Update: The Federal Communications Commission on Thursday (Dec. 14) successfully voted to repeal the Open Internet Order, an Obama-era rule protecting net neutrality. Split along party lines, the vote hands FCC chairman Ajit Pai a major victory and potentially allows US telecoms to block, slow, or charge more for certain content. Read more about the decision and opposition to it here.
Voters of every political persuasion agree: we need net neutrality (pdf). The political debate is how to enforce it.
Here, the divide is stark. Democratic policy makers assert the threat of regulation is needed to keep the telecoms in check. Without it, quasi-monopolists can raise prices, extort companies trying to reach their customers, and create anti-competitive internet “bundles” similar to cable TV. Republicans argue the market needs to operate more freely so companies can innovate. Regulators such as the Federal Trade Commission (FTC) will catch abuses of voluntary net neutrality principles as they arise, they say.
We don’t know what will happen if the repeal of current net neutrality rules goes forward (it already faces legal challenges). It’s never been tried. In some form or another, the Federal Communication Commission (FCC) has enforced net neutrality since the 1990s. But we can look to economists for predictions. They have a few arguments to suggest that relaxing net neutrality rules might improve the market for broadband services. Unfortunately, the most vocal proponent for eliminating them, FCC chairman Ajit Pai, has not made them. In public statements, Pai, a former lawyer for Verizon, has argued that broadband investment is declining because of the 2015 Open Internet Order “micromanaging the internet,” and the US needs a return to “light-touch rules.” Neither of these statement is entirely true.
Investment has dropped slightly over the last two years, but it’s not clear why. Telecoms (as industry CEOs freely admit) do not change their investment plans based on net neutrality rules, and have show no inclination to invest windfall profits if they are changed. As for the “light-touch” regime of the last two decades, it was always backed up by a very big stick of utility-style regulation, an authority that the FCC has steadfastly refused to relinquish, until now.
Yet good faith arguments about net neutrality tradeoffs exist. Quartz organized some of the main reasons being cited in support of repealing net neutrality, as well as their limits.
Partisans should pause before claiming victory, warn economists publishing this spring in the Journal of Economic Perspectives (pdf): “The thrust of the conclusions from economic analysis tilt against simplistic declarations in favor or against net neutrality,” they wrote. “This suggests that bold and sweeping recommendations and interventions, given the current state of empirical knowledge, have a substantial chance of being misguided.”
Less regulation equals more investment
This is the central justification cited by the FCC and industry advocates for repealing net neutrality. They argue that regulatory overreach has dampened investment in rural broadband and underserved communities. Even a critic of net neutrality, New York University economist Nicholas Economides, concluded in a 2012 study that under certain conditions “the ability to price discriminate increases [ISP’s] incentives to invest” (pdf).
Jonathan Banks, a law and policy expert at US Telecom, also points to Europe, which has more regulation than the US, and where infrastructure investment is lower. He says declining broadband investment in the US was plausibly if not definitively linked to new net neutrality rulings in 2015. For US investment trends, he said, “so far, nothing looks good.”
Critics of this argument say it ignores telecoms’ actual investment in infrastructure (not clearly correlated with net neutrality decisions) and industry executive’s own assertions. In 2005, a Verizon spokesman said net neurality principles would not stall investments in their network (“Our plans haven’t changed“). Inn December 2015, AT&T’s CEO told investors the FCC’s decision to reclassify them as a utility under Obama (Title II) after years of uncertainty would not hinder future business plans (although he later amended this in a January earnings saying Title II was “suppressive to [industry] investment,” even it did not affect AT&T’s infrastructure spending which rose 4.5% in 2016 over 2014). This year, Comcast also claimed the FCC’s treatment of broadband providers “harms investment and innovation” even as it increased its investment by 10.2% in the first quarter of 2017.
Different pricing models will spur competition
This is markets 101. Companies trying out new business models and products forces other firms to compete. Prices fall, quality rises, and customers benefit. Heavy regulation often favors incumbents (see AT&T), therefore relaxing net neutrality rules deters new entrants.
“These [net neutrality] regulations are plucked from a policy regime that created anti-competitive mischief and stifled innovation,” Thomas Hazlett, a former FCC chief economist, argued in the New York Daily News. He points to the fact that internet services such as Skype and FaceTime are only possible because of a 2004 deregulation ruling (pdf). Something similar happened with T-Mobile, argues Ben Thompson of Stratechery. After the Department of Justice blocked its sale to AT&T in 2011, the company began to compete by rolling out new features such as no-contract pricing and phone financing forcing the rest of the industry to follow. That could be a model for the broadband industry.
That’s possible, but is by no means assured. Very limited competition exists among internet providers in many markets. No competition at all exists in many more. At the moment, more than 56 million households lack any choice for their wired 25MB broadband connections. Relying on competition in this environment is risky, critics charge.
