With the help of corporate sponsors like Netflix and Google, net neutrality has gone from being an unknown issue to garnering national attention. Like most fads, though, net neutrality’s popularity has grown far more rapidly than the public’s understanding of it, and people do not realize how unnecessary and destructive net neutrality policies actually are.
“Net neutrality” refers to a principle under which all types of information on the internet are delivered at equal speeds. In a neutral internet, an email from your grandmother will download to your computer at the same rate as a Netflix video. In a non-neutral internet, by contrast, some information could get prioritized, necessarily slowing the rest. Content producers (such as Netflix) and end-users tend to be in favor of net neutrality because they benefit from a vast diversity of content on the internet, and no one wants to run the risk of having their preferred content throttled (slowed).
Opponents of net neutrality tend to include internet service providers (ISPs), such as phone and cable companies, who believe that tailoring their networks to fast-track certain types of content could lead to better end-user experiences and cost savings.
The net-neutrality principle has been invoked in several pieces legislation and proposed administrative rules over the past eight years. Each of these acts would, to varying degrees, restrict the autonomy of ISPs. As a result, the term “net neutrality” now denotes a specific set of public policies, and not just a principle.
Like the proponents of many government regulations, net neutrality supporters will often invoke the public interest, the protection of some disadvantaged group, and/or the promotion of economic efficiency. Touchy-feely catchphrases like “keep the internet free and open” and “all bits are created equal” abound, along with the assertion that net neutrality will bolster marketplace competition by relieving the burden of bandwidth costs for startup tech companies. Proponents also assert that net neutrality will prevent ISPs from arbitrarily censoring (competitors’) content on their networks.
The proponents of such regulation seem to concede the benefit of market competition—a refreshing sign—but they fail to see the contradiction created by invoking it. Net neutrality is properly seen as a hindrance to competition, not a facilitator.
In order to compete in a market, companies must differentiate themselves in a way that satisfies the consumer. This is innovation. One method ISPs have to satisfy the wants and desires of their customers is to expedite the information their customers consume. The net neutrality regulations proposed by the Federal Communications Commission (FCC)—recently struck down in January—would have prevented this, stifling innovation in the provision of internet services. As Larry Downes noted in November:
In all, the FCC’s Open Internet order itself cataloged a dozen major non-neutral technologies, protocols, and business arrangements that have long been necessary parts of the Internet. Sensibly and of necessity, the agency granted exceptions from the rules for each and every one of them, recognizing that the “open” Internet, at least from an engineering standpoint, was anything but. For the Internet to continue functioning at all, the rhetoric had to give way to reality.
But there was no way for the rules to preemptively grant similar permission to any future network optimization technologies, other than to caveat all of the rules with exemptions for “reasonable network management.” That term couldn’t be defined, however, meaning that any future innovations will require FCC approval before large-scale implementation.[i]
In other words, such an obstacle to innovation and experimentation in network management could spell higher costs and a far lesser quality of service for end-users and content providers alike. This seems like a terrible tradeoff, since even an absence of government net neutrality regulations would not prevent ISPs from adopting net-neutral practices; if consumers demanded such practices, they could simply switch from a non-neutral ISP to a neutral one. The same is true for content providers—not only the giant companies like Facebook, Netflix, and Amazon; smaller companies and (yet-to-exist) startups may also switch among ISPs if they believe that their content is being discriminated against. This would be a system of true market competition.
In response, net neutrality advocates quickly (and rightly) point out the monopolistic state of the broadband internet market. The FCC has reported that of the 132 million households in the United States, only 47 million (roughly 35%) have access to four or more video programming distributors (i.e., cable, satellite, and telephone companies); cable companies alone have a market share of 56% among these distributors, and of the roughly 1,100 cable companies in the United States, the top five of them (in market share) account for nearly 82% of all video programming subscribers.[ii] Given that all of these companies also provide broadband internet services to many of their customers, the ISP market looks incredibly uncompetitive.
The uncompetitive nature of the industry would seem to refute the argument that net neutrality stifles innovation—there’s no need for companies to innovate anyway if the market is cornered. Since Comcast and similar companies so effectively control their respective markets, there is virtually no recourse for a dissatisfied customer, which removes the normal incentives for companies to improve services and cut costs.
For most people, unfortunately, this is where the debate ends. Although many will concede the benefits of competition among ISPs, they dismiss those benefits as immaterial, since an effective monopoly exists in the largest markets. Now the only available option they see for ensuring fair or neutral business practices is for government to impose net neutrality upon the industry.
But this disregards the important question of how the industry became so uncompetitive in the first place. If the ISP market is naturally and inevitably monopolistic, it might lend support to net neutrality advocates. But if it is not, then net neutrality may unnecessarily stifle innovation and raise costs. Before we propose policies, we need to ask, “Why is there effectively a monopoly in internet service markets?”
Basic economic theory informs us that monopolies can only endure as long as no new companies enter the market to provide the same (or better) service at a lower price. So why haven’t more companies entered the market to upend the entrenched giants?
There are a number of up-front costs associated with starting a cable company and/or entering a cable market. Building the initial cable infrastructure is one of these costs, but another significant, yet often unmentioned cost is that of acquiring cable franchises. In most states, cable companies must obtain a cable franchise from each and every municipality in which they want to do business. Large companies can easily expand into new markets because they have lots of cash with which to pay licensing fees; but for smaller/startup companies, the licensing requirements present an insurmountable barrier to market entry. Encouragingly, 21 states have passed cable franchise reform bills, meaning that cable companies need only obtain one license to operate within the entire state. In the 29 remaining states, however, cable companies must still work through the old, inefficient system.
Evidence indicates that the entry of companies into previously uncompetitive ISP markets does reduce cable prices and provoke efforts from the incumbent cable companies to improve services. In response to entry by AT&T, which offers video services over telephone lines (and is thus not subject to cable franchise requirements), Comcast of Santa Rosa, CA, rushed to deliver “new features [video-on-demand, more channels] in Santa Rosa […]” In Houston, similarly, Comcast pledged to offer more “linear and high-definition channels, video-on-demand titles and digital phone features” following potential AT&T entry.[iii] A Bank of America study also observed basic cable price reductions of between 28% and 42% in areas of Virginia, Texas, and Florida where Verizon rolled out its FiOS video service.[iv]
The lesson from these stories is clear: Wherever ISPs are able to circumvent onerous cable franchise requirements and enter the market, services and pricing improve. The solution to the lack of market competition, therefore, is not to implement new government regulations, but to repeal the regulations we already have. Getting rid of cable franchising would abrogate the need for net neutrality while also improving consumer choice and quality of services. These reforms, not innovation-stifling net neutrality, will be a crucial step toward a truly free and open internet.
[i] Downes, L. (2002). What Verizon’s Net Neutrality Challenge Is Really About. Forbes. Retrieved from: http://www.forbes.com/sites/larrydownes/2013/09/11/what-verizons-net-neutrality-challenge-is-really-about/
[ii] Federal Communications Comission. (2013). Fifteenth Report. Retrieved from: https://apps.fcc.gov/edocs_public/attachmatch/FCC-13-99A1.pdf
[iii] Singer, H.J. (2007). The Consumer Benefits of Telco Entry in Video Markets. Retrieved from: http://www.justice.gov/atr/public/workshops/telecom2007/submissions/228100.htm
[iv] Bank of America Equity Research. (2006). Battle for the Bundle: Consumer Wireline Services Pricing.