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TOTM The Telecom Hootenanny is back from a little summer break. As they say on AM radio: “If you miss a little, you miss a lot.” . . .
TOTM In late June, Sen. Mike Lee (R-Utah) sent a letter to Assistant Attorney General Jonathan Kanter arguing that the U.S. Justice Department (DOJ) needs to investigate the . . .
In late June, Sen. Mike Lee (R-Utah) sent a letter to Assistant Attorney General Jonathan Kanter arguing that the U.S. Justice Department (DOJ) needs to investigate the Tennessee Valley Authority (TVA) and its local power companies (LPCs) on grounds that abuses of the pole-attachment process appear to be slowing broadband deployment.
Read the full piece here.
ICLE Issue Brief I. Introduction As part of the Infrastructure Investment and Jobs Act (IIJA), signed by President Joe Biden in November 2021, Congress provided $42.5 billion for . . .
As part of the Infrastructure Investment and Jobs Act (IIJA), signed by President Joe Biden in November 2021, Congress provided $42.5 billion for broadband deployment, mapping, and adoption projects through the Broadband Equity, Access, and Deployment (BEAD) program, with the stated goal of directing the funds to close the so-called “digital divide.”[1] But actions by pole owners—such as refusing to allow broadband companies to attach their lines on reasonable and nondiscriminatory terms—threaten to slow broadband deployment significantly.
In a recent letter to Assistant Attorney General Jonathan Kanter, Sen. Mike Lee (R-Utah) put forth the argument that the U.S. Justice Department (DOJ) should take action to address abuses of the pole-attachment process by local power companies (LPCs) regulated by the Tennessee Valley Authority (TVA).[2] His concern is that such abuses threaten to slow broadband deployment, especially to rural areas served by the TVA and the LPCs.[3] Among the abuses he details are:
Section 224 of the Communications Act exempts municipal and electric-cooperative (“coop”) pole owners, such as the LPCs, from oversight by the Federal Communications Commission (FCC).[5] At the same time, the TVA’s authority over pole attachments is not subject to oversight by state governments.[6] This loophole means that it is the TVA, not the FCC, that sets the rates for pole attachments. The TVA’s rates are significantly higher than those of the FCC, [7] and the TVA’s LPCs often are able to avoid the access requirements that states and the FCC typically require.[8]
But avoiding state and FCC regulatory oversight is not the only loophole that the TVA and its LPCs can exploit: the TVA and the government-owned LPCs also may not be subject to antitrust law. These entities hold a resource critical for broadband deployment, while it is essentially impossible for private providers to build competing pole infrastructure. In situations like this, government entities that participate as firms in the marketplace—known in the literature as “state-owned enterprises” (SOEs)—should be subject to antitrust law in order to ensure access by private competitors.
Sen. Lee is correct that the DOJ should examine the practices of the TVA and its LPCs under antitrust law. Antitrust clearly applies to those LPCs that are private coops, which have no immunities. But Congress should clarify that the TVA and government-owned LPCs are likewise subject to antitrust law when they act according to their “commercial functions” or as “market participants.” They should also consider bringing the TVA and all of its LPCs under the purview of the FCC’s Section 224 authority over pole attachments.
SOEs’ incentives differ from those of privately owned businesses. Most notably, while a private business must pass the profit-and-loss test, SOEs often are not subject to the same constraints. This difference may manifest through setting up legal SOE monopolies against which no other firm can compete; exempting SOEs from otherwise generally applicable laws; extending explicit subsidies to SOEs, whether in the form of taxpayer-financed appropriations or government-backed bonds (which the government explicitly or implicitly promises to repay, if necessary); or cross-subsidies from other government-owned monopoly businesses.
As a result, SOEs do not need to maximize profits (with Armen Alchian’s caveat that private market participants may be modeled as profit maximizers even if that isn’t their true motivation[9]) and can pursue other goals. In fact, this is exactly why some supporters of SOEs like them so much: they can pursue the so-called “public interest” by providing ostensibly high-quality products and services at what are often below-market prices.[10]
But this freedom comes at a cost: not only can SOEs inefficiently allocate societal resources away from their highest-valued uses, but they may actually have greater incentive to abuse their positions in the marketplace than private entities. As David E.M. Sappington and J. Gregory Sidak put it:
[W]hen an SOE values an expanded scale of operation in addition to profit, it will be less concerned than its private, profit-maximizing counterpart with the extra costs associated with increased output. Consequently, even though an SOE may value the profit that its anticompetitive activities can generate less highly than does a private profit-maximizing firm, the SOE may still find it optimal to pursue aggressively anticompetitive activities that expand its own output and revenue. To illustrate, the SOE might set the price it charges for a product below its marginal cost of production, particularly if the product is one for which demand increases substantially as price declines. If prohibitions on below-cost pricing are in effect, an SOE may have a strong incentive to understate its marginal cost of production or to over-invest in fixed operating costs so as to reduce variable operating costs. A public enterprise may also often have stronger incentives than a private, profit-maximizing firm to raise its rivals’ cost and to undertake activities designed to exclude competitors from the market because these activities can expand the scale and scope of the SOE’s operations.[11]
Here, entities like the TVA and many of the government-owned LPCs that sell the electricity it produces are simply not subject to the same profit-and-loss test that a private power company would be. But even more importantly for the discussion of broadband buildout, many of these government-owned LPCs also provide broadband services (or intend to), effectively using their position as a monopoly provider of electricity to cross-subsidize their entry into the broadband marketplace. Moreover, LPCs often own the electric poles and control decisions about whether and at what rates to rent them to third parties (subject to TVA rate regulations), including to private broadband providers that may compete with the LPCs’ municipal-broadband offerings.
This raises two significant issues for competition policy:
In Verizon Communication Inc. v. Law Offices of Curtis V. Trinko LLP,[13] the U.S. Supreme Court explained the reasoning behind a very limited duty to deal under antitrust law:
Compelling… firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.[14]
In sum, a private market participant is constantly looking to acquire monopoly power by innovating and better serving customers, and temporary monopolies—acquired through a legitimate competitive process—are not unlawful. If successful, this process provides incentive for more innovation and competition, including incentives for competitors to build their own infrastructure.
But this is not so when it comes to SOEs, which can prevent competition in a way that private market participants cannot, due to their special access to legal mechanisms like eminent domain, taxes, below-market-rate loans, government grants of indefinite monopolies, and cross-subsidies from their own monopolies in adjacent markets. As a result, SOEs possess both special ability and incentive to raise rivals’ costs through refusals to deal or predatory pricing.
Ironically, the lack of a profit motive may make SOEs uniquely positioned to harm competition. Thus, it may make sense to impose on SOEs a duty to deal on reasonable and nondiscriminatory terms when it comes to pole attachments.
According to the National Rural Electric Cooperative Association, the trade association for rural electricity co-ops (RECs):
There are some important differences between electric co-ops and investor-owned power companies. Most importantly, co-ops are owned by their consumers. Economics helps explain why this form of organization could be pro-competitive in some situations, but the history of RECs suggests that government support and corporate rules particular to co-ops are the main reasons that we continue to rely on co-ops to distribute electricity in rural areas of the United States. As a result, RECs—especially those that distribute electricity generated and transmitted by the TVA—have incentives more like those of state-owned enterprises (SEOs) than private firms.
In other words, RECs also have the incentive and ability to act anticompetitively—e.g., by refusing to deal with private broadband providers who wish to attach to the poles they own.
The classic law & economics examination of firms’ choice of business organization comes from Henry Hansmann, in his book The Ownership of Enterprise.[17] He explained that the choice of ownership for any firm is driven by costs. The form that is chosen by a particular firm is that which “minimizes the total costs of transactions between the firm and all of its patrons.”[18] These costs include both transaction costs with those patrons who are not owners, and the costs of ownership, such as monitoring and controlling the firm.
Hansmann argued that the form of consumer-owned co-ops predominates in the distribution of electricity in rural areas because it is a response to the threat of natural monopoly, where high barriers to entry and startup costs suggest that one firm is likely to dominate.[19] This is particularly true in geographic areas with low population density, because the costs of building out infrastructure is extremely high per individual consumer. As such, consumers would likely be subject “to serious price exploitation if they were to rely on market contracting with an investor-owned firm.”[20] Thus, the choice is among rate regulation of an investor-owned utility, municipal ownership, or consumer ownership through a co-op.
Hansmann argued that consumer co-ops best align “the firm’s interests with those of its consumers” because they have lower overall costs than other forms of ownership in rural areas.[21] This is because electricity is a “highly homogeneous [commodity] with few important quality variables that affect different users differently.”[22] Moreover, relatively stable farm and nonfarm residential households account for the overwhelming majority of the membership and demand for electricity in rural areas, “creating a dominant group of patrons with relatively homogenous interests.”[23]
As a result, the costs of monitoring and controlling these natural monopolies are relatively lower for the consumers as owners than they would be as citizens overseeing a public utility commission in charge of regulating an investor-owned utility, or a board in charge of a municipally owned utility.
On the other hand, the history of RECs suggests that their formation and persistence may be more due to government intervention than as a market response to consumer demand. As Hansmann himself recognized, RECs received significant public subsidies in the form of below-market loans from the Rural Electrification Administration (REA), though he argues that these loans were not significant subsidies for the first 15 years); exemption from federal corporate income tax; and preferential access to power generated by the TVA.[24] On top of that, the REA essentially organized many co-ops in their early days.[25]
Nonetheless, Hansmann argues:
These subsidies have undoubtedly been important in encouraging the formation and growth of cooperative utilities, and therefore the great proliferation of rural electric cooperatives does not provide an unbiased test of the viability of the cooperative form. Evidently, however, the federal subsidies have not been critical to the success of cooperatives in the electric power industry. Even before the federal programs were enacted, there already existed forty-six rural electric cooperatives operating in thirteen different states. Also, as already noted, there was no net interest subsidy to the cooperatives for the first fifteen years of the REA. And in its early years, the REA also offered low-interest loans to investor-owned utilities that wished to extend service into rural areas, but found little interest in these loans among the latter firms.[26]
In an excellent 2018 law-review article, however, Debra C. Jeter, Randall S. Thomas, & Harwell Wells systematically detail the great lengths to which the REA went to organize co-ops in rural areas.[27] The authors convincingly argue that the co-op model was not adopted as a market response, but primarily due to the REA’s organizational efforts and the subsidies bestowed upon them.
Even if RECs were a market response to natural monopoly in rural areas at the time of their adoption, that does not mean that they would necessarily continue to be the most economically efficient model. At a given point of time, economies of scale and high costs of entry may mean that the market can only support one firm (i.e., natural monopoly). But over the last 80-90 years, underlying conditions that may have made co-ops the most efficient model may have changed. As we argued in a 2021 white paper:
[I]n any given market at a given time, there is likely some optimal number of firms that maximizes social welfare. That optimal number—which is sometimes just one and is never the maximum possible—is subject to change, as technological shocks affect the dominant paradigms controlling the market. The optimal number of firms also varies with the strength of scale economies, such that consumers may benefit from an increase in concentration if economies of scale are strong enough… And it is important to remember that the market process itself is not static. When factors change—whether a change in demographics or population density, or other exogenous shocks that change the cost of deployment—there will be corresponding changes in available profit opportunities. Thus, while there is a hypothetical equilibrium for each market—the point at which the entry of a new competitor could reduce consumer welfare—it is best to leave entry determinations to the market process.[28]
In fact, as Jeter, Thomas, & Wells go on to argue, rules particular to the co-op model make it nearly impossible to change the form of ownership through merger or acquisition.[29] These rules—adopted as part of the model acts promoted by the REA—prevent what the great Henry Manne called “the market for corporate control” that would otherwise discipline co-op managers.[30]
As has been noted by even the strongest supporters of the co-op model[31]—and seemingly undermining Hansmann’s assessment that consumer-ownership is the most effective form of organization for these entities—RECs suffer from a lack of oversight by consumer-owners, with very few ever showing up to even vote for their board of directors:
[32]
This lack of oversight from the ownership means that the board of directors can engage in all kinds of abuses, as detailed extensively by Jeter, Thomas, & Wells.[33]
Without sufficient incentives for oversight by consumer-owners or a functioning market for corporate control, there is no basis to conclude that RECs remain the best business model for distributing electricity. Their ubiquity is more due to the REA’s organizational efforts and ongoing government benefits—in the form of subsidies, tax exemptions, and preferences from the TVA—than market demand.
