Net Neutrality – What’s Outside the Gate?

Content purveyors are asking a big political favor from regulators – regulate Internet delivery networks by controlling the speeds and prices those firms are allowed to offer to everyone.  Under a brilliant but cynical choice of name, “net neutrality,” regulations would grant the wishes of one group of technical firms to the detriment of other firms and the public – there is nothing neutral about it and it may eventually bring about 1930s-style regulation that could cripple innovation and competitive pricing.

Content purveyors dominate Internet traffic volumes: Netflix (34% of all Internet traffic), Google (75% of all search and related advertising activity), and video purveyors in general (84% of all Internet traffic). The companies who regularly flood the Internet want Internet delivery firms (aka Internet Service Providers, or ISPs) to invest in faster networks without pricing to recover those investments.  Their wish for cheaper delivery of content to their customers is hidden behind a populist chorus of “keep the Internet free” and “refrain from blocking or degrading websites.”  Some are going further calling on old public utility style regulations for Internet companies.

The inconvenient truth is that market failures like those have not happened — but why let reality spoil an emotion-fueled protest?

In the early 1970s, DARPA invented the Internet, but in the early 1990s, government sought private ownership because colossal investments would be needed to make it better and universally available.  Despite socialist daydreams, the Internet is not owned by the public.  In the US, the physical Internet is a voluntary collection of dozens of backbone operators and last-mile ISPs using cellular, Wi-Fi and WiMax networks, satellite, cable, fiber or plain old copper. There are hundreds of large and small ISPs, including universities, towns, and cable over-builders.

This heterogeneous cluster has dealt first-hand with the difficulty of raising enough capital to build fast networks. Excepting government and school owned-ISPs, they have to collect enough revenue to cover their operating costs –usually by setting prices higher for higher volume and speed, but keeping prices low for normal speed and volume. If they set prices “same for everybody,” normal customers would be forced to subsidize bandwidth glutinous customers, and evidently Netflix and Google would prefer such government-enforced subsidies.

Anyone who remembers the breakup of AT&T has scar tissue from pricing under what was referred to as common carrier regulation (Title II of the 1934 Communications Act). Title II regulation let regulators required the build-out of a telecom network to every corner of the US, and as innovations came along, telecom companies were required to deploy them to every rural and isolated community. Regulators set prices for basic service at levels below cost, knowing that Title II let them recover subsidies by setting prices for attractive services at levels far above cost. That resulted in interstate “access charges” of $0.19 per minute for “long distance” calls, massive subsidy flows into low density states from high density states, and higher prices for businesses than for residential customers for identical services.

Price discrimination was rampant and it had little bearing on real economic costs. Even in 1997, an evening and weekend long distance call within the U.S. cost over 36 cents a minute and dollars per minute internationally. For years, regulators delayed the introduction of news services, like cellular, caller-ID and ISDN data services. Even an inconsequential innovation, like moving services from rotary dial to touch tone, required customers to pay more for the option, even though the cost to the network provider was less. Regulators were not concerned about economic efficiency and market forces. Monopoly was king and innovation for consumer services was at a standstill for decades.

Essentially, it was a consumer nightmare and a telecom lawyer’s gravy train. Today, without onerous regulations, long distance and cellular prices have fallen close to zero cents per minute, value-added services are usually given away as part of the package, ISDN was eclipsed by broadband services running about 100 times faster or more today, and competition is rampant in the services, equipment and apps markets. In the end, the old regulations did little to help consumers.

Now regulators are considering whether or not to apply the 1930s-style Title II regulations on broadband services. The parameters of the 1996 Telecommunications Act leave somewhat different options, but if regulators use Title II to prevent Internet service prices from recovering some costs, costs will be shifted to others and regulators will have created subsidies that burden the rest of the public, as well as the economy which are so highly dependent on the Internet. If regulations begin to limit product differentiation or require ubiquity in speeds and service, then incentives to innovate could be affected in the core network and edge application services.

When a lobbying campaign is about enlisting regulators to hobble commercial rivals, we should be wary. “Net Neutrality” is clearly a Trojan Horse, and consumers need to be warned.

Alan Daley, who writes for The American Consumer Institute Center for Citizen Research, contributed to this piece.

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