Rent Seeking and the New Net Neutrality Rules

Net Neutrality
Yesterday the Federal Communications Commission voted to implement net neutrality rules banning internet service providers (ISPs) from privileging content from any one source over another. The worry was that ISPs would create “fast” and “slow” internet lanes based on payments from content creators. A company like Netflix might pay Comcast for priority on its broadband network, relegating competing companies to slower, stuttering service. Allowing that to happen, net neutrality advocates say, would result in a two tier access to the internet that will hurt poorer Americans, discourage internet startups, and line the pockets of already wealthy ISPs. Given how widely hated ISPs are–11 of the 15 least popular companies in America are cable or broadband providers like Comcast, Time Warner, and Charter Communications–it’s not surprising that a record 3.7 million pro-net neutrality comments were registered with the FCC in 2014.

ISPs and others opposed to net neutrality have argued that the rules will slow the expansion of faster broadband. Making broadband less profitable, the argument goes, will give companies less incentive to invest in new lines. Furthermore, opponents note that future internet innovation could very well depend on paid prioritization. For example, as telemedicine applications boom, wouldn’t you want your connection to your doctor across the country to be prioritized over someone playing Call of Duty? Lag when you’re shooting fake terrorists is less dangerous than if a doctor is controlling a distant surgical robot in a real isolated military outpost.

One of the odd aspects of the debate is how theoretical it is. The internet is one of the great technological innovation success stories of the past two decades and it became so with very little government regulation. Why, suddenly, are new rules needed now? After all, there is only a single concrete violation of net neutrality principles in recent years. In 2007 the FCC slapped Comcast’s wrist for “bandwidth throttling” when it discriminated against peer-to-peer traffic (P2P) . At the time ISPs had found that a massive proportion of bandwidth was consumed by P2P activity, between 49 and 95% depending on time of day, with most of that traffic coming from less than 1% of internet users. Heavy P2P downloaders of (mostly) illegal music, movies, porn, and games were clogging up the internet for everyone else. Comcast started throttling speed for those uber-users in order to speed up other customers who paid just as much for access. Yet net neutrality advocates worried that the action set a bad precedent. Comcast backed off under FCC pressure.

It’s a debatable issue, but what concerns me, as well as the generally pro-net neutrality Electronic Freedom Foundation, is how vague some of the new rules appear to be (the text of the new rules won’t be released for several more weeks). As the EFF put it in a letter to the FCC:

A “general conduct rule,” applied on a case-by-case basis with the only touchstone being whether a given practice “harms” consumers or edge providers, may lead to years of expensive litigation to determine the meaning of “harm” (for those who can afford to engage in it). What is worse, it could be abused by a future Commission to target legitimate practices that offer significant benefits to the public.

When the EFF refers to “those who can afford to engage in it,” its has in mind very profitable ISPs like Comcast, which had a cool $2.59 billion in income in its last reported quarter. Well-heeled companies are better able to afford to fight the rules in court as well as to cover the cost of compliance should they lose. ISPs should come through the new rules, whatever they end up being, relatively unscathed; they might not like them, but they’ll find a way to turn them to their own benefit. Regulation that preserves the status quo tends to favor incumbents and the new rules–which don’t appear to include an unbundling provision–may make it harder for new entrants to compete in the marketplace. Product differentiation, a key way for new companies to compete with incumbents, is now banned although they’ll still be able to compete on price.

Might this hurt new internet content creators as well? Imagine you’re a challenger to Netflix trying to break into the world of online video streaming. They are the 600 pound gorilla. So you make a deal with Google Fiber to allow their base level users–who pay nothing for 5 mbps download speeds–to also receive the 15 mbps speed necessary for HD streaming for no charge but only for your service. It’s a loss leader but it’s a way of trying to challenge the dominant market leader. Google wins–getting bucks from the upstart. The upstart wins–gets a shot at increasing market share. The public wins–get more free access to content. Only one person loses–Netflix.

Less you think this stranger than fiction, note that there are some past examples of cell providers trying to gain an edge over their competitors by not charging subscribers for data when they access certain websites or music services. There’s a precedent for this.

In that light, it’s no wonder that current internet companies tend to favor net neutrality. It protects them from future competitors. In other words, net neutrality isn’t just a story about little content creator Davids facing off against big ISP Goliaths. It’s also an attempt by incumbent internet content providers to protect against upstarts. Rent-seeking in all things, apparently.

Stay tuned later this week for some thoughts on how the FCC’s missteps with the Fairness Doctrine in the 1960s should give us pause over implementing net neutrality.