Net Neutrality An issue for ex ante or ex post intervention?

Transcription

1 Net Neutrality An issue for ex ante or ex post intervention? V Encuentro de la ACE - Madrid 2 nd November 2010 Pietro Crocioni * The views expressed do not necessarily reflect those of Ofcom.

2 1 Outline a. The Internet today; b. What s Net Neutrality (NN)? Focus on charging and discrimination; c. Context; d. Is ex ante intervention warranted? Pressure for change and risks; What is NN supposed to remedy? Foreclosure; or Wider regulatory concerns? e. If ex ante Intervention was warranted how could we intervene?

3 2 a. Today s Internet Price Subscription/pay content providers Consumers Price ISPs No price/no quality differentiation (best effort) Advertisingfinanced content providers Price Advertisers

4 3 b. Defining NN Restrictions on the retail consumers ISPs on how they interact with CPs; But different versions ISPs: 1. cannot charge CPs (zero price cap); 2. cannot discriminate => two possible versions: a. cannot price discriminate across content providers; b. cannot degrade the quality of the access services. Note 1 also achieves 2.a. but not necessarily 2.b; NN (extreme view) claims (based on non-economic and economic arguments) that ISPs should provide access to all for free on a best effort basis; However, even today some traffic management (discrimination) takes place.

5 4 c. Some context Issue discussed at many levels: FCC; European Commission; BEREC, Ofcom, Arcep etc.; Some cases in the US (Comcast, Madison River); Ofcom s June 2010 condoc focused on potential concerns about: a. (anticompetitive) discrimination; b. The potential impact of ISPs charging on innovation at the edges ; and c. Consumer transparency; Ofcom considered transparency and competition tools as the key. QoS may be considered if the latter do not work.

6 5 d. Is Intervention Warranted? Pressure for change Rapid traffic increases with data intensive applications (e.g. video); More heterogeneous service requirements - i.e. delay-sensitive applications, such as games, video, telemedicine etc.; and Capacity constrains (especially for mobile); Mobile data volumes Consumer Internet traffic forecast 18% 19% 20% 22% 23% 27% 29% 31% 32% 3G subscriptions as % of total Data volumes (terabytes) Q4 1,257 Q , , , , Q2 Q3 Q4 Q ,378 10, , Q2 Q3 Q4 3UK Vodafone T-Mobile Orange O2 Source: Ofcom

7 6 The potential risks of the status quo If trends continue current best effort for all for free (i.e. NN) carries risks: Congestion: everyone worse-off ; and Crowding-out: value of delay-sensitive applications may be lost or severely reduced; Absent NN a two (or more) tier system could develop: Capacity reserved for priority access (definition based on latency?) quality of service (guaranteed?) for a fee; best effort access for free.

8 7 What is NN trying to remedy? Prevent exclusionary behaviour? => no-discrimination rule: a. Typical foreclosure (absent cost-based wholesale regulation)? b. Sabotage (with cost-based wholesale regulation)? Wider regulatory objectives (with competing ISPs)? => zero price rule: c. Two-sided-markets implications i.e. remedy to a competitive bottleneck? d. Investment incentives (for ISPs/network vs. CPs)? e. Consumer information? Not the main focus f. Minimum QoS? What would be the most appropriate remedy? NN as an ex ante rule (but different versions); Case-by-case approach i.e. ex post intervention probably restricted to a.

9 8 Foreclosure ISPs could have ability and incentives to discriminate against rival CPs e.g.: ISPs leveraging into content/applications; or Content/application providers leveraging into Internet access? Potential concern if conditions exist: Market power; Vertical integration; Incentives and effects always/often present?

10 9 Foreclosure: is Internet different from telephony? Foreclosure incentives and risk of consumer harm - compare to traditional (voice) telephony: Voice telephony => historically strong incentive to exclude rivals that provided services like those of the incumbent; service range limited to voice telephony; ISPs may have their own content/services, while rivals can provide competing services e.g. VoIP -; but the largest majority of third party services will be complementary to those offered by ISPs e.g. auction sites, social networks etc. Incentive to exclude confined to fewer services? Sabotage with cost-based access incumbent has an incentive to engage in non-price discrimination in supplying access to rivals. Used to justify functional separation on BT. NN is an extreme version. If an ISPs has to offer access to a rival at zero price it may then have incentives to deteriorate the quality of access it provides to rivals. Hence, sabotage is a concern that may emerge from NN as a zero price rule; Is the case for ex ante intervention stronger in Internet?