Due to the privileged position enjoyed by RECs, particularly those that distribute electricity from the TVA, they have a unique ability and incentive to act anticompetitively toward broadband providers that want to attach to the poles they own.
Much like municipally owned electricity distributors, RECs are not motivated solely by profit maximization. RECs also have similar advantages, like access to eminent domain, below-market loans, tax exemptions, and the ability to cross-subsidize entry into a new market (like broadband) from its dominant position in electricity distribution.
On the other hand, unlike municipally owned electricity distributors, RECs can go out of business, and thus must earn sufficient revenues to remain a going concern. This means that the incentives for RECs to act anticompetitively are at least as strong as those of investor-owned firms, and may be even as strong as those of state-owned enterprises. This is especially notable, when so many RECs either have entered or are planning to enter the broadband market.
In such cases, there are strong incentives for RECs to refuse to deal with private broadband providers that are trying to deploy in—and introduce competition to—their rural areas, as Sen. Lee’s (R-Utah) recent letter to the U.S. Justice Department suggests, many of these co-ops have done exactly that.[34]
The economic logic that drives a limited duty to deal under antitrust law is that enforced sharing rarely makes sense because it reduces the incentives to build infrastructure. [35] But creating new rural infrastructure (like poles) is cost-prohibitive—at least, without the same subsidies, eminent-domain power, and other advantages that RECs have historically enjoyed. Thus, RECs may rightfully have a duty to deal with broadband providers on a reasonable and nondiscriminatory basis.
Moreover, many RECs receive little oversight from rate regulators when it comes to pole attachments. And when they do, like those RECs that distribute electricity from the TVA, the formula allows for much higher rates than the FCC would allow.[36] As a result, pole costs are much higher for broadband companies dealing with poles owned by co-ops and municipalities that are not subject to the FCC’s authority (see Figure II).[37]
There is, however, a complication. In his letter to the DOJ, Sen. Lee rightly complains that:
TVA’s regulatory practices enable such behavior: there is no reason why TVA’s regulation of the pole rental rates charged by its LPCs requires TVA to somehow exempt those LPCs from generally-applicable rules that protect competition by requiring pole owners to provide pole access to third parties on reasonable terms. TVA should be using its authority over LPC distribution contracts to require LPCs to offer reasonable, non-discriminatory, and prompt pole access to third-party broadband providers (particularly recipients of taxpayer-funded broadband grants) in unserved areas, rather than giving its LPCs a free pass from those requirements.[38]
Unfortunately, while Lee’s letter is addressed to the DOJ’s antitrust chief, it isn’t clear whether antitrust laws even apply to the behavior he observes. This is primarily because of two legal doctrines: federal sovereign immunity from lawsuit and state-action immunity from antitrust.
Normally, the federal government is immune from lawsuit under the ancient (and deeply flawed[39]) doctrine of sovereign immunity, except where explicitly waived by statute. The TVA is a wholly owned corporate agency and instrumentality of the federal government. Thus, federal courts have typically found that the TVA and other federal entities operating in the marketplace are exempt from antitrust.[40] This is despite the fact that the TVA’s enabling statute states:
Except as otherwise specifically provided in this chapter, the Corporation… may sue and be sued in its corporate name.[41]
There is, needless to say, nothing in the chapter that actually says the agency can’t be sued for antitrust violations. The older cases finding the TVA to be exempt from antitrust are likely to be found wrongly decided under the logic of the U.S. Supreme Court’s most recent case dealing with TVA’s immunity from suit. In 2019, the Court took up Thacker v. TVA,[42] which asked whether the TVA was immune from lawsuits for negligence. The Court rejected the lower court’s reasoning that the TVA was immune for torts arising from its “discretionary functions,” substituting a new test as to whether the TVA was acting pursuant to its governmental function or a commercial function. As the Court stated:
Under the clause—and consistent with our precedents construing similar ones—the TVA is subject to suits challenging any of its commercial activities. The law thus places the TVA in the same position as a private corporation supplying electricity. But the TVA might have immunity from suits contesting one of its governmental activities, of a kind not typically carried out by private parties.[43]
The Court also gave examples to help distinguish the two:
When the TVA exercises the power of eminent domain, taking landowners’ property for public purposes, no one would confuse it for a private company. So too when the TVA exercises its law enforcement powers to arrest individuals. But in other operations—and over the years, a growing number—the TVA acts like any other company producing and supplying electric power. It is an accident of history, not a difference in function, that explains why most Tennesseans get their electricity from a public enterprise and most Virginians get theirs from a private one. Whatever their ownership structures, the two companies do basically the same things to deliver power to customers.[44]
The test to be applied, therefore, is “whether the conduct alleged to be negligent is governmental or commercial in nature… if the conduct is commercial—the kind of thing any power company might do—the TVA cannot invoke sovereign immunity.”[45] Here, that arguably means that, when the TVA is acting pursuant to its commercial function, it should not receive immunity from antitrust suit.
On the other hand, Congress gave the TVA broad ratemaking authority and contractual powers. One federal court (previous to Thacker) rejected an antitrust challenge to the TVA’s ratemaking formula because it was a “valid governmental action and [therefore] exempt from the antitrust laws of the United States.”[46]
As noted above, some LPCs have entered into the municipal-broadband market and act as competitors to private broadband companies who want to attach to poles owned by LPCs. Thus, even though competition economics would suggest that LPCs would have a greater incentive to raise rivals’ costs by charging a monopoly price, the TVA would likely argue that it is acting in its government function when it sets those rates.[47] If courts agree, then antitrust law would not be able to reach that problem.
Consistent with the Court’s reasoning in Thacker, however, courts could find that antitrust law reaches agreements between wholesalers (like the TVA) and retailers (like the LPCs) to charge certain rates for pole attachments to competitors in an adjacent market. This would arguably be an example of the TVA acting as any other power generator would, pursuant to its commercial function, through some type of price-maintenance agreement. As it stands, it isn’t clear which way the courts would go.
Congress should strongly consider clarifying that the TVA is not exempt from antitrust scrutiny when it acts pursuant to a commercial function, including when it sets anticompetitive rates for pole attachments that would slow broadband buildout. This clearly affects the market for access to LPC-owned utility poles.
Even if the commercial versus government distinction is clarified with respect to the TVA, there is a further wrinkle as it relates to antitrust scrutiny of LPCs. This concerns how the TVA’s actions interact with state-action immunity in antitrust law.
Grounded in the 10th Amendment, the Supreme Court has found there is immunity from antitrust laws for conduct that is the result of “state action.”[48] This doctrine has been interpreted to immunize anticompetitive conduct pursuant to state and local government action from antitrust claims, so long as “the State has articulated a clear … policy to allow the anticompetitive conduct, and second, the State provides active supervision of [the] anticompetitive conduct.”[49] When it comes to municipalities, however, the Court has found that “[o]nce it is clear that state authorization exists, there is no need to require the State to supervise actively the municipality’s execution of what is a properly delegated function.”[50]
The Supreme Court has also left open the possibility of an exception to state-action immunity when government entities themselves are acting as market participants.[51] In one case dealing with a local municipally owned power plant in Louisiana, the Supreme Court did not grant broad immunity from antitrust laws, in part because:
Every business enterprise, public or private, operates its business in furtherance of its own goals. In the case of a municipally owned utility, that goal is likely to be, broadly speaking, the benefit of its citizens. But the economic choices made by public corporations in the conduct of their business affairs, designed as they are to assure maximum benefits for the community constituency, are not inherently more likely to comport with the broader interest of national economic well-being than are those of private corporations acting in furtherance of the interests of the organization and its shareholders.[52]
While there are a few cases applying this distinction in lower federal courts,[53] there is no Supreme Court caselaw determining how to differentiate when, for the purposes of state-action immunity, municipal corporations act as market participants versus when they act as government entities. Jarod Bona and Luke Wake have proposed applying a test similar to the one the courts use in dormant Commerce Clause cases.[54] The distinction made by the Supreme Court in Thacker and discussed above may also be applicable.
Government-owned LPCs are creatures of states or municipalities. As such, they would certainly argue they are immune from antitrust scrutiny, even when they refuse to deal with private broadband providers with whom they compete while withholding a critical input (i.e., the ability to attach to their poles). But there are two problems with this argument.
First, it seems unlikely that the LPCs could argue that they are acting pursuant to a clearly articulated policy of displacing competition when they refuse to deal with broadband providers. As Sen. Lee pointed out in his letter, there are state laws that would impose a duty to deal on reasonable and nondiscriminatory terms, but for any exemptions to that authority due to the TVA.[55] For instance, North Carolina and Kentucky require all pole owners not subject to FCC Section 224 authority to offer nondiscriminatory pole access.[56]
On the other hand, they could appeal to the TVA’s contract authority,[57] in addition to the TVA’s stated policy that its purpose is “to provide for the … industrial development” of the Tennessee Valley.[58] But even if this grants the TVA authority to regulate rates for pole attachments, it doesn’t mean the TVA has enunciated an articulable policy of displacing competition in refusing to deal with broadband providers. It also would appear to be contrary to the purpose of promoting industrial development to forestall broadband deployment in the Tennessee Valley because LPCs that also have municipal-broadband systems don’t want that competition. In other words, their refusal to deal is not protected by an appeal to any articulable policy to displace competition, either by a state or the TVA.
Second, under the caselaw that does exist, government-owned LPCs are market participants that should not receive antitrust immunity. For instance, in one case, a private arena owner challenged under antitrust law an exclusive contract between a municipal-arena owner and LiveNation.[59] The court held that state-action immunity was “less justified” because the municipality’s “entertainment contracts” reflected “commercial market activity,” not “regulatory activity.”[60] Here, the LPCs’ actions as both power companies and municipal-broadband providers reflect commercial-market activity more than regulatory activity. They shouldn’t be able to claim immunity from antitrust for this refusal to deal, any more than a private broadband provider could.
In sum, the LPCs’ anticompetitive refusal to deal appears to be separate from the rates set by the TVA pursuant to its ratemaking authority or contractual powers. They should be subject to antitrust law. But due to uncertainty in this area, Congress should clarify that LPCs are not immune from antitrust scrutiny, and consider codifying the market-participant exception to state-action immunity in antitrust statutes.
In his letter, Sen. Lee noted that, under Section 224 of the Communications Act, “Congress determined that poles and conduits are essential facilities that lack a viable market-based alternative, which led it to require utilities to extend nondiscriminatory access to utility poles to cable operators and competitive telecommunications providers.”[61] While acknowledging that TVA distributors are not subject to Section 224, Lee argued that “the congressional conclusion that poles are essential facilities that lack a viable market-based alternative holds for all poles.”[62] Lee further noted that the “TVA’s regulation of its LPCs’ pole attachment rates also impedes competition by setting rates well above the rates set by the FCC and deemed compensatory by the U.S. Supreme Court, inflating the cost for competitive broadband providers unaffiliated with TVA LPCs to offer service.”[63]
Theoretically, government-owned LPCs and cooperative LPCs are subject to some oversight when they run services like municipal broadband, either from voters or member-owners. But it is implausible that such oversight can be truly effective, given that these pole owners are not subject to normal market incentives and have their own conflicts of interest that encourage hold-up problems. Combined with their ability to cross-subsidize operations in broadband from their electricity customers, it should be clear that these entities pose a host of potential public-choice problems.[64]
Indeed, as FCC Commissioner Brendan Carr has noted:
I continue to hear concerns from broadband builders about unnecessary delays and costs when they seek to attach to poles that are owned by municipal and cooperative utilities. Unlike what we are doing in today’s item, there is a strong argument that Section 224 does not give us authority to address issues specific to those types of poles. Therefore, I encourage states and Congress to take a closer look at these issues—and revisit the exemption that exists in Section 224—so that we can ensure deployment is streamlined, regardless of the type of pole you are attaching to.[65]
We echo both Sen. Lee’s and Commissioner Carr’s sentiments here. The FCC’s important work on this matter stands to benefit millions of Americans trapped on the wrong side of the digital divide. The co-op and municipal loophole poses a major obstacle to achieving these ends. Insofar as Congress prioritizes quick and efficient broadband buildout, the TVA and its LPCs should not be able to thwart these goals through anticompetitive rates and refusals to deal. Congress should revisit this issue and grant the FCC jurisdiction over these types of pole owners.
