the Commission should try to identify long-term trends in broadband and related high-tech markets that may offer useful insight to federal policymakers as they seek to resolve ongoing disputes over the appropriate statutory framework to govern these markets.
Second, the Commission should try to qualify and quantify the extent of convergence in broadband and related high-tech markets today. Historically, home broadband service, mobile broadband service, cable video service, and the endless variety of applications and services that are available on the Internet have been viewed as separate markets and regulated accordingly. However, recent technological advancements and changes in business models have started to blur the lines between these once separate markets. The Commission should use its unique perspective and experience to assess the extent of this convergence and predict the likely impact it will have on consumers and competition in these markets going forward.
Third, the Commission, through its Office of Policy Planning, should use its experience and expertise in overseeing broadband and related high-tech markets to offer insight to federal, state, and local policymakers on matters that may affect consumers or competition in these markets. In particular, the Commission should encourage policymakers at all levels of government to implement pro-competitive policy reforms wherever possible. R Street has done substantial research on this issue through its Broadband Scorecard project, which can be a useful resource for both the Commission in its purposes and for federal, state, and local policymakers in theirs.
I. Identifying long-term trends in broadband and related high-tech markets
Telecommunications policy has historically been the province of the Federal Communications Commission (“FCC”) because the FTC lacks jurisdiction over “common carriers,” and many telecommunications services have, at one time or another, been classified as common-carrier services. However, general antitrust law still applies to all telecommunications services, including broadband, regardless of what sector-specific regulations may be in place. Congress made this clear in 1996. Moreover, following the FCC’s 2017 Restoring Internet Freedom order, the FTC once again has both antitrust and consumer-protection authority over broadband markets.
While broadband markets remain fully within its purview, the FTC should reflect upon its experience overseeing broadband and related high-tech markets to see what long-term trends, if any, the Commission can identify. The FTC’s jurisdiction over broadband markets has changed over time, but it has issued two prior reports on broadband markets that would be useful to reflect upon now: The 1996 High-Tech Report and the 2007 Broadband Report.
A. Broadband competition in the 1990s
The 1996 High-Tech Report, released 23 years ago this month, mentioned the word “broadband” only twice, but its understanding of broadband and related high-tech markets was remarkably prescient. That report accurately identified many key features of broadband markets, including “economies of scale . . . economies of scope . . . interconnection problems . . . network externalities . . . and switching costs and corresponding lock-in effects[.]” That report also identified the two key goals of broadband policy—promoting inter-system and intra-system competition among broadband networks—and explored several analytical approaches that could be used to balance these two goals.
Ultimately, the Commission concluded that:
[T]he difficulty in deciding whether inter-system or intra-system competition holds more promise for the consumer in any given situation depends crucially on whether the relevant market can support more than one network and how ultimately to weigh the value of inter-system versus intra-system competition in the particular factual scenario at hand.
This conclusion was essentially the same one reached by Congress earlier that year as expressed in Section 401 of the 1996 Telecommunications Act, which directed the FCC to embrace regulatory flexibility and forbear from enforcing certain intra-system regulatory mandates where inter-system competition is present. At that time, the systems contemplated by Congress and federal regulators were telephone networks, but following the release of the first Data Over Cable Service Interface Specification in 1997, technological advances soon enabled broadband services to run both over telephone networks and cable networks.
With that, despite all the handwringing over whether local markets could support competing networks, inter-system competition was achieved throughout the nation almost overnight. Accordingly, the FCC soon embraced inter-system competition and either relaxed or repealed many of the regulations designed to promote intra-system competition. This seems in keeping with both congressional intent and the analysis contained in the FTC’s report, as does what happened next.
B. Broadband competition in the 2000s
If broadband markets were born in the 1990s, the 2000s were their turbulent adolescence, full of growing pains and drama. In the wireline context, cable companies’ entry soon disrupted the dominance that telephone companies previously had in broadband markets. From nonexistent to market leaders, cable’s takeover of broadband was partly due to physics—cable’s underlying infrastructure, coaxial cable, naturally has better throughput and propagation capabilities than the twisted-copper wiring used for telephone network infrastructure—and partly due to regulation. The FCC’s intra-system unbundling mandates applied only to telephone companies, at least until the FCC successfully resisted an attempt to impose them on cable companies and subsequently forbore from applying them to telephone companies. It took years of bureaucracy and litigation, but eventually the FCC embraced inter-system competition between telephone and cable companies in the wireline broadband market.
