Regulation & The Internet: 1999-2019 Thomas W. Hazlett H. H. Macaulay Endowed Professor of Economics ACCC/AER Conference Brisbane, Australia August 1-2, 2019
The Beauty of Brisbane • Rated 8 th most beautiful city in the world • It was once a point of shame that Australia was settled by convicts , but today • locals are embracing their crime-ridden past. • Jan 26, 2012 BBC.com 8.1.19 ACCC/AER Conf. * Brisbane, Australia 2
20 Years of Broadband Regulation • Markets yield surprises – and the disruptions yield growth • Joseph Schumpeter right about dynamics – optimizing over time “imperfect competition” • New structures provoke old policy arguments – demanding rigorous and analytically symmetric comparisons (Insert: Ronald Coase citation here) 8.1.19 ACCC/AER Conf. * Brisbane, Australia 3
The 1999 Broadband Internet • there was no residential broadband market • dial-up mass market Internet • waiting for deployment of Bell Labs’ ISDN • “It Still Does Nothing” 8.1.19 ACCC/AER Conf. * Brisbane, Australia 4
And we worried about this-- AOL Buys Time Warner for $162 billion Jan. 10, 2000 8.1.19 ACCC/AER Conf. * Brisbane, Australia 5
The AOL-Time Warner Monopoly • America Online (AOL) is the largest, and in some aspects dominant, firm in the aggregation and distribution of content and services over the Internet. • AOL is also the largest provider of Internet access in the U.S. This is a business that AOL essentially invented, and no other firm has been able to compete effectively with AOL. – Jeffrey MacKie-Mason, Federal Trade Commission (10.17.00) 8.1.19 ACCC/AER Conf. * Brisbane, Australia 6
AOL’s Revolution 8.1.19 ACCC/AER Conf. * Brisbane, Australia 7
AOL not a Common Carrier • Deregulation in the 1980s allowed AOL – escaped access charges, licensing, taxes, mandates • Without this freedom, the “tens of millions of Americans today who enjoy unlimited use of the Internet for around $20 a month, and who invest, shop, learn and otherwise benefit from home Internet access, might never have experienced this extraordinary tool.” (FCC 1999) 8.1.19 ACCC/AER Conf. * Brisbane, Australia 8
Walled Garden Regula ng Broadband ISPs * Western Carolina University 8.1.19 ACCC/AER Conf. * Brisbane, Australia 9
That Model Did Not Control Broadband • but was disrupted and terminated by broadband • in a very informative way 8.1.19 ACCC/AER Conf. * Brisbane, Australia 10
Three U.S. Regulatory Regimes Period Cable Modems Telecoms/DSL regulated with “line sharing” obligation before 2003-1Q unregulated 2003-1Q to regulated but no “line sharing” 2005-3Q unregulated 2005-3Q forward unregulated deregulated 8.1.19 ACCC/AER Conf. * Brisbane, Australia 11
Three U.S. Regulatory Regimes Period Cable Modems Telecoms/DSL regulated with “line sharing” obligation before 2003-1Q unregulated 2003-1Q to regulated but no “line sharing” 2005-3Q unregulated 2005-3Q forward unregulated deregulated 8.1.19 ACCC/AER Conf. * Brisbane, Australia 12
1 st Period: Cable Dominates 12 Subscribers (in millions) 10 ADSL (in millions) Cable Modem 8 (in millions) 6 4 2 0 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 8.1.19 ACCC/AER Conf. * Brisbane, Australia 13
2 nd Period: DSL Surges 35 11% DSL 'Line Sharing' Number of Subscribers (in millions) above 30 Dereg trend 25 65% above 20 trend 15 10 DSL 5 Cable 0 -5 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 8.1.19 ACCC/AER Conf. * Brisbane, Australia 14
3 rd Period: DSL Spikes Again (Less) 1% 30 above trend DSL Dereg II DSL 'Line Sharing' Number of Subscribers (in millions) 25 Dereg 12% above 20 trend 'Line 15 Sharing' Trend 10 Trend 5 II DSL 0 Cable -5 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 Source: Hazlett-Caliskan, Natural Experiments in US Broadband Regulation, R EVIEW OF N ETWORK E CONOMICS (Dec. 2008) 8.1.19 ACCC/AER Conf. * Brisbane, Australia 15
Disruptions in Fixed Broadband • not via common carrier regulation • not via common carrier business models • yet markets evolved to “openness” 8.1.19 ACCC/AER Conf. * Brisbane, Australia 16
1999: Wireless Web • NTT DoCoMo’s iMode • “strong vertical integration” • bandwidth optimized by carrier rules • content, prices and services “co-ordinated” • 25 mil. subscribers, Feb ‘99 to Sept ‘01 8.1.19 ACCC/AER Conf. * Brisbane, Australia 17