11 10 Wider regulatory objectives? What maximises efficiency when: Excess demand Capacity constraints Heterogeneous consumers Application have different supplyside requirements Fixed & common costs Rationing demand Product differentiation Price discrimination Under (an extreme view of) NN none of the above could be possible.

12 11 Internet access is a two-sided market additional consumers benefit content providers Consumers Price ISPs Price? Content Providers extra content benefits consumers

13 12 What can we learn from the two-sided market literature? a. Cross-group externalities need to be reflected in the efficient structure of prices => efficiency may require one side to be treated better ; e.g. advertising supported media => advertisers cover most of the costs viewers/listeners/readers often get it for free; Price (on each side) = Cost of provision + Degree of Market Power ± Cross Group Externalities One-sided/ traditional components Two-sided component b. Market failure possible in certain types of two-sided markets ( competitive bottlenecks ) depending on facts and evidence => multi-homing side charged too much (inefficient price structure).

14 13 Which view is right? All advertising supported media (TV, radio, newspapers etc) => consumers pay ~ 0, CPs and advertisers pay all => viewers value incremental content less than content providers (and advertisers) value access to extra consumers? Internet largely advertising based. Is a different treatment justified? Competitive bottleneck? Competitive bottleneck price ( Too high ) Removing NN obligation Some factors could counter the competitive bottleneck outcome 1.Google, Amazon etc. have bargaining power. Are consumers loyal to content providers or ISPs? 2.CPs may reverse outcome with exclusive contracts - e.g. Apple was paid and did not pay O 2 for IPhone; 3.Do consumers single-home (home, office, mobile etc)? Efficient price takes into account cross group externalities but does not allow for market power exploitation Price level range without NN Price = zero with a NN obligation ( Too low )

15 14 Investment incentives Debate focused on: CPs - without NN => disincentives for next Google? Or hampering delay sensitive services? Simple intuition: without NN, ISPs would charge CPs => fewer funds to invest; But CPs without NN could have choice between free best effort and pay priority ; They could chose priority if their customers valued priority access; Without priority some services (e.g. telemedicine) will never emerge? ISPs - best effort for all => excessive investment in capacity? Without NN, with competing ISPs when congestion arises ISPs/networks could: a. Invest in extra capacity; or b. Ration demand; a. is not necessarily more efficient than b. If capacity is lumpy and future demand uncertain b. > a.; With NN, no control of demand => only a. is possible.

16 15 e. If Intervention was warranted, how to intervene? Focus is on charging and discrimination What could we do under the current ex ante European Framework? Three criteria test = 1) high and non-transitory barriers to entry + 2) market structures do not tend towards effective competition in a relevant time horizon + 3) application of competition law alone inadequate. Market Definition SMP Remedy = = = A market for terminating data traffic on each ISP s network. Equivalent to voice call termination? Competitive bottleneck on all ISPs? Evidence of SMP i.e. overcharging? Non-discrimination obligation? Cost based access? Zero price cap? Like B&K for voice? Feasible? Need the Commission legislating? Ex post? Similar questions as for ex ante but also need to find evidence of exclusionary effect and consumer harm.

17 16 Other tools: Transparency and QoS Transparency: Absent NN: Today there is already some traffic management; Tomorrow priority access is likely; Consumers contracts may become increasingly complex raising issues about the provision of clear and transparent information; Minimum QoS as a USO: Unit of measure latency, speed etc.?; measurable/verifiable?; will it change over time depending on features of the services it needs to support? All USOs are costly. How costly? If QoS is set too high would consumers that demand lower QoS be priced out? Could ISPs guarantee QoS when they may have not control of some network elements?

18 17 Thanks & Questions?