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"Uneconomics 101" as Taught by FreePress
Submitted by Scott Cleland on Thu, 2009-04-23 10:04
Uneconomics appears to be a new economic school-of-thought struggling for some credibility in Washington.
- FreePress, the well-known leading proponent for mandated net neutrality regulation, also appears to be the lead proponent of uneconomic thought -- as outlined in their recent letter to the House Energy and Commerce Committee on broadband consumption-based billing.
Lessons in Uneconomic Thought as taught by FreePress:
First, "We urge you to consider whether above-cost metered pricing for broadband constitutes an unfair business practice." (p. 3, 1st para)
- In economics 101, "above-cost... pricing" is:
- Called "profit;"
- The goal and necessity of every private enterprise;
- Essential for the sustainability of any business;
- The ultimate source of any investment for the future, new products/services, R&D, innovation, etc.;
- Necessary for any growth, job creation and progress; and
- Basically, the core driver of a market-based economy.
- A "business" is defined as:
- "The purchase and sale of goods... to make a profit; and
- A person, partnership, or corporation engaged in commerce, manufacturing, or a service; profit-seeking enterprise or concern."
- Unfair business practices have long been well-defined by the FTC, the statutory authority on unfair business practices, as involving three factors. Does the practice;
- Injure consumers?
- Violate established public policy?
- Constitute unethical or unscrupulous behavior?
- Long established facts have determined that "above-cost...pricing" or profit does not:
- Injure consumers...
- On the contrary, profit is the source of the sustainability and improvement of the service to the consumer and the well spring of innovation that benefits consumers.
- Violate established public policy...
- Communications competition and a free market Internet have been the bi-partisan law and policy of the U.S. since 1996.
- Antitrust law has existed for over one hundred years to prevent and address anti-competitive behavior.
- Constitute unethical or unscrupulous behavior...
- Given that business for a profit generates over three quarters of all economic output in the U.S. it is unlikely that our economic system of profit-seeking would be judged unethical by the mainstream.
- Second, "The burden of proof to demonstrate that prices are just and reasonable must fall to the companies."
- FreePress' uneconomics approach is based on incorrect assumptions.
- The law of the land is competition and not government price regulation.
- FCC policy, affirmed by the Supreme Court in Brand X is that broadband is an unregulated information service.
- In a market economy, prices are set by competition, providers who ill-serve their customers lose them and the revenue and profit they generate.
- Moreover, FreePress' invocation of the "burden of proof" being on the companies, is an unconstitutional guilty-until-proven-innocent approach to economic regulation of a competitive market.
- The FCC, FTC, and DOJ have repeatedly found that these communications markets are competitive and not monopolies warranting antitrust action or price regulation.
- Third, "In a robust network, substantial use of the Internet by consumers should have near zero marginal cost."
- Core to FreePress' school of uneconomic thought is that the economics of the communications business are based on marginal costs and not fixed and total costs.
- Freepress' assuming away the existence of fixed costs in a tremendously capital intensive network business and the high marginal cost of customer churn and acquisition in a competitive broadband market, is simply devoid of reality.
- FreePress's uneconomic myopia for only marginal costs rests on flawed assumptions in at least four dimensions:
- Broadband networks are not isolated from the reality of time -- networks are dynamic and cannot be disconnected from the reality that they require constant replacement, upgrade, maintenance, protection, improvement, investment, innovation, etc.
- Broadband companies are not isolated from the reality of the company they are owned by -- and communications companies offer multiple products and services, multiple lines of business, and multiple marketing bundles that all use different portions of the network at different times in different ways. Networks are not businesses, companies are.
- Broadband companies are not isolated from the reality of competition -- companies must be economically able to recover the high cost of customer churn, marketing and installation.
- Broadband companies are not isolated from the reality of the economic recession where some business lines and some regions get hit much more than anticipated and the business needs to maintain economic cushions in order to preserve the viability of the franchise.
- Finally, "Imposing arbitrarily low usage limits and arbitrarily high usage fees on Internet access may have substantial negative impacts on competition, innovation, and long-term economic growth."
- FreePress' upside-down uneconomics school of thought also has an upside-down view of competition.
- Competition will over time eliminate any price experimentation that proves not to be competitive with what others are charging.
- Moreover, the price regulation approach FreePress is advocating has proven to discourage innovation and long-term economic growth -- not encourage it, as FreePress tries to imply.
To put this all in context, FreePress' uneconomics approach declares price experimentation and market forces as "price gouging."
- FreePress' myopia on consumption-based billing constraints affecting only a small percentage of extremely high users of bandwidth, totally ignores that broadband competition has rewarded most all broadband users with much more speed at the same or lower price over the last few years -- greatly enhancing broadband value to the average consumer.
- FreePress' concern about broadband affordability overall simply does not comport with the facts.
- Data in a broad new study by the International Telecommunications Union (ITU) of 150 countries, show the U.S. substantially in the world lead with the lowest broadband prices as a percentage of per capita GNI. (See the tables on pages 56 and 66.)
- Interestingly, the data show broadband in the U.S. is 2.5 times more affordable than Japan, and three times more affordable than South Korea and France (p. 66).
In sum, FreePress' "Uneconomics 101" approach to broadband policy simply does not withstand scrutiny based on the facts, merits and/or mainstream economic thought.