An Encounter Broadsides excerpt “There is little dispute . . . that the Internet should continue as an open platform,” notes the Federal Communications Commission. Yet curiously, they moved to discontinue the legal regime yielding openness.
In late 2010, exercising gusto rejected for over a decade by both Republican and Democratic commissions, it imposed “network neutrality” regulations on wired and wireless broadband-access providers.
Networks cannot block subscribers’ use of certain devices, applications, or services, or unreasonably discriminate, offering superior access for some services.
The commission argues such rules are necessary, as the Internet was designed to bar “gatekeepers.” This view is faulty; the network of networks wasn’t built on blueprints.
Rather, it’s an evolving ecosystem relying on freedom to innovate, even when that disadvantages some firms. Networks routinely manage traffic and bundle content with data transport precisely because such coordination produces superior service.
Universities often bar peer-to-peer services such as Skype; nonprofits harbor no profit motives, but limit traffic to improve overall performance. When “walled gardens” emerge as at AOL in 1995, or Apple’s iPhone in 2007, they often disrupt old business models — attracting subscribers and providing golden opportunities for application developers.
In many cases, these walls have dropped; others remain “walled,” lush and highly competitive with alternatives. Platform rivalry advances innovation and growth.
A truly “open Internet” allows consumers, investors and entrepreneurs to choose among many models, discovering efficiencies. The FCC mistakes natural market processes for planned structure, imposing new rules to “protect” what evolved without it.
Were broadband ISPs using market power to harm consumers such activity would be illegal. But antitrust regulators have not brought a single major case accusing a firm of “anticompetitive foreclosure.”
Indeed, the Department of Justice Antitrust Division recommended that the FCC not impose “neutrality” rules, arguing they could reduce investment in broadband networks.
There is economic evidence precisely to this effect. When telephone networks were mandated to provide “open access” to DSL networks, a policy effectively discontinued by regulators in 2003, unregulated cable modem services out-sold DSL by nearly two-to-one.
But newly deregulated DSL networks grew rapidly, catching up (for new subscribers) with cable’s broadband market share in just two years. By year-end 2006, there were 25 million DSL subscribers in the United States — 10 million above pre-deregulation trends.
Instead of examining economic evidence, the commission ploughed forth with regulations justified by political rhetoric. The rules were needed because otherwise, we would be “[a]llowing gigantic corporations … to exercise unfettered control over Americans’ access to the Internet,” wrote Commissioner Michael Copps.
This “unfettered control” is actually considerably “fettered” — by competition. And it is the regime that delivered the “open platform” the commission supposedly seeks to protect.
And it was not exactly a “gigantic corporation” that was first to feel the chill of an FCC neutrality complaint. That honor belongs to MetroPCS, America’s fifth-largest mobile operator, one-tenth the size of Verizon Wireless.
The firm offers an “all you can eat” plan for wireless talk, texting and data for just $40 a month — and blocks video streaming. With a special compression format cooked up by Google, owner of YouTube, MetroPCS offers its customers unlimited YouTube videos. But this discriminates against other video websites. MetroPCS: busted.
Of course, MetroPCS has no market power and, even if it had, possesses no incentive to harm YouTube’s rivals. It neither owns YouTube nor is paid by Google.
Rather, it seeks more customers, and attempts to do that by giving them more for their buck. This is what competitive markets are supposed to deliver.
Yet, net neutrality essentially invited the attack on MetroPCS, singling out their business model as suspiciously non-neutral. In forcing innovative firms to defend themselves for offers that improve consumer welfare, a clumsy government does not advance an “open Internet,” but harms it.
Thomas Hazlett is professor of law and economics at George Mason University, and author of the Encounter Broadsides No. 23 “The Fallacy of Net Neutrality” (2011), from which this was adapted.