POCKET MONSTER (9.01) • How DoCoMo's wireless Internet service went from fad to phenom - and turned Japan into the first post-PC nation. • So far, the wireless Internet has flopped spectacularly in every part of the world except Japan. • https://www.wired.com/2001/09/docomo/ 8.1.19 ACCC/AER Conf. * Brisbane, Australia 18
Vertical Restrictions • At the heart of all this is a paradox: i-mode depends on outside providers for everything from handsets to content, yet it's managed so carefully that nothing is left to chance. • Critics see a walled garden, more mobile mall than wireless Web. 8.1.19 ACCC/AER Conf. * Brisbane, Australia 19
Business Model Rivalry 8.1.19 ACCC/AER Conf. * Brisbane, Australia 20
Liberalization allowed this 8.1.19 ACCC/AER Conf. * Brisbane, Australia 21
Beyond iMode 8.1.19 ACCC/AER Conf. * Brisbane, Australia 22
Sometimes with Walls 8.1.19 ACCC/AER Conf. * Brisbane, Australia 23
"Closed" v. "Open" (c. 2009) 8.1.19 ACCC/AER Conf. * Brisbane, Australia 24
Google challenges record $5 billion EU antitrust fine ( OCT. 9, 2018) … Google’s illegal practices included forcing manufacturers to pre-install Google Search and its Chrome browser together with its Google Play app store on their Android devices. The EU antitrust authorities said the company also paid manufacturers to pre-install only Google Search and blocked them from using rival Android systems. https://www.reuters.com/article/us-eu-alphabet-inc-antitrust-idUSKCN1MJ2CA 8.1.19 ACCC/AER Conf. * Brisbane, Australia 25
Internet’s Wild Ride, 1999-2019 8.1.19 ACCC/AER Conf. * Brisbane, Australia 26
Reality v. Meme 8.1.19 ACCC/AER Conf. * Brisbane, Australia 27
Layers of the Internet Content Layer Logical Layer Physical Layer 8.1.19 ACCC/AER Conf. * Brisbane, Australia 28
Hipster Antitrust • platform creators endemically foreclose – Broadband ISPs with content – Amazon with independent vendors – Wireless carrier with applications • per se non-discrimination rules pro-consumer • gains from rivalry to create markets dismissed • net neutrality and ”antitrust activism” popular 8.1.19 ACCC/AER Conf. * Brisbane, Australia 29
Whopper Neutrality 8.1.19 ACCC/AER Conf. * Brisbane, Australia 30
For the purposes of this example = 8.1.19 ACCC/AER Conf. * Brisbane, Australia 31
8.1.19 ACCC/AER Conf. * Brisbane, Australia 32
Outraged Customers, Forced to Wait -- or Pay a Fee for Faster Service 8.1.19 ACCC/AER Conf. * Brisbane, Australia 33
What you won’t wait for at Burger King 8.1.19 ACCC/AER Conf. * Brisbane, Australia 34
BUT…. you will pay extra for speed. 8.1.19 ACCC/AER Conf. * Brisbane, Australia 35
8.1.19 ACCC/AER Conf. * Brisbane, Australia 36
No common carrier rules needed. 8.1.19 ACCC/AER Conf. * Brisbane, Australia 37
Corporate Happy Meal? How ‘Whopper Neutrality’ Became the Perfect Combination of Entertainment and Education (and Burger King's most shared ad) Ad Week (June 20, 2018) “We believe the internet should be like Burger King restaurants, a place that doesn’t prioritize and welcomes everyone,” says Fernando Machado, Burger King’s global chief marketing officer. “That is why we created this experiment, to call attention to the potential effects of net neutrality.” Ad Week (Jan. 24, 2018) 8.1.19 ACCC/AER Conf. * Brisbane, Australia 38
New Learning and Old Rhythms • Liberalization has opened markets • Business model rivalry disrupts & discovers – battling on the “open/closed” frontier • New Learning is powerful and contagious • But so are old beliefs and political coalitions • Policy economists are not yet obsolete 8.1.19 ACCC/AER Conf. * Brisbane, Australia 39
Thank You. 8.1.19 ACCC/AER Conf. * Brisbane, Australia 40
And also in 1999 • Amazon offered to buy Netflix for $12M • Following year Netflix tried to sell for $50M • to Blockbuster 8.1.19 ACCC/AER Conf. * Brisbane, Australia 41
A Brief History of Netflix • launched 1997 as online mail-order video casette rental service • Blockbuster dominant with 9,000 stores renting VHS tapes – blocked by FTC from acquiring Hollywood Video (1999, 2004) • attacked Blockbuster with DVDs, marketing tactics, price war • Netflix launched streaming in 2007 • Blockbuster bankrupt in 2010 • Battled for network neutrality regulation, circa 2010-14 8.1.19 ACCC/AER Conf. * Brisbane, Australia 42
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