In the late nineteenth and early twentieth century, many of America’s first large-scale industrial corporations snapped up competitors and made liberal use of political connections to build monopolies and near-monopolies in critical emerging sectors, like long-distance rail transportation and the oil and gas business. These “trusts” aimed to increase their pricing power, and they often succeeded. And the rise of the trusts also prompted a fierce political backlash. Right now, there is a widespread conviction that we are living in a parallel moment, and the idea isn’t totally crazy. Specifically, the broadband sector, which is arguably as important to a communication- and consumption-centric economy like our own, in which a chief source of innovation is a wave of cloud computing start-ups, is dominated by a strikingly small number of firms, and that number may well shrink.
So what happens when one large broadband provider serves as the gatekeeper to a large chunk of U.S. consumers? According to Tim Lee, “recent developments are putting the Internet’s decentralized architecture in danger.” In the past, Internet service providers (ISPs) and content providers all relied on backbone providers, which competed with each other to offer a reliable, high-quality service. These backbone providers, in turn, exchanged traffic with each other gratis, as they all recognized that to do so was in their best interest. This convention of allowing one backbone provider more or less seamless access to all others meant that content providers didn’t have to fear losing access to the customers of any particular ISP. So ISPs didn’t actually serve as gatekeepers. Yes, they charged customers for access to the Internet. But the real action was happening behind-the-scenes, among mid-sized backbone providers that were kept in line by market discipline. What is happening now, however, is that some ISPs have or are contemplating acquiring backbone providers themselves. ISP-owned backbone providers really can control access to content in a meaningful way. This gives them leverage over content providers. Disintermediation is all the rage, and Lee acknowledges that it might make the Internet more efficient. Yet he fears that it will set the stage for a world in which network owners are more powerful, and in which they are more likely to abuse their power.
Lee’s article was prompted by a recent decision by Netflix, a content provider that is building its own content delivery network, to enter a new business arrangement with Comcast, the country’s largest broadband provider. It’s not obvious that this arrangement is problematic in itself, for the reason that Dan Rayburn outlines in detailed discussion. But Lee is looking two steps ahead, and he doesn’t like what he sees. (It is also true, however, that it is not just the broadband providers that have leverage; as Berin Szoka observes, content providers have leverage too, and at least some of them have demonstrated a willingness to use it.)
I don’t have any deep insight into the future of the broadband market. Andy Kessler’s call for federal preemption rules designed to encourage more broadband competition seems like a sensible idea, and perhaps it will chip away at the power of the Comcasts and Verizons of the world. Larry Downes, co-author of Big Bang Disruption, often makes the point that far from being the most powerful kids on the block, broadband providers are actually in a very awkward position — the more they invest in increasing the quality of broadband service, the more content providers create new applications that lead demand to increase dramatically, which then leads to people to perceive that quality has actually deteriorated. If you’re a broadband provider, you can’t help but think that everyone else — Netflix, Hulu, Amazon, etc. — is profiting from your hard work. It’s thus easy to see why they’re trying to change the script. The good news, according to Downes, is that a more competitive mobile broadband sector has the potential to keep wireline broadband providers in check, provided the FCC reforms its process to ease the spectrum crunch.