Discussion Papers

Kenneth R. Carter, J. Scott Marcus, Christian Wernick

Network Neutrality: Implications for Europe

No. 314 / December 2008

Summary

Network Neutrality is a catch-all phrase that emerged in the United States over the pastdecade to reflect a number of potential behaviours that some consider to be anticompetitive. Network neutrality implies that all Internet Protocol (IP) packets should be treated more or less the same, and the debate reflects concerns that they might not bein the future – that a network operator might somehow apply different and anticompetitivetreatment to IP packets (or datagrams) associated with specific services, applications,origins, destinations or devices.

This report seeks to provide clearer answers to several key questions:

  • What exactly is meant by “Network Neutrality”?
     
  • Under what circumstances might it be anticompetitive to discriminate among IP traffic to different services, applications, destinations or devices?
     
  • Why has the issue emerged at this particular time, and in this particular way?
     
  • Why does the debate seem to be so much more heated and intense in the US than in Europe?
     
  • What should be done about Network Neutrality going forward?

The report reviews the economics that underlies the Network Neutrality debate, includingprice discrimination, network externalities, transaction costs, switching costs, twosided markets, and especially the economics of vertical foreclosure. It also briefly reviews the technical aspects of quality differentiation for IP traffic (including packet delay, jitter and loss). It provides background on a number of alleged deviations in the U.S. (including Madison River and Comcast), and assesses the Network Neutrality concerns that have been raised in Europe (for example, by the BBC’s iPlayer). It explores the related topic of wireless Network Neutrality. It reviews the limited options available to U.S. regulators, and compares them to the more expansive palette of options available under the European regulatory framework and under European competition law. The report also considers the ways in which the changes proposed to the European regulatory framework as part of the ongoing “2006 review” might strengthen the hand of European regulators, and at what cost.

A key conclusion is that circumstances in the United States are significantly different from those in Europe. Competition for broadband Internet access is richer in European markets in ways that are highly relevant to Network Neutrality – the average European has a far wider range of meaningful choice. As a result, problematic deviations from Network Neutrality are far less likely in Europe than in the U.S. At the same time, European regulators have far more tools (both ex ante and ex post) to prevent anticompetitive deviations from Network Neutrality, or to deal with deviations once they have occurred.

For all of these reasons, Network Neutrality manifests itself very differently, and much less problematically, in Europe than it does in the United States. Given the very different character of the Network Neutrality problem in Europe, the first line of defence for European regulators and policymakers should continue to be to attempt to avoid the problem altogether by maintaining the competitiveness of the underlying markets. The Commission’s proposals of 13 November 2007 expand modestly on the already considerable tools available to European regulators, primarily by fostering informed consumer choice. This seems to be a measured and appropriate positive step. We see no need for more radical measures in Europe.

Discussion Paper is available for download.

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