Gerald Faulhaber and David Farber today published a post questioning the need for open internet rules. The authors expressed a sense of irony that after decades of successfully running a communications platform built on open network architecture that technologists and engineers today would need the help of the Federal Communications Commission in keeping said network of networks open.
Online video distributor Netflix has been documented as thinking that the Commission should be riding to the rescue of content providers by advocating that the Commission implement strong net neutrality rules. By strong net neutrality rules Netflix means that the Commission should prohibit the payment of tolls by content providers to broadband operators such as AT&T, Comcast, or Verizon. According to Netflix:
“Without strong net neutrality, big ISPs can demand potentially escalating fees for the interconnection required to deliver high quality service. The big ISPs can make these demands — driving up costs and prices for everyone else — because of their market position.”
Netflix tried to invoke a little altruism asking the Commission to imagine the plight of smaller content providers facing the threat of escalating toll charges assessed year of year at an increasing rate by broadband providers.
It appears the real plight that Netflix is concerned with is the uptick in competition resulting from an HBO or ESPN streaming their content. For example, an analysis last week by Morningstar questioned the long term profitability of Netflix in the face of competition from content owners. According to Morningstar:
“Video distribution firms (cable, satellite, phone) have suffered from inertia in building out TV Everywhere, which would allow customers to stream current channels on the device of their choice. Aside from HBO GO and Watch ESPN, the ability to stream channels is much weaker than we would have expected in the present day. Still, we view this service as inevitable within the next two to three years and believe the market is underestimating the potential negative impact on Netflix when most cable channels with fresh content can be streamed.”
This competitive threat, in my opinion, has Netflix seeking rents with net neutrality and Title II as the vehicle. According to Investopedia, rent seeking is defined as when a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation. An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don’t create any benefit for society; they just redistribute resources from the taxpayers to the special-interest group.
Time Warner’s HBO, Disney’s ESPN, and Viacom’s CBS apparently recognize the need to respond to Netflix’s disruptive model with a little innovation of their own, thus their proposed streaming services.
Would consumers of video content via the internet benefit if competing online streaming providers were ensnared by additional regulations flowing from Title II or net neutrality rules? No, they would not because fewer online content providers would step up to challenge Netflix and consumer welfare would shrink because of reduced access to video content.
The Commission should recognize that net neutrality and calls for Title II regulation are nothing but attempts at rent seeking. If Netflix and other content providers believe their content or services are of value to the consumer, they will not need the Commission to intervene in this market.