Net Neutrality and Competition Scott Wallsten Senior Fellow Director, Communications Policy Studies Progress & Freedom Foundation scott@wallsten.net Thank larry and george for organizing what looks like a wonderful event, and for inviting me here today. I’m honored to have the opportunity to speak to you.

The Internet Multi-sided market merchants consumers Multi-sided market. Credit cards, dating club. Need at least 2 sides to succeed. Optimal pricing is very difficult to figure out. You have to at least cover your fixed costs, and prices might differ substantially from marginal cost, and one side often subsidizes the other. MAIN POINT: EVEN IN RELATIVELY SIMPLE TWO-SIDED MARKET LIKE CREDIT CARDS, OPTIMAL PRICE STRUCTURE IS NOT OBVIOUS

The Internet Multi-sided market + network effects Infrastructure Consumers (demand) Content NN proponents say that content is king, you want to max innovation in content and that dumb pipes are responsible for that innovation. To do that, they want to regulate how and who infrastructure providers can price their services. HOW AND WHO THE INFRASTRUCTURE PROVIDERS CAN CHARGE Two problems with that. We don’t know that the SQ is optimal. We don’t know the counterfactual. What goods and services might be developed under different models?? We just don’t know. We certainly know that advocates of NN, like google, are very much in favor of exclusive deals for themselves. As bbd providers they seem perfectly willing to violate NN. Free wifi funded by ads. Innovation in BOTH infrastructure AND content is important. Question is what is the best way to encourage that? You want to make sure that there is adequate investment and innovation in BOTH infrastructure and content. Point here is that NN proponents seem to think they know what the optimal price structure of the Internet should be.

Mandatory net neutrality = price regulation Price regulation has a terrible history not just in telecom, but in general. It distorts behavior and investment. Finally, as we move away from it we find that prices generally go down, investment goes up, etc.

Discrimination? Not with adequate competition. Infrastructure Consumers (demand) Content First, if they do I would argue that we have proper antitrust tools to deal with that sort of thing.

Competition Share of zip codes with multiple broadband providers 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Dec 1999 Dec 2000 Dec 2001 Dec 2002 Dec 2003 Dec 2004 Dec 2005 Share of zip codes with multiple broadband providers 1 or more 4 or more

Competition - encourage entry Spectrum Spectrum still scarce Continue moving it to market Lobby for firms that don’t exist yet

Conclusions Content AND infrastructure important Optimal pricing of parts unknown Net neutrality = price regulation Focus on competition Don’t drop spectrum reforms We don’t want to be locked in to current infrastructure