Net Neutrality, the MetroPCS Complaint, and Low-Income Consumers - International Center for Law & Economics
Focus Areas:    Antitrust | Behavioral Economics | Net Neutrality

Net Neutrality, the MetroPCS Complaint, and Low-Income Consumers

I blogged a bit about the MetroPCS net neutrality complaint a few weeks ago.  The complaint, you may recall, targeted the MetroPCS menu of packages and pricing offered to its consumers.  The idea that MetroPCS, about one-tenth the size of Verizon, has market power is nonsense.  As my colleague Tom Hazlett explains, restrictions on MetroPCS in the name of net neutrality are likely to harm consumers, not help them:

Indeed, low-cost prepaid plans of MetroPCS are popular with users who want to avoid long-term contracts and are price sensitive. Half its customers are ‘cord cutters’, subscribers whose only phone is wireless and usage is intense. Voice minutes per month average about 2,000, more than double that of larger carriers.  The $40 plan is cheap because it’s inexpensively delivered using 2G technology.   It is not broadband (topping out, in third party reviews, at just 100 kbps), and has software and capacity issues. In general, voice over internet is not supported by the handsets and video streaming is not available on the network. The carrier deals with those limitations in three ways.

First, the $40 per month price tag extends a fat discount. Unlimited everything can cost $120 on faster networks. Second, it has also deployed new 4G technology, offering both a $40 tier similar to the 2G product (no video streaming), but also a pumped up version with video streaming, VoIP and everything else – without data caps – for $60 a month. Of course, this network has far larger capacity and is much zippier (reliable at 700 kbps).  PC World rated the full-blown 4G service “dirt cheap”.
Third, to upgrade the cheaper-than-dirt 2G experience, MetroPCS got Google – owner of YouTube – to compress their videos for delivery over the older network. This allowed the mobile carrier to extend unlimited wildly popular YouTube content to its lowest tier subscribers.  Busted! Favouring YouTube is said to violate neutrality. …

So much for the “consumer welfare” case for net neutrality in practice.  Of course, the FCC mandate is one of “public interest,” and not just consumer welfare.  So — perhaps another case can be made to defend the MetroPCS complaint?   Malkia Cyril from the Center for Media Justice offers just such a case in a recent blog post.  The problem with MetroPCS satisfying consumer demand for low-cost prepaid plans? Cyril argues that the “Lowering the price for partial Internet service while calling it “unlimited access” is a fraudulent gimmick that Metro PCS hopes will confuse low-income consumers into buying its phones,” and that it is “un-American to give low-income communities substandard Internet service that creates barriers to economic opportunity and democratic engagement.”

Cyril is wrong that competition for low-price plans makes low-income consumers worse off.  The claim is the same one that is often made in defense of restricting the access to low-income individuals to other products (and especially consumer credit) because their purchasing decisions cannot be trusted, i.e. the revealed preferences of those 8 million consumers should be substituted for by the Federal Communications Commission in this case.  This is precisely the type of claim for which a little bit of economic analysis can go a long way in shedding some light.

David Honig, co-founder of the liberal Minority Media & Telecommunications Council, makes the relevant points (HT: Hazlett):

One of the wireless carriers is offering three packages, all of VOIP-enabled (so they can get services like Skype) with free access to any lawful website, and all of them clearly labeled:

• Plan A: $40, with no multimedia streaming (that is, no movie downloads such as Netflix, porn, etc.)

• Plan B: $50, with metered multimedia streaming.

• Plan C: $60, with unlimited multimedia streaming.

Could you decide which of these three packages meets your needs?

Or is all this just too confusing? Cyril thinks so.

She writes that Plan A “will confuse low-income consumers” into buying this carrier’s cell phones because they won’t be able to figure out that “if you want the WHOLE Internet, you just have to pay more.”

Well, actually you don’t have to pay more. The most expensive option — Plan C — costs $40 less than the least expensive offering of any of the other carriers. And if you later discover you don’t like Plan A, you can upgrade to Plan B or Plan C with no penalty, or you can pay the $100 it would cost to get service similar to Plan C from competing carriers. And you can do that immediately, since none of these plans has an early termination fee. What’s wrong with paying less for the particular services you want?

Cyril is making a common mistake among us lefties when it comes to low income people — she is being paternalistic. Those poor poor people. They can’t think for themselves, so the government has to make decisions for them. In this case, Cyril argues, the FCC should outlaw Plan A (and maybe Plan B) and require every carrier to offer only full-menu service like Plan C. All this in the name of “net neutrality.”

If I’ve learned anything from my 45 years working with low income folks, it’s this: they’re intelligent and they’re resourceful. They have to be in order to survive. They don’t appreciate condescension or sloganeering in their name. And they have sense enough to know whether they’d rather use an extra $20 a month for movie downloads or for movie tickets — and would rather get discounts for services they do not want or need. …

What the FCC doesn’t need to do is increase costs for those who can least afford it. As long as there’s full transparency, low income people ought to be able to choose Plan A, B or C. Low income people — the underserved — don’t need the FCC to decide, for them, how they can spend their money.

Well put.

This relates to an important economic point that the proponents of these types of regulation often miss, including in the context of lawyer licensing, but also with respect to the hundreds of state and local regulations impacting hundreds of industries that create barriers to entry in the provision of medical services, dental services, hairdressing, etc.  The introduction of lower quality products provides greater choice and significant economic value.   The fact that not all consumers demand (or can afford) premium brands and services does not mean that consumers are exploited.   Recall Milton Friedman’s statement that lawyer licensing is very much like requiring consumers desiring an automobile to purchase a Cadillac.  In this case, low-income consumers would bear the brunt of a restriction against the type of plan offered by MetroPCS.

There is a longstanding debate over the differences between the FCC’s “public interest” standard and the “consumer welfare” standard used in traditional antitrust analysis.  Sometimes, the two appear to conflict.  Sometimes, as is the case here, with the benefit of economics it is clear the two standards converge.  Here’s hoping the FCC doesn’t take the bait.

Filed under: antitrust, behavioral economics, economics, net neutrality