Meanwhile, mobile broadband markets were also springing into existence and beginning to take shape during this time. While mobile (or cellular) telephony services had been available since the 1980s, it was only with the third generation of mobile wireless standards that these networks were able to support data services and other Internet-based applications. There was also substantial concentration within the mobile broadband industry during this time, as firms increasingly consolidated in order to take advantage of the significant economies of scale present in mobile broadband networks. Indeed, concentration in mobile broadband far outpaced concentration in wireline broadband markets, illustrating just how dynamic the nascent mobile broadband industry was at the time. And as noted by the Commission in its 2007 Broadband Report, many mobile wireless services were operated by wireline broadband providers.
With robust competition finally developing between rival wireline broadband providers and wireless broadband providers, concerns over inter-system competition began to subside and concerns over intra-system competition returned to the forefront of policymakers’ minds. Accordingly, the Commission’s 2007 Broadband Report discussed these issues in great depth, wrestling with the concept of so-called “network neutrality” and analyzing whether procompetitive regulations were needed to promote competition among the endless variety of applications and services that run over the top of broadband networks. This would become the subject of the dominant policy debate in broadband and related high-tech markets for the next decade, and it is one with which we are still grappling today.
II. Qualifying and quantifying recent convergence in broadband and related high-tech markets
As the 2010s have come and gone, the broadband industry has continued to evolve and adapt to changes in technology and consumer purchasing habits. Where we once saw home broadband, mobile wireless, cable television, telephony, and a variety of other applications and services as distinct, these lines have now started to blur.
At the FCC, these services are generally treated separately, with different treatment for broadband services depending on whether they use wireline or wireless connections, and vastly different treatment for video services depending on whether they are delivered via over-the-air broadcast, cable television systems, or over-the-top of a broadband connection. However, the FTC is not bound by the restrictive and outdated silos of the Communications Act, so it can take a fresh look at these markets and determine whether and to what extent they truly are separate. The Commission should take this opportunity to carefully evaluate these markets and try to both qualify and quantify recent convergence in broadband and related high-tech markets.
A. Intermodal competition and convergence among broadband providers
As detailed above, the broadband market has already seen tremendous convergence between wireline providers, to the extent that cable and telephone companies are now viewed simply as broadband companies competing head-to-head in the same market. However, broadband service can also be broken down into wireline home broadband service and wireless mobile broadband service.
Many broadband companies offer both home and mobile broadband services, and this trend is increasing over time. While mobile broadband networks have often been run by telephone network operators, cable network operators have also begun to offer mobile broadband to customers within their wireline footprints. Comcast and Charter, the two largest cable companies, both now offer a mobile broadband service that runs partly on their cable and unlicensed wireless infrastructure and partly on licensed wireless infrastructure leased from other wireless companies. And just this week, Altice, the fourth-largest cable company, announced that it is launching a similar mobile wireless service with a very aggressive price point. This development—in which cable operators are now able to offer consumers a “quad-play” of services (i.e., home broadband, mobile broadband, video service, and telephony)—has been tremendously popular with consumers.
Meanwhile, as cable companies try to eat away at the market share of mobile wireless providers, they have started going after the home broadband market. New fifth-generation wireless standards have enabled mobile broadband providers to offer home broadband service that offers similar speeds and capabilities as wireline broadband. Verizon, for example, offers 5G home broadband service in parts of Sacramento, Los Angeles, Houston, and Indianapolis. T-Mobile has also committed to offering home broadband service through its 5G network if its pending merger with Sprint is approved by regulators.
Convergence of broadband service between wireline and wireless providers means that consumers have more choice than ever in terms of where, how, and from whom they receive their broadband service. And in many cases, these broadband services come bundled with other attractive services, including any combination of the aforementioned “quad-play” services as well as access to other over-the-top services, such as music streaming or online shopping. This convergence will only grow more pronounced as next-generation wireless technologies are deployed throughout the country. Yet these converging markets may still be subject to vastly different regulatory treatment based on legacy technologies that are no longer relevant to the services being offered. Therefore, the Commission should carefully consider the ongoing convergence of these services when analyzing inter-system competition in the broadband marketplace and advise policymakers in Congress and the FCC as to the likely impact such convergence will have on competition and consumers in broadband markets.
B. Vertical integration and competition between affiliated and nonaffiliated applications and services
While there has been substantial convergence and transformation in the broadband market since the FTC’s 2007 Broadband Report, there have also been substantial changes in the markets for applications and services that ride over-the-top of broadband connections since then. These changes should come as little surprise, as they all reflect the same key features of the broadband market identified by the FTC in its prior reports.