Sen. Lee’s letter to the DOJ highlights issues that are extremely important to closing the digital divide. Broadband deployment could be harmed as a result of the practices by the TVA and the LPCs. If DOJ Antitrust Division chief Jonathan Kanter is serious about taking on gatekeeper power,[66] he should start here: with public entities granted a truly unassailable gatekeeper position over private markets. But even more importantly, Sen. Lee’s letter highlights the need to reform antitrust immunities that apply to SOEs. Economics suggests government monopolies are a greater harm to competition than private ones. Antitrust law should reflect that reality.
[1] 47 U.S.C. § 1702(b) (2018).
[2] See, infra, Appendix A [hereinafter “Lee Letter”].
[3] Broadband Assessment Report, Tennessee Valley Authority (Dec. 2022), https://www.tva.com/energy/technology-innovation/connected-communities/broadband-assessment-report.
[4] See Lee Letter, supra note 2, at 1-2.
[5] See 47 U.S.C. § 224(a)(1) (2018) (“The term ‘utility’ means any person who is a local exchange carrier or an electric, gas, water, steam, or other public utility, and who owns or controls poles, ducts, conduits, or rights-of-way used, in whole or in part, for any wire communications. Such term does not include any railroad, any person who is cooperatively organized, or any person owned by the Federal Government or any State.”).
[6] See Lee Letter, supra note 2, at n.2.
[7] Pole Attachment Fee Formulas Adopted by TVA and the FCC, Tennessee Advisory Commission on Intergovernmental Relations (Jan. 2017), available at https://www.tn.gov/content/dam/tn/tacir/commission-meetings/january-2017/2017January_BroadbandAppL.pdf.
[8] See Lee Letter, supra note 2, at n.4.
[9] See Armen A. Alchian, Uncertainty, Evolution, and Economic Theory, 58 J. Pol. Econ. 211 (1950).
[10] See, e.g., Jonathan Sallet, Broadband for America’s Future: A Vision for the 2020s, at 50-51 (Oct. 2019), available at https://www.benton.org/sites/default/files/BBA_full_F5_10.30.pdf.
[11] David E.M. Sappington & J. Gregory Sidak, Competition Law for State-Owned Enterprises, 71 Antitrust L.J. 479, 499 (2003).
[12] See Ben Sperry, Islands of Chaos: The Economic Calculation Problem Inherent in Municipal Broadband, Truth on the Market (Sept. 3, 2020), https://truthonthemarket.com/2020/09/03/islands-of-chaos-the-economic-calculation-problem-inherent-in-municipal-broadband.
[13] 540 U.S. 398 (2004).
[14] Id. at 408-09.
[15] This section is adapted from Ben Sperry, Broadband Deployment, Pole Attachments, & the Competition Economics of Rural-Electric Co-ops, Truth on the Market (Aug. 16, 2023), https://truthonthemarket.com/2023/08/16/broadband-deployment-pole-attachments-the-competition-economics-of-rural-electric-co-ops.
[16] See Brian O’Hara, Rural Electrical Cooperatives: Pole Attachment Policies and Issues, at 2, NRECA (Jun. 2019), available at https://www.cooperative.com/programs-services/government-relations/regulatory-issues/documents/2019.06.05%20nreca%20pole%20attachment%20white%20paper_final.pdf.
[17] Henry Hansmann, The Ownership of Enterprise (2000).
[18] Id. at 21.
[19] See id. at 169.
[20] Id.
[21] Id. at 170.
[22] Id.
[23] Id.
[24] See id. at 173
[25] See id.
[26] Id.
[27] See Debra C. Jeter, Randall S. Thomas, & Harwell Wells, Democracy and Dysfunction: Rural Electrical Cooperatives and the Surprising Persistence of the Separation of Ownership and Control, 70 Ala. L. Rev. 316, 372-395 (2018).
[28] Geoffrey A. Manne, Kristian Stout, & Ben Sperry, A Dynamic Analysis of Broadband Competition: What Concentration Numbers Fail to Capture, at 28, 32 (ICLE White Paper – June 2021), available at https://laweconcenter.org/wp-content/uploads/2021/06/A-Dynamic-Analysis-of-Broadband-Competition.pdf.
[29] Jeter et al., supra note 27, at 419-39.
[30] See Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110 (1965).
[31] See John Farrell, Matt Grimley, & Nick Stumo-Langer, Report: Re-Member-ing the Electric Cooperative, Inst. For Local Self-Reliance (Mar. 29, 2016), https://ilsr.org/report-remembering-the-electric-cooperative/#Missing%20Members (“More than 70 percent of cooperatives have voter turnouts of less than 10 percent [] including Wilson’s Jackson Energy Cooperatives, which averages just under 3 percent turnout.”).
[32] Id.
[33] Jeter et al., supra note 27, at 397-400.
[34] See Lee Letter, supra note 2, at 1-2.
[35] See Trinko, 540 U.S. at 408-09.
[36] See Pole Attachment Fee Formulas Adopted by TVA and the FCC, supra note 7.
[37] See NCTA, Pole Attachments, https://www.ncta.com/positions/rural-broadband/pole-attachments (last accessed Sept. 4, 2023).
[38] Lee Letter, supra note 2, at 2.
[39] See Ben Sperry, When Violations of the Law Have No Remedy: The Case of Warrantless Wiretapping, Competitive Enterprise Institute (Aug. 8, 2012), https://cei.org/blog/when-violations-of-the-law-have-no-remedy-the-case-of-warrantless-wiretapping.
[40] See, e.g., Webster Cty. Coal v. Tennessee Valley Authority, 476 F.Supp. 529 (W.D. Ky. 1979) (finding the TVA is exempt from antitrust law); Sea-Land Serv. Inc. v. Alaska R.R., 659 F.2d 243 (D.C. Cir. 1981), cert. denied, 455 U.S. 919 (1982) (finding the Alaska Railroad exempt from antitrust law).
[41] 16 U.S.C. §831c(b) (2018).
[42] 139 S. Ct. 1435 (2019).
[43] Id. at 1439.
[44] Id. at 1443-44.
[45] Id. at 1444.
[46] City of Loudon v. TVA, 585 F.Supp. 83, 87 (E.D. Tenn. Jan. 30, 1984).
[47] The TVA could also argue that the rate formula for pole attachments that it sets is subject to the filed rate doctrine and thus exempted from antitrust scrutiny. The filed rate doctrine does not allow courts to second-guess agency determinations of rates. See Keogh v. Chicago & Northwest Railway Co., 260 U.S. 156 (1922). While the original case on the filed rate doctrine dealt with the literal situation of regulated entities filing rates which were approved by a regulator, courts have extended the doctrine to other situations where a regulator uses its authority to set rates. Cf. Wortman v. All Nippon Airways, 854 F.3d 606, 611 (9th Cir. 2017) (“While the filed rate doctrine initially grew out of circumstances in which common carriers filed rates that a federal agency then directly approved, we have applied the doctrine in contexts beyond this paradigmatic scheme.”) The unique situation with the TVA is that there is no clear statutory ratemaking authority over pole attachments, but they have asserted the ability to do so under their contract powers, raising the same issue of whether this is a governmental function or market function. See TVA Determination of Regulation on Pole Attachments 2 (Jan. 22, 2016), available at https://tva-azr-eastus-cdn-ep-tvawcm-prd.azureedge.net/cdn-tvawcma/docs/default-source/about-tva/guidelines-reports/determination-on-regulation-of-pole-attachments-7-12-2023.pdf. Even if the filed rate doctrine applies, though, it would not stop an enforcement action aimed at an injunction or declaratory relief by the DOJ, just treble damages sought by a private litigant. See Keogh, 260 U.S. at 162 (“[T]he fact that these rates had been approved by the Commission would not, it seems, bar proceedings by the Government.”).
[48] See, e.g., Parker v. Brown, 317 U.S. 341 (1943) and its progeny.
[49] North Carolina State Bd. of Dental Examiners v. FTC, 574 U.S. 494, 506 (2015) (internal citations omitted).
[50] Town of Hallie v. City of Eau Claire, 471 U.S. 34, 47 (1985).
[51] See, e.g., City of Columbia v. Omni Outdoor Advertising Inc., 499 U.S. 365, 379 (1991) (“We reiterate that, with the possible market participant exception, any action that qualifies as state action is ‘ipso facto… exempt from the operation of the antitrust laws…’”); FTC v. Phoebe Putney Health Systems Inc., 568 U.S. 216, 226 n.4 (“An amicus curiae contends that we should recognize and apply a ‘market participant’ exception to state-action immunity because Georgia’s hospital authorities engage in proprietary activities… Because this argument was not raised by the parties or passed on by the lower courts, we do not consider it.”).
[52] City of Lafayette v. Louisiana Power & Light Co., 435 U.S. 389, 403 (1978).
[53] See, e.g., Edinboro Coll. Park Apartments v. Edinboro Univ. Found., 850 F.3d 567 (3d Cir. 2017); VIBO Corp. v. Conway, 669 F.3d 675 (6th Cir. 2012); Freedom Holdings Inc. v. Cuomo, 624 F.3d 38 (2d Cir. 2010); Hedgecock v. Blackwell Land Co., 52 F.3d 333 (9th Cir. 1995).
[54] See Jarod M. Bona & Luke A. Wake, The Market-Participant Exception to State-Action Immunity from Antitrust Liability, 23 J. Antitrust & Unfair Comp. L. Section of the State Bar of Ca., Vol. 1 (Spring 2014), available at https://www.theantitrustattorney.com/files/2014/05/Market-Participant-Exception-Article.pdf.
[55] See Lee Letter, supra note 2, at 2.
[56] Id. at n.4; N.C. Gen. Stat. § 62-350(a) (requiring all pole owners to offer non-discriminatory pole access); 807 Ky. Admin. Regs. 5:015 § 2(1) (same).
[57] 16 U.S.C. § 831i (2018) (“Board is authorized to include in any contract for the sale of power such terms and conditions, including resale rate schedules, and to provide for such rules and regulations as in its judgment may be necessary or desirable for carrying out the purposes of this Act”).
[58] 16 U.S.C. § 831 (2018).
[59] See Delta Turner Ltd. v. Grand Rapids-Kent County Convention/Arena Authority, 600 F.Supp.2d 920 (W.D. Mich. 2009).
[60] Id. at 929.
[61] Lee Letter, supra note 2, at n.5.
[62] Id.
[63] Id. at n.3.
[64] See Vincent Ostrom & Elinor Ostrom, Public Goods and Public Choices, in Alternatives for Delivering Public Services: Toward Improved Performance (1979) (“[I]nstitutions designed to overcome problems of market failure often manifest serious deficiencies of their own. Market failures are not necessarily corrected by recourse to public sector solutions.”).
[65] Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment, WC Docket No. 17-84, Second Further Notice of Proposed Rulemaking (March 16, 2022) (Statement of Commissioner Brendan Carr), available at https://docs.fcc.gov/public/attachments/FCC-22-20A3.pdf.
[66] See, Assistant Attorney General Jonathan Kanter Delivers Opening Remarks at the Second Annual Spring Enforcers Summit, U.S. Justice Department (Mar. 27, 2023), https://www.justice.gov/opa/pr/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-second-annual-spring (“Gatekeeper power has become the most pressing competitive problem of our generation at a time when many of the previous generations’ tools to assess and address gatekeeper power have become outmoded.”).
Scholarship Abstract Accelerating demand for wireless broadband is accentuating the need to optimize use of limited spectrum resources that are susceptible to congestion. Recent technological innovations . . .
