Neutrality in Question, Protection of Corporations Possible
Google’s response to the Federal Communications Commission’s Net Neutrality Notice of Inquiry was telling. By focusing on market power of Internet access providers, they call attention to their own. People are coming to realize that Google is trying to quarantine any business model that contains any business conduct that is disadvantageous to them. Eventually, those now supporting Internet regulations will realize that they too are exposed to Google’s growing power and 61 percent revenue growth in the last twelve months. Google and other major web-centric companies also have dominating shares in search, transactions (PayPal), online ad revenue, file sharing apps, etc. and have spent billions staking out first mover advantages in dozens of other “emerging” markets. We find the Internet regulation fight to be one of self-interest, not consumer interest, in which dominant firms seek to impose restrictions on potential rivals and limit future competition.
Calling the Kettle Black?
In its comments to the FCC proceeding on proposed Internet regulations, innocuously referred to as net neutrality rules, Google has focused its argument on the market concentration within network providers. By doing so, however, Google and other major web-centric firms call attention to their own market dominance in search, software, online auctions, online sales, etc.
The accompanying table (on the next page) maps firms active in the re-regulation debate against selected indicia of financial performance. The indicators are chosen to allow a rough comparison of how financial markets assess market power, size and prospects of web-centric firms to the assessments of advocates of broadband re-regulation. If significant amounts of market power are present and being exercised, it would show up in financial results. If access providers have monopoly power, we should see monopoly returns to show for it.
As the table below shows, there is no basis in the table for concluding that broadband providers are harvesting supernormal financial returns from the exercise of market power. Indeed, comparing the performance of different web-centric firms using standard measures of “profit” (return on investment and net margins), size (the value of outstanding stock), or investor assessments of risk and growth profiles (stock price to cash flow) paints a picture that contrasts sharply with the one depicted in the casual characterizations of regulation advocates generally and “Consumer Groups” in particular.
Selected Financial Indicators for Web-Centric Companies*
Market Cap ($B)
Return on Invested Capital
Net Profit Margin
* Source: Thomson Financial Data collected June 25, 2007 at http://financials.thomsonfn.com/financials/
The table warrants careful study, but as a matter of first impressions it suggests that telecom companies have greater sales, but tend to have lower, and in no sense abnormal, profit margins in comparison to the “edge” companies. Cable profitability as measured by net margins is higher, but returns to equity shareholders is lower than for telecom companies; and, both are well below the earning performance of other web-centric firms — Google, Microsoft, eBay and Amazon — each of which dominates its core market space.
We have added a column – price to cash flow – to indicate investors’ expectations about future performance of each of the firms. If investors believed there to be unexploited monopoly power that does not show up in current earnings performance, that fact would should up in indicators of growth expectations, such as what they are willing to pay for a dollar of cash flow. The huge disparities in investor expectations reflected in the spread between the ratios for “edge” companies and for infrastructure companies give the lie to any claim that infrastructure companies have “dormant” monopoly power that can reasonably be expected to be used in the future.
It is uncertain how markets will develop, what business strategies will be tried and succeed or fail, and where Google’s interests will or will not reflect consumers’ interest. In that context, the practical intent and effect of Google’s plea for ex-ante regulatory protections is the equivalent of issuance by government of an insurance policy – one that protects Google from potential threats, but requires the premiums to be paid by consumers and other stakeholders in the internet value chain.