Business Thoughts: State of American ISPs and Telecoms
The big news yesterday was FCC Chairman Ajit Pai’s announcement on his quest to repeal/undo Title II rule implemented under his predecessor that re-classified ISPs (internet service providers). ISPs include telecoms such as T-Mobile and Verizon. Title II has been labeled as favoring “net neutrality” as it reclassifies ISPs into common carriers that have to abide by stricter rules and, more importantly, grants FCC the authority to regulate them accordingly. Personally I’m all for Title II and think that there’s something inherently unethical about having Ajit Pai, a former Verizon lawyer, presiding over the FCC. (But that’s the topic for a different post…)
The focus for this post is highlighting the phenomenon of American ISPs morphing into content providers. Recent examples include Verizon’s acquisition of Yahoo as well as AOL, and AT&T’s pending mammoth acquisition of Time Warner. These deals are intriguing because on the surface, they don’t quite make sense other than for revenue diversification purposes. Why would Verizon risk its healthy profits and duopolistic position on waning media companies such as AOL and Yahoo? For one, business model of media companies are very different than the utility-looking ones of ISPs; a fitting analogy would be Duke Energy or Exelon likewise acquiring News Corp.
But if one digs a little deeper, these deals make sense under a different regulatory environment…such as one devoid of Title II. In a world without Title II, ISPs can discriminate the network traffic as well as engage in selling of consumer browsing histories to advertising companies. The latter, of course, has already become a reality under this new Trump administration. The result is that ISPs can collect potentially very significant revenue from the network traffic they manage — and therefore it’s in their interest to own media companies or content providers to synergize from. For example, Comcast will bully and collect fees from a Netflix or a Google to normalize network speeds for consumers while at the same time allowing its unrestricted access to content from its own NBC Universal site. The sad reality is that this is already happening with AT&T granting uncapped data access to its DirectTV Now app.
An neoclassical economist can argue that the examples provided simply show the free market at work. Companies are leveraging their market power and benefiting from their own respective synergies. This assessment is correct but overlooks the small fact that there is no perfect competition, which is necessary for free market principles to be maximized and beneficial to consumers. There are only a handful of ISPs in the U.S. and from those, one or two wield the control the bulk of the market: AT&T and Verizon rule the telecom market while one of Verizon and Comcast are oftentimes the only choice available (anecdotally, Comcast is my only option). Therefore in this real world, these ISPs are more or less free to set the prices for consumers. And they absolutely would love to acquire additional revenue via selling browser history and charging other content providers for privileged access.
We can only hope for the best, that the FCC and this administration does the right thing for the public — to view the internet as an utility like electricity or water and maintain the divide between ISPs and media companies/providers. Otherwise we’ll see the quick blurring of these lines akin to the consolidation of the financial industry.
Maybe Disney would like to join the game and acquire T-Mobile? /s