Accelerating demand for wireless broadband is accentuating the need to optimize use of limited spectrum resources that are susceptible to congestion. Recent technological innovations enable exclusive-use, licensed spectrum and open-access, unlicensed spectrum to serve as complementary goods. We present a game-theoretic model in which wireless broadband service providers engage in simultaneous pricing and service decisions for a heterogeneous consumer population. We demonstrate that for some unlicensed allocations, service providers may maximize profit by offloading some consumer traffic onto the unlicensed band. Consequently, adding unlicensed capacity can increase congestion in wireless spectrum bands in ways that harm social and consumer welfare. These effects are reminiscent of Braess’s Paradox, in which adding capacity counterintuitively leads to greater congestion. Notably, these effects emerge through supply-side differentiation strategies, rather than demand-side responses. We then utilize our framework to analyze recent high-profile decisions by the FCC and introduce a framework for identifying the appropriate balance between licensed and unlicensed allocations.
TOTM Grab a partner, find a group, and square up for Truth on the Market’s second Telecom Hootenanny. We’ve got spectrum auctions, broadband subsidies, and a . . .
Grab a partner, find a group, and square up for Truth on the Market’s second Telecom Hootenanny. We’ve got spectrum auctions, broadband subsidies, and a European 5G tango.
TOTM In Susan Crawford’s 2013 book “Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age,” the Harvard Law School professor argued that . . .
In Susan Crawford’s 2013 book “Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age,” the Harvard Law School professor argued that the U.S. telecommunications industry had become dominated by a few powerful companies, leading to limited competition and negative consequences for consumers, especially for broadband internet.
Crawford’s ire was focused particularly on Comcast, AT&T, and Verizon, as she made the case that these three firms were essentially monopolies that had divided territories and set up roadblocks through mergers, vertical integration, and influence over regulators and franchisors to prevent competition and innovation. In particular, she noted the power Comcast commanded in securing access to live sports, allowing them to effectively prevent cord-cutting and limit competition from other cable companies.
According to Crawford, the consequences of this monopoly power were high prices for service, poor customer service, and limited access to high-speed internet in certain areas, particularly in rural and low-income communities. In effect, she saw no incentives for broadband companies to invest in high-speed and reliable internet. In response, she proposed increased competition and regulation, including the development of fiber-based municipal broadband to foster greater consumer choice, lower prices, and improved access to reliable internet service.
A decade later, the broadband market is far more dynamically competitive than critics like Crawford believed was possible. YouTube TV’s rights to NFL Sunday Ticket (as well as the massive amount of programming available online) suggests that Comcast did not have the control over important programming like live sports that would have enabled them to prevent cord-cutting or to limit competition. And the rise of 10G broadband also suggests that there is much more competition in the broadband market than Crawford believed was possible, as her “future proof” goal of symmetrical 1Gb Internet will soon be slower than what the market actually provides.
TOTM Announced with the sort of breathless press release one might expect for the launch of a new product like Waystar Royco’s Living+, the Federal Communications Commission . . .
Announced with the sort of breathless press release one might expect for the launch of a new product like Waystar Royco’s Living+, the Federal Communications Commission (FCC) has gone into full-blown spin mode over its latest broadband map.
This is, to be clear, the map that the National Telecommunications and Information Administration (NTIA) will use to allocate $42.5 billion to states from NTIA’s Broadband Equity, Access, and Deployment (BEAD) program. Specific allocations are expected to be announced by June 30.
Written Testimonies & Filings Abstract Seeking to boost funding for the next generation of telecommunications infrastructure, European Union (EU) policymakers have proposed mandating that some large online platforms pay . . .
Seeking to boost funding for the next generation of telecommunications infrastructure, European Union (EU) policymakers have proposed mandating that some large online platforms pay a special usage fee to network operators. Framed as a way to ensure that the largest users of internet infrastructure contribute their “fair share” to telecommunications networks, the proposal would be another unnecessary and harmful regulatory intervention. These comments paper seek to demonstrate that the fair-share debate itself is, in fact, the byproduct of an earlier intrusive government initiative: net-neutrality regulation. Like net neutrality’s anti-discrimination rules, a “fair share” tax would represent a solution that doesn’t work to a problem that doesn’t exist. Moreover, the debate reflects the EU’s fundamentally misguided inclination toward an industrial-policy approach to the digital transformation, built on the unsound belief that innovation can be delivered via regulation and by subsidizing legacy domestic firms with rents transferred from successful global players. Rather than continuing to interfere in market dynamics and private negotiations without any solid evidence of market failure, the EU should instead learn from its past mistakes and acknowledge the limited scope for regulation in these dynamic markets.
“[W]e have a vision, and we have a goal,”[1] European Commissioner Thierry Breton said in a February 2023 speech in Helsinki announcing the launch of a public consultation on the future of connectivity and infrastructure in the European Union (EU).[2] The consultation’s stated goal is to keep pace with transformative technological developments and to make Europe a digital leader by boosting deployment of forward-looking telecommunications infrastructure. Toward this end, the European Commission argues, it is essential that the regulatory framework is fit for purpose, with adequate funding to support the required investments.[3]
Given that ambitious goal, these comments investigate the likelihood that this vision can become a reality.
As part of the 2030 Digital Decade policy program,[4] European policymakers are seeking a means to equip Europe with the next generation of connectivity infrastructure. The primary solution offered—one that has the backing of incumbent European telecom operators (telcos)—is to make some large online platforms (so-called “Big Tech”) contribute to the cost of telecom networks. The proposal has been justified on grounds that Big Tech firms use a large share of bandwidth, while the telcos have seen a decline in their returns on investment.[5]
Essentially, the proposal would constitute a direct welfare transfer from online content and application providers (CAPs) or over-the-top service providers (OTTs) to benefit telcos and other internet service providers (ISPs). This would be accomplished by setting a data-transmission threshold and charging CAPs a fee when they transmit data exceeding that threshold. Indeed, the questionnaire the Commission released as part of the public consultation does not ask whether such a levy is needed, but merely seeks input on how it should be structured.[6]
Unsurprisingly, telcos have described the fair-share tax as “a once in a lifetime opportunity to recover digital leadership in Europe.”[7] Telco operators argue that a few Big Tech firms generate a significant portion of all internet traffic, but do not adequately contribute to the development of such networks.[8] These concerns find support in the recent European Declaration on Digital Rights and Principles for the Digital Decade, which calls for a framework through which “all market actors benefiting from the digital transformation assume their social responsibilities and make a fair and proportionate contribution to the costs of public goods, services and infrastructures, for the benefit of all Europeans.”[9]
EU policymakers have also explored the need to encourage consolidation in the telecom industry in order to sustain investments that will stanch “Europe’s progressive technological decline.”[10] Under this vision, the path to promote investment and spur innovation in Europe’s digital future would be forged not only through rent transfers from CAPs to telcos, but also by defeating “excessive competition” in the telecom section.[11]
We argue here that the current debate stems, instead, from earlier invasive and unnecessary regulatory initiatives. Notably, the “fair share” proposal is the poison fruit of net-neutrality regulation, which has prevented telcos from monetizing their networks. In an alternative framework, the telecom sector could have instead been permitted to manage the transmission of content and services according to their value for end users, anticipated bandwidth use, or a host of other quality requirements upon which various CAPs depend.
Rather than acknowledging the limits of regulation, the fair-share proposal reflects the Commission’s persistent distrust of market forces and private-ordering mechanisms. Further, the debate represents just the latest instance of a more generalized EU industrial-policy approach to the digital transformation. This approach rests on the unsound belief that innovation can be delivered through regulation and by subsidizing legacy domestic EU firms through the transfer of rents from successful global players.
Having in this section provided an overview of the conflict between telecom operators and CAPs, Section II frames the “fair share” debate within the broader EU industrial-policy approach to the digital transformation, noting similarities with earlier efforts to support the EU’s audiovisual and publishing industries. Section III investigates the controversial relationship between “fair share” duties and net-neutrality rules. Section IV points out the limited role for regulation and the principles that should guide government intervention in fast-moving industries. Section V concludes.
The 2030 Digital Decade policy program highlights the need to foster investment in high-speed telecommunications networks if the EU is to meet the connectivity targets established in the path to the digital transformation.[12]
Data traffic represents the critical determinant of telecom networks’ size and capacity. EU telcos claim, however, that exponential growth of internet traffic has left them unable to earn viable returns on network investments.[13] According to the telcos, traffic growth is disproportionately driven by a small number of OTTs, who provide relatively little direct economic contribution to network rollout.
According to a report for the European Telecommunications Network Operators Association (ETNO), just six firms generated roughly 56% of all network traffic, with Google accounting for 21%; Meta accounting for 15.4%; Netflix accounting for 9.4%; Apple accounting for 4.2%; Amazon accounting for 3.7%; and Microsoft accounting for 3.3%.[14] Further, a study conducted by Frontier Economics on behalf of Deutsche Telekom, Orange, Telefo?nica, and Vodafone estimated that traffic driven by OTTs could generate annual costs for EU telcos of €36 to 40 billion.[15] Such findings are often cited by telcos to make the case that OTTs are free riding on their network investments and need to be made to more equitably share the burden:
Digital platforms are profiting from hyper scaling business models at little cost while network operators shoulder the required investments in connectivity. At the same time our retail markets are in perpetual decline in terms of profitability.[16]
To address the concern of free riding, telcos have proposed a sending-party-network-pays system, which would mandate that the largest online platforms pay usage fees to compensate network operators.[17] In singling out the largest platforms for exceptional treatment, the proposal resembles how EU institutions already approach the regulation of “gatekeepers” under the Digital Markets Act (DMA) and “very large online platforms” under the Digital Services Act (DSA).[18] The proposal would establish a direct compensation mechanism, rather than private negotiations among the relevant parties, because it assumes that network operators are not positioned to negotiate fair terms with leading OTTs due to the latter’s alleged strong market positions, asymmetric bargaining power, and a lack of a level regulatory playing field.
The telcos point to the revenue and market capitalization enjoyed by the largest OTTs as demonstrating that the services Big Tech provides are essential for consumers.[19] But while the growth in traffic volume for the OTTs’ services creates additional costs for network operators, the telcos contend that they cannot respond to that growth in demand with higher retail prices, both because of strong competition in the retail telecommunications market and due to regulatory interventions at the wholesale level.[20] These factors, they contend, have created an uneven regulatory playing field between OTTs and telcos. Moreover, they argue that this uneven playing field has contributed to declining profit margins for telcos’ traditional retail revenue streams and that, consequently, telcos’ costs of capital are now higher than their returns on capital.
For their part, OTTs argue that they contribute to the internet ecosystem with investments in content-delivery networks and infrastructure—such as data centers, undersea cables, and satellites—and by creating content that is attractive to consumers, who in turn buy access from the ISPs to consume that content.[21] Therefore, they argue, it is the end users who generate traffic by consuming content, and they already pay ISPs through their subscriptions.
This debate over how network costs should be allocated is not new, and nor is the idea of a sending-party-network-pays system. The Body of European Regulators for Electronic Communications (BEREC) rejected a similar proposal 10 years ago, arguing that requests for dataflows stem not from content providers, but from retail ISPs’ own customers. BEREC further contended that increased demand for broadband access can be attributed to the success of content providers.[22]
Indeed, broadband networks are two-sided markets that bring together CAPs and end users. ISPs derive revenue from end users, who in turn pay for internet service to gain access to OTTs’ content. Since both sides of the market (content providers and end users) contribute to the cost of internet connectivity, BEREC found that “[t]here is no evidence that operators’ network costs are already not fully covered and paid for in the Internet value chain.”[23]
Further, BEREC acknowledged that the current “model has enabled a high level of innovation, growth in Internet connectivity, and the development of a vast array of content and applications, to the ultimate benefit of the end user.”[24] Therefore, “the nature of services to be delivered across the network, and the charging mechanisms applied to them, should continue to be left to commercial negotiations among stakeholders.”[25]
While prevailing internet traffic volumes are notably higher today than those observed a decade ago, it does not appear that BEREC regards the recent changes in traffic patterns as sufficient to modify its underlying assumptions regarding the sending-party-network-pays regime.[26] Indeed, in a recent preliminary assessment of a proposed direct compensation mechanism to benefit telcos, BEREC confirmed that it feels “the 2012 conclusions are still valid” and that the sending-party-network-pays model would provide ISPs “the ability to exploit the termination monopoly” and could be of “significant harm to the internet ecosystem.”[27]
BEREC also questioned the assumption that an increase in traffic directly translates into higher costs, noting that the costs of network upgrades necessary to handle increased traffic volumes are small relative to total network costs, and that upgrades come with significant increases in capacity.[28] In other words, BEREC found that rising traffic volumes do not directly lead to significant incremental costs relative to total network costs.[29]
Finally, BEREC once again found no evidence of free riding along the value chain,[30] finding that the IP-interconnection ecosystem remains largely competitive and that costs for internet connectivity are typically covered by ISPs’ customers.
