An Analysis of the Arguments in Favor of a Forced-Access Policy for Internet Cable Broadband Technology

The forced-access debate revolves around whether or not market forces are more effective than government regulation in ensuring that the market for Internet access remains competitive and whether or not consumers will continue to have choices among different Internet access service providers in the future. The analysis presented in the previous section shows that the market is indeed competitive and because it is relatively easy for new firms to enter the market, it will likely remain competitive in the future as well.

The OpenNet coalition, however, maintains that since cable firms have had a head start in the technological race to develop and deploy broadband access, and since these same firms have affiliated ISPs, independent ISPs will not have equal access to potential customers and, consequently, are at a competitive disadvantage.

But OpenNet's argument is flawed for three reasons. First, it ignores the opportunities other broadband access suppliers offer to compete for customers. Indeed, independent ISPs have negotiated access arrangements with telephone companies.24 Second, the argument is inconsistent with economic incentives that improve the efficiency of the marketplace, and it disregards the limitations of the existing technology. Third, the argument is flawed because it is based on similar policies to promote competition that have already been tried and largely failed in other telecommunications markets. Each of these arguments is examined below.


Broadband Access Is an Option Already Available to Independent ISPs

Any independent ISP today can freely negotiate an agreement with an Internet access provider, such as a cable firm, to provide access service to potential consumers. If such an agreement were reached, then the cable firm would provide the physical connection while the independent ISP would provide related services like first-page features and other proprietary services. A cable firm would refuse to negotiate such an agreement if the independent ISP is likely to provide inferior service relative to that provided by the cable firm's affiliated ISP. Why? The reason is simple. Consumers want the highest quality access to the Internet at the lowest price. If a cable firm negotiates an agreement with an independent ISP and the ISP provides poor service, then the cable firm's customers will buy their access service from other suppliers. By the same logic, if the cable firm's affiliate provides poor service, the cable firm loses its customers to other suppliers as well. In either case, the cable firm has the incentive to provide the best overall service to its customers and consequently must choose the best way to do so. As Sky Dayton, the founder of EarthLink (an independent ISP), predicts, "Consumer demand will eventually force companies like AT&T to give consumers a choice of any ISP."25

There is a more subtle yet important reason why cable firms would not allow all independent ISPs to provide access service over their cable lines. Like other technologically sophisticated products consumers purchase today that operate in conjunction with other complementary products (e.g., computer hardware and software), it may be difficult for consumers to discern which firm is to blame in the event there is a problem with the service provided. For example, suppose there is a glitch in the service and consumers are unable to make a good connection to the Internet. Consumers may attribute this problem to the cable firm, which only supplies the physical connection, when in fact the problem lies with the independent ISP. The cable firm's reputation is harmed and potentially its long-term profitability is reduced because current and potential future customers switch to other access suppliers. In these situations, the cable firm may be unable to write a contract that would eliminate or even minimize this type of problem. Moreover, the ISP would have every incentive to shift the blame to the cable firm to avoid the harmful impact on its reputation.26 Similarly, cable firms would have an incentive to blame their problems on independent ISPs if the physical connection failed to operate in a satisfactory manner. This is one of the reasons why firms in the real world often vertically integrate, or write long-term contracts, to avoid problems of this type.27 Thus, it seems reasonable to expect that cable firms would prefer to have their affiliated ISPs provide the complementary access service.

Does this mean that independent ISPs must vertically integrate in order to survive in the marketplace? Not necessarily. It does mean, however, that these firms will have to provide a service that is of a higher quality and at a lower price than the service provided by cable-affiliated ISPs to convince the various access suppliers to use their service.


