BEREC public consultation on Net Neutrality: Differentiation practices and related competition issues in the scope of Net Neutrality

Transcription

1 PD Dr. Simon Schlauri, Attorney-at-law Promenadengasse Zürich Switzerland simon@schlauri.name Body of European Regulators for Electronic Communications By pm@berec.europa.eu Zurich, July 31st, 2012 BEREC public consultation on Net Neutrality: Differentiation practices and related competition issues in the scope of Net Neutrality Dear Sirs, On May 29, 2012 BEREC opened a public consultation on Net Neutrality issues. This document is to comment on the draft document titled Differentiation practices and related competition issues in the scope of Net Neutrality which is subject of said consultation. My comments are based on my academic work related to the subject, in particular on my professoral thesis Network Neutrality, Netzneutralität als neues Regulierungsprinzip des Telekommunikationsrechts which was published as a book in 2010 (Nomos/Dike) and can be found electronically on In particular, the book contains a survey of twenty-two groups of cases of net neutrality violations which are assessed according to economic and legal considerations (pp. 272 ff.). An english summary of this book was published in my paper Network Neutrality as a New Regulatory Principle of Telecommunications Law in Indra Spiecker gen. Döhmann/Jan Krämer (eds.), Network Neutrality and Open Access, Baden-Baden 2011 (Nomos), p General Remarks Market definition The draft report shows very clearly the current concerns regarding net neutrality violations. It gives a comprehensive overview of the incentives of ISPs (or end-user connectivity providers, ECPs) to violate net neutrality, and of the risks which emerge from such violations. Nevertheless the report does not put enough weight on the interrelation between ECPs and content or application providers (CAPs), above all from a competition law perspective. According to the model I developed in my publications, this interrelation should be seen as a new market which 1

2 comes into existence as soon as ECPs start charging CAPs for access to their end-users or block or degrade their content. It is this new market for access to end-users which should in my opinion be in the focus of the interest. Neighbouring markets for Internet access for end-users, for interconnection etc. should only be considered as such, i.e., as markets which may or may not have a disciplining effect on the market for access to end users. This model would comply with antitrust decisions in which markets for access through networks were considered termination monopolies, implying that each network forms its own access market (Germany: BGH, 19. Sept. 2003, V ZR 319/01, pay TV; Switzerland: Wettbewerbskommission, RPW 2007/2, 241 ff., termination on mobile phone networks). Furthermore I believe that this model will allow for a more precise, realistic and systematic regulatory analysis, as market forces of ECPs, CAPs and end-users are examined separately. From this different a perspective the question if a ECP has market power on the end-user markets loses a lot of its significance. In the case of an ECP with SMP on end-user markets there exists of course no disciplining effect from these markets on the market for access to end-users. But also in other cases this disciplining effect must be doubted because of switching costs, information deficits and the simple fact that Internet access is from an end user s perspective a complex product which the user will not change only because a few details do not fit his needs (or CAPs are blocked). These three factors might effectively prevent end users from switching providers in case of net neutrality violations even under competitive conditions. The report should further investigate into these effects before relying on competition as a remedy for net neutrality violations to prevent unrealistic outcomes. Pricing as a remedy for congestion In addition I miss the notion of pricing as a remedy against congestion. The main reason for congestion problems on the Internet lies in the fact that ECPs sell their network capacity based on flat rate price models. As for all scarce resources one very obvious remedy for over-usage is pricing. Nonetheless the report does not reflect the ECPs possibilities to use price differentiation (on/off peak rates, prices based on volume, etc.), even though these could be used at least to cure periodic general congestion problems. I believe that the existence of such pricing options could be a valuable argument against DPI-based degradation of data streams for reasons of congestion control. Evolutionary economics The report does not refer to the concept of evolutionary economics to describe innovation. This concept is based on the idea that market participants will not be able to easily anticipate developments in their markets, nor the needs of the opposite market side. Therefore technical progress must be seen more as a game of trial and error instead of a directed process. This leads to my conviction that a high number of (small) competitors will at least on markets with low entry barriers like the ones for Internet applications or content be more successful innovators than a low number of big competitors (no matter if for big or small innovatorial steps, as the trial and error game is valid for both step sizes). Therefore it is crucial that end-users can decide which products and services to use based on a huge number of CAPs which are offering their services. If ISPs would pre-decide which products end- 2

3 users should be able to access, this would result in an artificial reduction of the number of competitors and in my opinion impair competition. Specific comments: Ad (22): It is not clear what prices would be higher. Ad (25): In all other cases the rationality behind the ECPs behaviour could be distortion of competition : This does not take into accounts that application-agnostic measures might just be more expensive to implement than application-aware measures while resulting from the ECP s perspective in the same results. An ISP would therefore choose the application-aware measures. Ad (27): See above: Competition on the retail level should not play such a big role. In particular I believe that the average consumer s interest in violations of net neutrality would be restricted to main stream applications, while start-up CAPs which play the most important role in the current trial and error game which is so crucial for innovation in the content and application markets, would not profit from this effect. Ad (47): I miss IPTV. Ad (50): It seems quite obvious to me that ISPs influence hardware/software producers in a way which at least indirectly influences net neutrality. Only this can explain why Apple would allow profiles on their iphones which prevent tethering, for instance. Similar reasons might also have prevented smartphone producers to integrate VoIP apps to their devices (there is also no technical reason why Apple s FaceTime should only cover video telephony and not plain voice telephony). Ad (51): Another possibility to show the value chain would be the following: 3