It would be reasonable to assume that if there had been such a significant free-riding, this would have been reflected in ISPs financial statements and also in loss warnings.[31]
BEREC’s preliminary findings and continued skepticism of replacing freely negotiated internet interconnections with mandated network-usage fees are supported by studies that similarly find a lack of evidence of free riding;[32] report significant investments by CAPs to support network infrastructure;[33] and raise concerns about the potential side effects of a sending-party-network-pays model on the proper functioning of internet connectivity.[34]
A study conducted by WIK-Consult for the Federal Network Agency Germany (Bundesnetzagentur) confirmed that the IP-interconnection ecosystem is largely competitive and warned against the kinds of potential unintended consequences already seen in South Korea, the only country thus far that has mandated sending-party-network-pays billing.[35] South Korea provides a cautionary tale about the adverse effects that stem from interference in voluntary negotiations. Indeed, there is evidence that the competitive distortions between CAPs and ISPs generated by the Korean initiative had negative effects for consumers in terms of costs and the degradation of quality.[36]
Some EU member states have also been skeptical of telcos’ pleas and of the idea more generally that charging a toll on the internet is an appropriate strategy to promote network investments.[37] According to these members, the proposed “fair share” toll would pose considerable risks to the internet ecosystem and is likely to cause considerable harm to businesses and consumers. Indeed, as the envisaged data-transmission tax will affect the most popular services and content, a huge percentage of consumers are expected to bear the relative cost, as targeted OTTs eventually pass the new fees paid to ISPs downstream.[38] These concerns were expressed in a letter from Austria, Estonia, Finland, Germany, Ireland, and the Netherlands that urged the Commission to publish the Broadband Cost Reduction Directive (BCRD) review without discussion of the “fair share” debate.[39] In their view, while the revised BCRD should aim to accelerate the deployment of very high-capacity networks, the fair-share proposal is a distinct topic that requires a proper evidence-based assessment of its own merits.
From a broader perspective, the “fair share” debate reflects the EU’s recent industrial-policy approach to the digital transformation.
The internet has deeply transformed traditional industries by favoring the emergence of new business models and creating opportunities for new players to enter those markets. Because of these challenges, some legacy incumbents struggle to keep pace with innovation and new forms of competition, disrupting entire industries. It is no secret that Europe has lagged behind in the digital economy and that established European companies have suffered most from the emergence of digital markets, as they have thus far been unable to develop competitive platform-based ecosystems.
Against this backdrop, European institutions have looked to subsidies as the solution to rescue some legacy players. Such interventions have been justified by policymakers on grounds of alleged market failures or the importance of public interests at stake. Such claims are not new, and public deliberation would ordinarily turn to evaluating whether the claimed market failures are real and whether the measures identified to promote future competition and innovation are effective. But EU policymakers have managed to evade such questions by insisting that the rescues they obviously seek not rely directly on subsidies from the European public.[40] Instead, the proposed subsidies would come from private, largely U.S.-based firms.
In sum, the manifesto for the new protectionist EU industrial policy is to “blame and tax Big Tech.” This narrative holds that the success of a few large online platforms is the cause of the purported market failures, and that it is therefore fair to tax their success and force them to share their profits.[41] The approach is shortsighted but, from the perspective of EU policymakers, certainly convenient.
The internet’s impact on business models is seen as particularly threatening to the media industry. In light of new technologies to transmit audiovisual-media services, European institutions argued for a regulatory framework that would ensure “optimal conditions of competitiveness” for European media and safeguard certain “public interests, such as cultural diversity.”[42]
The policy solutions identified by the revised Audiovisual Media Services (AVMS) Directive are twofold.[43] First, European works are required to represent at least 30% of on-demand audiovisual-media services’ catalogs, and the services are require to ensure the prominence of those works.[44] Second, to ensure adequate levels of investment in European works, EU member states are permitted to impose financial obligations (including requiring direct investments in content and mandated contributions to the national fund) on media-service providers established within their territory, or on the basis of revenues the providers generate from services that are provided in and targeted toward the member state’s territory.[45]
In other words, to counter U.S. platforms’ dominance in the European video-on-demand (VOD) market,[46] the new AVMS Directive targets large foreign companies by imposing content quotas and financial obligations under a regime that has been termed the “Netflix tax.”[47] While this protectionist intervention to rescue the European audiovisual market is ostensibly made in the name of the public interest, both of the envisaged measures more accurately reflect resentment of the global players’ success than they do concern for Europe’s noble cultural diversity.[48]
Shortly after the AVMS Directive’s enactment, taxing Big Tech also became the preferred solution to rescue the European publishing industry.[49] Seeking to address a purported gap in value between digital platforms and news publishers, the Directive on Copyright in the Digital Single Market granted the latter a right to control and receive compensation for the reproduction and availability of online summaries of their news articles.[50] Indeed, publishers claim that the sustainability of their entire industry has been jeopardized by the emergence of digital gatekeepers, which capture most of the advertising revenue without bearing the cost of the investments needed to produce news content. It is alleged that this unfair split of revenues is the result of asymmetric bargaining power, which makes it difficult for press publishers to negotiate with Big Tech on an equal footing.[51]
In sum, the news publishers’ case that free riding and asymmetry of bargaining power justify their request for revenue sharing are the same arguments used by telcos to support their own “fair share” proposal. The publishing industry’s struggles, however, started swell before the emergence of digital platforms. Newspapers’ business models were first hit by the advent of the internet, which changed consumption habits and enabled the growth of new forms of journalism.[52] Moreover, digital platforms arguably play a complementary role to news sites, as legacy publishers benefit from inbound links that drive audience traffic. Indeed, empirical evidence does not support the free-riding narrative.[53] It may be sound policy to support publishers in their digital transformation but, as argued some years ago, “[t]axing new digital players will not save press publishing industry and legacy business models.”[54]
Such findings also apply to the telcos. Indeed, as is evident from this brief analysis, there are strong similarities between the audiovisual market and the publishing industry when it comes to the fair share of network costs. All of these policy initiatives stem from European industries’ inability to keep the pace with the digital transformation that has been enhanced by the spread of high-speed internet. While the internet revolution has enabled the emergence of new global players, legacy European companies are struggling to adapt their business models and strategies in order to compete.
In this context, policymakers frequently invoke the need to protect public interests as justification for regulatory interventions they claim would correct purported market failures, but that instead merely alter the prevailing market dynamics. Indeed, protectionist interventions that impose financial obligations on successful players will not address the problems in question, and will therefore be ineffective at achieving the goal of closing the competition gap between European firms and the global players. Moreover, as discussed in the next section, taxing online providers in the telecommunications sector, specifically, would appear to be clearly at odds with the rationale that underlies European efforts to enforce the net-neutrality regulation.[55]
The European Commission’s “fair share” proposal is of dubious compatibility with net neutrality, which was the flagship initiative delivered by the Commission in the previous political term. Indeed, the Commission has appeared anxious to reassure the public that there is no going back on net neutrality and that it remains “strongly committed” to protecting a neutral and open internet.[56] But there are manifest concerns that direct compensation from large OTTs to ISPs would endanger the principle of net neutrality.[57] Indeed, the fair-share proposal appears at odds with both the legal obligations of net neutrality and its underlying economic rationale.
Net neutrality has always been a particularly contentious topic, as confirmed by the transatlantic divergence on the topic. While the EU regulation remains in force, the U.S. Federal Communications Commission’s (FCC) 2015 Open Internet Order was repealed in 2018 by the superseding Restoring Internet Freedom Order.[58] The FCC reverted to its pre-2015 position, concluding that the benefits of a market-based, light-touch regime for internet governance outweigh those of utility-style, common-carrier regulation. Quoting then-FCC Chairman Ajit Pai, “there was no problem to solve. The Internet was not broken in 2015. We were not living in a digital dystopia.”[59]
Given the assumption that broadband providers enjoy endemic market power, a common feature of net-neutrality regulations is the imposition of non-discrimination rules that ensure all internet traffic is treated equally. As terminating-access monopolists, ISPs are deemed gatekeepers for edge providers that seek to reach their end-user subscribers—hence, they may discriminate against the former and impose restrictions on the latter. Toward this end, the 2015 Open Internet Order imposed three ex ante bright-line rules preventing U.S. ISPs from blocking content, throttling traffic, or discriminating against specific content for a fee (so-called “paid prioritization”).[60] These rules were predicated on the belief that there was a need to protect and promote openness, since “the Internet’s openness promotes innovation, investment, competition, free expression, and other national broadband goals.”[61]
In a similar vein, by establishing common rules to safeguard equal and non-discriminatory treatment of internet traffic, the EU Regulation pointed to the need to protect end-users and guarantee the continued functioning of the internet ecosystem as an engine of innovation:[62]
The internet has developed over the past decades as an open platform for innovation with low access barriers for end-users, providers of content, applications and services and providers of internet access services. … However, a significant number of end-users are affected by traffic management practices which block or slow down specific applications or services.[63]
Indeed, proponents of net neutrality typically claim that allowing ISPs to treat different CAPs differently through, e.g., paid prioritization would stifle innovation by hindering the entrance of new content providers. This, in turn, would negatively affect the welfare of end-users through rising subscription fees, less variety of content, and reduced quality of connections.[64] Opponents, on the other hand, question the very economic logic of net-neutrality regulation, maintaining that it would increase regulatory costs, dampen ISPs’ incentives to invest in broadband capacity, and harm both consumers and content providers.[65]
Moreover, these types of regulations explicitly prevent ISPs from bargaining with CAPs in ways that would allow ISPs to seek payment for excessive network usage. Thus, some substantial portion of the “problem” that “fair share” seeks to correct directly arises from telcos being constrained from arm’s-length negotiations with CAPs.
Net-neutrality opponents also contest the claim that ISPs have and use market power in ways that lead to market foreclosure, arguing that this is not supported by empirical evidence.[66] A related concern is that vertically integrated ISPs with market power could potentially self-preference their own content.[67] But even if a vertically integrated ISP had market power, it is not obvious that compromising the quality of content requested by end users would be profit maximizing.[68] That is, even in this extreme hypothetical, the threat of user defection because of degraded quality mutes or answers the concern.
More generally, the economic literature has stressed that the consequences of net-neutrality regulation depend on precise policy choices, how they are implemented, and how long-run economic trade-offs play out.[69] Strict net neutrality may lead to socially inefficient allocations of traffic, as well as traffic inflation. It would thereby harm efficiency by distorting both ISPs and content providers’ investments and service-quality choices.[70]
Given the ambiguous effects of net neutrality’s anti-discrimination rules, the most controversial issue concerns whether any value is added value by enforcing a net-neutrality regime through an ex ante regulatory ban, rather than traditional ex post case-by-case antitrust enforcement.[71] Indeed, net neutrality introduces a blanket ban of practices that would not be per se antitrust violations.[72] Notably, net neutrality de facto prevents broadband providers from introducing vertical contractual restraints, which have typically proven to be welfare enhancing more often than anticompetitive.[73] Therefore, there is a risk that, in the name of leveling the playing field, net neutrality focuses on competitor welfare rather than consumer welfare.[74] In sum, given the ambiguous welfare effects of discrimination, it is impossible to establish in advance whether the purported exclusionary effects outweigh their potential procompetitive benefits. Hence, there is no economic support for an ex ante absolute prohibition.
The “fair share” solution of taxing Big Tech to fund broadband-network improvements also appears to violate both the economic rationale for and legal obligation of equal treatment under net neutrality. By only imposing fees on OTTs that transmit data exceeding a certain threshold, the “fair share” proposal clearly discriminates against some online services and content—that is, the largest ones. With regard to the economic rationale, net neutrality has been justified on the grounds that broadband providers enjoy endemic market power as terminating-access monopolies. It would therefore be strange to impose an intervention to restore “fairness” in the relationship between network operators and content providers on the premise that the former suffers from an asymmetry of bargaining power. Indeed, under EU net-neutrality rules, ISPs are assumed to have insurmountable bargaining power, even though the “fair share” proposal presumes them to be powerless before Big Tech.