Broadband networks are general-purpose technologies that can support an endless variety of applications and services. For that reason, they exhibit economies of scope, which naturally present opportunities for broadband network operators to vertically integrate into markets for applications and services that run over-the-top of their broadband networks. Broadband providers have long offered telephony, cable video services, and home-security monitoring as complements to their broadband offerings, and some providers have integrated into other markets, too. For example, broadband providers Comcast and AT&T both purchased major content programming studios (NBC Universal and Time Warner, respectively) in the last decade, while Verizon purchased major digital media assets including AOL and Yahoo.
By vertically integrating into these markets, those broadband providers have gained ancillary revenue streams and new opportunities for growth, all of which can be used to deploy new infrastructure and better compete in the broadband market. However, such vertical integrations also potentially raise new conflicts of interest, with broadband providers tempted to favor their affiliated services over nonaffiliated services. Such preferential treatment may manifest in differential pricing, differential traffic management, or not at all, but these are the primary concerns animating the protracted debate over network neutrality.
R Street has long recognized these concerns and defended the rights of unaffiliated service providers to compete fairly in the markets for over-the-top applications and services. However, we believe that common-carrier regulations and ex anterules are not the best way to address those concerns, as such regulations are unnecessary to achieving that goal and would impose an undue burden on broadband providers. Accordingly, R Street supports the FCC’s recent step to restore FTC oversight over broadband networks. While the FTC may not have a chance to demonstrate its ability to adequately address potential network neutrality concerns in the context of an enforcement action, the discussion during the public hearing and the forthcoming report should clarify the Commission’s understanding of these issues and competency in this area.
III. Implementing pro-competitive broadband policies
The Commission should encourage policymakers at all levels of government to implement procompetitive policies that encourage the deployment of broadband services. For example, local infrastructure siting laws can pose a significant barrier to deployment, both in terms of cost—by charging significant fees for access to public rights of ways and construction permits—as well as time—by requiring a lengthy review process. Similarly, franchising laws can limit competition by allowing municipalities to restrict entry and disguise fees beyond those legally allowed as in-kind contributions, thereby increasing the costs on providers generally. Finally, local municipal broadband networks may harm competition in the broadband market by charging supra-competitive prices for access to utility-owned infrastructure or leveraging captive electricity customers to cross-subsidize the broadband business.
While the FTC cannot change these laws, its Office of Policy Planning can use its experience and expertise overseeing broadband markets to offer guidance to federal, state, and local policymakers about the negative effects these laws may have on competition.
A. Improving local siting procedures
Before existing infrastructure can be upgraded or new infrastructure deployed, broadband providers must first obtain permission from the relevant state and local authorities. This process typically involves filing applications, paying fees, and waiting for bureaucracies to process the applications. Thus, a simple way to promote competition in the broadband marketplace would be to ensure that state and local approval processes are streamlined and efficient so that this barrier for new entrants and incumbent upgrades is as low as possible.
One way to improve these processes would be to encourage local governments to ease regulations on access to public rights of ways. For example, allowing exclusive access or discriminatory pricing for these rights of ways would harm competition and potentially prohibit entry by other service providers. Likewise, charging exorbitantly high fees for accessing public rights of ways can also limit competition by increasing the costs that providers must pay before entering the market. While localities do have an interest in collecting fees to support the management and upkeep of the public rights of ways, these fees should be kept low and be based on the actual costs of the management.
Along with general approval to access and operate in public rights of ways, broadband providers must also obtain regulatory approval for each construction project they plan to undertake, such as digging trenches, stringing wires, siting wireless antennas on existing structures, and deploying new support structures. As with right-of-way access, the costs for reviewing and approving these applications should be low and tied to the actual cost of reviewing the application. Similarly, shot clocks should be imposed on the review process to ensure broadband providers can move through the regulatory process with predictability and relative ease, since delays can often be more costly than the fees themselves. Furthermore, “dig once” or joint-trenching policies—which require “public and private excavators to coordinate with local government on the installation of extra fiber or conduit whenever ground will be broken in the public [right of way]”—can alleviate these costs and delays by limiting the amount of construction that needs to be done.
Localities also frequently require broadband providers to undergo zoning reviews prior to new construction in public rights of ways, which adds another regulatory barrier to the process. While localities must engage in some zoning, the procedures for gaining approval should be clear, quick, and cheap. Additionally, any requirements on the design and concealment of broadband infrastructure should be set to reasonable, publicly available standards so as not to effectively prohibit deployment.
