Are “Dumb Pipe” Mandates Smart Public Policy? Vertical Integration, Net Neutrality, and the Network Layers Model

Abstract

Many academics and some public policymakers are increasingly advocating the adoption of regulations mandating ‘‘open’’ or ‘‘dumb’’ broadband networks over ‘‘closed’’ or proprietary systems. While such an ‘‘open-vs.-closed’’ distinction grossly over-simplifies the issue, it would be a mistake for lawmakers to implement regulations choosing network architectures. Such regulatory proposals are based on the mistaken belief that vertical integration between the ‘‘layers’’ of the Internet is inefficient or at least discriminates against firms or consumers operating in other layers. To the contrary, vertical integration can play a vital role in ensuring the development of a more robust broadband marketplace and offering consumers a wider array of service options. ‘‘Dumb pipe’’ mandates might also have a discouraging effect on competition in the creation of entirely new networks and services if these regulations formally prohibit vertical integration between network layers. * Adam Thierer, Senior Fellow and Director, Center for Media Freedom, Progress & Freedom Foundation, Washington, D.C. (www.pff.org) and the author or editor of four books on technology policy. The author wishes to thank Andrew Odlyzko, Bruce Owen, Philip Weiser, Tim Wu, Jeffrey Eisenach, and Daniel Brenner for their comments and suggestions, and Thomas Pearson for his tireless research assistance. 276 J. ON TELECOMM. & HIGH TECH. L. [Vol. 3 ABSTRACT 275 INTRODUCTION 276 I. THE NETWORK LAYERS MODEL AND DUMB PIPE THEORY 279 II. DUMB PIPES LITE: THE NET NEUTRALITY PROPOSAL......... 283 III. DISINCENTIVES TO INNOVATE AND CREATE ENTIRELY NEW PLATFORMS 287 IV. OPENNESS AND (SEMI-) DUMB PIPES WILL LIKELY PREVAIL NATURALLY 292 V. WHAT ABOUT REGULATORY CAPTURE AND PROPERTY RIGHTS? 297 VI. THE IMPORTANCE OF PRICING FLEXIBILITY 298 VII. MARKET POWER, CONTESTABILITY AND CARTERFONE...... 300 VIII. WHAT TO WATCH FOR NEXT 302 A. Comcast-Disney (or whatever follows) 303 B. Telco Entry Into Video Marketplace 304 C. Wireless Broadband 305 D. Microsoft 305 E. Google 307 CONCLUSION 307 275 INTRODUCTION 276 I. THE NETWORK LAYERS MODEL AND DUMB PIPE THEORY 279 II. DUMB PIPES LITE: THE NET NEUTRALITY PROPOSAL......... 283 III. DISINCENTIVES TO INNOVATE AND CREATE ENTIRELY NEW PLATFORMS 287 IV. OPENNESS AND (SEMI-) DUMB PIPES WILL LIKELY PREVAIL NATURALLY 292 V. WHAT ABOUT REGULATORY CAPTURE AND PROPERTY RIGHTS? 297 VI. THE IMPORTANCE OF PRICING FLEXIBILITY 298 VII. MARKET POWER, CONTESTABILITY AND CARTERFONE...... 300 VIII. WHAT TO WATCH FOR NEXT 302 A. Comcast-Disney (or whatever follows) 303 B. Telco Entry Into Video Marketplace 304 C. Wireless Broadband 305 D. Microsoft 305 E. Google 307 CONCLUSION 307