The Problem with Giving Verizon the Benefit of the Doubt

In August, Verizon and Google agreed on principles to help create a better Internet for the future. But a new paper (.pdf) on net neutrality from New York University Law School's Institute for Policy Integrity finds a few flaws with the plan. Although much of the paper titled "The Value of Open: An Update on Net Neutrality" is controversial, there is one point in particular that's quite strong. It assets that ruling proactively on pricing strategies is better than ruling reactively.

The Verizon-Google agreement provides Internet service providers (ISPs) like Verizon the freedom to manage their traffic. But it says that their pricing strategies could be overruled by the Federal Communications Commission (FCC) if it receives a complaint. The FCC's net neutrality plan, however, forces ISPs to prove that any price discrimination fits with the exceptions set forth by the FCC before being permitted.

On this issue, the FCC's plan is better. The Institute for Policy Integrity's paper explains why:

Given the significant uncertainty associated with allowing a price discrimination regime, the burden should fall on ISPs to explain how their practices fall within either the "reasonable network management" or "managed services" exception. Both of these exceptions should be well-defined and carefully circumscribed. Allowing ISPs to operate under a regime where there is a presumption in favor of their practices--such that small and under-capitalized firms and consumers are put in a position of having to affirmatively challenge ISP practices that breach neutrality--will create disincentives for content providers to enter the market.

Imagine a new startup content provider under the Google-Verizon plan. In order to create a dotcom, you need an initial investment before you know if it will be a success. A good business plan would require a budget of potential costs and revenue. But if ISPs have limitless flexibility to decide how to manage their network, then a startup will find it impossible to determine a reasonable estimate of its costs.

Let's consider an example. Think back a few years to when Twitter was being formed. How would each plan have encouraged or discouraged its formation?

FCC Plan

Under this plan, there is a fair amount of certainty around the costs ISPs might impose on the startup. They can't simply change their pricing at their discretion, but must first submit changes to the FCC for approval. If, for example, an ISP decided to create a new rule that imposed higher costs on websites with more than one million unique users per day, then Twitter and others would have the opportunity to lobby the FCC and complain about how it would affect their business models. The content providers may or may not win that battle, but at least the rule wouldn't be imposed on them immediately so that they would have time to plan for the change. Moreover, rules that the FCC would have forbid anyway will never be put in place at all.

Google-Verizon Plan

Imagine that same situation, but under the Google-Verizon Plan. Now, an ISP can put the rule in place immediately. Knowing this, a potential startup like Twitter might have far more trouble determining its costs. Even if it fights a pricing change and wins, there may be some time under which it must live under the rule. And it will also deal with the possibility that the FCC doesn't want to disturb the status quo, which in this case gives the benefit of the doubt to the ISPs instead of the content providers.

And that's really the crux of the problem with this aspect of the Google-Verizon plan. It creates much more uncertainty for new startups -- which is something that Internet regulation should definitely attempt to avoid so to encourage innovation, as long as such regulation doesn't impose undue cost on ISPs. In fact, ISPs can still attempt to impose precisely the same pricing rules, but must have them approved first. That makes the FCC's approach much safer, as new startups will better understand the environment they intend to enter due to greater certainty.