Before Net Neutrality Eats the World (Part 5): The Fallacies Motivating Net Neutrality

by Wayne Crews on August 23, 2013 · 1 comment

in Deregulate to Stimulate, Economy, Regulation, Tech & Telecom

(Note: On September 9, the U.S. Court of Appeals for the D.C. Circuit will hear oral arguments in Verizon’s challenge of the Federal Communications Commission’s December 2010 Order on “Preserving the Free and Open Internet.” This series explores fundamental issues at stake.)

Net neutrality is one variant of government-backed forced access to someone else’s property.

So it is not a new notion, but one rooted in discredited ideas of natural monopoly and a longing for common carriage.

Natural monopoly is unseen in nature. But monopolies are frequently created and officially sustained by governments through such vehicles as exclusive franchises and regulatory “certificates of convenience and necessity.”

In all the great network industries that cry out for liberalzation but that attract misguided calls for forced access instead, competition is outlawed, or was until recently illegal.

It’s been pointed out that, in the electric power industry, if you run an extension cord across the street, you go to jail. The local utility has a protected monopoly franchise.

We’ve put most of that behind us in communications, and wired and wireless and satellite options abound; blimps are on the way, and we’ll probably see communications drones before Hyperloop Alpha.

But the policy incarnations of the residue of natural monopoly philosophy inevitably induce calls for forced access to others’ technologies and networks.

Examples have included: the “retail wheeling” proposals for access to the power grid (instead of just ending monopoly franchises) that have destroyed the prospect of electricity liberalization for at least a generation; the forced access to the Microsoft Windows Desktop for competitors; and the demands for Google to be less successful so that rivals could have access to the eyeballs that Google had attracted.

(Incidentally, like forced access schemes, antitrust is a corporate welfare policy that transfers customers already secured by a firm to a rival who had not attracted those customers. It is sometimes wrongly touted as an alternative to net neutrality.)

Our modern problem embodied in the net neutrality war is not rooted in a lack of competition today, but in yesterday’s outlawing of competition. Urges to maintain that regulatory oversight in lieu of liberalization and actual competition are the fuel and oxygen of net neutrality.

Since it is a consciously anti-competitive framework, net neutrality is “not neutrality.” In that light we can see that Federal Communications Commission’s (FCC) net neutrality campaign rests upon numerous misperceptions and outright untruths about competitive markets and capitalism. Among these fallacies:

  • Infrastructure companies and content companies are naturally and inherently at odds.
  • Network competition requires political or regulatory force to exist.
  • Discrimination is bad, and that such a thing as “non-discrimination” exists.
  • Net neutrality is not itself a form of picking sides (or discrimination, as it were)
  • Infrastructure companies should not control content; however, content companies, in conjunction with bureaucracies backed by legislation and regulation, should control infrastructure. (See yesterday’s installment of “Before Net Neutrality Eats The World”)
  • Government enforced net neutrality spawns “openness”; Market impulses do not.
  • Communications flows (video, information, voice, future innovations like holograms, etc.) are maximized by neglecting, indeed blocking, the liberalization of and enforcement of property rights in grids.
  • Networks themselves cannot be regarded as a competitive unit in any sense: only the movement of bits from point A to point B on an existing network counts as competition. Networks best exist as passive husks, not dynamic forms of infrastructure wealth created, managed and duplicated in response to price signals and technological advance.
  • “Market failures” matter, government failures do not exist (indeed, they are of little concern in the 2009 Notice of Proposed Rulemaking and the Order on Preserving the Free and Open Internet).
  • Infrastructure companies’ interest lies in withholding services, in not exploiting gains from trade with content companies whatever petty transitory jealousies may exist.
  • Wall Street, rivals, advertisers, shareholders, consumers and the media are inherently passive and cannot react to discipline inefficient network management, or engage the capital markets to generate new bandwidth infrastructure themselves.
  • Alternative, profit-driven modes of future infrastructure expansion and organization matter less than FCC regulating the mode that happens to exist in 2013. User ownership of grids; liberalization of non-telecom network industries to enable wide-scale, cross-industry infrastructure consortia; “splintering” into and out of the public net by private carriers — all have no role to play and may safely be ignored and sacrificed in favor of net neutrality.

The philosophy underlying FCC interference will undermine alternative modes of competitive discipline and alter technological trajectories in harmful ways. Regulators amplify “market failure,” ignoring political failure.

Next time: Does “Market Failure” Demand Neutrality Regulation?

David Collado August 23, 2013 at 4:29 pm

Wired internet access options do not abound, not if you account for speed. A 2012 Bernstein Research market report titled “Why We Like Cable… In a Single Chart” showed that cable is the ONLY option for 51-57% of U.S. broadband subscribers desiring download speeds of at least 10 Mbps. For subscribers wanting at least 25 Mbps, cable is the only option for 78-82% of the country. (Bernstein Research is highly regarded as a leading telecom market research firm.) Oh yeah, and the vast majority of Americans have only one cable provider.

Wireless is not a substitute. At best, it’s a compliment. With higher cost, lower data caps, and lower reliability due to high sensitivity to distance and congestion around cell towers, wireless broadband will remain inferior (in speed and reliability) to wired broadband for much of the population for the foreseeable future.

Funny you mention public power utilities. Do you know why they came into existence in the first place? It was to correct market failure due to private power companies neglecting to connect rural areas (something about profits). The same is now happening with owners of high-speed data pipes. And guess what happens when neglected rural towns take matters into their own hands and try to build networks for their schools, hospitals and communities? They get sued and hog-tied by anti-competitive state laws (paid for by industry) aimed at “leveling the playing field” – a playing field already tilted against municipalities and towards behemoth incumbents with massive revenue streams.

The best solution to net neutrality is true competition at the network access level. If consumers have a choice between ISP-1, who prioritizes traffic from select sources, and ISP-2, who practices net-neutrality, they can vote with their wallets. But as the statistics I opened with clearly indicate, most consumers only have their single local cable company as an option for high-speed internet access. Under this status quo, we need net neutrality regulation to prevent the local cable monopolists from dictating how traffic flows over their pipes.

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