There is a simple economic rationale behind the FCC’s recent announcement, made last week by Chairman Julius Genachowski, on May 6th.The FCC had to act. The costs of not acting were too great.
Here is why. Broadband carriers have strong economic incentives to provide services that compete with the applications of others. Yet, those same broadband carriers carry the data of all those applications. These carriers face what is often called “mixed incentives”, and until recently all carriers were forbidden from acting on them. Genchowski wanted to keep things that way, but an appellate court made that hard to do.
Let me make the issue concrete. Just ask your neighbor what they would think of the following: Would they be angry if Comcast blocked Skype from operating and told all users they had to go through an approved vendor of IP telephony? Would your neighbor be unhappy if Google slowed down when the search concerned local car dealers because AT&T broadband had a local search service on which local car dealers advertised? Would your neighbor be frustrated if they could not go to Hulu, but instead had to go to the approved TV distributor who worked with Verizon?
Look, none of that has happened yet, but that is because it was forbidden by regulators until a few weeks ago. It is not anymore, and that illustrates what any sensible regulator should fear. They should fear slowly slouching towards a situation where the mixed incentives of carriers gets in the way of delivering services over the Internet. Households have gotten used to having unrestricted choice online of innovative services, and there would be a minor revolt if narrow firm self-interest got in the way of that.
I have no axe to grind with carriers, so let me say that more positively. The country has benefited from allowing carriers freedom to innovate and build, and that was so up to a point, painting a bright line in one clear place, limiting the discretion of carriers to interfere with anybody else’s innovative services.
More to the point, the present limitations have fostered an innovative ecosystem. Software vendors and Internet hosting companies have developed a range of innovative services in anticipation of (1) better infrastructure on which to run it, and (2) sending their applications across broadband lines that behave the same way everywhere.
In other words, application vendors do not worry about which carrier delivers the data to which homes because carriers are not allowed to act on their mixed incentives. Knowing that, application developers innovate in all sorts of ways that users enjoy.
Those simple economics explains quite a bit of regulatory action. If you look beyond all the posturing and public relations, it is not surprising the FCC feared what would happen if it permitted no legal restraint on carrier action.
To be sure, the FCC’s own explanation of its announcement is — *um*, how do I say this nicely? — confusing in its details. Many commentators have tried to figure out the legal subtleties, focusing on legal nuances about what the new regulations will do or will not do. I have yet to read a simple summary (and that is a worrisome).
More to the point, it is fine for commentators to gripe about legal definitions, but I think all the commentary must acknowledge the most primary economic motivation at the heart of the action: the FCC had to clearly signal that it would try to erect a new regulatory mechanisms for enforcing limitations on carriers’ mixed incentives.
That is the point of my post. There were two economic reasons to take action, and both point towards limiting mixed incentives. One has to do with the incentives to act on mixed incentives today, and the other has to do with the long term trends of the evolutions of the network, which reinforces incentives to act on mixed incentives tomorrow.