These issues become even more problematic as carriers deploy next-generation networks that rely on small wireless facilities. Unlike traditional wireless deployments, 5G networks will require a significant number of small wireless facilities in denser deployments. Treating these small wireless facilities the same as traditional macro-cell deployments makes little sense and can drastically delay the deployment of next-generation services. This barrier can be especially pernicious today, given the ongoing convergence between wireless and wireline broadband providers already underway. Restrictive siting policies can prevent wireless providers from deploying in some markets—or at least parts of those markets—ultimately leaving those consumers with fewer choices and less competition.
B. Franchise reforms
To provide cable video services, broadband providers must first obtain franchises from either state or local authorities. Such franchises were originally given exclusively to cable companies but, as explained above, the telecommunications industry has seen substantial convergence between cable video service and broadband Internet access service.
Federal law now prohibits exclusive franchise agreements and limits the fees and conditions that can be imposed on franchises. However, many aspects of franchising can still create barriers to deployment. For example, while franchise agreements can come with large upfront or annual fees—which are at least partially passed through to consumers—they could be issued at cost or for no charge at all. And many localities still try and extort additional fees in the form of “incidental” in-kind contributions, which the FCC is working to eliminate. Unreasonable delays or moratoria on processing new franchise applications are already prohibited, but states could and should be doing more. Specifically, they should be encouraged to either further streamline and expedite the franchising process or eliminate the process entirely and stop requiring franchises at all. Indeed, local franchises are akin to the type of occupational licenses that the FTC’s Office of Policy Planning, in general, and its Economic Liberty Task Force, in particular, have challenged in the past. Reforming or eliminating the franchise process would improve broadband competition significantly by lowering barriers to entry and making it easier for broadband providers to offer their services.
C. Municipal broadband networks
Another important consideration for policymakers is the effect that municipally owned broadband networks can have on the deployment of broadband service and competition among broadband providers. While many tout municipally owned networks as a procompetitive service, there are reasons to be concerned about how these networks can limit competition and broadband deployment.
First, and most importantly, electricity utilities that offer broadband service often cross-subsidize their competitive broadband service with funds derived from their monopoly utility service. This means that rather than competing on a level playing field in the broadband market, electricity co-ops systematically underprice broadband service by allocating more costs to the side of the business that is a monopoly. Ultimately, consumers suffer by paying higher electricity fees to subsidize the inefficient deployment of municipal broadband.
Second, when a municipal network fails, the consumers and local taxpayers are the ones who suffer. Broadband networks are not the easy business venture some envision, as research has shown. In a recent study, experts found that:
Of the 20 municipal fiber projects that reported the results of their fiber operations separately, eleven generated negative cash flow. Unless operations improve substantially, these projects cannot continue to operate over the long haul, let alone cover the capital costs needed to establish operations. Of the others, five are projected to take more than 100 years to recover their costs, and two others are projected to take over 60 years. Only two are on track to break even, and one of those is based on a highly urban, business-oriented model that few other cities are likely to be able to replicate, and the other includes data from two years of stronger performance when it offered only DSL service.
The Commission should convey to federal, state, and local policymakers that broadband services are unlike electricity, water, and other utility services, so they should not be treated as such. While all these services benefit from economies of scale, broadband service improves and changes over time, so short-run static efficiencies should not be prioritized over long-term dynamic efficiencies. Moreover, given the ongoing convergence between wireless and wireline broadband markets, the case for competition is getting stronger every day. A utility network entering the broadband market entails significant risk to the taxpayers and the potential foreclosure of private broadband investment. Instead, policymakers should seek to promote competition in local broadband markets by lowering barriers to entry and working hand in hand with industry to support public-private partnerships.
* * *
The R Street Institute thanks the Federal Trade Commission for the opportunity to submit comments in response to its recent public hearing on broadband competition. R Street recommends that the Commission pursue the above-identified areas in its ongoing work on promoting competition and innovation.
Technology & Innovation Manager
Technology & Innovation Fellow
Technology & Innovation Fellow
The R Street Institute
1212 New York Ave. N.W.,
Washington, D.C. 20005
May 31, 2019
 Tom Struble et al., Comments of R Street Institute, In the Matter of Competition and Consumer Protection in the 21st Century Hearings – Topic 2: Competition and Consumer Protection Issues in Communication, Information, and Media Technology Networks (Fed. Trade Comm’n Aug. 14, 2018), http://bit.ly/2JTm65X.
 See 15 U.S.C. § 45(a)(2).
