As is the case with many studies produced by the General Accounting Office (GAO), the October 12th report, “Technological and Regulatory Factors Affecting Consumer Choice of Internet Providers” means different things to different people. All in all, the report is a needed contribution to the “open access” debate and should provide a framework upon which to build.
However, the report did overstate the ability of regulation to provide consumer choices in the market for Internet Service Providers (ISPs). For instance, the report states that ISP choice in the “dial-up” world has been “facilitated by the design of the telephone infrastructure as well as by the common carrier regulation of these companies.” The report further contends, “Because only telephone providers are required to offer nondiscriminatory access to their network, consumers who choose another transport mode may find their choice of ISPs limited.”
Such competition, developed within a free market uninhibited by regulation, will ensure, as the GAO report notes, “no one transport method will become so dominant that the others will fail.”
Both of these statements are difficult to disprove due to a lack of empirical evidence. However, it is more likely that consumer choice of ISPs in the “dial-up” model is a result of technological limitations rather than regulatory successes. Common carrier regulation does nothing to encourage a competitive ISP market; its only function is to ensure competitive access to the phone lines that provide transport to the ISP. Consumers would use the same lines to connect to the ISP regardless of the regulatory regime.
Thus, the second contention is misleading because it stems from the speculative notion that common carrier regulation has led to greater consumer choice of ISPs. It may, in fact, be true that “consumers who choose another transport mode may find their choice of ISPs limited,” but it is difficult to see why that is due to a lack of common carrier regulation.
To better understand this complicated issue, let us examine the nature of “dial-up” or “narrowband” connection versus cable broadband connections. In the dial-up model, consumers use their computer modem to dial the telephone number of their ISP. Once connected, the ISP provides content and transport to other sites on the web. The data travels very rapidly on the ISP network and “backbone” to which it is connected, but transmission speed drops precipitously once the data reaches the telephone line that connects the consumer to the ISP. Since all ISPs must use these telephone lines, in the dial-up model there is nothing to limit the number of ISPs; all that is required is a server with a phone number. Indeed, the GAO report found that 92 percent of American consumers had seven or more ISPs to choose from in their local areas.
Cable broadband differs from this model in that the slow-speed phone lines are eliminated in favor of an upgraded cable system. The cable provider directly connects its customers with the Internet, eliminating the need for traditional ISP service. As the GAO report illustrates, “one of the reasons broadband users commonly cited for choosing an ISP was that, in effect, they had no choice—the ISP came bundled with the physical transport service.” Broadband customers enjoy “always on” connections and have no need to dial to an ISP since they are directly connected to the Internet.
Advocates for regulation point to this decrease in ISP options as irrefutable evidence of the need for an open access regulatory mandate. But since the traditional role of ISPs is simply a remnant of bygone technology, why the need for regulation to ensure their continued existence?
Pro-regulation advocates use “content discrimination” or “content restriction” arguments to answer this question. If cable systems remain free of common carrier regulation, so the argument goes, the cable “monopoly” will be able to restrict access to unaffiliated content or demand licensing fees for sites and services that wish to service the cable company’s subscribers.
The GAO report empirically refutes this contention with clarity:
Despite the prospect for a decrease in consumers’ choice of ISPs in the future, many market participants and industry experts we spoke with told us that consumers currently have, with few exceptions, full access to and broad choice of portals, applications and content, both on the Internet and, in many cases, as part of their ISP subscriptions. There was wide consensus that ISPs generally have a strong competitive incentive to provide extensive access to features, functions, and content. Generally no limitations on access to portals were described to us.
The “competitive incentive” to refrain from limiting content comes in the form of various transport options. Instead of cable broadband, consumers may choose Digital Subscriber Lines (DSL) from local phone companies or satellite broadband with a phone line upstream connection. By the first quarter of 2001, fixed wireless from WorldCom will be available in 60 markets and soon thereafter, Microsoft and Gilat will offer nationwide coverage for two-way satellite broadband. With all of these transport options, consumers will not stand for an ISP that restricts content.
Despite the reduction in ISP options, consumers will enjoy far more meaningful choice in the broadband world. As the GAO study confirms, all of the content options will remain in place, plus consumers will be able to pick from a number of options for transport to the Internet. Companies invest millions of dollars to put these new networks in place; there is little choice but to compete for business if they are to earn a return on investment. This competition will involve price, service, bundled components, and other considerations that can only be speculated at this time. Such competition, developed within a free market uninhibited by regulation, will ensure, as the GAO report notes, “no one transport method will become so dominant that the others will fail.”
Businesses concerned that consumers will prefer the content provided, or promoted, by their transport provider should make efforts to develop value-added content that consumers will access instead of demanding government intervention. Similarly, regulators worried about reduction in ISP choice should welcome the increased transport options provided by technological advance and not lament its insignificant externalities. As the GAO report confirms, the market for broadband is working splendidly; no sensible argument exists for regulation.