The Strange Persistence of Net Neutrality

The Strange Persistence of Net Neutrality
June 5, 2012

Eduardo Porter’s May 8, 2012 article for the New York Times, “Keeping the Internet Neutral,” got a lot of people in the communications policy community talking. Porter suggests more regulation to mandate “net neutrality” will be necessary to keep the Internet free and prosperous.

Net neutrality is very controversial. Countless political leaders, economists, policy experts, and legal scholars have criticized the idea as harmful to the Internet and consumers. In fact, net neutrality is so controversial some Internet service providers have challenged the Federal Communications Commission’s authority to promulgate regulations mandating it. Given the discord, why does the call for net neutrality persist?

First, some proponents are trying to use net neutrality to gain a competitive advantage. Porter points out some companies, such as online video service companies, are concerned about potentially having to pay for Internet bandwidth their services require. Thus some of these companies have decided to form political action committees to support candidates for office who favor net neutrality. These companies are also lobbying officials and building coalitions to support such a regulatory scheme.

Ignoring Basic Economics
What Porter fails to mention is that some of these online video-service companies naturally have a strong incentive to fight to protect their business model of streaming high-quality video over broadband networks built and maintained by other businesses. Their success has generated billions in annual revenues by piggybacking on the high-speed broadband networks built with billions of dollars in investment by Internet service providers.

These online video services currently don’t pay any charges for using broadband networks, even though their traffic accounts for most of the Internet traffic during peak hours.

Second, Porter and other net neutrality proponents ignore basic economics. Porter’s article bemoans a lack of competition in the broadband marketplace, saying most Americans can choose only between a cable and telephone company for high-speed service.

Although the broadband marketplace may not be a textbook case of perfect competition, it is (to borrow an economics term) workably competitive, as many consumers can actually choose between telephone, cable, satellite, wireless, and even electric utilities for high-speed Internet access. Moreover, as technology advances, so will the choice of broadband access and quality. Industry leaders and experts already predict, for example, that wireless technology is the “future of broadband.”

‘Requisite Financial Incentives’
Further, Porter ignores the high, prohibitive costs that net neutrality imposes. He writes that “[i]n the era of dial up Internet, [government regulations] ensured that phone companies allowed rival Internet service providers to reach their customers.”

Porter also speaks critically of government inaction in communications industry and what he views as “wrong calls” in decision-making. But Porter fails to mention that it was not until the government dropped these costly open access rules that Internet service providers had the requisite financial incentives to invest in high-speed broadband networks that consumers enjoy today. Deregulation and regulatory modernization led to more, better broadband, not less.

Finally, regulations like those embodied by net neutrality maintain government as the middle-man in the online world, a place that has traditionally been free of regulation.

Technological change, competition driven by consumer demand, and basic economics will ultimately lead to the undoing or irrelevance of net neutrality. As Adam Thierer of the Mercatus Center puts it, “[S]omething must cover the significant fixed costs associated with broadband investments if you hope to sustain those networks.”

We are already seeing signs of this as consumer preferences change and new business models are developed. Until then, expect to see continued defenses and challenges to net neutrality at every turn. 

John Stephenson (jstephenson@alec.org) is director of the Communications and Technology Task Force at the American Legislative Exchange Council. Learn more at http://www.alec.org/.

Internet Info

“Keeping the Internet Neutral,” Eduardo Porter, New York Times, May 8, 2012: http://www.nytimes.com/2012/05/09/business/economy/net-neutrality-and-economic-equality-are-intertwined.html

“Net Neutrality: Prevention Worse Than Cure,” John Stephenson, InfoTech & Telecom News, October 28, 2011: http://news.heartland.org/newspaper-article/2011/10/28/net-neutrality-prevention-worse-cure

    “Netflix Takes up 32.7% of Internet Bandwidth,” John Wasserman, CNN Tech, October 28, 2011: http://www.cnn.com/2011/10/27/tech/web/netflix-internet-bandwith-mashable/index.html?hpt=hp_t2

“Network Access Regulation 4.0,” Hance Haney, Technology Liberation Front, May 11, 2012: http://techliberation.com/2012/05/11/network-access-regulation-4-0/

“More on Net Neutrality, the Importance of Business Model Experimentation & Pricing Flexibility,” Adam Thierer, Technology Liberation Front, May 9, 2012: http://techliberation.com/2012/05/09/more-on-net-neutrality-the-importance-of-business-model-experimentation-pricing-flexibility/