The end of the Obama administration’s regulatory regime known as net neutrality has brought with it prophecies of impending doom from across the political spectrum. Leaving aside the hyperbole, most objections stem from concerns that Internet service providers (ISPs) will start “discriminating” by offering preferential speeds and bandwidth allocation to certain websites or companies that pay for a higher tier of service. ISPs would, therefore, start to throttle the Internet speeds of normal users. This may well be the result, however, imposing stifling regulations that cement the current dominant players is only going to make to situation worse.
By: Sam Estep
This article first appeared at Mises.org
The reasons ISPs might be inclined to engage in these practices are mainly twofold: one, ISPs lack any competition in many parts of the country. Two, Internet traffic is increasing and ISPs are looking for ways to raise capital in order to accommodate that growth.
Before we address these issues it is worth making an important distinction: so-called “net neutrality” isn’t simply a regulation, it is a total reclassification of the Internet from an “information service” to a “telecommunication service.” This may seem like simple semantics, but the latter classification has been around far longer, and has, consequently, accumulated a bevy of regulations and restrictions confining it.(In fact the classification “information service” was created specifically to help the Interet avoid the more stringent regulation of telephone and cable services.) The FCC’s goal in this reclassification was to bring the Internet under the purview of Title II of the Communications Act of 1934, specifically, SEC.202:
It shall be unlawful for any common carrier to make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services for or in connection with like communication service, directly or indirectly, by any means or device, or to make or give any undue or unreasonable preference or advantage to any particular person, class of persons, or locality, or to subject any particular person, class of persons, or locality to any undue or unreasonable prejudice or disadvantage.
However, this reclassification has far more implications than the above. One must only peruse a little further down Title II until they happen upon this passage from Sec 214:
No carrier shall undertake the construction of a new line or of an extension of any line, or shall acquire or operate any line, or extension thereof, or shall engage in transmission over or by means of such additional or extended line, unless and until there shall first have been obtained from the Commission a certificate that the present or future public convenience and necessity require or will require the construction, or operation, or construction and operation, of such additional or extended line.
Clauses like this have been particularly hard on Small ISPs, and were one of the main reasons for the FCC’s re-evaluation of net neutrality. Even though the Title II regulations no longer directly apply to ISPs, a lack of competition still thrives off the fact that the parent companies of most ISPs are telecommunication and cable firms, which are still covered under the act. Such “common carriers” are given benefits similar to public utilities, meaning their position is secured while prospective competitors must divert resources into lobbying the gatekeepers at the FCC for a certificate or waiver. But it isn’t just federal interference that hampers competition. Fees for so-called “rights of way,” in which local governments act as needless middlemen, are another impediment. Impositions such as these effectively give telephone and cable companies government granted monopolies over certain parts of the country.
Declassification of common carriers and public utilities, repeal of charters, as well as other government constructed barriers, would allow more regional providers to compete with national ones. Such a deregulation would force companies that have exceeded their ability to function effectively due to their size, but are still being protected from competition by regulations to fail. As Thomas Sowell describes in Basic Economics:
While there are economies of scale, there are also diseconomies of scale. There may be things that companies could do better if it were larger and other things it could better if it were smaller. Eventually, diseconomies of scale begin to outweigh the economies, so it does not pay a firm to expand beyond that point. This why industries usually consist of many firms, instead of one giant, super-efficient monopoly.
The idea of a dysfunctional economy of scale propped up by regulations isn’t just a theory. Consider how regulatory reforms, such as the Airline Deregulation Act of 1978 and the Bermuda agreement (which allowed domestic airlines to compete internationally) exacerbated Pan-Am’s demise and opened the way for regional airlines that had previously been restricted to domestic flights, e.g. United Airlines and Southwest, to rise to prominence in subsequent years. Consequently, Airline ticket prices have been dropping ever since. More regulations, especially those imposed under Title II, only tighten the hold of already powerful businesses in the sector, as well as discouraging investment in the Internet all together.
Another similarity between ISPs and the airline industry is that ISPs overbook. Have you ever noticed that your files are not downloading as fast as your plan advertised, or that the Internet seems slow on some days? While many things can cause these issues, usually it’s down to the fact that most ISPs simply can’t handle all, or even most, of the data usage they have allotted their users. ISPs routinely throttle user speeds for this very reason. So, unless net neutrality were simply about the right of all internet users to be suppressed equally, allowing ISPs to create tiers of preferential service would afford users more control over the Internet, not less.
Furthermore, due to the ever increasing demand for high quality streaming services, companies like Netflix and Youtube take up more and more bandwidth. Therefore, with increasing demand and supply decreasing in turn, ISPs will inevitably raise prices on data usage until supply can be increased. In a free market the high demand for internet services, coupled with the inability of the current lot of ISPs to fully provide the services they advertise, would lead to scores of startups and competitors. However, the innumerable amount of regulations and outright monopolistic grants of the status quo, only discourage investment exacerbating the problem. Likewise, the potential profits from a foray into the industry would have to be so high as to outweigh the capital and time wasted on convincing the FCC and local governments of the company’s benevolent intentions. Repealing regulations lowers the point at which entrepreneurs and investors are willing to startup invest in competitors that, in turn, increase supply, thus decreasing the incentive for ISPs to ration their limited capabilities by implementing higher tiers of service.
Perhaps most concerning is the claim is that, without net neutrality, ISPs will start splitting the Internet into packages as in Portugal. However, this neglects the important detail that Portugal is already under the jurisdiction of the EU’s net neutrality regulations. As well as the fact that the ISP accused of this was, in fact, offering extra data for specific content in addition to their standard plan, not as an exclusive service as was misleadingly claimed.
Many comparisons can be drawn between the current consolidation of ISPs and the monopoly power by enjoyed by AT&T until it’s dissolution via antitrust law. However, the most distinct similarity is the special relationship AT&T held with the US government, which culminated in AT&T’s nationalization in 1918. This uncannily mirrors the relationships that modern ISPs possess with local and state governments. Net neutrality was simply another government intervention to protect the “public interest” from “natural monopolies” despite the history of such pretenses being destruction of competition, consolidation, and eventual monopoly.
While it may be gone for now, unless a larger deregulation occurs, the increasing consolidation of the ISP industry will inevitably be blamed on net neutrality’s elimination.
This article first appeared at Mises.org