4 Antitrust: Market Definition Disciplining Effect? End User Market Competitive Market for Access to End Users Termination Monopoly Residential Customer Residential Access ISP Internet Backbone Content Providers ISP Content Provider Value Chain Ad (86): The above-mentioned model with a new market might be included. Ad (93): See above: price differentiation might cure at least part of the congestion problems. Ad (97): I agree with the notion that the respective types of differentiation can be classified as efficiency enhancing (see below). Ad (99): I agree with the idea that, if at all, application agnostic measures should be preferred. This also based on the above competition model which might lead to a dominant market position of the ECP towards the CAP, in case of which discrimination might be considered an antitrust law violation. Ad (100): I agree with the idea that anti-congestion measures must only apply in case of actual congestion. Ad (101): Discriminating anti-congestion measures might also lead to lower innovation because the number of innovators is artificially lowered (see the introduction on evolutionary economics above). 4

5 Ad (107): I agree that quality differentiation might be efficiency enhancing because it allowes for more quality-demanding services. I also agree that in case an ISP offers prioritization NRAs should take care that best effort access to end users stay open. In my opinion this means that in cases of noncongested lines best effort applications should profit from very similar transmission quality as the prioritized application under conditions of congestion. Artificial degrading under non-congested conditions is highly problematic and will usually find its reasons in anticompetitive behavior. The cost of overprovisioning might be noted more clearly. Ad (110): I miss a chapter on the protection of vertically integrated OTT services. Ad (112): The notion of indirect effects and medium or longer term effects, i.e., externalities or network effects is not clear enough. For instance van Schewick points out that exactly these effects might also incentive ECPs to discriminate. I miss a reference to other dynamic effects. Ad (126): See above (General remarks, Evolutionary economics). Ad (127): What if ECPs ask for money for plain best effort access? This case has not been covered by the report, and it would be highly problematic (more on this below). Ad (130): Best effort must be kept open in non-congested situations. In addition, degrading and blocking practices might unlike prioritization be seen critically in general, as price differentiation might also be a remedy. Ad (138): As pointed out above (new market with termination monopoly) it is not so obvious that the end user side and the relationship between ISP and end user play an important role. Ad (148): See above (new market with termination monopoly): The relationship between ECP and CAP is in my opinion the most important part to look at. 5

6 Ad (151): In case the ECP provides a connectivity service to the CAP only indirectly this can be thought as a wholesale service which is resold via the CAP s HCP. As soon as the ECP starts selling access directly, the new (retail) market for access to end-users comes into existence. Ad (153): (152 is missing) The notion that the relationship between ECP and CAP might become a sort of a market should be further detailed (see above). As pointed out before in my opinion this relationship can clearly be seen as a new market under many circumstances and according to current competition law practice. Ad (169): I do not believe that providers would take into account these externalities in an effective competitive environment. On the contrary: A provider will never take into account positive static or dynamic effects on other providers or his users because it is not only him who would profits, but all other competitors as well (market failure due to positive externalities). Therefore I disagree with the general notion that such arrangements should be a commercial matter. Ad (180) ss.: I miss the information that in most cases such a vertical integration will be present, at least for VoD, IPTV and VoIP in cases of today s omnipresent quadruple play offers. Ad (183): As mentioned one can describe the ECP s position towards CAPs as a termination monopoly, similar to the one in interconnection markets or in the market for pay TV operators access to their end users. As a matter of course, in such a situation countervailing power also has to be taken into account, which will mainly be the case for big CAPs as Facebook or Google. Nevertheless, the market for Internet content and applications is very fragmented. Countervailing power will therefore only be present in few cases. In all other cases the position of the ECP towards a CAP will be dominant, meaning that a ECP might be able to realize supracompetitive prices from the CAP. Ad (185, 188): I agree that legacy services like telephony or TV services as well as contractual agreements with over exclusive or quasi-exclusive access to end-users are regarded as cases of vertical integration, as they have very similar effects as vertical integration into OTT markets. 6

