Sunday, May 13, 2012

Propelling the Internet Backwards in Time

New York Times columnist Eduardo Porter's piece, "Keeping the Internet Neutral," just as easily could have been – should have been -- titled "Propelling the Internet Backwards in Time."
At bottom, Mr. Porter's piece is an argument for public utility-type regulation of private broadband Internet providers. Such regulation would be imposed in the name of protecting network neutrality to ensure all content is required "to travel through the Internet on equal terms."
This may sound appealing, at least superficially. But, in fact, the regime that Mr. Porter prefers likely would suppress investment and innovation in the Internet ecosystem.
Why does Mr. Porter insist all Internet traffic should be treated equally? Primarily, it seems, to protect the preferred business model of Netflix, which Mr. Porter describes as an "online video powerhouse." As Scott Cleland recently pointed out, Netflix's annual revenues are $3.36 billion, with gross profits of $1.16 billion.
I understand why Netflix is conducting what Mr. Porter describes as a "budding lobbying effort" trying to ensure that Internet service providers, like Verizon, Comcast, AT&T, and Time Warner Cable, must continue to carry Netflix's video streaming traffic -- which amounts to approximately 33% of all peak hour Internet traffic -- on the most favorable terms possible. For now, Netflix is protected by the FCC's recently adopted net neutrality regulations from having to pay any charges for delivering its videos over the Internet service providers' last-mile facilities. Instead, Netflix simply rides free "on top of" the broadband networks that Internet providers have constructed over the past decade by investing over $350 billion of private capital.
Constructed with no government funding, government guarantees, or government bail-outs.
It’s clear why Netflix is lobbying to continue paying as little as possible for using the Internet providers' facilities. But I fail to understand why the Times’ Mr. Porter doesn't appreciate why Netflix's effort should not succeed, or to put the matter more broadly, why net neutrality regulation is not sound public policy.
In essence, Mr. Porter wants is to regulate today's Internet providers in the same way that Ma Bell was regulated as a monopoly before its pre-1984 breakup. Subject to public utility-like regulation, Ma Bell was not allowed to discriminate among users of its network facilities, and its rates were regulated.
Of course, the marketplace environment in which Internet providers operate today is much different. Granted, the market is not as competitive as the proverbial wheat market – never will be in light of the high fixed costs of building and maintaining multi-billion networks. But it is workably competitive. Cable and satellite operators, and wireless and wireline companies, compete to provide broadband services, including video services that are the focus of Mr. Porter's piece. These services may not be perfect substitutes for one another. They have different capabilities, features, and costs characteristics, which, by the way, are by no means static. They are constantly evolving in response to technological developments, changing consumer demands, and experimentation with different business models.
In the name of ensuring neutrality, Mr. Porter's vision likely will lead to stasis, or worse, even backwardness. This is because, by design, neutrality mandates inhibit market dynamism, which depends upon the freedom to experiment with new business models that differentiate among consumers with distinct demands and needs. And it is this market dynamism that leads to more innovation in products and services and more investment in new facilities.
In his January 2011 Wall Street Journal op-ed, "Towards a 21st Century Regulatory System," President Obama at least acknowledged that, when regulations get out of balance, they place "unreasonable burdens on business – burdens that have stifled innovation and which have had a chilling effect on growth and jobs." In contrast, Mr. Porter doesn't even nod in the direction of accepting that net neutrality regulation imposes costs that should be considered.
Instead, he retreats into a backwards-looking time warp.
For example, Mr. Porter says, "[i]n the era of the dial-up Internet, [government regulation] ensured that phone companies allowed rival Internet service providers to reach their customers." I'm surprised he didn't go on to repeat the old canard that during the dial-up era there were 6000 Internet service providers! Of course, if ever there were 6000 – or 4000 or 2000 -- dial-up ISPs, everyone knows these resellers offered "plain vanilla" services. These so-called "Internet in a Box" providers existed only at the sufferance of government-enforced “open access” mandates requiring facilities-based providers to share their networks at regulated rates.
Here's the most fundamental point Mr. Porter fails to appreciate: It was not until the FCC abandoned the "open access" sharing mandates after the turn of the century that major Internet service providers began to invest billions dollars to build out today's high-capacity, high-speed broadband networks. Once the facilities-sharing mandates were repealed, almost all of the 6000 resellers disappeared, while actual investment spurted.
Does Mr. Porter really think Americans want to return to last century's dial-up era for the sake of artificially propping up so-called "rivals"?  I don't think so.
Immediately following his wistful invocation of the dial-up era, Mr. Porter says, "Congress might remember that government regulation was crucial for the development of the Internet we know today." It is true that it was the government – not Al Gore – that "invented" the Internet and got it up and running. But by the 90s, there was widespread agreement the Internet should be privatized, and the Clinton Administration played a central role in implementing this privatization policy. The Clinton Administration's "Framework for Global Electronic Commerce," issued in 1997, stated:

Though government played a role in financing the initial development of the Internet, its expansion has been driven primarily by the private sector. For electronic commerce to flourish, the private sector must continue to lead. Innovation, expanded services, broader participation, and lower prices will arise in a market-driven arena, not in an environment that operates as a regulated industry. Accordingly, governments should encourage industry self-regulation wherever appropriate and support the efforts of private sector organizations to develop mechanisms to facilitate the successful operation of the Internet.

When advocates implored the FCC in the late '90s to impose on cable companies the same "open access" mandates Mr. Porter now advocates, Clinton Administration FCC Chairman William Kennard stated he refused "to go to the telephone world, a world that we are trying to deregulate and just pick up this whole morass of regulation and dump it wholesale on the cable pipe. That is not good for America."
As long as there are opportunities for companies like Netflix to lobby in the name of "open access" or "neutrality" or "unbundled networks" or "equal access" – superficially appealing slogans all -- they will do so. They will fight to preserve special regulatory protections that allow them to ride on top of the networks of others under favored financial terms.
But they should not prevail arguing for such a backwards-looking approach. The net neutrality regime adopted by the FCC in 2010 is harmful enough without introducing further regulatory micro-management.
Mr. Porter may wish to propel the Internet backwards to the dial-up era, but we must hope the nation's policymakers don’t agree. If they do, to steal a line from former FCC Chairman William Kennard: "That is not good for America."