Excerpt of the Week – Tim Karr’s Nutty Net Economics

by Mike Wendy on September 13, 2010

Tim Karr of the Free Press seems to think that AT&T liked Net Neutrality regulations so much for its merger with Bell South that the company should be just fine with any anti-prioritization regs imposed by the FCC via its Open Internet / Net Neutrality proceeding (see Karr’s diatribe here).


The following excerpt from Karr deserves some closer scrutiny:

For two years, the company operated under Net Neutrality rules as a condition of its merger with Bell South. Under that agreement, AT&T said that it would not “provide or sell to Internet content, application, or service providers … any service that privileges, degrades or prioritizes any packet … based on its source, ownership or destination.”

Under these conditions, the company increased investment in new networks and grossed profits in the tens of billions of dollars – without prioritization.” (emphasis added)

What Does Karr Want:

  • Net Neutrality / Anti-Prioritization Rules Regardless of Marketplace Realities – Karr flippantly surmises that because AT&T once labored profitably under onerous Net Neutrality / anti-prioritization rules during the AT&T / Bell South consent decree, they should be made to do it again.  In his view, it wasn’t such a problem then, so what’s the harm if they’re imposed now?

Media Freedom Analysis: 

  • Karr Calls for Internet Success to Be Perpetuated through Regs, Not Marketplace – Karr simultaneously decries corporations like AT&T that have successfully built the Internet, while at the same time urging regulators to enshrine the Internet’s success through onerous rules and regulations – a very ironic position given that the Internet’s explosive growth occurred exactly because rules were absent.  
  • Karr can’t get over the fact that profit is a powerful (and moral) force that brings people / companies to the table to provide services desired by the marketplace.  The unregulated Internet, which has enhanced the chances of making a profit in this environment, has brought immense resources to the medium, resulting in the great success it is now.  Core and edge innovators have thrived – and importantly, consumers / society have benefited – being motivated in no small measure by the profit motive.
  • To correct the “immorality” of the profit motive, Karr wants to supplant it with heavy-handed regulations.  Ironically, a favorite method of his is the consent decree, one of the most corruptible and lopsided policy tools known to man.  It allows the government to extort concessions that it could not otherwise directly obtain through operation of the law.  On the whole, it’s about as friendly as a “negotiation” with the mob.  Needless to say, it is repugnant to Democracy.
  • Karr Willfully Blind of Consent Decree’s Cost – The cost of the consent decree – i.e., its Net Neutrality and anti-prioritization rules – was indeed a problem then, yet something that could be calculated.  Among other factors, it was based on a time limitation; the proscriptions would ultimately end (which they have).  What was not figured into the decree was the cost of an engorged Net Neutrality and anti-prioritization regulatory schema, which will result if the FCC’s “Third Way” goes through.  Nor was it based on the FCC’s potential to regulate the wireless Internet (which will affect the hugely popular iPhone), something that was not formally on the table until last October, years after the consent decree was negotiated.  While the consent decree was in effect, Net Neutrality and anti-prioritization could be dealt with.  Now, it’s a whole different ballgame.  The two timeframes and the effect of rules, then and now, are apples and oranges, completely unrelated.   Karr’s surmise simply does not apply; it is an economic non-sequitur.
  • Karr’s Math Misleading, Anti-Corporate Ad Hominem – It is virtually impossible to separate how much, if any, profit was touched / affected by the anti-prioritization concession in the decree.  Consequently, Karr’s figures purposely mislead and conflate the growth of the company, which was clearly affected by a myriad of other factors, not the least of which was the merger itself.  He traffics in such ad hominem because it’s quick math for his zealots to understand, even if it is wrong; he is not concerned about details if excising them means he can more easily stir up his troops.        

There Is a Silver Lining:

  • Consent Decree Circumspect & Limited – Like any agreement, the Net Neutrality and anti-prioritization rules within the consent decree have timed out.  The company – now free from its anti-prioritization burden – is now able to economically price and differentiate its offerings as it sees fit.  It should and must.  This will result in better offerings for consumers and content providers.  Moreover, it will bring others into the marketplace to provide alternatives.   
  • Karr Willfully Ignorant of Economics – Karr advocates banning one of the most common and effective means that businesses use to compete – e.g., price and service discrimination.  The Internet, while “special,” also adheres to the laws of economics.  If Karr and his ilk have their way, however, his blueprint will doom the Internet to 19th-Century innovation and service quality.  Such efforts will eliminate integral pricing and other signals, which spur competition and new service offerings into the marketplace.
  • Policymakers Appear Hip to Karr’s Rips – With the recent Google / Verizon legislative proposal, as well as Congress’ calls to more actively shape Internet policy, it appears that agency policymakers are taking a much needed deep breath, slowing down their needlessly hasty regulatory process.  As recently witnessed in the FCC’s further inquiry into its Net Neutrality proceeding, they seemingly realize that Karr’s arguments greatly (perhaps, purposely) minimize the role of the marketplace and economics towards spurring the growth of core network facilities.  If the core is unreasonably thwarted from growing because of unwise policy proscriptions (as per Karr’s blueprint), edge innovation will be adversely affected, too.  A result such as this remains at odds with balanced policymaking.        
  • Policy Outstripped by Technology Can Impose Harmful Costs – The continual onslaught of technology can greatly increase the cost of public policies to consumers / the public; such rules can only guess at what may be offered down the road and are never able to take into full-effect non-linear jumps like the iPhone and its market-changing popularity, etc.  Karr’s suggestion that time does not matter (both as to the consent decree itself, as well as to the advance of technology) makes his position nonsensical and more than likely unsupportable by a majority of the commissioners now at the agency.  The FCC is already under the gun to arrive at a well-reasoned decision on Net Neutrality (even though any such decision has been self-imposed).  If the Commission followed Tim Karr’s plan, it would be taking an approach to Internet growth that runs contrary to how the medium succeeded for Americans.  Such a move, shorn of sound economic / marketplace arguments, should be rejected by the Agency.  To do otherwise would represent an administrative-state tyranny not seen since the times of FDR.        

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