Life support for unaffiliated ISPs? Independent ISPs are asking for government protection in the broadband era.

DURING THE FORMATIVE YEARS OF THE Internet, thousands of Internet Service Providers (ISPs) offered dial-up service to dispersed telephone subscribers over traditional telephone lines. Over time, the service became concentrated in a handful of large ISPs, including America Online, Juno, MSN, and EarthLink. Those carriers were successful for two reasons: they provided a higher-quality service (e.g., offering higher ratios of moderns per subscriber) and they bundled premium content with their access service.

In the last several years, however, narrowband ISPs have been decimated by consumer migration to higher-speed broadband services. As of December 2004, 35.3 million U.S. residential and small business customers--or about one-third of Internet subscribers--subscribed to a broadband service. The shift to broadband has forced dial-up service providers to consolidate and exit the market unless they can find some way to provide broadband services over someone else's network.

Narrowband ISPs are now pressuring the Federal Communications Commission and other telecommunications regulators to implement policies that would breathe life back into their businesses. But the consumer welfare justifications that they offer for government intervention are dubious. Although the independent ISPs were instrumental in narrowband Internet access, the same cannot be said for their contribution to the growth of broadband. In this article, we explain that the dial-up model cannot be replicated in the broadband era--that is, independent broadband ISPs simply do not currently contribute to the value of the service. If those companies have valuable content to offer broadband subscribers, they can make it available to subscribers without mandated access to the broadband service providers' networks. Currently, there is simply no reason to worry about access to unaffiliated content on the Internet. Broadband is thriving without independent ISPs.

Vertical integration of modern broadband network operations and the retail service offering is likely to generate societal benefits because of the economies of scope in delivering a quality service. Vertical relationships, whether through ownership or close contractual relationships, allow network providers to develop innovative products that complement current products in a manner that can be advantageous to platform providers (even duopolists) and consumers. Mandatory access for multiple unaffiliated ISPs to a broadband network--a local telephone network or a cable television system--simply creates unnecessary transactions costs, leaves upstream concentration intact, and decreases the incentives for a firm to invest in or develop alternative networks.