Faucets and Tubes

Since we're discussing ancient history like Carterfone, let's bring up some more. In the BPL Ham post I mentioned essential access bottleneck monopoly; here's what that's about.

When discussing net neutrality, it's useful to distinguish two types of network access, as a professor from U.Penn has done:

"Access" has been and continues to be an important concept in regulation and antitrust. In this paper, I consider two interrelated access concepts: access to essential facilities (access¹) and access via interconnection to customers (access²). Neither concept is new; some industries are characterized by one or the other, some industries characterized by both. I argue that the public policy implications of each are rather different, and relate this difference to antitrust treatment of the "new" economy.

ACCESS != ACCESS¹ + ACCESS², Gerald R. Faulhaber, 2002

BOTTLENECKS AND BANDWAGONS: ACCESS POLICY IN THE NEW TELECOMMUNICATIONS, Gerald R. Faulhaber, 2002

In the second paper, he refers to the same two concepts as bottlenecks and bandwagons, respectively. Maybe we should call them faucets and tubes to match current terminology.

Essential Facilities Access, or Bottlenecks

Power companies, telephone companies, cable companies, airports, harbors, some railroad depots, etc. have a natural monopoly because they have essential facilities, i.e., a bottleneck that is not practical for rivals to duplicate. Such an essential facility is usually physical, and there are different degrees of difficulty. A shipping harbor may be particularly difficult to duplicate, because it is determined largely by geography, while telco local loop is technically trival, yet economically difficult, due to "extreme economies of scale".

Interconnection Access, or Bandwagons

Telephone long distance companies, railroads, airlines, etc. have network effects in which the value of a company's network depends on the number of customers, and interconnection among companies is valuable because it increases the number of customers reachable directly or indirectly: that's the bandwagon. If such a company has the majority of a market, it may choose not to interconnect with competitors because it already has the biggest and thus most valuable network, and interconnecting with the competitors would give them more value than the biggest player would gain. This kind of natural monopoly is familiar from telephone companies: fairly early there were local monopolies on interconnection, and then there was AT&T with the biggest network.

Different but Related

Essential facilities (bottleneck) access and interconnection (bandwagon) access are indeed not the same, but they've often been related. To get universal long distance, governments basically granted AT&T local essential facilities monopolies. Of course, this also gave AT&T an interconnection majority.

AT&T divestiture in the 1980s was about separating these two types of access into different companies so as to promote competition. The 1996 Telecommunications Act required the holders of the local loop monopolies to grant access to their essential facilities to competitors. As we know, both of these changes are rapidly being undone.

Faulhaber's paper appears to me as a long rationale for why telco local loop isn't really an essential facility any more, neither for voice nor for Internet, and thus government should not intervene. Some of his criteria seem to require predicting the future, thus leaving the monopolists in a position of wealth and political influence that tends to squelch any other entrants regardless of the technical feasibility of alternatives. This is what I was refering to in the BPL Ham post. However, there's not much likelihood of governments doing much to do away with the telco monopoly, regardless of whether it's natural or a legislative creation.

Cable company facilities don't seem to have ever been actually formally treated as essential facilities in court cases or legislation, but there are cases that describe them in terms that amount to the same. The same arguments as to whether they're a natural monopoly apply as for telcos.

Network neutrality originated because the first big commercial ISPs were not telcos and thus weren't subject to the legislated natural telco monopolies. Most of the big content providers or participation facilitators in the Internet today grew up in an Internet with open peering and flat bandwidth rates and want to keep it that way, so net neutrality is basic to what they do. Net neutrality is not, of course, basic to what the telcos do, as we saw with Carterfone.

-jsq