Nothing Neutral about Net Neutrality: Internet Regulations Will Harm Consumer Welfare

Last year, the New York University Law School research team took to an analysis of the FCC’s net neutrality regulations that is unlike any other to date. The study, finding that the regulation could cost the US economy upwards of $68 billion and more than a half-million potential jobs, was the first to look at net neutrality from a strictly macro-economic perspective. Clearly the results were damning for proponents of the new regulation who had, until then, suggested the new law would benefit consumers without any negative effect to the broader economy.

Making the case for net neutrality (NN) has gotten even harder still in the past few months. Researchers from George Mason University offer new evidence of the damning effects of this dangerous policy.

Thomas Hazlett and Joshua Wright, researchers from George Mason University, set out to examine the FCC’s “no blocking” and “no unreasonable discrimination” rules on both their legal and economic merit. First, the authors point out the absurdity of any attempt to create “neutrality” on the Internet:

“The Market is neutral in that entry is free and that costs and consumer demand interact to set prices… In the FCC’s view, data networks are “dumb pipes” that stick to their assigned task, treating all traffic, all applications, and all providers alike. In reality this system cannot be saved by net neutrality because it never existed.”

Legally speaking, Hazlett and Wright find that the rules are outside the scope and definition of the Federal Communications Commission’s charter. The authors first cite a legal decision denying the FCC the power to enforce net neutrality regulations. The judge in that case said that granting such great power would be “flatly inconsistent with precedent” and would “virtually free the commission from its congressional tether.”

Legal history was certainly speaking out loudly against the presumed FCC power.  The authors at George Mason also found that the FCC was well outside its jurisdiction in dealing with Internet business and antitrust regulation. The authors write, “salient precedent rebukes the FCC’s overtures towards far reaching ancillary jurisdiction over the Internet itself.”  Finally the authors make a constitutional challenge to net neutrality regulations:

 “The NN Order asserts with little explanation and even less precedent that broadband ISPs’ network regulation serves no editorial function within the First Amendment’s purview. This approach overlooks substantial federal First Amendment jurisprudence imposing little to no editorial requirement to entitle a publisher or carrier some First Amendment protection when filtering the content of others. Even this relaxed approach ignores the robust First Amendment protection ISPs enjoy when providing content-related services, such as video services, which likely fall under the NN Order’s ambit. Net neutrality advocates often cite the potential harms of an ISP squelching a rival product’s traffic–or favoring it’s own traffic–through lower or higher data speeds, respectfully. It is relatively simple to envision a First Amendment conflict when the NN Order prevents an ISP from carrying it’s own traffic – it’s own speech – in it’s preferred method.”

The newly released George Mason University research study goes on to examine the economic impact of the FCC’s unfounded regulatory overreaching. The authors point out that the FCC’s entire critique of Internet Service Providers–that their actions will harm consumers–is predicated on just one flawed study.  As the authors suggest, “The Goolsbee analysis [the FCC cited study] does not offer even the beginnings of an economic case for further regulation.”

In order to make the case for further regulation (the type that we see in Net Neutrality) the FCC must prove two things: (1) that vertical integration is substantially harmful to consumers; and (2) that proposed new regulations would “reduce quality adjusted prices for consumers.” The Goolsbee study attempts to prove the first, but fails miserably, and doesn’t even venture into the second. The vertical integration in question here is seen when an Internet Service Provider integrates other services of its own brand and promotes them using the speed on connectivity. The authors argue that this sort of integration is seen throughout the entire world of business regularly and is rarely, if ever, proven to have detrimental impact on consumers. It’s especially unlikely, of course, in the robust and competitive market of broadband internet which sees competitors in the form of mobile telephony, cable, traditional phone companies, satellite internet companies, and now broadband over electrical lines.

Indeed, competition is so robust in the broadband market that the DoJ Antitrust Division used it as evidence that the basic premise of the FCC’s grab at power–that their exists a market failure–isn’t true. From the DoJ statement:

On the empirical side, despite the Commission’s request for evidence of harmful discrimination or behavior… Commenters failed to present evidence suggesting that a problem exists. To the contrary, it appears that the Internet is flourishing without the proposed sectoral regulation. Statistics evidence an explosion in Internet usage in recent years due to new applications and … Between June 2005 and June 2006, the Commission found that high-speed lines increased by 52 percent (or 22.2 million lines).

This new study is one of what I expect to be a flow of similar studies showing the harmful effects of regulation on an economy that has erupted, thanks in no small part to its lack of regulation. The authors point out that, “sound economic analysis, supported by robust and meaningful empirical data, must animate any upcoming debate over net neutrality ␣ as it must with any consumer-welfare- oriented legislation.” Their text is certainly this sort of robust and meaningful data and, if listened to, could stand to do a lot of good for consumers.  “From C Block licenses to cable broadcast, promulgating regulations with obvious protectionist implications and dubious consumer welfare benefits has proven a truly bipartisan affair.  NN follows in this pedigree, privileging certain market participants at the expense of others — and consumers.  Both Congress’s and the court’s rejection of NN is therefore welcome news for consumers at large.”

Zack Christenson is a Chicago-based digital strategist who writes on tech policy.