Seconds out, the internet gloves are finally off

Well, after many years of fretting about the net neutrality debate, I see that the combatants have now begun the move into battle formation.  Presumably encouraged by the FCC’s recent set-back in its attempt to enforce net neutrality principles, and the FCC chairman’s rather limp response,  Comcast has exploited the virtual vacuum by establishing something like ‘most favoured nation’ commercial terms with Netflix. 

There is no shortage of doom-mongers to proclaim that the (internet) sky is falling but, however controversially, I’d like to put forward a contrary, albeit rather simplistic hypothesis.  Another recent Washington Post article by Timothy Lee is right to focus on competitive dynamics in its analysis of how Comcast and Netflix reached this new negotiation but I would argue that an ISPs’ exercise of market power needs to be regarded in the same light.  Why does Comcast have market power over Netflix – and other content providers?  Simply because Comcast has chosen to invest in the – hitherto – least rewarding segment of the value chain, the local access network.  There is, in principle, nothing to prevent another player - or Netflix itself – exploiting these economic rents if it is prepared to make a similar long-term investment in infrastructure.  It won’t, of course, and the chances are that the wounded FCC will still find some way to minimise rent-seeking by the ISPs but the clash between these leading internet players may yet prove to have been a useful reminder of basic economics.