Net Neutrality: No One Will Be Satisfied, Everyone Will Complain

Chairman Julius Genachowski of the Federal Communications Commission is set to introduce a proposed Order at the FCC's meeting today on the highly contentious Network Neutrality issue.

The proposal seeks a middle ground among broadband ISPs (such as Comcast, Verizon and AT&T), content providers (such as Google, Microsoft, Yahoo and Amazon), and public interest groups (such as Free Press and Public Knowledge), a difficult if not impossible task on this supercharged issue. One thing is sure; no one will be satisfied, everyone will complain.

The focus of debate has been upon what rules will be embedded in the order. Transparency is sure to be included (we strongly agree) as well as a non-discrimination rule (sounds good, but what happens when the first spam factory complains an ISP is blocking their traffic?), both of which would apply to wireline and wireless broadband. We have argued before that wireless is a quite competitive industry with special technical and capacity issues and the FCC should back off. They have indeed backed off somewhat from earlier proposals, but certainly not all the way.

Apparently, the FCC will signal that permitting usage-based pricing to customers will be OK (which is true today, but few wireline ISPs do it). Charging content providers for superior service, however, will not be OK. Seems the Post Office can offer express service and first-class service without attracting negative comment, but ISPs will not be able to offer such services to content providers. Incidentally, such "paid priority" services (in the form of third-party caching services, such as offered by Akamai) have been in use since 1998; many content providers who value speedy delivery of content are Akamai customers. So why can't ISPs be in the same business?

But is this focus on the rules in the Order appropriate? We think not. Those of us who have spent time at the FCC and have worked in this area understand that the bigger problem is that this order will sweep broadband ISPs, and potentially the entire Internet, into the Big Tent of Regulation. What does this mean?

When the FCC asserts regulatory jurisdiction over an area of telecommunications, the dynamic of the industry changes. No longer are customer needs and desires at the forefront of firms' competitive strategies; rather firms take their competitive battles to the FCC, hoping for a favorable ruling that will translate into a marketplace advantage. Customer needs take second place; regulatory "rent-seeking" becomes the rule of the day, and a previously innovative and vibrant industry becomes a creature of government rule-making. Advocates of government-mandated network neutrality have argued this is necessary to permit new and resource-poor innovators to bring their products to market; in fact, it will have exactly the opposite effect: innovators are better at fighting it out in the market with better products rather than fighting it out in front of the FCC with high-priced lawyers; they will lose out. The best example: since the inception of the Internet, backbone networks, regional networks, and content delivery networks have exchanged traffic under privately negotiated contracts (call "peering" and "transit" contracts) with no "help" from regulators. Recently, Level 3, a backbone and now content delivery network, has complained to the FCC that Comcast is renegotiating their contract in ways that violate network neutrality. Level 3 discerned that the FCC was now willing to inject itself into contracts that were previously privately negotiated, and that Level 3 could gain a negotiating advantage over Comcast. Unfortunately, the FCC has just agreed to "investigate" Level 3's allegations. And so it goes; market negotiations are trumped by a regulator too willing to inject itself into what has always been private transactions.

The real tragedy of the Chairman's Network Neutrality proposal is not the rules; it is that we are finally bringing "the Dead Hand of Regulation" (to quote James Q. Wilson) to the Internet, with all its attendant legal wrangling, rent-seeking and special pleading. Goodbye, innovation. Hello, government regulation.