FCC Chairman Martin’s “Policy” for Broadband

It often impresses me that people who are so “pro-free market” and “pro-competition” are able to completely ignore these beliefs when faced with the pleas of a large company (or several large companies). FCC Chairman Martin talks today in an article in the Wall Street Journal, Fighting a Broadband Battle about how he believes universal broadband should be central to his agency’s agenda:

In an interview, Mr. Martin, a 38-year-old Bush loyalist, says his top goal is to increase Americans’ access to high-speed Internet. Late last week, he began circulating plans to loosen rules so neither phone nor cable companies will be required to share their Internet connections with competitors like America Online, a change that essentially would create a duopoly in many local markets. He also embraces the idea that local governments should be allowed to offer wireless Internet services, at least in rural areas where some phone and cable companies balk at providing high-speed service.

Mr. Martin’s theory is that phone and cable companies will be more inclined to expand broadband connections to consumers if they don’t have to help foot the bill for their rivals. “If you have to share your network at marginal costs with your competitors, going forward you won’t have an incentive to invest in your network,” he says. Last month, the Supreme Court deferred to the FCC on the matter, handing Mr. Martin an invitation to write new rules.

There is a simple tenet of basic economic theory that says that a company will always perform to maximize its profit. Accordingly, it would be illogical for a phone or cable company to refuse to offer broadband service if there is profit to be made. This is easy to understand. What’s not so easy to understand is why Mr. Martin is under the mistaken impression that (a) sharing a network necessarily reduces profits, and (b) that this is the only reason why phone and cable companies are not building more broadband.

The truth of the matter is that Commissioner Martin’s economic basis for policy is fundamentally flawed. He is basing his policy on the requests of the largest players in an industry that is known for lying, cheating, and taking money from government without delivering on promises. He is taking this industry’s statements about why there isn’t more broadband penetration in this country at face value. He isn’t questioning why a big and successful company cannot figure out how to make a profit in a properly competitive market.

The phone and cable companies that are behind this FCC policy shift aren’t doing their best to compete in an open marketplace. They are doing their best to ensure that there is no open marketplace at all. There is another simple tenet of basic economic theory that says that the maximal amount of profit can be derived from a market when there is pure monopoly power, where prices can be set artificially high, and competition can be blocked.

Unfortunately, this is the type of anti-competitive marketplace towards which we are heading, and Commissioner Martin is driving us there at full steam. We are heading towards a marketplace where there are only one or two companies (the definition of monopoly or duopoly, indeed). Thus far, where such a marketplace exists in this country—and there are plenty of cities and towns where this is true—broadband penetration is low and prices for broadband are high. Where there is a healthy marketplace—and this is primarily due to entry by a third competitive entity, the municipality—broadband penetration is high and prices are low.