Network neutrality: free market vs. regulation

Network neutrality is a contentious topic, particularly because billions of dollars of revenue hinge on the way it pans out. Because of these high stakes, partisans are motivated to use all the tools of rhetoric to argue for their positions. One way that the debate is commonly misrepresented is as one between regulation and the free market. It is actually a debate between more or less regulation. A free market is one where competition leads to abundant choice, and where consumers have the option to select one service over another. A monopoly is one where there is no choice, and consumers must take or leave what they are offered. Internet access is not a monopoly, but it is close, because of the limited number of suppliers in any particular location. The supposed purpose of network neutrality regulation is to preserve the current vibrant free market of internet services (services provided via the internet, as opposed to internet access service.)

There are several arguments against network neutrality. One is that it is impossible to enforce, that the Internet access providers will subtly strangle third party services by intentional incompetency if the regulators try to force them to stay open. This seems to be one of the ways that the CLECs were held off until the demise of UNE-P. A second one is that there is no need for regulation because there is no threat to third party services. This argument points out that the commercial Internet has been going strong for over a decade, so why fiddle with it when it is working so well? The rebuttal to this argument is that Ed Whitacre, CEO of AT&T has famously said that they intend to double charge providers of services over the network like Google: once for their own internet access like now, and a second time for their customer’s network access, additional to the one that customers are already paying for their own internet access. If the access providers succeed in this it will become much harder for small companies to offer new services on the Internet.

Another anti-network neutrality regulation argument is that network neutrality is good, that we have it now, and that any Internet Access Provider that tries to mess with it will get savaged by customer opinion and lose customers to competitors who keep their network open. This argument assumes that there is a free market in Internet access, and that a move by the telcos to double-charge service providers will not be immediately echoed by the MSOs. Or in a slightly modified version, it assumes that if the telcos and MSOs jump on this together, public outcry will force immediate regulatory reversal, so why try to fix something that ain’t broke yet?

Putting on the other hat, the access network operators have poured and continue to pour billions of dollars a year into upgrading their networks. They certainly deserve a fair return on their investments. The problem is that competition is so vigorous that neither the telcos nor the MSOs can afford to raise their rates to pay for all this build-out. But service providers (Google) have cash coming out of their ears, and they would happily share some of it in exchange for guaranteed priority of their content on congested networks.

OK, let’s take that hat off again. While Google does indeed have money coming out of its ears, and probably could afford to send some of it the way of the access providers, what about service providers with no spare cash, in other words, startups? The Internet has been a hothouse of innovation because of its spectacularly low barriers to entry. It costs virtually nothing to set up a new Internet service. Loss of network neutrality would shut down this innovation, because the telcos and MSOs would get to decide which of these services survived. Their track record at this stinks. If they had an inkling how to do it there would be no Google, UTube, MySpace or eBay, because the telcos would have put services like this into place 20 years ago. But they didn’t. Large companies are structurally incapable of this kind of radical innovation, while a vibrant free market does it naturally. This is because evolution by natural selection is a far more potent force than executive edict, and “let a thousand flowers bloom” is a vastly more fertile approach than “let’s not do anything risky.” Looked at this way, the telcos’ presentation of tiered service as “free market” rings hollow.

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