Net neutrality has benefits, and regulation has a role in ensuring its continuing existence, but there are several problems inherent in FCC telecom policy and the debate about net neutrality.
The new FCC chair (and Trump appointee) Ajit Pai has proposed reclassifying internet service providers as not “common carriers” under Title II of the 1934 Communications Act, thus reducing the available regulatory options for the FCC.
Net neutrality is the concept that all internet traffic should be treated identically by Internet Service Providers (like cable companies) or governments regardless of content, protocol, users, destination, sources, etc. It means that loading a webpage from this blog would not cost you more than loading a webpage from a large company, assuming the content size is similar.
The FCC has broadly promoted net neutrality in the past. Around 2008, the FCC blocked Comcast from slowing the speed of its users who were utilizing BitTorrent to download videos. Comcast appealed and won, with an appellate court ruling that the FCC did not have the anciliatory jurisdiction over Comcast’s network (Comcast v FCC). The FCC next tried to issue an Open Internet Order in 2010, but in Verizon v FCC, that order was largely vacated, as the same appellate court ruled that the FCC could not regulate ISPs unless it classified them as common carriers under Title II of the 1934 Communications Act. In 2015, the FCC classified ISPs as common carriers under Title II and enforced net neutrality rules.
Problems with Title II
A big problem with Title II is that it was written in 1934, 21 years before Tim Berners-Lee, the inventor of the world wide web, was born. In fact, the vast majority of Title II is so useless that when Tom Wheeler proposed ISPs be classified as common carrier, he said that of the 61 Title II sections, the FCC would forebear from applying the entire title except six sections (201, 202, 208, 222, 254, and 255).
One question I cannot answer without more specific legal expertise is whether Wheeler’s rule only allows the application of those sections, or if in the future the FCC can unilaterally decide to apply other sections of Title II, now that ISPs are seen as common carriers. For example, Section 224 of Title II relates to pole attachments. Can the future FCC regulate broadband providers’ pole attachments if they wanted to under Wheeler’s rule? If not, they can certainly write a new rule that applies all of Title II by a vote of the commission.
Perhaps a better solution would be for Congress to pass a new law allowing the FCC to regulate net neutrality, but bar the FCC from regulating ISPs under Title II otherwise. This would narrow the FCC’s focus officially to what consumers care about. Of course, that would require Congress to actually act correctly, which I don’t have much faith in.
Is Title II regulation overwhelming and innovation killing? Ajit Pai has argued so. The New York Times editorial board disagrees, but their argument seems quite lacking. They dismiss Pai’s claim that broadband capital investment declined since Title II classification as “alternative facts”, but a simple Google search reveals why they found numbers that conflict with Pai. The source, the Free State Foundation, calculated a trend line of broadband capital expenditures since 2003. They calculated the expected expenditures after the Title II regulation as compared with the actual. So while capital expenditures actually increased after the regulation, they increased less than the trend line indicates they should have.
Is it misleading for Pai to say capital expenditures decreased? Yes, or at the very least it’s imprecise. Is it misleading for Title II proponents to say there has been no effect? Probably, although trend lines are tricky. Additionally, the Times argues that the pattern of increased consolidation in the telecoms industry is a symptom of a healthy economic sector. This is a non sequitur. Mergers and acquisitions could be symptoms of profitable or unprofitable companies, depending on who is buying who, but ultimately to me it seems more indicative that economies of scale exist. One possible explanation for recent increase in economies of scale could be an increased regulatory burden. I don’t know if that’s the case, but to suggest that Charter’s purchase of Time Warner is a symptom of a healthy telecoms sector is the Times projecting their own political views onto market actions.
Problems with Net Neutrality
Ajit Pai has argued (in this Reason interview) that ISPs were not favoring some internet traffic over others. This seems incorrect. Comcast v. FCC was specifically about Comcast reducing the speed of some types of traffic. John Oliver points out that Google Wallet was not allowed to function on phones on the networks of AT&T, Verizon, and Sprint since it competed with a joint electronic wallet venture of those companies. On the other hand, Google Wallet still out-competed the networks’ own payment system despite being banned on those platforms. Consumer response was so positive on other networks that the consumers demanded it on AT&T and Verizon. Eventually the joint venture folded and got absorbed by Google Wallet/Android Pay.
Moreover, a few phone networks have run afoul of net neutrality rules by giving consumers free data for certain services, e.g. T-Mobile allowing streaming music to not count against a customers’ data cap. If the service provided by the content producer is so profitable that it can afford to pay for its own bandwidth, is it wrong to give that bandwidth to customers free of charge?
The economics here is complicated. In a perfectly competitive market, content producers could only charge for the marginal cost of producing more content while ISPs could only charge the marginal cost of additional bandwidth. Consumers would pay each company for their respective consumption of their products.
But we don’t have a competitive market, either for content producers (only HBO has Game of Thrones, only Netflix has Stranger Things) and especially not for ISPs. Since cable ISPs are state granted monopolies, there is a solid argument for regulating them, as they have leverage over content producers. That argument does disappear though when there is competition, such as there is for wireless broadband.
It is also worth pointing out that the importance of “neutrality” towards content is only narrowly valid. For example, bandwidth at certain times is more valuable. The Economist has suggested electric power be charged at different rates when used at different times. Similar arguments could be used for internet usage. It is also undeniable that some internet traffic really is more important, and consumers would be willing to pay more to have their bank notifications or business calls come through faster than YouTube videos, which they might be ok with allowing to buffer. Certainly we would want consumers making this decision and not ISPs, especially when there is little ISP competition for most end users. Additionally, such prioritization could be done by software on the consumer/LAN side of the router, and ISPs should likely just be dumb pipes that deliver what we tell them to.
Finally, we should be cautious about locking in rules even if they make sense today. Markets change over time, and there is a possibility that past rules will restrict innovation in the future. Since competition itself can defend against bad ISP behavior (perhaps even better than the FCC), having the FCC focus on increasing competition seems at least as vital as net neutrality. Interestingly, this is what Ajit Pai has argued for (see Reason interview above).
Today it seems likely that a policy of net neutrality by cable ISPs is more beneficial than not. It also seems likely that to protect that idea today, some form of regulation is needed on cable companies that are state granted monopolies in a given area. Such regulation is not as clearly necessary in wireless providers, and we should always be reviewing the importance of FCC regulations in order to avoid a curtailment of innovation. Additionally, any regulation should come from new Congressional legislation, not a law written 80 years ago. However, the benefits of net neutrality should not be taken as given. Variations in the consumer value of content priority as well as bandwidth scarcity during peak hours are perfectly acceptable ways to prioritize internet traffic. The problem arises when monopoly ISPs are doing the prioritizing rather than consumers.