Google may profit from ISP discrimination

Biggest content outfits may make more money if neutrality goes. The levels of competition in the carrier and the content industries determine the effect of payments. Hong Guo, Subhajyoti Bandyopadhyay. two other economists plus a mathematician have a new model  that suggests the biggest content outfit could benefit. The driver in their model is the “relative intensity of competition between the markets of Internet access service and digital content.” The big guy’s increased advantage over the little guys may more than make up for the payment to the carriers. In all cases, the smaller content outfits become worse off. The professors believe:

 Under certain conditions, it is economically beneficial for the dominant content provider to reverse its stance on net neutrality. …  In fact, [it] might actually eke out a higher profit under packet discrimination, since its payments to the ISP for priority delivery might pay off in terms of the additional revenue garnered from consumers that have switched from a rival CP.

Particulariy relevant to policy debates is their conclusion about online markets:

It is likely that the more efficient content provider would become increasingly dominant over time, which makes it more difficult for the less efficient content provider to compete. This is especially true in many online markets, where there is often a large gulf between the market leader and the next leading competitor.

 Professor Bandyopadhyay writes me:

Our results show that the conventional wisdom of CPs being on the side on NN and ISPs being opposed to NN is being upended. ISPs still want to get rid of NN, but now they have an ally on their side – the large Internet companies. We were reminded of a recent article in the Times. That article goes on to speculate that the large Internet companies might be on the sidelines of the NN debate because they “would escape relatively unscathed” by the paid prioritization. Our research shows that not only would some of these large Internet companies escape “relatively unscathed” from paid prioritization, they might actually prosper from such an arrangement. In other words, the large Internet companies can use the competition between ISPs to their advantage. We are obviously very encouraged by the result, since we can now prove the economic incentives of the various players in the debate. Our results also indicate that NN is not just an US-centric issue: large Internet companies would profit from NN being abolished worldwide.

They present a theoretical model which like most economic models is necessarily simplified. That’s why I say above “suggests.” The profs follow academic convention and use the term “prove.” That’s stretching, of course. In D.C. there is a plague of advocacy economists whose models fall apart when you realize what they have assumed. They prove nothing except how clever the advocate is and how many are easily fooled. I’m not saying we have implausible here. Rather, I wince at any assertion that simple models “prove” anything without strong empirical confirmation. Empirical confirmation is likely impossible here because companies don’t release their results with a similar breakdown. Even if they did, the accounting assumptions necessary would make the result uncertain.

12/12 Update Subhajyoti Bandyopadhyay writes me with a further thought: 

In the fixed-line broadband market, where users have a very high difficulty in switching between ISPs, content providers – even dominant ones – are never better off without net neutrality. Which might explain why the content providers – all of them – were united in their stance against dismantling net neutrality a few years back.

 

However, if it is relatively easy for consumers to switch ISPs, as is the case in the mobile-broadband market, a dominant content provider can be better off. Which might explain the change in stance by some content providers now. The only ones who are arguing for net neutrality are the little guys.

 

The abstract is below but unfortunately the paper itself (which I’ve read in draft) is delayed while a journal reviews it. 

Effects of Competition Among Internet Service Providers and Content Providers on the Net Neutrality Debate

 


Hong Guo 


University of Notre Dame

 

Subhajyoti Bandyopadhyay 


University of Florida – Warrington College of Business Administration

 

Arthur Lim 


University of Notre Dame

 

Yu-chen Yang 


University of Florida

 

H. Kenneth Cheng 


University of Florida – Warrington College of Business Administration

November 22, 2014


Abstract:      

Supporters of net neutrality have often argued that more competition among Internet service providers (ISPs) is beneficial for an open Internet and that the market power of the ISPs lies at the heart of the net neutrality debate. However, the joint effects of the competition among ISPs and among content providers have yet to be examined. We study the critical linkage between ISP competition and content provider competition, as well as its policy implications. We find that even under competitive pressure from a rival ISP, an ISP still has the incentive and the ability to enforce charging content providers for priority delivery of content. Upending the commonly held belief that content providers will always support the preservation of net neutrality, we find that under certain conditions, it is economically beneficial for the dominant content provider to reverse its stance on net neutrality. Our paper also makes an important contribution in extending the traditional two-dimensional spatial-competition literature.

 

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