 See Telecommunications Act of 1996, Pub. L. No. 104-104, § 601(b)(1), 110 Stat. 143 (1996) (codified at 47 U.S.C. § 152).
 See Declaratory Ruling, Report and Order, and Order, In re Restoring Internet Freedom, WC Docket No. 17-108 (Fed. Comms. Comm’n Jan. 4, 2018), https://bit.ly/2JC08VK (reclassifying broadband service as an “information service” not subject to common-carrier regulation).
 1996 High-Tech Report, supra note 4.
 2007 Broadband Report, supra note 5.
 1996 High-Tech Report, supra note 4, at ch.1, p.13 n.53 (quoting Council of Econ. Advisors, Economic Benefits of the Administration’s Legislative Proposals for Telecommunications 2 (June 14, 1994)).
 Id. ch.9, p.2.
 Id. ch.9, p.3.
 Id. ch.9, pp.6–8.
 Id. ch.9, pp.5–6.
 See Telecommunications Act of 1996, Pub. L. No. 104-104, § 401, 110 Stat. 128 (1996) (codified at 47 U.S.C. § 160).
 See 2007 Broadband Report, supra note 5, at 23 n.70 (noting that the plurality (44.1 percent) of U.S. broadband connections are cable-based, compared to 36.4 percent that are telephone-based).
 See Nat’l Cable & Telecom. Assoc. v. Brand X Internet Servs., 545 U.S. 967 (2005) (upholding the FCC’s decision not to impose unbundling mandates on cable companies).
 See Report and Order and Notice of Proposed Rulemaking, In re Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities, WC Docket No. 04-242 (Fed. Comms. Comm’n 2005), https://bit.ly/2HCKMhD.
 See, e.g., Carl Shapiro, Info. Tech. & Innovation Found., Univ. of Cal. at Berkeley, High-Tech Antitrust in a Time of Populism 11–13(Oct. 26, 2017), http://bit.ly/2K2XyaP (showing substantial increases in concentration in information, communications, and technology sectors from 1997 to 2012).
 See id. at 12 (showing a CR4 increase of 38 percent for wireless carriers from 1997 to 2012, but only an increase of 4 percent for wireline carriers during that same time period).
 2007 Broadband Report, supra note 5, at 24.
 See generally id. at 51–97 (assessing arguments in favor of and against network neutrality regulations, and the specific practices such regulations may target).
 See, e.g., Sarah Krouse & Lillian Rizzo, Cable Answers Cord-Cutters With Half-Price Cellphone Service, Wall St. J., May 28, 2019, https://on.wsj.com/2Z313lT (detailing Altice’s plans to offer mobile broadband service with unlimited data plans for between $20 and $30 per phone per month).
 1996 High-Tech Report, supra note 4, at ch.9, p.2.
 See Tom Struble et. al., Comments of R Street Institute at 5, In re Accelerating Wireless Broadband Deployment by Removing Barriers to Infrastructure Investment, WT Docket No. 17-79 (Fed. Comms. Comm’n June 15, 2017), https://bit.ly/2Es4pXp.
 47 U.S.C. § 541(a)(1).
 Id. § 542.
 Id. § 542(g)(2)(D) (stating that franchise fees do not include “requirements or charges incidental to the awarding or enforcing of the franchise, including payments for bonds, security funds, letters of credit, insurance, indemnification, penalties, or liquidated damages”).
 Second Further Notice of Proposed Rulemaking, In re Implementation of Section 621(a)(1) of the Cable Communications Policy Act of 1984 as Amended by the Cable Television Consumer Protection and Competition Act of 1992, MB Docket No. 05-311 (Fed. Comms. Comm’n. Sept. 24, 2018), https://bit.ly/2DqFrYM.
 47 U.S.C. § 541(a)(1).
 See Charles M. Davidson & Michael J. Santorelli, Advanced Comms. Law & Policy Inst., N.Y. Law Sch., Understanding the Debate Over Government-Owned Broadband Networks (June 2014), https://bit.ly/1pnE3bf.
 Johnny Kampis, Alabama’s Rural Broadband Bill Could Lead to Higher Power Rates, Tuscaloosa News, May 13, 2019, https://bit.ly/2M9IR8x (quoting Travis Kavulla, Energy Director, R Street Institute).
 Christopher S. Yoo & Timothy Pfenninger, Ctr. for Tech., Innovation & Competition, Univ. of Penn. Law Sch., Municipal Fiber in the United States: An Empirical Assessment of Financial Performance 23 (2017), https://bit.ly/2rYZ4ys.