You may have seen some short news stories this morning about a new report issued yesterday by the Federal Trade Commission about Net Neutrality. It was in all the papers, if not in great length.

It's a cinch that all the lobbyists for the telephone and cable companies saw it and are even now spreading it around Capitol Hill because FTC Chairman Deborah Platt Majoras is taking a skeptical view of the issue, just as she did a year ago.

Every once in a while, it's a useful exercise to look under the hood and to see how those facile conclusions in the headlines about the FTC urging caution on Net Neutrality were derived. Just a warning -- it's not pretty.

The Federal Trade Commission staff labored mightily to produce a report on Net Neutrality that restated the conclusion Majoras announced last year. In a speech Aug. 21, 2006, she said: “I urge caution in proceeding on the issue.” In the report issued June 27, 2007, the staff said, “We advise proceeding with caution,” a word that shows up repeatedly.

No one who favors an open, non-discriminatory Internet expected much from this report. However, it was possible to be disappointed just the same. They started with the correct premise that consumers in terms of broadband access “have revealed a strong preference for the current open access to Internet content and applications.” They then proceeded to ignore that basic finding for the rest of the 165-page report. Instead, there was no original research on the state of the broadband market. Instead, there were all sorts of justifications about how discriminatory behavior can benefit telephone and cable companies.

The staff did no original research on the state of competition in the broadband market. Then they proceeded to accept the arguments from the telephone industry that competition is on the way in the broadband market, citing the emergence of Wi-FI, and looking to the Federal Communications Commission (FCC) for data on prices and deployment.

The staff dismissed rather abruptly the one concrete example we have of Net Neutrality language, from the AT&T-BellSouth merger. The report quoted one industry representative (Bob Pepper from Cisco) as saying it would hurt competition and noted that two FCC commissioners called the language irrelevant to the merger. End of discussion.

Buried deep in the report is the flawed analysis that led to the conclusion of caution. For example: “Even assuming discrimination against content or applications providers took place, moreover, there remains the question – also unanswerable in the abstract – whether such discrimination would be harmful, on balance, to consumer welfare.” The report then goes on to posit that discrimination “may facilitate product differentiation, such as the provision of Internet access services designed specifically for certain product population segments or other audiences with specialized preferences.” Coming from an agency that purports to protect consumers, that logic is astounding.

What would the benefits be? Mostly, the FTC suggests ways that the telephone and cable companies could have new ways to make money from content and applications providers. Or lower-income subscribers could be charged lower prices, subsidized by “prioritization revenues” much ad supported e-mail services now provide free email accounts. Nowhere is there discussion of what the consumer gets out of the deal.

The FTC report does suggest that if the telephone and cable companies somehow prioritize their data flow which “could lead to the intentional or passive degradation of non-prioritized data delivery over broadband networks.” The staff also recognizes that data prioritization could “enable exclusive deals for priority that, if combined with inadequate delivery of non-priority data, would hinder the traditional ability of every end user to reach every content and applications provider through a single Internet access agreement.”

That sounds reasonable, but what conclusion is reached from those possible conditions? The staff is “unable to determine in the abstract the net effect on consumer welfare of the various forms of data prioritization that may be pursued in the marketplace.”

In addition to the dubious discussion of “prioritization,” there is an equally dubious discussion of “differentiation.” The report makes no distinction between “differentiation” and “discrimination.” Once again taking the side of the telecom companies, the FTC staff observed: “Broadband providers that cannot differentiate their products or gain new revenue streams may have reduced incentives to upgrade their infrastructure.” The providers, of course, can differentiate between products. They do that now. They shouldn’t be allowed to play favorites.

The staff also argued that regulation aimed at guaranteeing a free and open Internet “could actually erect barriers to new content and applications that require higher-quality transmission.” The example the staff gives is that a new entrant into streaming video “might prefer to purchase a certain quality of service from broadband providers, rather than invest in server capacity and other resources to provide good service on its own.” That example has nothing to do with Net Neutrality and nothing to do with erecting barriers.

As the representatives from telephone and cable companies distributing the FTC report, and their spin, around Capitol Hill and centers of policy analysis, astute observers should take a closer look at the details before endorsing the conclusions. With this kind of twisted analysis, it’s no wonder the FTC staff urged caution. Had their examination of the problem taken a more direct path, the conclusions would have been clearer.