Monday, November 24, 2014

How Neutral Is Net Neutrality?: Keep the Government Out of Internet Regulation

Net neutrality has been making the news a lot lately. Both sides make is seem like if things do not go their way, it will be the end of the Internet as we know it. A couple of weeks ago, President Obama reaffirmed his support for net neutrality. Ted Cruz replied that net neutrality is like Obamacare for the Internet. In his rather amusing video below from a few months back, comedian John Oliver humorously called protecting net neutrality "preventing cable company fuckery." What is it about net neutrality that has people so worked up?

Net neutrality is the idea that both Internet service providers (ISPs) and governments should treat all data, content, platforms, and sites on the internet equally. For proponents of net neutrality, no net neutrality means that cable companies act as "content gatekeepers" and essentially gouge consumers by demanding a toll for an "Internet fast lane." I'm no fan of Big Business, and a lot of that has to do with its collusion and rent-seeking with Big Government, but if we're griping about companies like Comcast have such monopolistic power because monopolies are inefficient, why should we entrust the government with the same monopolistic power? Do we think that the Federal Communications Commission (FCC), the agency that censors expletives on television and hardly has a history for impartiality, is going to permit unfettered access to the Internet? Whether it is health care or education, any sector with heavy government regulation has only resulted in stifling failure. A University of Michigan economics professor conducted a study with one of his graduate students, and found that franchising reform to allow for deregulation of the cable industry resulted in lower service prices (Bagchi and Sivadasan, 2013).

Looking at the economics of net neutrality (also see here), net neutrality is tantamount to price regulation. Whether we're discussing price floors, price ceilings, or subsidies, not allowing for price discrimination via price regulation has a way of distorting the market for the worst, as is shown by a study conducted by the New York Law School (Davidson and Swanson, 2010). For instance, net neutrality can impose costs from any where between $10-55 per mensem per client (Stratecast, 2010).

A tiered Internet system seems to goes against the idea of those who view Internet access as a right. Rather than view Internet as a right, how about viewing it as a good that is paid for based on the amount of bandwidth used or number of megabytes consumed? Since the Internet does not transmit data in generic "bits," all data on the Internet are not created equal. Netflix or Hulu should be charged more because they're transferring larger amounts of data. It's hardly unfair to pay for a good or service based on the quantity or quality consumed. After all, that is how markets work.

Advocates of net neutrality present such dire hypotheticals, like less services, higher costs, limited choices, network discrimination, or the end of the Internet as we know it. The problem is that they are just that: hypotheticals. Even if ISPs have the technological capability to block certain websites, they don't because because it's bad business. Blocking certain websites would mean driving current customers to competitors. As for less competition, the FCC provides data (see Figures 1, 5b, Maps 2-3) showing not only that Internet connectivity is improving, but that most counties have access to multiple providers. When looking at Internet download speed by country, America's ranking is still above many developed nations, and even for the countries ranked above the United States, the OECD points out that they have virtually have no open access rules. Plus, we also need to keep in mind that speed is hardly the only metric for determining quality of broadband consumption. There is also internet affordability in terms of access to entry-level high-speed broadband, mobile accessibility, jitter, and latency.  

The Internet is not a monolithic entity, but rather a decentralized network of networks. To adapt to the ever-evolving technology, the Internet needs to remain as competitive as possible. For there to be sensible regulation of any kind, one would need to point out the market failure, such as restricting customer access to certain sites so they can increase their profit margin. Considering that there is a lack of a consensus of whether such a market failure exists (Hazlett and Wright, 2012), there is no need to implement net neutrality. Freezing in place the business models of today with net neutrality regulation would stifle Internet innovation. The deregulated approach for the Internet has served and would continue to serve the Internet well. We don't need further regulations; we need to maintain a competitive market. Repeal local franchising regulations so that they don't act as a barrier to entry to the market. Create the right climate for businesses to invest and the broadband market will expand even more. America needs to get off the net neutrality bandwagon if it wants to still have a thriving Internet.

5-17-2017 Addendum: The Competitive Enterprise Institute provides a nice primer on net neutrality.

8-23-2017 Addendum: The American Enterprise Institute (AEI) released a paper examining net neutrality rules in 53 countries, and found that net neutrality does not spur Internet innovation. 

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