net neutrality

Net Neutrality and Rent-Seeking

by Ryan Young on October 5, 2009 · 1 comment

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

Here is a letter I sent recently to The Wall Street Journal:

September 22, 2009

Editor, The Wall Street Journal
200 Liberty Street
New York, NY 10281

To the Editor:

Your article “Bad News for Broadband” (editorial, Sept. 22) hints at, but does not make, a key point: net neutrality proposals are driving a wedge between service providers like AT&T and content providers like Google.

Strange, is it not? Their interests are actually closely aligned. If AT&T upgrades its network, Google benefits from the increased bandwidth. If Google improves its products, AT&T benefits from increased demand for broadband.

Net neutrality proposals give companies the incentive to seek rents at each other’s expense when they could be benefitting from each other’s innovations instead. This must be music to the ears of lobbyists, but how sad for consumers.

Ryan Young
Fellow in Regulatory Studies
Competitive Enterprise Institute
Washington, D.C.

The Economics of Net Neutrality

by Ryan Young on September 23, 2009

in Economy, Regulation, Tech & Telecom

Over at the Washington Examiner‘s Opinion Zone, I apply what  I learned back in Economics 101 to the net neutrality debate. It’s all about scarcity.

LibertyWeek 61: How About FCC Neutrality?

by Richard Morrison on September 21, 2009

in CEI Projects, Environment, Features, Global Warming, Podcast, Zeitgeist

Your host Richard Morrison welcomes returning guest co-host William Yeatman and special guest commenter Ryan Radia to the program for Episode 61 of the LibertyWeek podcast. We start with the FCC’s just-announced proposal for “net neutrality,” Treasury documents that reveal the true cost of cap-and-trade legislation and the plan for getting over California’s great depression. We then move on to the G20 Summit’s potential path to prosperity and the ever-expanding scandal that is ACORN.

Waxman Joins Markey Again to Sponsor a Terrible Bill

by Elizabeth Jacobson on September 17, 2009

in Tech & Telecom

You know them from the cap-and-trade climate bill that failed to generate funding for Obama’s proposed health reforms.  Now, they’re joining forces again. Rep. Henry Waxman (D.-CA) announced Thursday that he will co-sponsor a net-neutrality bill introduced by Rep. Ed Markey (D.-MA).  Misleadingly named the Internet Freedom Preservation Act, Waxman-Markey v 2.0 would hold Internet Service Providers legally responsible for ensuring that every user has access to whatever they want, whenever they want, regardless of the actual resources available.

While Internet firms have in recent years embraced a pricing scheme that renders users unaware of the marginal cost of their surfing habits, the unfortunate fact is that bandwidth isn’t free. Somebody has to pay for it. U.S. consumers seem hesitant to embrace a metered pricing system, which could theoretically be the most efficient and “fair” way to bill users (though it seems doubtful that many people would stream video online if they faced an astronomical monthly broadband bill). Somewhere in between those two extremes lies a pricing/usage model that the ISPs are trying to find.  They ought to have the ability to experiment to find out what works. And net neutrality advocates should remember that Comcast, the last company that tried implementing an unpopular network management scheme, was scolded by the FCC. As the CNET article above notes, after a public backlash, Comcast quietly stopped the practice. Preventing network administrators from managing traffic on their own networks will lead to either congestion and poor service or prohibitively expensive prices. Under a rule that prohibits innovation in network management schemes, congestion can only be fixed by increasing overall bandwidth, which ultimately leads to higher prices for all consumers.

Neutering the Net

by Jack O'Connor on August 12, 2009 · 1 comment

in Regulation, Tech & Telecom

The Washington Examiner has published my op-ed on net neutrality:

A war is waging over the future of the Internet. On one side are the supporters of “net neutrality,” a proposal to ban Internet service providers (ISPs) from giving different treatment to network traffic from different sources. The Internet Freedom Preservation Act of 2009, introduced in the House two weeks ago, is their latest salvo.

On the other side are those who believe that regulation will threaten the very freedom that has allowed the Internet to thrive.

The net neutrality movement is an unfortunate departure from the “keep your hands off my Internet” attitude long held by many on the Web. Advocates of neutrality legislation are asking Congress to write into law what they see as an Internet that treats everyone equally. They are concerned that new technologies and business models might give big players an advantage over the little guy, or worse, that ISPs might use their market power to force a crippled Internet on their customers. Both fears rest on significant misconceptions.