7 Ad (190): Again, it would be better to speak of a market for access to end-users. Ad (191): I agree with the integration of specialized services (or managed services) like IPTV into the scenario of vertical integration. In addition, specialized services should in my opinion be treated like normal IP applications/content, rather than implementing a special rule for specialized services which would let ECPs exclude third-party CAPs from their prioritized access. The background lies again in competition law and the termination monopoly which request non-discrimination. Ad (194): I strongly disagree with the notion that CAPs could opt to provide their application/service through another ECP reaching a large proportion of end-users. As the Internet has always been an open platform, meaning that all CAPs should be allowed to reach all users, a sudden restriction of access to the end-users also by a non-smp provider (SMP with regard to the end-user market) should be considered an abuse of a dominant market position. This result would also correlate to the mentioned model of the termination monopoly, which was upheld also for non-smp providers in the afore-mentioned Swiss mobile termination decision (RPW 2007/2, 241 ff.; the termination monopoly did not lead to a dominant position in this case, though, due to the disciplining effects of neighboured markets). Nevertheless, a soft regulatory approach for minimum quality of service might include two steps, meaning that in a first step only (end user market) SMP providers would be regulated, and that only in cases where a greater number of non-smp providers is violating net neutrality regulation for them would be enacted. Ad (197): Again, it is my opinion that regulatory tools to resolve SMP constellations will not work reliably as net neutrality violations are the result of a termination monopoly on the market for access to end users rather than of SMP on the end-user market itself, and as the disciplining effect of a competitive end-user market must be questioned. Ad (198, 199, 298): The report states that it would be worth exploring the case of ECPs beginning to charge CAPs to access their end users (two-sided market). I agree with this statement, as far as charges for best effort access is covered: Such charges for best effort access to end users seem highly problematic to me, though not from a static point of view (which might even justify charges based on the concept of Ramsey pricing), but from a dynamic one. And in highly innovative markets like the ones for Internet content and applications the effects of static efficiency are insignificant compared to the ones of dynamic efficiency. In other words, the interest of consumers in somewhat lower broadband prices will 7

8 hardly be higher than their interest in the ever-growing benefits from the Internet acting as an innovation motor for content and applications. If one then considers the huge difference with regard to CAPs transaction costs between todays world of best effort and end-to-end connectivity and a world in which only paid access to end users would be possible (every CAP would have to negotiate prices with every ECP whose customers he wanted to reach, which would create high costs), it becomes clear that the introduction of such access fees would dramatically threaten the high pace of innovation we see today (for the relevance of a high number of small innovators see above [General remarks, Evolutionary economics]). Furthermore, given the mentioned termination monopoly, it seems unlikely that without regulatory intervention an efficient price level would emerge at all (competitive bottleneck). Ad (202): No. 202 is referring to the concern that if prioritisation becomes widespread the amount of capacity used along the vertical channels to deliver non-prioritized services would be reduced, and that this might impair innovation in the long run. First, it is important that congestion problems mainly appear in the local loop and not in the backbone and the aggregation network. This because capacities in these parts of the network can easily be upgraded due to fiber access. For similar reasons prioritization mechanisms are not widespread on backbone level. Therefore, if at all, prioritization of one service will only affect the quality of other services which are being used by the same customer at the same time. In cable networks, the problem of congestion also exists between the users of a local loop as the medium is shared, but the problem is smaller as cable networks generally offer higher capacity to the end-user than DSL, and as capacity can be easily improved by splitting local networks. Second, only prioritization will allow to introduce services with a high quality demand as IPTV. Therefore prioritization itself has a significant potential to improve innovation on the application level. Prohibiting prioritization will, on the other hand, render such services impossible which have been years ago and which are run very successfully. Third, I believe that at least on fixed networks prioritization will be a time-limited phenomenon: As with VoIP, which was impossible to use without prioritization some years ago and which works flawlessly over today s broadband access lines, also other services which still have to be prioritized to work satisfactorily today will not need prioritization in future networks any more. This said, I do not share the concerns that prioritization will in general impact innovation on the content side, at least as long as best effort access is preserved (because only a viable best effort access will some day make prioritization redundant). I am also of the opinion that ECPs should be allowed to demand a fee for prioritized access to their end-users: To implement applications like IPTV, relatively high investments have to be taken also by the CAP (because a prioritized service will only work with direct peering). Therefore small startup CAPs will be excluded from the market for prioritized content anyway. Unlike for best effort, which is important for start-up CAPs, access high fees will therefore not cause significantly higher market entry barries for CAPs, because they already have to pay for direct peering infrastructure. Last but not least free prioritization for everyone would not work anyway because of market failure (tragedy of the commons). 8

9 Ad (205): As mentioned before, a viable best effort access to end users is crucial to preserve the innovation potential of the Internet. In my opinion this should mean that best effort applications and content should have access to the full capacity of the line the user paid for in uncongested times (i.e., prioritization will only have an effect in case of congestion). (See above, ad 107, 130, for my concerns regarding degrading practices in general.) Ad 209: I agree with the notion of application-agnostic measures. I strongly disagree with the idea that ISPs would act like retailers and choose the best services to be offered for their customers. It clearly contravenes to the mentioned idea of evolutionary economics, according to which only a high number of innovators will preserve the current pace of innovation on the net, and that a small numbers of ISPs will not be able to predict which applications and content their customers would choose. Ad (236, 242, 280, 297): As mentioned before I would suggest to investigate more into how end users will react to net neutrality violations, given the fact that there are switching costs, etc. (Introduction, section Market definition ). I severely doubt that competition on the end-user markets will solve net neutrality problems on its own. The current approach just does not seem to be very realistic. Ad (283): I agree with the clear distinction between positive and negative differentiation (prioritization/degrading), als the two measures should be treated differently (see above). Ad (292): The last sentence might refer to the principle of non-discrimination in competition law. Please do not hesitate to contact me if I can be of further help. Yours faithfully Dr. Simon Schlauri 9