Cage Match Competition

by Reihan Salam

Eli Dourado is enthusiastic about Ev Ehrlich’s call for a new progressive broadband agenda, published under the auspices of the center-left Progressive Policy Institute. Ehrlich contests the widely-held assumption that the quality and penetration of U.S. broadband services has been undermined by an anti-competitive “duopoly,” and he also questions the wisdom of net neutrality regulations that flow from the duopoly premise. Part of Ehrlich’s argument is that broadband providers aren’t just competing with each other — in a sense, they are competing with the providers of devices and applications that make use of broadband services:

Signal providers innovate and invest in faster and more reliable signal, only to find that device manufacturers find ways to utilize that greater capability, essentially capturing much of its value. For example, the ability to have a SIRI-type voicerecognition feature in an iPhone has existed for a long time. What has changed is the availability of a signal that allows the phone to be in continual and robust contact with cloud computers that make SIRI happen. It is an “Apple innovation” that was made possible by the innovations of signal providers. That is how competition works in the integrated market for broadband signal, devices, and services; that is how competitors innovate and improve their offerings in the “cage match.” This puts the signal providers in a position familiar to anyone who sells into a competitive marketplace— they must innovate to survive, but cannot capture the rewards to their innovations, which are taken away through competition. Far from a deviation from the competitive model, this multidimensional “cage match” competition is a perfect example of how competition works to the benefit of consumers.

So perhaps the greatest paradox inherent in “cage match” competition is that, while advocates champion more intrusive regulation, the signal providers are in the fight of their business lives. The benefits of their innovation and investment are being appropriated by the devices and services that use the signal; their stock values and capitalizations are listless compared to the companies that make devices and applications; they have made commitments in the tens of billions to build infrastructure that cannot be reversed. And they are trapped in a vicious circle: they innovate to improve signal quality and availability, these innovations make possible new devices, applications, and services that capture consumer allegiance, these other aspects of the broadband experience appropriate value and make signal more commodity-like in the eyes of consumers, which forces the providers to further improve their product, perpetuating the cycle. They are the economy’s front line for investing in and innovating for our broadband infrastructure, and perhaps they benefit from that investment and innovation the least. [Emphasis added]

Rather than champion net neutrality and common carriage regulations, which would further undermine the relative position of broadband providers, Ehrlich favors efforts to expand broadband access, including wireless services that can compete with wireline services, by (among other things) devoting more spectrum to consumer applications.

I’d be eager to read Tim Lee’s take on Ehrlich’s analysis, as well as Larry Downes’.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.