The Internet has never been a level playing field. Big companies like Google, for example, offer their customers an Internet “fast lane” by building server farms all over the world. Cable broadband providers still reserve most of their bandwidth for cable TV. Far from hurting the Internet, these non-neutral elements have been essential to pay for the wires and servers than carry the Web as we know it.

Neutrality is not an all-or-nothing choice. Different elements coexist and make each other better. Companies that take advantage of openness can wipe the floor with those who do not, as AOL’s competitors did in the late nineties. At the same time, if Google’s servers gave the company no advantage, Google would never have built them, and the Internet would be slower for everyone.

Future innovations will be just as helpful, if we allow them. ISPs might save their customers money by “unbundling” Internet access, as we often wish cable companies would. Or they might take a cue from mobile providers and let their customers choose “preferred sites.” Some of the strongest proponents of neutrality laws—Google, Amazon, and eBay—made their fortunes with the same “dynamic pricing models” that they want to deny to ISPs. No one could have predicted the diversity of prices and services that has made AdWords possible, and there is no reason ISPs and their customers cannot benefit from the same strategy.

Many neutrality advocates admit that non-neutrality could help the Internet, but they worry that ISPs will exploit non-neutrality to swindle their customers. Doomsayers warn that ISPs will start cutting users off from some parts of the Internet in exchange for bribes from powerful players. Neutrality advocates want to make these practices illegal, to stop the problem before it starts.

That theory has several problems. The first mark of a monopolist is price gouging, not shoddy service. There is no evidence that ISPs are gouging prices, and even if they were, net neutrality would do nothing to stop them. More importantly, though, if competition were lacking, neutrality laws could only make the problem worse.

It is nearly impossible to compete directly with a powerful company. Instead, competitors try to enter the market by offering something new, like Progresso did with upscale canned soup or Apple did with the iPhone. Yet the goal of neutrality legislation is that ISPs should compete only on price. By forcing new companies to use the same business model as the big dogs, the law would make competition much more difficult.

Many advocates answer that ISPs will never be competitive, and that the best we can hope for is to regulate them. In fact, that is exactly what regulators thought in the 1920s, when the Bell telephone monopoly was just taking off. They assumed that competition had no chance, so they ignored the anti-competitive effects of their rules. Those mistakes choked the telephone industry for decades.

Competition is not perfect. It never has been and never will be. But assuming that we can do without it, that we can help consumers by prohibiting diversity, is a blunder too costly to make again.

The Internet is a process in motion. New sites and applications come and go in the blink of an eye, and that dynamism has created a wealth of content like nothing ever before. We cannot expect anything less of the technologies that carry that content, or of the businesses that pay for those technologies. They too must come and go and change as the Internet grows. The Web should not rely on one unchanging business model any more than it should run on just one browser.

We had it right the first time. Congress, keep your hands off!

Net Neutrality: A Dialogue With Ars Technica

by Jack O'Connor on July 24, 2009 · 1 comment

in Regulation, Tech & Telecom, Zeitgeist

CEI’s broadband reply comments from earlier this week received a generous quotation by Ars Technica’s Nate Anderson. Mr. Anderson took issue, however, with our claim that net neutrality mandates are essentially price controls:

“In particular, [neutrality rules] require ISPs to offer content providers a price of zero, and to differentiate prices to consumers only in certain limited ways,” says CEI’s filing. “The disastrous consequences of price controls are all too familiar. And while neutrality may currently align with industry best practices, that fact limits the possible benefits just as much as the possible harm.”

Content providers pay for bandwidth on the competitive market, so it’s not clear what the line about “a price of zero” refers to (that money is passed along to other ISPs along the network path through the mechanism of “peering and transit“). But it is clear what groups like CEI want from a broadband plan: nothing at all.

There’s a lot more to say about net neutrality, especially regarding antitrust and regulatory capture. (For a brief summary of CEI’s broadband comments, check out our topic-by-topic summary.) This post aims to address Mr. Anderson’s objection on net neutrality in particular.

One of most incendiary moments in the history of the neutrality debate came during a 2005 interview with Ed Whitacre, then CEO of SBC. Ars reported Whitacre’s remarks:

How do you think they’re [Google etc.] going to get to customers? Through a broadband pipe. Cable companies have them. We have them. Now what they would like to do is use my pipes free, but I ain’t going to let them do that because we have spent this capital and we have to have a return on it. So there’s going to have to be some mechanism for these people who use these pipes to pay for the portion they’re using. Why should they be allowed to use my pipes? The Internet can’t be free in that sense, because we and the cable companies have made an investment and for a Google or Yahoo! or Vonage or anybody to expect to use these pipes [for] free is nuts!

