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FCC's concluding market power in the wrong place; See great ACI analysis: Broadband vs Internet profits

Given that the apparent justification for new formal net neutrality rules is that fifteen-year policy has failed and that the market is unable to ensure consumer choice, the FCC will need to justify with facts that broadband providers indeed have market power to exercise anti-competitively.

Kudos to Larry Darby of the American Consumer Institute for his excellent and illuminating comparative financial analysis of the market power and profits of broadband companies vs. Internet companies. From his post

  • "Perhaps the most important reason for regulation is the existence of market power. There are several potential indicators of market power... most importantly, abnormal returns on investment or high profit rates."
  • "...the data make clear that, according to each of these measures, operators of broadband networks (Comcast, Time Warner, AT&T and Verizon) earn relatively modest returns compared to other major companies both inside and outside the Internet sector. Indeed, in each case, returns are below the average for firms in the S&P 500 index and substantially below those posted by other firms in the Internet Value Cluster. For example, Google’s profit margin is 2-3 times greater than earned by network providers and twice the average rate for S&P 500 firms. The comparisons are even more striking in the case of returns to investors or on assets. Return on investment for network providers are a fraction of those enjoyed by the average of all S&P 500 firms and, depending on the measure and company, are between 10% and 25% of those earned by Google."

The big takeaway from this analysis is similar to my last post, which is that if the FCC is concerned about the anti-competitive exercise of market power, they need to focus on players where the facts suggest market power exists.

  • Perversely, the FCC is focused on regulating competitive broadband providers (which market financial facts strongly suggest do not have market power), while protecting from new regulation companies like Google (which market financial facts strongly suggest have market power.)
  • That FCC approach does not appear to be fair or fact-based.