Net Neutrality Struck Down? (Revised)

Earlier in the month, I wrote about the conclusion of a lawsuit between Verizon and the FCC. Verizon won the lawsuit; “three judges on a US Appeals court panel struck down net neutrality rules saying that because the FCC decided to characterize ISP’s not as telecom companies but in a category of their own, the FCC could not regulate them as such.” (Econ 411 Blog).

This essentially left the door open for the FCC to start pushing through new laws in an attempt to regulate this “new market” that they had characterized these ISP’s as. Since I wrote this article, there have been a few very interesting developments that I think stoke a fire under the net neutrality debate as well as the FCC as they are now under even more pressure to take action in markets that are seemingly becoming more and more concentrated. The most prominent of these events are the Comcast/TWC merger as well as the deal between Netflix and Comcast that effectively makes Netflix pay for efficient streaming of their content.

With this in mind, I would like to take a look back over my explanation of the Comcast/Time Warner merger:

“Let’s start with just the bare bones of each company — according to the NYPost, TWC had some 11 million video subscribers combined now with Comcast’s 22 million gives you a rough estimate of 33 million subscribers out of a total of 100 million people who have some sort of cable video connection through a provider in the USA. The question then, is what constitutes a monopoly? In terms of Antitrust regulation (and in Econ 432 class), one of the main indicators of monopoly or at least one of the main influencers of regulation from the government is the Herfindahl-Hirschman Index or more simply known as the (HHI). This measurement is used to determine the “concentration” of an industry or given market in an attempt to determine how close to monopoly conditions a given merger would create. According to the article, the formula is computed on a scale of 0-10000 with 0 being perfect competition and 10000 being one single company owning the market. According to the government, a score from 0-1499 is low concentration, 1500-2500 is moderately concentrated and above that is considered to be highly concentrated. Moreover, in a “somewhat concentrated industry” a merger resulting in a 200 point increase gets the government worried and an increase of 100 points in a highly concentrated market does the same. The NY Post did rough calculations and found that the HHI increase due to the Comcast/TWC merger was in the range of 639 points (500 if you want to be conservative they say). This most definitely would make the government look twice.” (Econ 411 Blog)

As of this moment in time, the FCC has not made any major comments about this case, but the word is that they are looking into things. It would seem just from the piece above, that there should at least be some due diligence completed by the FCC on a deal like this. The WSJ and myself made the comment about the Verizon/FCC case that maybe Verizon’s victory in that case had set the stage for the FCC to take a strong stance in the future to regulate the ISP industry.

This however, was before the Comcast/TWC took place and the deal between Comcast and Netflix succeeding even that — things have gotten even scarier for those wanting to make sure the internet stands to stay the internet we know and love.

So while those of us waiting waiting eagerly to see the FCC action from the Comcast merger had our eyes locked on just that, Comcast had different plans. Sunday morning it was announced by the WSJ that Netflix would be paying Comcast an undisclosed amount for direct access to their servers. Yes, I know you are wondering what the heck that means, so here is a little background on this issue. Recently (around Holiday ’13 and since then) there have been numerous anecdotal reports of Netflix streams deteriorating on different ISP’s networks. The WSJ article I just mentioned dives into this with a little more detail, “the average speeds of the company’s prime-time streams to Comcast subscribers dropped 27% from October to January. Netflix’s streams to Verizon subscribers also have slowed in recent months.” The battle has since ensued as to who should pay to prop up the ISP’s networks in order to keep things running smoothly. Netflix acknowledged these issues in their 4th quarter conference call recently saying that if they were forced to incur additional expenses due to paying to keep networks running in such a state that they can efficiently transfer their content, that their own bottom line would be adversely affected. It is hard to speak to this point at the current time due to the fact that we do not know exactly how much Netflix agreed to pay Comcast– what effectively happened was that Netflix paid to cut out the middle man between them and Comcast.

The issue here is not that Netflix paid Comcast to cut out the middle man; the money was going to someone regardless and that, in my eyes, is just an expense that is built into their business model to begin with. The real issue is the fact that Comcast has a makings of a monopoly in the US market and is in a position to make a company pay based on the type of use of Comcast’s network. In other words, Comcast is the ISP to enough Netflix customers, that Netflix had no choice but to cave and pay in order to maintain the integrity of their own business. It is extremely disturbing to me that a company like Netflix, that has fundamentally changed the way that average American citizens consume media, is now at the mercy of an ISP like Comcast.

The time to act is now, and if there was not a clear enough image of the types of perils caused by allowing these ISP’s to run amok without proper legislation, I believe there is now. The problem with not treating all traffic the same is not the fact that Netflix’s bottom line gets squeezed at Comcast’s glee, but rather that smaller companies (the next Netflix etc) that require full use of the internet as a part of their business model, can now be choked out like a weed in concrete. I hope that the FCC sees this and does prove both myself and the WSJ right by issuing legislation with a heavy hand, as the future at this moment seems quite fragile.