Over-regulation is costly
This argument is simple: the costs of regulation are clear, and the benefits are not. This argument, favored by some economists, posits that in the absence of clear harm, regulators should take on hands-off approach. Who knows what people will come up with? Those like Tyler Cowen at Marginal Revolution say that they don’t trust the FCC to fairly administer rules under Title II, and would prefer to entrust net neutrality protections to the market and the FTC: “I would rather take my chances with the market, even with some monopoly power at the cable end.”
Instead, argues Thompson of Stratechery we “should stick to ex-post instead of ex-ante until there is compelling evidence of systematic abuse.”
What’s the counter-argument? Telecoms have been held in check not just by regulators, but by the threat of regulation. There is a history of net neutrality abuse (although US Telecom says the number of incidents is small, relative to the size of the industry). The advocacy group Free Press counts ten significant violations of net neutrality since 2005. Back in 2014, the communications firm Level 3 accused six internet service providers (ISPs) of degrading internet services for companies like Netflix, a process known as paid peering, to secure payments. “They are deliberately harming the service they deliver to their paying customers,” the firm reported. “They are not allowing us to fulfill the requests their customers make for content.”
The repeal will remove much of the federal government’s authority to deal with these issues.
Today’s robust internet is the result of an unfettered market
It’s true regulators have managed to beat back ISPs attempts at bad behavior in the past. The two most prominent cases directly related to net-neutrality were short-lived. One was an attempt by internet provider Madison River Communication to block a competing Voice over Internet Protocol (VoIP), which was stopped once the FCC stepped in. The other was Comcast’s undisclosed throttling of Bit-Torrent, which was halted after a public outcry.
The Federal Trade Commissions could avert some abuses. The FCC’s draft proposal calls for the FTC to (pdf) “protect consumers online from any unfair, deceptive, and anticompetitive practices without burdensome regulations, achieving comparable benefits at lower cost.”
But it’s worth noting that the Title II authority (stripped away under Pai’s proposal) is the only way the FCC can claim legal right to combat net neutrality violations, according to the courts, and it was crucial leverage in earlier decisions. It’s also not clear if the FTC will have authority to enforce net neutrality principles since it relies on policing company’s voluntary commitments, and anti-trust and anti-competitive authority, neither of which would apply to many net neutrality issues.
The fact is we don’t really know how telecoms will behave if freed from these regulations in the internet-era because we’ve never really experienced it. The internet exists in its current form today because it took shape under the four principles of net neutrality the FCC formally articulated in 2005.
Consumers are entitled to access the lawful Internet content of their choice.
Consumers are entitled to run applications and services of their choice, subject to the needs of law enforcement.
Consumers are entitled to connect their choice of legal devices that do not harm the network.
Consumers are entitled to competition among network providers, application and service providers, and content provider
Under the repeal proposal, much of this will become voluntary.
Discriminating on price leads to increased innovation
Incumbents already have built in advantages to favor their content: they can pay for private networks (Google) or install their own servers within ISP’s infrastructure (Netflix). This argument contends that startups, instead of worrying about getting shut out by preferential pricing for packages, should welcome the possibility of differentiating through whatever programs internet providers might offer. The chance that they’ll be shut out entirely is low since ISPs simply want the most users as possible, and degrading their selection is bad for business.
It also precludes charging less to households that only use basic internet services like email. Companies that want fast internet can pay more while those who don’t need it can pay less, argues Michael Katz, chief economist at the FCC from 1994 to 1996. A 2016 review of economics research on internet regulation found these households would probably be better off without net neutrality.
The counter? “Right now we don’t see companies like Microsoft, Google, and Amazon coming to AT&T begging for prioritization,” Nicholas Economides, an economist who studies net neutrality at New York University told Quartz. “Instead, we see AT&T coming and saying we want a new revenue stream, so we can’t create artificial scarcity and make more money.”
Don’t let agencies seize authority. Let Congress do it!
US rules on “network neutrality” have flipped six times in the last decade. The FCC, under a future administration, could reclassify telecoms as utilities yet again. Congressional legislation could solve this problem by laying out clear guidelines and agency authority, so this argument goes. “Only Congress can put net neutrality on a sound legal footing,” argues Berin Szóka, president of the think tank TechFreedom.
Unfortunately, the legislative body has been paralyzed for years when it comes to ambitious bi-partisan bills. That doesn’t seem be changing anytime soon. Too bad, say advocates. It’s better to force the issue with Congress that overextend the FCC’s authority.
Privately, even net neutrality advocates say a clear decision by Congress could clear up the matter. But, they charge, net neutrality is too important to be held hostage to Congress’ dysfunction and agency regulation is up to the job. We’ll find out soon which argument wins out.