Indeed, as noted above, net neutrality is a primary driver of the current “fair share” debate. Allowing paid prioritization between ISPs and CAPs likely would have prevented the emergence of these claims. Indeed, it could be argued that, on the one hand, net neutrality has tilted the balance in favor of large OTTs[75] and, on the other hand, paid prioritization would be the efficient market answer to different content offerings.
Notably, conventional economic principles justify vertical restraints and discriminatory practice, as online content varies in terms of value for consumers, bandwidth use, and quality requirements.[76] Indeed, as was raised years ago during the U.S. net-neutrality debate, a ban on paid prioritization is inconsistent with a well-developed body of literature showing that it is impossible to determine ex ante whether any specific instance of paid prioritization will have positive or negative effects for consumers.[77] Moreover, restraints on prioritization are likely to thwart a range of welfare-increasing business models on the internet and to chill further pricing innovations.[78]
Therefore, the fair-share proposal struggles to address the same fundamental question already raised in the case of net neutrality: whether a regulatory intervention is justified in the first place.
According to the economic literature, regulatory intervention is only justified under limited circumstances. The case for regulation is best substantiated where it can correct market failures, such as when free and unrestricted competition is unable to allocate resources efficiently.[79] Even under the romantic assumption that regulation serves consumers’ interests and policymakers have sufficient information and enforcement powers to both promote the public interest and maximize social welfare, the primary focus of regulation will still be to tackle market failures.[80]
Outside those examples of market failure, effective competition is commonly accepted to be the best regulator, as it has been empirically demonstrated to lead to lower prices, better quality, and greater innovation.[81] Without a proper justification, regulation negatively interferes in market dynamics by generating inefficiencies, introducing artificial barriers to entry, and deterring technological innovation.
Calibrating regulation is extremely difficult. Although regulation is expected to be forward-looking, it may lack flexibility, and the imposition of rigid sets of rules can risk enshrining a static view of the market at the expense of its dynamic evolution. Moreover, consistent with both private-interest and public-choice theory, government intervention is often prone to capture by special interests, rather than promoting general social welfare.
Although these are limits of regulation generally, they are particularly critical in fast-moving industries, where it is challenging to design a future-proof framework.[82] Therefore, especially when dealing with digital transformations, it is appropriate to embrace regulatory humility, acknowledge the inherent limits of regulation, and refrain either from picking winners and losers in the marketplace or from preemptively intervening in the absence of solid evidence of market failure and consumer harm.[83] Notably, the market-failure approach assumes that government activity should be limited to the minimal amount of intervention sufficient to correct for specific failures.[84]
Further, interventions to correct market failures should neither require nor assume a particular technology. This would ensure much-needed flexibility to adapt the rules to rapidly changing realities, thus avoiding early obsolescence. It would also avoid the weaponization of regulation to protect incumbents’ market position by freezing investments and hindering the development of new technologies. In sum, the principles of minimal and technologically neutral intervention reflect a light-touch approach of regulatory self-restraint, with awareness that the market is generally better suited to promote innovation and that regulation scores poorly on dealing with the unexpected.
The EU’s net-neutrality rules departed from the principles of self-restraint and technological neutrality.[85] Despite the fact that there was no discernible evidence of a market failure, EU policymakers chose to interfere with the management of internet traffic. Moreover, they did so by imposing an outright ban on common marketplace practices whose effects are at least ambiguous, and hence deserving of case-by-case assessment. As a result, net neutrality picked winners (OTTs) and losers (ISPs). At the time, academics and other experts warned against the adoption of rigid regulation, which by definition cannot aspire to be future-proof and is apt to capture the dynamics of industries characterized by rapid innovation.[86]
Indeed, net neutrality did not anticipate the rise of OTT services. A fascinating slogan has apparently proven to be more influential than economic principles and reality. And now, “fair share” advocates want the EU to step into the breach created by net-neutrality regulation and impose further (likely inefficient) levies on Big Tech. The more rational course would be to reconsider the nature of net neutrality’s non-discrimination principles in the first place. Alas, the “fair share” proposal in fact shares several features with net-neutrality regulation, demonstrating that, rather than learn from previous mistakes, European institutions are ready to repeat them. In particular, the proposal at issue does not square with economics.
Indeed, the economic justification for the regulatory intervention is missing, as there is no evidence of a market failure to address. Quite the opposite, according to BEREC.[87] The current model has fostered innovation, growth in internet connectivity, and the development of a vast array of content and applications. In other words, it has generated significant benefits for end users. The increase in traffic volume has not altered this fundamental reality and the IP-interconnection ecosystem largely remains highly competitive. At the same time, there is no evidence of free riding by CAPs along the value chain. As a result, the adoption of a sending-party-network-pays model would represent an unwarranted threat to the internet ecosystem that would generate costs with little or no countervailing benefits.
It is even questionable whether increases in internet traffic have resulted in higher costs for the telcos, who also benefit from the demand for broadband access that has been driven by the success of OTTs’ content and services.[88] More generally, it is not clear how punishing the success of some OTTs would promote investment and innovation in the broadband market.
Further, rather than abiding by the principle of minimal intervention, the proposal would interfere with market dynamics by substituting a direct-compensation mechanism for private negotiations. The justification advanced for such an invasive intervention is the alleged asymmetry of the telcos’ bargaining position vis-à-vis large OTTs. The assertion is that OTTs enjoy this disproportionate bargaining position because of their market power and an uneven regulatory playing field. Leaving aside the inherent knowledge problem in a central regulator deciding how dynamic data flows should be valued, this explanation is at odds with the primary assumption of net neutrality—that the telcos play a gatekeeper role because of their control of access to the internet. In reality, both Big Tech and the ISPs are sufficiently competent parties that they should be able to negotiate mutually beneficial business terms among themselves.
If telcos face an uneven regulatory playing field, it is precisely because of net neutrality, which limits their ability to monetize their networks by discriminating among content and applications. Rather than acknowledge that interfering with market forces was the original mistake and that it is therefore time to restore private parties’ ability to freely negotiate the terms for content delivery, EU policymakers once again choose to blame the market.
If we acknowledge that internet traffic is generated by consumers (rather than by OTTs), payments into a fund managed by the European Commission would have the same welfare implications as direct payments.[89] Given that everyone benefits from the internet, if there is a policy issue regarding financing the next generation of telecommunications infrastructure, it makes more sense for that to be financed out of a fund born through general taxation.
The proposed tax on Big Tech has been framed as ensuring that they pay their “fair share” of network costs. But fairness is in the eye of the beholder. The term is so vague that it inherently grants policymakers greater discretion and room for intervention, all in the name of a purportedly noble cause.[90] Unfortunately, regulations that aren’t supported by market-failure framework are doomed to be captured by private interests. From this perspective, the “fair share” proposal is, indeed, consistent with public-choice theories of regulation that regard it as a rent-seeking device to benefit a small group of incumbents at the expense of rivals and consumers.
According to an old saying, history tends to repeat itself. This result is avoidable only if we learn from our mistakes.[91] Looking at the “fair share” debate, European institutions appear condemned to repeat the past.
When it comes to technology and innovation, Europe systematically lags behind the United States and China. In the best-case scenario, it is catching up, but there is a significant gap to close. This picture is captured by various proxies of technological progress, such as the number of patents, the amount of R&D expenditure, the amount of private investment in artificial intelligence, the location of so-called “unicorn” firms, and the number of leading research institutions in high-tech fields.[92]
There is another digital-economy scoreboard, however, on which Europe is the clear frontrunner. Namely, Europe celebrates its position as the leading regulator of digital markets.[93] Indeed, in less than a decade, Europe has delivered the GDPR, the DMA, the DSA, and countless data-sharing initiatives. Indeed, it would appear that regulation is at least a partial cause of the EU’s poor results in the digital economy. After all, EU policymakers’ primary concern should be to ensure that the regulatory framework is fit for purpose. But over the past decade, when the expected results didn’t arise or when there were unintended consequences, rather than question the treatment, EU policymakers routinely have suggested increasing the dosage.
Against this background, the idea of introducing a tax on CAPs to boost investments in the next generation of telecommunications infrastructure could be just considered another piece of the jigsaw.
However, it is worth remembering that the diminished bargaining position that telcos have vis-à-vis online platforms is the result of another EU regulation. Indeed, without the net-neutrality ban on paid prioritization, telcos would have been free to negotiate differentiated terms for the delivery of OTTs’ content and services. OTTs could have been charged according to bandwidth usage, through side payments for setting up optimized network nodes, or through any number of other mutually beneficial business arrangements.
Further, the proposal contradicts the central premise of net neutrality, which was that broadband providers’ position as internet gatekeepers threatens OTTs and end users. But rather than acknowledge the mistakes of that earlier unnecessary and myopic intervention, the EU is supporting another shortsighted initiative that would be at odds with the economic rationale and the legal provisions of current internet regulation.
Again, as BEREC stated in 2012, the internet “has developed well without regulatory intervention, through stakeholders’ coordination in the free market. Its ability to evolve over time and self-adapt has been key to its growth and success.”[94] More recently, this message has been reiterated, emphasizing that “[t]he internet’s ability to self-adapt has been and still is essential for its success and its innovative capability.”[95]
There was no evidence of market failure to justify net neutrality, and there isn’t a market failure to justify imposing a “fair share” tax for network costs. Therefore, like net-neutrality anti-discrimination rules, mandating some large online platforms to compensate network operators with a usage fee would be a solution that wouldn’t work to a problem that doesn’t exist.[96]
The “fair share” proposal also reflects another pattern of recent EU industrial policy already seen in the audiovisual and publishing industries. As the digital revolution challenges existing business models, thus requiring a radical transformation of entire economic sectors, some incumbents suffer in adapting to the new environment, which requires facing new rivals but also taking advantages of new opportunities. This is part of the natural evolution of the market, where the disruptive force of innovation is generally welcome.
The EU is, instead, apparently concerned about the welfare of some legacy incumbents, especially if they are EU-born companies. As a result, market dynamics are once again threatened by regulatory interventions that impose financial obligations on successful online (and largely foreign) players. Such protectionist initiatives are at odds with the fundamental principle of competitive neutrality, according to which governments actions should ensure that all enterprises face a level playing field, irrespective of factors such as their ownership, location, or legal form.[97] Moreover, they have already proven to be an ineffective means to help companies in reinventing themselves and filling their competitive gap.
In sum, the EU not only assumes that it could lead and deliver innovation through regulation, but also that an industry’s digital transformation could be achieved by subsidizing legacy homegrown companies with welfare transfers from successful foreign players.
Such a vision does not live up to the ambitious goals of the 2030 Digital Decade. Insofar as Europe will be a place where innovation is regulated, rather than invented, there will be no chance to reverse its technological decline and recover digital leadership. Taxing Big Tech will not make Europe great again.
[1] Thierry Breton, Getting Europe Ready for the Next Generation of Connectivity Infrastructure, European Commission (Feb. 6, 2023), https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_23_623.
[2] See Press release, Commission Presents New Initiatives, Laying the Ground for the Transformation of the Connectivity Sector in the EU, European Commission (Feb. 23, 2023), https://ec.europa.eu/commission/presscorner/detail/en/ip_23_985.
[3] Exploratory Consultation – The Future of the Electronic Communications Sector and Its Infrastructure, European Commission (Feb. 23, 2023), https://digital-strategy.ec.europa.eu/en/consultations/future-electronic-communications-sector-and-its-infrastructure (paras. 2.1 and 2.3, quantifying investment needs until 2030 of about 174 billion euros).
[4] Decision (EU) 2022/2481 of the European Parliament and of the Council Establishing the Digital Decade Policy Programme 2030 (Dec. 14, 2022), OJ L 323/4; see also, 2030 Digital Compass: The European Way for the Digital Decade, European Commission (Jan. 26, 2023), COM/2021/118 final.
