Assigning Broadband Rights: Could Private Control of Access and Standards Lead to a Balkanization of the Internet?

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SOME INTERNET SERVICE PROVIDERS (ISPs) and portals like Yahoo! and Earthlink are concerned that cable television and telephone companies that now provide residential high-speed Internet access may branch out into the provision of content or enter into exclusive deals for content. Their fear is that this might result in current ISPS and content providers being cut off from access to existing and new customers.

Meanwhile, some legal scholars have expressed concern that the provision or control of content by local broadband providers will create incentives for them to adopt proprietary technical standards that would, even if inadvertently, exclude certain kinds of content and information sources. They worry that this would undermine the very incentive and opportunity for innovation that led to the creation and growth of the Internet.

Those concerns have led to various policy proposals. For example, cable television companies providing broadband Internet access might be required either to stay out of the content business or to accept transmission requests from all ISPs without discrimination. My Stanford colleague Larry Lessig's "net neutrality" proposal, although not well-defined, would seek to preserve what he sees as an existing "commons" in which Internet technology and standards are neutral among service providers, users, and content.

Solutions to complex policy debates like these must incorporate ideas from economics, law, and technology. One way to integrate and focus those approaches is by using the idea of property rights. In the present case, we can think of the right to control access to a local broadband system or the right to determine the technical standards that describe which transmissions will or will not be processed for local distribution, as property rights. Such rights can then be assigned to someone, or to some group, or to no one. We then ask which of those assignments produces the greatest net economic benefit for society, and how that assignment might be accomplished.

The policy issue of assigning rights of access to local broadband facilities is no mere academic exercise, partly because of the inconsistencies, noted above, in how technologies and providers are treated. Furthermore, various commercial interests with a stake in the debate have invested in advocacy by lobbyists and economists. The issue also remains alive because of academic support for a collective approach in which no facilities investor would control access.

PROPERTY RIGHTS AS COMMODITIES

Economics students learn about the Coase Theorem. What they remember, usually, is Nobel laureate Ronald Coase's argument that property rights will end up in the hands of the most efficient owners or users if such rights are clearly defined and can be traded freely and cheaply.

The Coase Theorem is an elegant extension of the concept of competitive markets and the power of the "invisible hand." Indeed, the idea is not limited to property rights, but extends to any legal entitlement. The key insight is that legal entitlements are, for some purposes, best understood as economic goods to be bought and sold in the market. Just as competitive markets can allocate other scarce resources efficiently, they can do so with rights.

The Coase Theorem has two policy implications. The point that people tend to remember is that laissez faire policies generally advance consumer welfare. The other implication, less often remembered, is that when transactions are not cheap and easy, it is important to assign property rights as nearly as possible to their most efficient users. Otherwise, unless the hard-to-transfer rights happen to land naturally in the hands of efficient users, opportunities for welfare gains will be lost. The recognition and initial assignment of property and other legal rights are, of course, roles for the state.

Determining who are the most efficient holders of a given property right is not easy, which is why it is a relief to let the market work out the answer whenever possible. …