Reactions to that comment have been at the core of the neutrality debate. Whitacre was asserting SBC’s right to charge content providers directly for their use of SBC’s lines — in essence, the right to set the price of premium service quality higher than zero — and neutrality advocates have clamored ever since to prohibit that kind of pricing. CEI wasn’t the first group to recognize the dangers of price controls at the core of net neutrality. A paper by Robert Hahn and Scott Wallsten,  “The Economics of Net Neutrality,” made the same point three years ago:

Mandating net neutrality amounts to price regulation. In this case, the regulation would state, in part, that broadband providers charge content providers a price of zero.

Mr. Anderson was correct when he pointed out that content providers already pay ISPs indirectly through various transit and peering agreements, and he linked to an excellent Ars piece explaining how these payments work. The Cato Institute’s Timothy Lee raised the same point in his 2008 policy analysis, “The Durable Internet,” in reference to Hahn and Wallsten’s argument. Lee ultimately acknowledged, however, that direct and indirect payments are not perfect substitutes, and his conclusion was simply that direct payments are inefficient:

With thousands of network owners and hundreds of millions of users, it would be prohibitively expensive for every network to charge every user (or even every online business) for the bandwidth it uses. Transaction costs would absorb any efficiency gains from such an arrangement. It would make no more sense than an automobile manufacturer requiring its customers to make separate payments to the manufacturers of every component of a new automobile. One of the services an ISP provides to its customers is “one stop shopping” for Internet connectivity. This arrangement has important economic advantages and is unlikely to change in the foreseeable future.

It’s indeed unlikely that direct payments would be worth the cost to negotiate them. Net neutrality is targeting prices that would probably remain zero anyway, at least for the foreseeable future. But for the most dynamic marketplace in history, etching the business models that prevail today in stone would be unwise — especially considering how often inefficient, outdated regulations impede market evolution.

It’s impossible to predict the evolution of content and technology online or the ways in which new developments might conflict with one another, and thus with neutrality. ISPs might even invent ways to save money for consumers by “unbundling” content, like the FCC nearly forced cable companies to do. No one knows. What is certain, though, is that thwarting innovation in service and pricing will close the widest open door to competition.

Standing Before the FCC Shouting Stop

by Jack O'Connor on July 23, 2009

in Features, Regulation, Tech & Telecom, Zeitgeist

CEI submitted our initial comments to the FCC on broadband policy last month, and this week we submitted our reply comments. A brief overview:

  • International Comparisons: The gap between the US and other industrialized nations is vastly overstated. The differences between the leaders and the rest only amounts to a few months given the current extraordinary rate of growth. Much of our alleged lag is due to the fact that we subsidize broadband less than others, and yet we still seem to get better use out of it.
  • Open Access: Line sharing mandates and other access requirements are just another term for price controls. We’ve tried that before. Price controls either entrench monopolies or deter any investment at all. In order to retain investors, open access regulations would be accompanied by subsidy programs, and past experience with such programs has found them actively hostile to competition as well.
  • Universal Service Fund: Even those who recommend extending the USF to broadband admit that the fund is full of waste, fraud, and abuse. There is no reason to expect future subsidy programs to behave any differently. The snail’s pace with which these subsidies are phased out tends to entrench old technologies beyond their optimal lifetimes. If the money can’t be returned to taxpayers, it would be far more efficient to simply distribute it directly to the underserved customers it is intended to help.
  • Network Neutrality: Advocates of government involvement pretend that the pure, unblemished neutrality of the Internet is under attack. In reality, the Internet has never been so neutral. Companies like Google and Akamai have already spent billions of dollars on server farms, effectively buying “fast lanes” for their own content. Cable television–the largest and most popular proprietary network in the world–travels over the very same wires as IP traffic. Far from hurting the Internet, however, these non-neutral elements have been essential to pay for infrastructure. Neutrality and non-neutrality coexist very effectively online, and if we call on government to deal with this “problem,” we will buy ourselves an expensive lesson in regulatory capture.
  • Special Access: The NoChokePoints coalition doesn’t even hide its intentions to enact price controls. The obscene profits cited by these advocates are calculated from ARMIS data that were never intended to accurately reflect earnings, and their claims have been roundly rejected. Price controls on middle mile wires, in addition to having the same well-known consequences that all price controls do, will also thwart investment in wireless backhaul.
  • Explaining Deficiencies: First and foremost, there is no reason to expect that all areas of the US should have the same preferences regarding broadband, and if some rural areas don’t value broadband highly enough to warrant investment, that is no justification for the FCC to intervene. Second, though broadband growth is extremely rapid, there are plenty of government impediments holding it back from even more impressive growth. The largest by far is spectrum allocation; the FCC and other agencies are holding on to spectrum rights that would be worth trillions of dollars on the open market, and the cost of relinquishing those rights would be orders of magnitude lower.
  • Policy Recommendations: The vast majority of proposed regulations for broadband are just explicit or hidden price controls. There is simply no defense for price controls as a mechanism of policy. The most important goal of the FCC should be to free up spectrum for public and private use. US broadband markets do not need subsidies, much less wasteful and fraudulent subsidies, and those funds should be returned to the taxpayer.