[5] Breton, supra note 1; see European Commission, supra note 3, para 2.3, reporting that “some European providers of electronic communication networks and services, especially incumbents, claim that they suffer from a decreasing market valuation and lower return on investment, especially when compared to companies in the US.” The European Commission also mentioned that telcos’ claims regarding declining margins and rising costs are stem from current uncertainties (including high inflation, rising interest rates, and geopolitical tensions) that have led capital markets to focus on assets with better short-term returns and profitability and to prefer solutions that protect them from demand risk.
[6] This was also the opinion expressed by the German secretary at the Ministry for Digital Affairs and Transport (BMDV); see Christian Zentner, Kritik an Geplanter „Zwangsabgabe“ für Netflix und Co, Bundestag (March 2, 2023), https://www.bundestag.de/presse/hib/kurzmeldungen-936322 (finding the questionnaire to be “slightly tendentious”).
[7] Carlos Rodri?guez Cocina, You Have Not Seen This Movie Before: Fair Share Is Not a Remake, Telefónica (March 10, 2023), https://www.telefonica.com/en/communication-room/blog/you-have-not-seen-this-movie-before-fair-share-is-not-a-remake.
[8] Europe’s Internet Ecosystem: Socio-Economic Benefits of a Fairer Balance Between Tech Giants and Telecom Operators, Axon Partners Group Consulting (May 11, 2022), https://axonpartnersgroup.com/europes-internet-ecosystem-socio-economic-benefits-of-a-fairer-balance-between-tech-giants-and-telecom-operators (report prepared for the European Telecommunications Network Operators’ Association); Estimating OTT Traffic-Related Costs on European Telecommunications Networks, Frontier Economics (April 7, 2022), available at https://www.telekom.com/resource/blob/1003588/384180d6e69de08dd368cb0a9febf646/dl-frontier- g4-ott-report-stc-data.pdf (report for Deutsche Telekom, Orange, Telefonica, and Vodafone); see also, European Commission, supra note 3, Section 4 (describing the phenomenon as a “paradox” between increasing volumes of data on the infrastructures and alleged decreasing returns and appetite to invest in network infrastructure).
[9] European Declaration on Digital Rights and Principles for the Digital Decade, European Commission (2022), 28 final, 3.
[10] Alan Burkitt-Gray, Vestager Calls for EU to Centralise and Consolidate Telecoms, Capacity (Jan. 31, 2023) https://www.capacitymedia.com/article/2b7xs7payiktkefkh1hj4/news/vestager-calls-for-eu-to-centralise-and-consolidate-telecoms; see also, Breton, supra note 1.
[11] Id.
[12] Supra note 4.
[13] See, CEO Statement on the Role of Connectivity in Addressing Current EU Challenges (Sep. 26, 2022), available at https://etno.eu//downloads/news/ceo%20statement_sept.2022_26.9.pdf; see also, United Appeal of the Four Major European Telecommunications Companies (Feb. 14, 2022), https://www.telekom.com/en/company/details/united-appeal-of-the-four-major-european-telecommunications-companies-646166.
[14] Axon, supra note 8; see also, 2023 Global Internet Phenomena Report, Sandvine (Jan. 2023) https://www.sandvine.com/global-internet-phenomena-report-2023-download?submissionGuid=7b66978f-d664-4f10-b50b-28a48700788f.
[15] Frontier Economics, supra note 8.
[16] United Appeal, supra note 13.
[17] Axon, supra note 8.
[18] Regulation (EU) 2022/1925 on Contestable and Fair Markets in the Digital Sector and Amending Directives (EU) 2019/1937 and (EU) 2020/1828 (Digital Markets Act), (2022) OJ L 265/1; Regulation (EU) 2022/2065 on a Single Market for Digital Services and Amending Directive 2000/31/EC (Digital Services Act), (2022) OJ L 277/1.
[19] Axon, supra note 8, 18.
[21] See, e.g., Doing Our Part: How Google’s Network Helps Internet Content Reach Users, Google (Apr. 20, 2022) https://cloud.google.com/blog/products/infrastructure/google-network-infrastructure-investments; Network Fee Proposals Are Based on a False Premise, Meta (Mar. 23, 2023), https://about.fb.com/news/2023/03/network-fee-proposals-are-based-on-a-false-premise.
[22] BEREC’s Comments on the ETNO Proposal For ITU/WCIT Or Similar Initiatives Along These Lines, BoR(12) 120, Body of European Regulators for Electronic Communications (2012), 3; Report on IP-Interconnection Practices in the Context of Net Neutrality, BoR (17) 184, Body of European Regulators for Electronic Communications (2017), (finding the internet-protocol-interconnection market to be competitive); Neelie Kroes, Adapt or Die: What I Would Do If I Ran a Telecom Company (Oct. 1, 2014), https://ec.europa.eu/commission/presscorner/detail/de/SPEECH_14_647 (arguing that OTTs are driving digital demand: “[EU homes] are demanding greater and greater bandwidth, faster and faster speeds, and are prepared to pay for it. But how many of them would do that if there were no over the top services? If there were no Facebook, no YouTube, no Netflix, no Spotify?”); see also, Proposals for a Levy on Online Content Application Providers to Fund Network Operators. An Economic Assessment Prepared for the Dutch Ministry of Economic Affairs and Climate, Oxera (Feb. 27, 2023), 19, available at https://open.overheid.nl/documenten/ronl-8a56ac18a98a337315377fe38ac0041eb0dbe906/pdf, (noting that the cause of the traffic is the consumer’s initial request rather than the CAP’s fulfilment of that request).
[23] BEREC 2012, supra note 22, 4; see also, Oxera, supra note 22, 14 (arguing that there is no clear evidence that the absence of charging CAPs means that telcos are unable to raise revenues and cover their costs).
[24] BEREC 2012, supra note 22, 4.
[25] Id., 1.
[26] BEREC Preliminary Assessment of the Underlying Assumptions of Payments from Large CAPs to ISPs, BoR (22) 137, Body of European Regulators for Electronic Communications (2022), 4.
[27] Id., 4-5.
[28] Id., 7-8 (“BEREC considers in this regard the incremental costs necessary for the upgrade in capacity on a given network to handle more incoming traffic. These costs can incorporate to some extent technological upgrades as far as they are relevant for solving capacity issues. These costs have to be differentiated from the total network costs, which are mostly coverage costs.”).
[29] Id., 9
[30] Id., 11-14.
[31] Id., 13; see also, Plans for Charging Internet Toll by Large Telecom Companies Feared to Have Major Impact on European Consumers and Businesses, Government of the Netherlands (Feb. 27, 2023), https://www.rijksoverheid.nl/documenten/publicaties/2023/02/27/plans-for-charging-internet-toll-by-large-telecom-companies-feared-to-have-major-impact-on-european-consumers-and-businesses (arguing that “the large telecom operators seem to forget that consumers already pay for their Internet traffic, through their Internet subscription. The plea for an Internet toll actually implies that large telecom operators want to get paid twice.”).
[32] David Abecassis, Michael Kende, & Guniz Kama, IP Interconnection on the Internet: A European Perspective for 2022, Analysys Mason (Sep. 26, 2022), https://www.analysysmason.com/consulting-redirect/reports/ip-interconnection-european-perspective-2022; Volker Stocker & William Lehr, Regulatory Policy for Broadband: A Response to the “ETNO Report’s” Proposal for Intervention in Europe’s Internet Ecosystem, SSRN (Oct. 16, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4263096; Brian Williamson, An Internet Traffic Tax Would Harm Europe’s Digital Transformation, Communications Chambers (Jul. 2022), available at https://lisboncouncil.net/wp-content/uploads/2022/07/COMMUNICATIONS-CHAMBERS-Internet-Traffic-Tax-2.pdf.
[33] David Abecassis, Michael Kende, & Shahan Osman, The Impact of Tech Companies’ Network Investment on the Economics of Broadband ISPs, Analysys Mason (Oct. 12, 2022), https://www.analysysmason.com/consulting-redirect/reports/internet-content-application-providers-infrastructure-investment-2022.
[34] See, e.g., Connectivity Infrastructure and the Open Internet, BEUC: The European Consumer Organisation (Sep. 16, 2022), available at https://www.beuc.eu/sites/default/files/2022-09/BEUC-X-2022-096_Connectivity_Infrastructure-and-the_open_internet.pdf; Bijal Sanghani, Fair Share Debate and Potential Impact of SPNP on European IXPs and Internet Ecosystem, European Internet Exchange Association (Jan. 3, 2023), available at https://www.euro-ix.net/media/filer_public/1a/e4/1ae40d86-95ea-460a-920d-3b335c2439d4/spnp_impact_on_ixps_-_final.pdf.
[35] Karl-Heinz Neumann, et al., Competitive Conditions on Transit and Peering Markets, WIK-Consult (Feb. 28, 2022), available at https://www.bundesnetzagentur.de/EN/Areas/Telecommunications/Companies/Digitisation/Peering/download.pdf?__blob=publicationFile&v=1.
[36] Id., 36-38; see also Oxera, supra note 22, 28—33 (arguing that implementation of such a scheme would entail significant transaction and regulatory costs, as the regulator would be required to fulfil such recurring tasks as traffic analysis and verification, dispute settlement, and coordination with companies and other authorities).
[37] Government of the Netherlands, supra note 31; see also, Zentner, supra note 6 (stating that the telecommunications companies’ argument that such a levy would provide them with more money for network expansion does not hold water).
[38] Government of the Netherlands, supra note 31; Oxera, supra note 22 (predicting that only a limited portion of the additional revenue stream to telecom operators would be passed on to the internet subscribers in the form of slightly lower subscription fees, and that this would be offset by price increases from online services for subscriptions to, e.g., Spotify or Netflix more expensive).
[39] Call for Release of BCRD Revision – Refusal of Merge with Fair Share Debate, Austria, Estonia, Finland, Germany, Ireland, and the Netherlands (May 12, 2022), available at https://www.permanentrepresentations.nl/binaries/nlatio/documenten/publications/2022/12/05/call-for-release-of-bcrd-revision—refusal-of-merge-with-fair-share-debate/Call+for+release+of+BCRD+revision+-+Refusal+of+merge+with+fair+share+debate_def.pdf.
[40] See Breton, supra note 1 (arguing that the burden of financing connectivity infrastructure should not rest solely on the shoulders of member states or the EU budget).
[41] See Tobias Kretschmer, In Pursuit of Fairness? Infrastructure Investment in Digital Markets, SSRN (Sep. 20, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4230863 (arguing that a transfer from large OTTs to telcos would be equivalent to a tax on success and that this would appear to arbitrarily target a group of largely U.S.-based firms while letting at least partly European newcomers and/or smaller firms enjoy the same externalities at no cost).
[42] Directive 2010/13/EU on the coordination of certain provisions laid down by law, regulation or administrative action in Member States concerning the provision of audiovisual media services (Audiovisual Media Services Directive), [2010] OJ L 95/1, Recitals 4 and 12.
[43] Directive (EU) 2018/1808 amending Directive 2010/13/EU on the coordination of certain provisions laid down by law, regulation or administrative action in Member States concerning the provision of audiovisual media services (Audiovisual Media Services Directive) in view of changing market realities, [2018] OJ L 303/69.
[44] Id., Recital 35 and Article 13(1).
[45] Id., Recital 36 and Article 13 (2).
[46] For analysis of the EU market, see David Graham, et al., Study on the Promotion of European Works in Audiovisual Media Services, Attentional, KEA European Affairs, and Valdani Vicari & Associati (Aug. 28, 2020), https://digital-strategy.ec.europa.eu/en/library/study-promotion-european-works.
[47] See Sally Broughton Micova, The Audiovisual Media Services Directive: Balancing Liberalisation and Protection, E. Brogi & P.L. Parcu (eds.), Research Handbook on EU Media Law and Policy, Edward Elgar Publishing (2020), 264 (arguing that the AVMS Directive is a unique blend of the liberal-market approach typical of the EU’s single market and classic protectionism, stemming from a history of concern that American content and media services would dominate European screens, threatening its cultures and industries).
[48] Id.; see also Joe?lle Farchy, Gre?goire Bideau, & Steven Tallec, Content Quotas and Prominence on VOD Services: New Challenges for European Audiovisual Regulators, 28 Int. J. Cult. Policy 419 (2022), (noting that the objective of cultural diversity contains a great ambiguity and that “[b]eyond the incantatory discourse on the expected benefits of cultural diversity, the notion is in fact complex, and refers to multiple, sometimes contradictory aspects.”).
