[AfrICANN-discuss] What the airline industry can teach us about broadband caps

[Anne-Rachel Inné]

 What the airline industry can teach us about broadband caps The free
market can't do it alone; good government policy can promote competition.

by Timothy B. Lee <http://arstechnica.com/author/timothy-b-lee/> - May 11
2012, 1:36am RDT

Writing for *Wired* (which shares a parent company with Ars Technica),
Susan Crawford, currently a visiting professor at Harvard,
complained<http://www.wired.com/epicenter/2012/04/opinion-crawford-cableization/>about
a recent travel mishap. An airline agent told her she wouldn't be
allowed to bring her viola on the airplane despite the fact that the
flight's overhead compartments had plenty of room for it. Violas are too
fragile to check, Crawford says, so she was forced to spend an extra night
in DC in order to take a different flight—and deal with a different,
more accommodating gate agent—the next morning.

She used her story as an extended metaphor for the current debate over
Comcast's broadband cap. Netflix is the hapless passenger in this analogy,
while Comcast is the erratic gate agent who demands it pay extra to allow
its viola high-bandwidth videos on the airplane network.

In a response to Crawford, Hance Haney of the Discovery Institute pounced
on this example<http://techliberation.com/2012/05/03/nothing-to-fear-from-pricing-freedom-for-broadband-providers/>and
argued that it demonstrated precisely the opposite point:

Most people don't own a viola, nor do they want to subsidize viola travel.
They want to pay the lowest fare. Differential pricing (prices set
according to the differing costs of supplying products and services) has
democratized air travel since Congress deregulated the airlines in 1978.
First class helps make it possible for airlines to offer both lower economy
ticket prices and more frequent service. Which is probably why Crawford's
column isn't about airlines.

The comparison of broadband to airlines *is* instructive, but not for the
reasons that either Haney or Crawford suggest. Haney is right that
airlines' ability to offer a first-class option is good for everyone
because it induces those first-class passengers to pay a disproportionate
share of the costs of air travel. But airlines' discriminatory policies are
not a matter of public concern precisely because good public policy has
made the airline industry relatively competitive. If one airline makes its
coach passengers miserable to induce them to upgrade to first class, many
will switch to a competing airline.

That's often not a realistic option for broadband customers, who rarely
have more than one serious alternative to their current broadband provider.
Thus, Internet data caps have generated so much more outrage than price
discrimination by airlines. But the success of airline deregulation has
important lessons for fixing our dysfunctional broadband markets.
Airlines don't own airports

The deregulation of air travel was an important achievement of the Carter
administration. Before 1978, the airline industry was a cozy cartel
insulated from competition by government regulations. The elimination of
these regulations allowed a number of airlines to enter the market or
expand service to new cities. Fares plummeted, bringing air travel within
the financial reach of many more travelers.

Paradoxically, a key factor in the success of airline deregulation was that
airports remained in government hands. It's a useful thought experiment to
imagine what would have happened if the same policymakers who deregulated
the airlines had also privatized the nation's airports by selling them to
incumbent airlines. Superficially, that might look like a further step in a
free-market direction, but appearances can be deceiving.

Deregulation succeeded because it opened the market up to new firms. But
new airlines require access to existing airports, and incumbents would have
little incentive to rent gates on good terms to would-be competitors.

Theoretically, new firms could just build their own network of rival
airports. But this would not only be prohibitively expensive, it would also
require demolishing thousands of homes and subjecting thousands of
households to the noise and other nuisances of living near these redundant
airports. Indeed, constructing a new major airport is so disruptive to
nearby residents that in practice it only occurs with government
assistance. That's one reason that most metropolitan areas have only one
major airport, and even the largest metropolitan areas only have two or
three. City officials are understandably reluctant to have more airports
than absolutely necessary.

Fortunately, incumbent airlines don't control the nation's airports; as a
result, the airline industry has become highly competitive. New firms like
US Airways, Frontier, JetBlue, and Virgin enter the market at regular
intervals.
Vertical integration can harm competition

We can illustrate the problems of the current broadband market by extending
our airline analogy one step further. Suppose that in addition to owning
the nation's airports, the incumbent airlines also acquired hotel chains.
These "vertically integrated" airlines could then boost their profits by
pursuing the following strategy. First, hike the cost of an ordinary
airplane ticket. Second, offer customers "double play" deals if they stay
at airline-owned hotels. This would make it easier for airlines to identify
their richest customers based on which hotels they stayed at, and to charge
those customers correspondingly higher prices.

This kind of bundling would be good for the bottom lines of incumbent
airlines. But it would be a terrible development for independent hotels and
tour companies, which would be starved of customers and struggle to stay in
business.

The broadband market seems to be undergoing a similar transformation.
Comcast already offers "triple play" deals of data, phone, and video
services. And it recently acquired NBC, paving the way for even greater
vertical integration down the road. This makes independent firms like
Netflix and Sony understandably
nervous<http://arstechnica.com/tech-policy/news/2012/05/sony-warns-comcast-cap-will-hamper-video-competition.ars>,
because it means that Comcast is both a key source of customers—Comcast
controls more than 20 percent of the US residential broadband market—and a
major competitor.

This isn't just bad for Netflix; it's bad for consumers too. Competitive
markets produce a wide variety of innovative content that a handful of
vertically integrated telecom-entertainment conglomerates can't match. If
incumbent firms destroy their competitors in an effort to increase their
profits, consumers will suffer from reduced competition and perhaps higher
prices as well.
Fixing broadband is hard

By separating the airports from the airlines, regulators ensured that
airport monopolies didn't undermine competition in the airline market. In
principle, this is a good model for the telecommunications market, and it's
a model some countries around the world have pursued.

In the UK, for example, the incumbent telecom company, BT, was required to
create a separate subsidiary, called Openreach, that provided wholesale
access to the "last mile" of its network. A variety of companies, including
another division of BT, offer retail broadband access on top of the bare
infrastructure provided by Openreach. This has enabled serious
competition<http://www.ispreview.co.uk/story/2011/09/06/uk-home-and-business-broadband-isp-connections-top-19-9-million-in-q1-2011.html>among
wired broadband providers.

The United States tried a similar regulatory approach starting with the
1996 Telecommunication Act, requiring the local phone incumbents to
"unbundle" their lines for use by competitors. But the incumbents were not
required to fully separate their wholesale and retail divisions, and that
made it almost impossible for the Federal Communications Commission to
guarantee that third parties were being treated fairly. The incumbents wore
their would-be competitors down with years of foot-dragging and litigation.
The unbundling experiment finally ended when the Supreme Court
allowed<http://en.wikipedia.org/wiki/Brand_X>the FCC to abandon it in
2005.

At this point, resurrecting unbundling would be a tough sell, and the
National Broadband Plan doesn't call for it. Most of the independent firms
that took advantage of the first unbundling program wound up in bankruptcy.
If a future FCC tried to revive the policy, it would face a tough sell with
potential entrants.

Still, the success of competition in the airline industry—and a similar
success in trucking<http://www.nationalaffairs.com/publications/detail/keeping-the-internet-competitive>—suggests
that the long-term goal should be to achieve a clean separation between the
monopolistic parts of the broadband industry and the competitive parts. In
recent years, we've been moving in the opposite direction, with telephone
and cable incumbents merging with each other and acquiring "upstream"
businesses like NBC. Just as we would have been concerned about a
monopolistic TWA acquiring the Hilton hotel chain, so regulators should be
concerned of mergers between broadband incumbents and content companies.

Regulators missed the boat with the Comcast-NBC merger; they should be more
skeptical next time such a merger is proposed.
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