Crews in the News: Consumer Choice Doesn’t Come From Regulation

by Jack O'Connor on July 8, 2009

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

CEI’s own Wayne Crews is quoted in the Boston Globe this morning, explaining why real competition — not government-mandated ‘openness’ — is the best way to promote consumer choice.

Wayne takes issue with Ben Scott of Free Press, who describes cellular data access as “a classical net neutrality issue.’’ Apparently placing legal burdens on any new web platform is Mr. Scott’s strategy for encouraging the spread of mobile internet access…

Verizon, AT&T See the Regulation Writing On The Wall

by Nick Brown on March 31, 2009 · 1 comment

in Regulation, Tech & Telecom

AT&T and Verizon are indicating that there is a chance that they will not seek funds from the broadband stimulus portion of the American Recovery Act.

Verizon Executive VP Thomas Tauke has stated that, “We don’t have any plans to apply; we also have not made a decision not to apply.”

Similarly, AT&T Senior Executive VP told reporters that, “We do not have our hand out seeking government funds.”  But, “[AT&T is] open to considering things that might help the economy and might help our customers at the same time.”

This reluctance to accept government funding shows that major ISPs realize that acceptance of stimulus funds puts them squarely under the FCC Network Neutrality principles.   These principles could bleed into the other networks—such as Verizon’s FiOS TV or AT&T’s U-Verse—that these large Internet players own.   Meaning this policy would be the camel’s nose under the tent.  I ‘ve previously referred to this potential phenonmenon as “Gateway Neutrality.”

Molly Peterson of Bloomberg News confirms that big ISPs realize the danger associated with accepting recovery funds:

AT&T, Verizon and Comcast Corp., the largest U.S. cable provider, say the rules are unwarranted and would hinder their ability to manage congestion on networks they have spent billions to build.

So, it could be that networks built with stimulus funds would have sub par service when compared to networks built without the funds.  This forces one to wonder what the point of the multi-billion-dollar subsidy is in the first place.

Additionaly, were ISPs forced to merge networks that ran under different principles—those that are neutral like Internet service and those that are very non-neutral like television or phone service—very costly problems could emerge.  Trying to slam together TV, Internet, and phone service into one neutral IP-based service could even prove to be financially impossible.

At OpenMarket we often say that government should never be in the business of picking winners.  It appears the winners at broadband build-out will be those who avoid picking government.

LibertyWeek 32: FCC Don’t Tread on Me

by Richard Morrison on March 5, 2009

in CEI Projects, Podcast

Your hosts Richard Morrison and Cord Blomquist bring you Episode 32 of the LibertyWeek podcast with special guest Sam Kazman and surprise guest co-host Jeremy Lott. We start by looking into the possible future of the Federal Communications Commission with nominee Julius Genachowski about to ascend to the chairmanship, and then take another stroll through the New Great Depression with high-level financial talks between unpopular British Prime Minister Gordon Brown and über-popular President Barack Obama. Oregonian brewers fight a proposed fifteen cents a pint tax in Beer News, and the Lady Madoff tries to stash away tens of millions from the feds in this edition of Scandal Watch. We hit our stride with an interview with CEI General Counsel Sam Kazman and his tales of the icy global warming rally staged earlier this week here in Washington, D.C. Finally, a little belt-tightening Olympic News from the USOC.

Listen here!

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