Obsolete analysis will doom DOJ’s antitrust probe of cable

The political arguments fueling the WSJ-reported “wide-ranging antitrust investigation into whether cable companies are acting improperly to quash nascent competition from online video” ultimately will collapse under legal scrutiny, because the analysis undergirding the complaints is obsolete and the allegations are highly likely to be devoid of the evidence required by a court of law.

What’s really going on here? This is just the latest episode in the six-year political soap opera: All My Net Neutrality Children. Net neutrality activists, FreePress, Public Knowledge, and others who oppose any Internet usage limitations are pressuring the DOJ and the FCC to either: block the pending Verizon-Cable spectrum transaction; or to somehow force wireless net neutrality conditions on Verizon as payback for Verizon challenging the FCC’s net neutrality regulations in court. Netflix, the corporate world’s lone vocal net neutrality advocate, is simply forum-shopping, trying to get the DOJ interested in its pleas for regulatory corporate welfare, after getting rebuffed previously by the FCC and FTC.

Simply, this effort appears to be about net neutrality proponents non-transparently gaming the Verizon-Cable Spectrum transaction review process at the DOJ and FCC to try and extract net neutrality conditions that could not be achieved: politically through the electoral process; legislatively through Congress; or via a court-reviewable FCC rulemaking.

Let’s examine how these latest net neutrality political allegations rely on obsolete analysis and weak evidence.

First, the FCC already officially decided to allow usage-based pricing in their 2010 Open Internet  Order:  “…prohibiting tiered or usage-based pricing and requiring all subscribers to pay the same amount for broadband service, regardless of the performance or usage of the service, would force lighter end users of the network to subsidize heavier end users. It would also foreclose practices that may appropriately align incentives to encourage efficient use of networks.”

Second, the DOJ has no real interest in filing a Federal antitrust suit against the cable industry that would require the DOJ to publicly argue that the FCC’s regulatory policy judgment is wrong and that a key Supreme Court antitrust precedent, Verizon vs. Trinko, that rules already-regulated-behavior is not subject to additional antitrust enforcement, is wrong as well.

Third, the net neutrality political concept undergirding these allegations presumes that no amount of competition is sufficient to deter anticompetitive discrimination on networks, so there needs to either be a net neutrality law or regulation to prevent it. This does not square with the DOJ’s statutory antitrust authority which assumes competition serves consumers — not that it can’t. Ultimately net neutrality proponents are barking up the wrong tree here, because essentially they are asking the DOJ to legislate.

Fourth, net neutrality is an obsolete telephone-monopoly-era common carrier regulation concept that views networks as public property that can be resold wholesale, not private property that property owners can manage for their customers’ and shareholders’ benefit. At core, net neutrality proponents are asking the DOJ to ignore competition law, policy, and precedent.

Fifth, these allegations depend on obsolete assessments of competition in the marketplace. The broadband communications marketplace has never been more competitive, and it is more competitive than any other nation’s market. The U.S. is the only nation in the world with two separate competitive national broadband infrastructures — telco and cable. The U.S. also enjoys more facilities-based wireless broadband competition than any major industrialized nation, with four national network infrastructures, Verizon, AT&T, Sprint, and T-Mobile. Consumers routinely substitute bandwidth usage between wire line and wireless broadband services seamlessly. The DOJ would have a difficult time proving in a court of law that wireless broadband offerings do not compete with wire line broadband when the evidence is overwhelming that they do.

Moreover, broadband, Internet and cloud technologies have radically transformed communications competition in the two decades since the 1992 Cable Act. It has transformed from intra-modal resale competition (1996-2000), to inter-modal facilities-based competition (2001-2005), to multi-modal broadband Internet competition (2006-2010), to today’s omni-modal Internet cloud competition (2011-) where the cloud enables an omni-directional competitive free-for-all — where cloud providers charge for usage of their processing just as broadband providers charge for usage of their bandwidth.

Lastly, a DOJ antitrust case would have to convince a Federal Court that a high-fixed-cost infrastructure business like broadband should price on marginal cost, not total cost. No Federal judge with a basic working understanding of economics would expect a high-fixed cost business to ignore its total costs and price at marginal costs that would bankrupt the business long term.

In short, the DOJ is doing its job in investigating complaints. The DOJ eventually may bluster and bluff behind-the-scenes that they have an antitrust case against the cable industry for economically pricing their core business offering in a competitive market, but they should have near zero interest in prosecuting such a patently weak antitrust case in public. Nonetheless, the DOJ and the FCC may still try and threaten antitrust prosecution or action in order to extract net neutrality or other conditions that they could not achieve under due process in the light of day.

Scott Cleland is Chairman of NetCompetition® a pro-competition e-forum supported by broadband interests and President of Precursor LLC, a research consultancy for Fortune 500 companies.