[49] On the dispute between news publishers and digital platforms, see Giuseppe Colangelo, Enforcing Copyright Through Antitrust? The Strange Case of News Publishers Against Digital Platforms, 10 J. Antitrust Enforc. 133 (May 10, 2021); Giuseppe Colangelo & Valerio Torti, Copyright, Online News Publishing and Aggregators: A Law and Economics Analysis of the EU Reform, 27 Int. J. Law Inf. Technol. 75 (Jan. 11, 2019).
[50] Directive (EU) 2019/790 of 17 April 2019 on copyright and related rights in the Digital Single Market and amending Directives 96/9/EC and 2001/29/EC, [2019] OJ L 130/92, Article 15.
[51] Id., Recitals 54 and 55.
[52] See, e.g., The Evolution of News and the Internet, Organisation for Economic Co-operation and Development (Jun. 11, 2010), available at https://www.oecd.org/sti/ieconomy/45559596.pdf; Potential Policy Recommendations to Support the Reinvention of Journalism, U.S. Federal Trade Commission (Jun. 2010), available at https://www.ftc.gov/sites/default/files/documents/public_events/how-will-journalism-survive-internet-age/new-staff-discussion.pdf; Bertin Martens, et al., The Digital Transformation of News Media and the Rise of Disinformation and Fake News – An Economic Perspective, Joint Research Center (Apr. 25, 2018), available at https://joint-research-centre.ec.europa.eu/system/files/2018-04/jrc111529.pdf; Martin Senftleben, et al., New Rights or New Business Models? An Inquiry into the Future of Publishing in the Digital Era, 48 IIC 538 (2017).
[53] Colangelo-Torti, supra note 49.
[54] Id., 90.
[55] Regulation (EU) 2015/2120 laying down measures concerning open internet access and amending Directive 2002/22/EC on universal service and users’ rights relating to electronic communications networks and services and Regulation (EU) No 531/2012 on roaming on public mobile communications networks within the Union, (2015) OJ L 310/1.
[56] European Commission, supra note 2.
[57] Government of the Netherlands, supra note 31; BEREC, supra note 26, 5.
[58] Restoring Internet Freedom Order, Federal Communications Commission (2018) 33 FCC Rcd 311.
[59] Ajit Pai, FCC Releases Restoring Internet Freedom Order, Federal Communications Commission (Jan. 4, 2018) 1, https://www.fcc.gov/document/fcc-releases-restoring-internet-freedom-order/pai-statement.
[60] Open Internet Order, Federal Communications Commission (2015), 30 FCC Rcd 5601.
[61] Id., 5625-26.
[62] Regulation (EU) 2015/2120, supra note 55, Recital 1.
[63] Id., Recital 3.
[64] See, e.g., Barbara van Schewick, Towards an Economic Framework for Network Neutrality Regulation, 5 JTHTL 329, (2006)
[65] See, e.g., Michael L. Katz, Wither U.S. Net Neutrality Regulation?, 50 Rev. Ind. Organ. 441 (2017), (finding substantial tension between the regulation and the objective of promoting consumer choice and sovereignty, and noting that the internet has never been, and is not designed to be, neutral); Christopher S. Yoo, Beyond Network Neutrality, 19 JOLT 1 (2005), (considering network neutrality a misnomer that may reinforce sources of market failure in the last mile and dampen incentives to invest in alternative network capacity) Wolfgang Briglauer, et al., Net neutrality and High?Speed Broadband Networks: Evidence from OECD Countries, Eur. J. Law Econ. (forthcoming), (finding empirical evidence that net-neutrality regulations exert a significant and strong negative impact on fiber investments); Marc Bourreau, Frago Kourandi, & Tommaso Valletti, Net Neutrality with Competing Internet Platforms, 63 J Ind Econ 30 (2015), (noting that, in a model with competing ISPs—rather than a monopolistic market structure—a switch from the net-neutrality regime to the alternative discriminatory regime would be bene?cial in terms of investments, innovation, and total welfare).
[66] See, e.g., Katz, supra note 65, 450;
Thomas W. Hazlett & Joshua D. Wright, The Effect of Regulation on Broadband Markets: Evaluating the Empirical Evidence in the FCC’s 2015 “Open Internet” Order, 50 Rev. Ind. Organ. 487 (2017); Maureen K. Ohlhausen, Antitrust Over Net Neutrality: Why We Should Take Competition in Broadband Seriously, 15 Colorado Technology Law Journal 119 (2016); Timothy J. Tardiff, Net Neutrality: Economic Evaluation of Market Developments, 11 J. Competition Law Econ. 701 (2015); Gerald R. Faulhaber, The Economics of Network Neutrality, Regulation 18 (2011-12).
[67] Pietro Crocioni, Net Neutrality in Europe: Desperately Seeking a Market Failure, 35 Telecomm Policy 1, (2011) 6-7; see also, Zero-Rating Practices in Broadband Markets, DotEcon, Aetha Consulting, and Oswell and Vahida, (Feb. 2017), available at https://ec.europa.eu/competition/publications/reports/kd0217687enn.pdf.
[68] See Crocioni, supra note 67 (arguing that even a monopolist ISP may benefit from valuable complements and be better off charging a higher price for internet access, instead of trying to force customers onto its own services); see also Ohlhausen, supra note 66; Faulhaber, supra note 66.
[69] Shane Greenstein, Martin Peitz, & Tommaso Valletti, Net Neutrality: A Fast Lane to Understanding the Trade-offs, 30 JEP 127 (2016); see also Sébastien Broos & Axel Gautier, The Exclusion of Competing One-Way Essential Complements: Implications for Net Neutrality, 52 Int. J. Ind. Organ. 358 (2017), (showing that, even in monopoly and duopoly, imposing net neutrality does not always improve welfare).
[70] Joshua Gans & Michael L. Katz, Weak Versus Strong Net Neutrality: Corrections and Extensions, 50 J. Regul. Econ. 99 (2016); Martin Peitz & F. Schuett, Net Neutrality and Inflation of Traffic, 46 Int. J. Ind. Organ. 16 (2016).
[71] See, e.g., A. Douglas Melamed & Andrew W. Chang, What Thinking About Antitrust Law Can Tell Us About Net Neutrality, 15 Colorado Technology Law Journal 93 (2016); Ohlhausen, supra note 66.
[72] A good example is provided by the treatment of zero-rating offers. For an analysis, see Giuseppe Colangelo & Valerio Torti, Offering Zero-Rated Content in the Shadow of Net Neutrality, 5 Market and Competition Law Review 141 (2021); see also Pablo Iba?n?ez Colomo, Future-Proof Regulation Against the Test of Time: The Evolution of European Telecommunications Regulation, 42 Oxf. J. Leg. Stud. 1170 (2022), 1187-188 (noting that the very practices that are problematic from a net-neutrality perspective are healthy expressions of competitive markets; hence, absent a finding of significant market power, there is no support for a preemptive ban of vertical integration, exclusivity agreements, and other practices that have an equivalent object and/or effect: these practices are routinely examined by competition authorities and careful case-by-case evaluation has long been deemed appropriate for them).
[73] See, e.g., Katz, supra note 65; Ohlhausen, supra note 66; Joshua D. Wright, Net Neutrality: Is Antitrust Law More Effective than Regulation in Protecting Consumers and Innovation?, U.S. House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law (Jun. 20, 2014), https://www.ftc.gov/legal-library/browse/prepared-statement-commissioner-joshua-d-wright-net-neutrality-antitrust-law-more-effective; Christopher S. Yoo, What Can Antitrust Contribute to the Network Neutrality Debate?, 1 Int. J. Commun. 493 (2007).
[74] Katz, supra note 65, 454.
[75] Irene Comeig, Klaudijo Klaser, & Luci?a D. Pinar, The Paradox of (Inter)net Neutrality: An Experiment on Ex-Ante Antitrust Regulation, 175 Technol Forecast Soc Change 121405. (2022).
[76] Ohlhausen, supra note 66, 137.
[77] See Justin (Gus) Hurwitz, et al., Amicus Curiae Brief in U.S. Telecom Association et al. v. FTC, International Center for Law & Economics (Aug. 6, 2015), available at http://laweconcenter.org/images/articles/icle_oio_amicus_filed.pdf.
[78] Geoffrey Manne, et al., Policy Comments in the Matter of Protecting and Promoting the Open Internet, International Center for Law & Economics and TechFreedom (Jul. 17, 2014), available at https://laweconcenter.org/wp-content/uploads/2017/08/icle-tf_nn_policy_comments.pdf.
[79] Richard Baldwin, Martin Cave, & Martin Lodge, Understanding Regulation, Oxford University Press (2012).
[80] William J. Baumol, Welfare Economics and the Theory of the State, Harvard University Press (1952).
[81] Regulation and Competition. A Review of the Evidence, UK Competition and Markets Authority (2020), https://www.gov.uk/government/publications/regulation-and-competition-a-review-of-the-evidence, paras. 1.3 and 2.4,.
[82] Colomo, supra note 72.
[83] See Ajit Pai, Remarks at the 18th Global Symposium for Regulators, Federal Communications Commission (Jul. 10, 2018), https://www.fcc.gov/document/chairman-pai-remarks-global-symposium-regulators-geneva; Maureen K. Ohlhausen, Regulatory Humility in Practice, Federal Trade Commission (Apr. 1, 2015), available at https://www.ftc.gov/system/files/documents/public_statements/635811/150401aeihumilitypractice.pdf.
[84] Baldwin, Cave, & Lodge, supra note 79.
[85] See also Colomo, supra note 72.
[86] See, e.g., Melamed & Chang, supra note 71; Ohlhausen, supra note 66; Bruce M. Owen, Net Neutrality: Is Antitrust Law More Effective than Regulation in Protecting Consumers and Innovation?, U.S. House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law (Jul. 8, 2014), https://ssrn.com/abstract=2463823.
[87] BEREC, supra note 26.
[88] Id.
[89] See also Oxera, supra note 22, 34 (arguing that the fund would still lead to a transfer of money from one group to another and would not lead to substantially lower transaction costs).
[90] Giuseppe Colangelo, In Fairness We (Should Not) Trust. The Duplicity of the EU Competition Policy Mantra in Digital Markets, The Antitrust Bulletin (forthcoming).
[91] Paul Crampton, Striking the Right Balance Between Competition and Regulation: The Key Is Learning from Our Mistakes, APEC-OECD Co-operative Initiative on Regulatory Reform (Oct. 2002), available at https://www.oecd.org/regreform/2503205.pdf.
[92] For useful information about several key innovation indicators, such as the value of venture-capital deals, the number of science and technology clusters, and government budget allocations for research and development, see, Global Innovation Index 2022, World Intellectual Property Organization, https://www.wipo.int/global_innovation_index/en/2022; see also Riccardo Righi, et al., AI Watch Index 2021, Joint Research Centre (Mar. 20, 2022), https://publications.jrc.ec.europa.eu/repository/handle/JRC128744.
[93] See Margrethe Vestager, Tearing Down Big Tech’s Walls, Project Syndicate (Mar. 9, 2023), https://www.project-syndicate.org/commentary/eu-big-tech-legislation-digital-services-markets-by-margrethe-vestager-2023-03 (“We are proud that Europe has become the cradle of tech regulation globally.”).
[94] BEREC, supra note 22, 1.
[95] BEREC, supra note 26, 3.
[96] Ajit Pai, The FCC and Internet Regulation: A First-year Report Card, Federal Communications Commission (Feb. 26, 2016) https://www.fcc.gov/document/commissioner-pai-remarks-internet-regulation-first-year-report-card.
[97] See, Recommendation of the Council on Competitive Neutrality, Organisation for Economic Co-operation and Development (May 30, 2021), https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0462.
Popular Media The federal government is set to award more than $42 billion in new grants to state governments this summer, with the goal of expanding high-speed . . .
The federal government is set to award more than $42 billion in new grants to state governments this summer, with the goal of expanding high-speed internet access in areas that currently lack it.
But as this new Broadband Equity, Access, and Deployment program ramps up, it is crucial that states spend the money wisely.
