Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Wright Advocates FTC Antitrust Regulation of Net Neutrality Issues, (Apr 23, 2013)

By Tobias J. Gillett, J.D., LL.M.

FTC Commissioner Joshua D. Wright argued for FTC antitrust regulation of broadband competition, rather than regulation by the Federal Communications Commission under its Net Neutrality Order, in an April 19 speech before the Information Economy Project’s Conference on US Broadband Markets at George Mason School of Law in Arlington, Virginia.

Wright opened his speech, entitled "Broadband Policy and Consumer Welfare: The Case for an Antitrust Approach to Net Neutrality Issues," by discussing the FCC’s 2010 Net Neutrality Order regulating broadband providers. He observed that the Order contains three primary components: (1) a transparency provision requiring providers to explain their services to customers, (2) a "no blocking" provision requiring providers to permit customers to use any computers, mobile devices, or applications with their network access, and (3) a "no unreasonable discrimination" provision restricting providers’ pricing and packaging of their services.

Wright noted that the second and third components, intended to prevent providers from adopting practices to disadvantage their rivals, had generated a "firestorm" of controversy. He observed that the D.C. Circuit had struck down a previous attempt by the FCC to exercise ancillary jurisdiction over broadband providers through a policy statement setting forth principles later adopted in the 2010 Order. The Commissioner noted that the FCC had employed a similar jurisdiction theory in adopting the 2010 Order, and that litigation challenging the Order is currently before the D.C. Circuit.

Whatever the results of that litigation, "the Net Neutrality Order is a strikingly poor policy when analyzed from a consumer welfare perspective," he said. "[A]ntitrust quite clearly offers a far superior approach to addressing potential anticompetitive practices in broadband markets."

The Net Neutrality Order seeks to prevent broadband providers from entering into vertical contractual relationships because those relationships may allow them to disadvantage rivals and harm competition, Wright explained. The principal flaw in this theory is that it ignores "the vast economic literature and empirical evidence that support the view that such vertical arrangements are usually procompetitive."

According to Wright, vertical arrangements "can create efficiencies by reducing double marginalization, preventing free riding on manufacturer-supplied investments, and aligning incentives of manufacturers and distributors," resulting in benefits to consumers from "lower prices, increased output, higher quality, and greater innovation." He observed that a number of studies have supported the view that vertical restraints are usually procompetitive, and that no evidence demonstrated that vertical restraints in broadband markets should be treated differently.

Therefore, appropriate regulation of potential anticompetitive practices in broadband markets demanded a more flexible approach than that adopted in the Net Neutrality Order, according to Wright. He observed that antitrust jurisprudence has applied a "rule of reason" balancing approach to vertical arrangements, requiring case-by-case assessment of each arrangement, and had previously rejected a categorical prohibition similar to that employed in the Net Neutrality Order.

Wright observed that an appropriate rule must minimize "the social costs of false positives, false negatives, and administrative costs." A per se prohibition under this standard would only be appropriate "if vertical restraints were overwhelmingly, but not necessarily always, likely to cause competitive harm." As vertical restraints are not generally anticompetitive, the net neutrality blanket rule would not generate consumer welfare gains relative to the rule of reason approach, according to Wright.

Finally, Wright laid out his case for choosing the FTC as the regulator of broadband competition. He observed that the agency has core competencies in antitrust enforcement and consumer protection, as well as considerable experience with Internet and broadband access, that would "position the agency well to deal with the difficult legal, economic, and technological issues related to net neutrality." Moreover, he argued that the agency regularly deals with vertical arrangements and transparency and disclosure issues, and that placing both the consumer protection and antitrust enforcement aspects of net neutrality under the FTC would "eliminate inefficient overlapping jurisdictions."

Further, the FTC’s consumer welfare approach helps prevent politics from encroaching on the "competition and consumer enforcement mission," according to Wright. He cited the FTC’s recent decision not to pursue an enforcement action against Google as an example of its ability to weigh the merits of a case on the evidence rather than to bow to political pressure.

"While the FTC’s role in regulating broadband markets remains unclear at the moment, suffice it to say that we are up to the task of addressing competition and consumer protection issues arising in Internet markets generally, and more specifically, of applying our considerable experience and expertise in analyzing the vertical issues to the net neutrality context," Wright concluded.

News: Antitrust FederalTradeCommissionNews