Thursday, February 12, 2015

The Folly & Futility of Classifying Internet as a Utility Under Title II

The Federal Communications Commission (FCC) recently confirmed that it was going to vote on net neutrality rules later this month on February 26. The chairman of the FCC wants to use Title II of the Communications Act of 1934 to protect the Internet. For clarification's sake, Title II classification is not the same thing as net neutrality. As I had explained a few months ago, net neutrality is the idea that all data, platforms, and sites be treated equally by the government and Internet service providers (ISPs). This is about as close as a consensus definition to which one can reach. Title II classification, I'm afraid, is much more overreaching than that. Title II classification would categorize the Internet as  a telecommunication service provider instead of a broadband service provider. Aside from using a 81-year old piece of legislation initially intended for the telephone industry to regulate something as non-analogous as the Internet, why do I have an issue with Title II classification?

If I had to summarize up my annoyance, it would be that the Internet is not public utility, nor should it be treated as such. A public utility is based on the idea that a certain good falls under a natural monopoly. A natural monopoly is when it makes more economic sense, at least in terms of long-term cost, to have one company managing a certain market than it is to have a competitive market structure. Although there are some economists who think that natural monopoly theory is bunk,  it is a general economic consensus that there are at least a few industries that fall under this categorization. Since the capital costs are gigantic, like we see in water or electricity, it makes more sense for those goods to act as a natural monopoly.

However, we see no such issue in broadband Internet because there is competition in the market. Neither the scope of the market nor the economies of scale result in this market being a natural monopoly. Wireless networks have lower capital costs over time. As opposed to water or gas, broadband service can be delivered in a variety of ways, whether it's with metal wires, optic cables, or wireless connection. Many physical mediums and technologies can be used interchangeably to deliver the service, whereas utilities are based on single-use-facility economics. Plus, the vast majority of Americans have choices in providers, services, speeds, and other features on their Internet service, which is more than can be said for water or electricity.

It makes zero sense to regulate the Internet as a natural monopoly when there is still a competitive market by economic definition. Looking at the economics behind a natural monopoly, it's a good thing that it's not a natural monopoly. I went back to my public policy textbook, Policy Analysis by David Weimer and Aidan Vining (p. 98), and I actually found that it's considered a market failure because it creates allocative inefficiency (e.g., see diagram below).

From an economic welfare standpoint, deadweight loss is bad, especially for the consumer. Rather than pay the price at the equilibrium point under a competitive market (Pc), consumers now pay a higher cost at Pm. The economic theory makes sense. Back in December, the Progressive Policy Institute released a study saying that Title II classification would increase federal fees per household by $17 per annum, and that doesn't even include $67 in state fees or $72 in local fees per annum. Although that might not sound like much, when it all adds up, it will cost America over $15B per annum. If you need to think about it further, just think about how poorly actual utilities are handled, and ask if you want that low quality for your Internet. After all, are public utilities well known for quality customer service, upgrades, or technological innovation?

Let's not get into how Title II regulation wouldn't prevent paid prioritization or some of the other finer points that would translate into further government overreach. Broadband Internet does not possess the most basic characteristics of a public utility, and there is no reason to treat it as such. It is a variable service (unlike an actual utility), a constantly changing technology, and needs to be [relatively] free of regulation if it is to continue proliferating. The cry for net neutrality dates back to the 1990s, yet we haven't seen the Internet die. If anything, we went from stationary dial-up to the wide array of satellite, cable, mobile, and WiFi products with greater speed and less cost in less than two decades because the government has by and large stayed out of the way. As a result, America has enjoyed better broadband quality than its European counterparts (Yoo, 2014). It's Moore's Law at its finest! If you want to have some sort of regulation, use antitrust and consumer protection laws that are common in many other markets. Otherwise, remove the red tape, deregulate the local bureaucracy, and watch the market expand even further.

6-22-2017 Addendum: Here is some nice coverage from FreedomWorks on why repealing Title II won't lead to a broadband monopoly.

7-15-2017 Addendum: The American Enterprise Institute came up with a nice report on how Title II harms consumers and innovators.

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