Cable Broadband Providers Cannot Deliver "Open" Access to All ISPs

OpenNet's argument in favor of a forced-access policy ignores the fact that it is technologically impossible as well as economically unwise for a cable firm to provide access to any ISP wishing to use the cable firm's broadband pipe. The cable firm's bandwidth, which is shared capacity, would be spread across the total number of users making an access connection to the Internet. As more users connect, transmission speeds decrease and congestion becomes a real problem. Currently, there is no feasible solution to this limitation short of restricting the number of access providers to avoid the real problem of congestion. A forced-access policy would be an economic disaster for cable firms because the blame could be easily shifted to cable firms when congestion problems arose. What this means is that in the long run, cable firms would likely cut back on investments in broadband technology, which would limit consumers' access options—the exact opposite result of what forced-access advocates say their policy will achieve.


Forced-Access Policy Has Already Failed to Encourage Competition in the Telephone Service Market

The OpenNet coalition has argued that forced-access policy has been successful in promoting competition in local telephone markets. OpenNet is referring to the Telecommunications Act of 1996, which requires established local telephone companies to make their network facilities available to any competitor that wishes to offer local telephone service.28

However, the experience thus far in local telephone markets is a bad example to use to justify forcing cable firms to open their facilities to independent ISPs for two reasons. First, coercion is not a good substitute for voluntary arrangements. In a free market, firms can be expected to negotiate with other firms arrangements that best serve the consumer because their livelihoods depend upon it. Second, forced-access policy has not really worked to promote competition in the telephone market. For example, the Michigan Public Service Commission (MPSC) has reported that by the end of October 1997, 28 competitive local exchange companies (CLECs) were licensed to compete against Ameritech of Michigan in local telephone markets, but only 11 of those CLECs had actually signed "interconnection" agreements with Ameritech.29 Furthermore, those 11 CLECs were operating only 200,000, or 3.8 percent, of Ameritech's total access lines in Michigan. The MPSC report also noted that GTE-Michigan did not face any competition from CLECs in its respective service areas. In other words, despite the 1996 Telecommunications Act's mandate to make established telephone companies' network facilities available to potential competitors, the established local telephone companies still earned 96 percent of all local service revenues in 1998.30

The first lesson to draw from the forced-access experience in the telephone industry is that forcing companies to negotiate contractual arrangements that they would not normally negotiate is a bad idea for promoting competition. The second lesson from this experience is that new entry has emerged in the profitable business segment of the local market. Why? Because there is a private incentive to provide a competitive service, and new firms are willing to take advantage of the opportunity. Similarly, there is a profit opportunity in the Internet access market, and many firms are already responding to this opportunity by developing and implementing new access technologies without any direction from the government. The market is competitive and market participants will continue to compete in the absence of government interference.31


Conclusion: Government Regulation is Not Necessary to Level the Internet Access Playing Field

The OpenNet coalition and other proponents of government forced-access policy argue that regulating access is necessary to maintain a level playing field, but there are two major problems with this argument. The first is that the playing field is already level. Independent ISPs have access to various narrowband and broadband technologies and, thus, currently do enjoy an equal opportunity to compete. The second problem is that forced-access will most likely lead to a reduction in the number of playing fields available. If cable firms are not able to compete and enjoy the full benefits of their investments, these firms are less likely to undertake the risks to develop these new technologies in the first place. Profits are a necessary incentive to reward investors for assuming the risks inherent in entering a rapidly changing market and to reward firms that develop new technological innovations.

An example from the pharmaceutical market provides a good illustration of why policy makers should avoid making a mistake in the market for Internet access by mandating a forced-access policy. Pharmaceutical product innovation is stimulated through the government's protection of property rights and shows how the government can play a positive "referee" role in the marketplace. The United States government strictly enforces a set of laws that protect the intellectual property rights of all pharmaceutical firms. This is a major reason why many firms commit millions of dollars to research and development to discover, develop, and market new drugs here in the United States: They consider the United States a safe haven for doing business. By contrast, countries that do not protect intellectual property rights find that firms based in their countries do not commit many resources to developing innovative new drugs. In which country are consumers better off? The answer of course is the United States. The lesson to be taken from this example is that the government's role should be to protect the competitive process by respecting and enforcing property rights. The government's role should not be such that it tilts the playing field to protect competitors that might be harmed by the competitive process.