With president Obama announcing yesterday that he wants the internet regulated as a public utility, many so-called net neutrality advocates celebrated. Unfortunately, their celebration is likely unwarranted because, in fact, government regulation will likely threaten, not improve, net neutrality and internet openness. Here are a few myths proponents of net neutrality regulation will proclaim:
Myth #1: Regulation is necessary because there is insufficient competition for broadband
Proponents often say that one reason why the Internet should be treated as a pubic utility because consumers face little choice in their internet provider, in fact it is commonly claimed in most instances it’s a monopoly. However, this is patently false. As Dr. Christopher Yoo of the University of Penn points out:
The most recent data collected by the FCC indicate that as of December 2012, 99 percent of US households live in census blocks with access to two or more fixed line or mobile wireless broadband providers capable of providing the benchmark speeds of 3 Mpbs down stream and 768 kpbs upstream. Some 97 percent have access to three or more providers. Faster service tiers are also becoming more competitive. For example, 96 percent of US households have access to two or more providers offering service at the higher standard of 6 Mpbs downstream and 1.5 Mbps upstream, and 81 percent have access to three or more. Even at the highest tear reported (10Mpbs downstream and 1.5 Mpbs upstream), 80 percent have access to two or more providers and 48 percent have access to three or more.
Yoo further points out that there is more competition coming from close substitutes to broadband like wireless LTE providers. He concludes:
Although these markets are not perfectly competitive, empirical studies indicate that markets with three firms are workably competitive, with most of the competitive benefit occurring with the entry of the second or third firm and minimal benefits resulting from entry into markets that already have three to five firms. One must also bear in mind that regulation is costly and typically falls short of replicating the performance of a perfectly competitive market. Regulation thus turns on a comparison of second-best outcomes. Although the poor performance of unregulated monopoly justifies the significant cost of regulation, an unregulated oligopoly performs sufficiently better at some point tips the balance in favor of deregulation.
Myth #2: Without regulation, net neutrality is almost certainly going to be destroyed as ISPs will create internet fast-lanes, which will make it impossible to access content from new start-ups
This myth ignores the fact that fast-lanes are not even all that profitable for ISPs. As Timothy Lee pointed out in a 2008 paper for the Cato Institute:
The fundamental difficulty with the “fast lane” strategy is that a network owner pursuing such a strategy would be effectively foregoing the enormous value of the unfiltered content and applications that comes “for free” with unfiltered Internet access. The unfiltered internet already offers breathtaking variety of innovative content and application, and there is every reason to expect things to get even better as the availabe bandwidth continues to increase. Those ISPs that continue to provide their users with faster, unfiltered access to the Internet will be able to offer all of this content to their customers, enhancing the value of their pipe at no additional cost to themselves.
In contrast, ISPs that chose not to upgrade their customers’ Internet access but instead devote more bandwidth to a proprietary “walled garden” of affiliated content and applications will have to actively recruit each application or content provider that participates in the “fast lane” program. In fact, this is precisely the strategy that AOL undertook in the 1990s. AOL was initially a propriety online service, charged by the hour, that allowed its users to access AOL-affiliated online content. Over time, AOL gradually made it easier for customers to access content on the Internet so that, by the end of the 1990s, it was viewed as an Internet Service Provider that happened to offer some propriety applications and content as well. The fundamental problem requiring AOL to change was that content available on the Internet grew so rapidly that AOL (and other proprietary services like Compuserve) couldn’t keep up. AOL finally threw in the towel in 2006, announcing that the proprietary services that had once formed the core of its online offerings would become just another ad-supported web-site. A “walled garden/slow lane” strategy has already proven unprofitable in the market place. Regulations prohibiting such a business model would be suprlusage.
We already have evidence that ISPs cannot even profit from such a slow-lane strategy in the past. It seems that net neutrality as we know it today is only the result of the market process. Why would regulation even be necessary to maintain it?
Myth #3: Regulating the Internet as a public utility will simply enforce net neutrality, it wouldn’t do anything else
This simply ignores the history of regulation and rich literature on how the regulatory process works. If one gives the FCC so much power to control the internet, there is nothing stopping companies like Comcast from lobbying the FCC to selectively force regulations, write regulations in their favor, or use regulations to erect barriers to entry to potential competitors. This is what is what public choice economists call “regulatory capture." If the FCC is allowed to regulate, the internet may be put in the hands of lobbyists, bureaucrats, and politicians who will use the regulations to benefit their interests.
Regulatory capture has happened in many, many other similar instances. For example, with the Interstate Commerce Commission was originally created in 1887 to regulate the railroads using strikingly similar rationale to current net neutrality enthusiasts: they wanted to prohibit giving "undue or unreasonable preference or advantage” to particular customers. However, by the 1920s the ICC started establishing minimum and maximum rates, by the thirties congress gave it power to regulate truckers specifically to stop competition with the railroads. By 1970, it was being described by a Ralph Nader group as “primarily a forum at which transportation interests divide the national transportation market.” Effectively, the ICC became a means of promoting a transportation cartel.
Proponents of regulation ignore the possibility that regulation can be used by special interests capturing regulators as a means to stop regulation. Such an unintended consequence can be observed in history, why would it not happen with the internet?
In sum, regulation is likely not necessarily to encourage competition and internet fairness, and in fact will likely lead to a less fair, less open internet due to public choice reasons. Giving politicians, bureaucrats, and lobbyists control of the internet is not a good idea.