By Thomas W. Hazlett
About the author: Thomas Hazlett is Hugh H. Macaulay Endowed professor of economics at Clemson University, and formerly served as chief economist at the Federal Communications Commission.
The Federal Communications Commission has voted on yet another round of net neutrality rules. Its vote Thursday reprises the 2015 rules, which resuscitated the 1934 Communications Act for modern, high-speed broadband networks. The agency decided, by a partisan split of 3-2, to end the " abdication of authority over broadband in 2017" and the ensuing years of "no federal oversight."
Specifically, the regulators are acting to "re-institute...rules that prohibit blocking, throttling, or engaging in paid or affiliated prioritization arrangements." Alas, such activities may be either pro- or anticompetitive, and the latter are already mitigated by both market incentives and governed by federal antitrust law.
The argument the FCC has crafted for net neutrality regulation is a non sequitur. The internet had evolved with open access, explained the FCC in 2010, with end users enjoying freedom to connect anywhere and virtuous circles of creativity forming all about. Yes, amazing. And all this via privatization of public facilities, investments by entrepreneurs, and the magic of market design. In response, the FCC applauded and declared: We must regulate the contracts and business models in this spontaneously emergent network of networks to protect it. Well, there's your non sequitur.
Tombstones bearing memories of "the internet, R.I.P." went viral when net-neutrality rules were overturned previously. Hysteria gripped cyberspace -- and spilled over, as in 2019 when an activist was sentenced to prison for threatening to kill FCC Chair Ajit Pai's family over the state of the rules. But whereas the commission received 22 million comments in its 2017 deregulation (of which about 1.3 million looked to be nonduplicates), just 52,000 were filed this year. The flames have died down, perhaps, because the death of the Internet has been greatly oversold.
And because the FCC's own "oversight" when it did try to regulate was an embarrassment. Take the 2010 Open Internet Order. It asserted that it would prevent broadband internet service providers "from deliberately interfering with consumers' access" to content. But the suspect the FCC singled out was MetroPCS, a small, discount mobile carrier that sold low-income shoppers a cut-rate unlimited talk and texting plan. To boost sales, it innovated. Reducing costs by using a relatively low-bandwidth network, it mitigated congestion by blocking voice-over-internet apps and most video services -- but then gave unlimited access to YouTube. The popular service was made network-compatible when Google (YouTube's owner) devised a compression technique to enhance spectrum sharing. MetroPCS had nothing to gain by the blocking save a better bargain for its customers.
Yet, the first complaint under the new net neutrality rules was filed against the upstart. Wired reported the problem: "MetroPCS, the nation's fifth largest mobile carrier, announced earlier this week it...would block online video streaming -- except for YouTube...The plans seem to be in conflict with the FCC's new net neutrality rules." Oops. Not the behemoth broadband operator the program had been aiming for.
The episode taught keen observers at least two things. First, "blocking" is not a categorical bad. The local internet connection is a shared resource, and your service provider logically manages the link to optimize value. IT administrators at universities and nonprofits routinely block, forbidding certain apps such as Skype to maintain overall throughput. There is no plausible rationale about "foreclosure" of competition.
Second, the above point is so clear -- and so undermines the premise of categorical rules under "net neutrality" -- that regulators themselves have subtly edited their approach to include exceptions for "reasonable network management" while adopting "case-by-case" determinations.
Take T-Mobile's "Binge On" program in 2016, when the 3rd-largest mobile carrier gave subscribers unlimited streaming from Netflix, Amazon, and dozens more websites. This "zero rating" did not count against the customer's data cap -- as did shows from competing programmers. In addition to this discrimination, T-Mobile limited data rates across all video services -- "throttling." Slate noted: "T-Mobile Is Likely Violating Net Neutrality."
The FCC rejected the claim. "It's clear in the Open Internet Order that we said we are pro-competition and pro-innovation," responded Chair Thomas Wheeler. Well, no -- it's not clear. But, yes -- extending customers more product at lower (zero) pricing at higher quality overall is pro-competitive -- exactly why actually enforcing tough net neutrality rules would prove not only costly and contentious but anticompetitive.
In truth, the vigil held for the internet ended with a margarita party; the patient is now tossing back victory shots. When net-neutrality rules were officially ended in early 2018, the average American household consumed around 240 gigabytes of data per month. By the end of 2023, consumption had risen to 641 GBs. The robust nature of unregulated U.S. networks had led to healthy investments in wired and wireless; the market responded to pandemic lock-down demands seamlessly; by 2022, America became a world leader in 5G coverage; and the U.S. internet has launched a revolution in video rivalry -- with cable -- and telco-supplied broadband networks streaming massive flows of competing traffic.
Companies like Comcast or AT&T were predicted to block just this access in the absence of enforced net neutrality. Harvard law professor Susan Crawford wrote in her 2013 Captive Audience: "The absence of any regulatory regime...makes it unlikely that Netflix will be able to challenge Comcast." Yet by 2021 Netflix had more subscribers than the entire cable TV industry and today boasts a market cap of $239 billion, having surpassed the once "dominant" Comcast ($160 billion). An open, free, and unregulated internet is doing its job.
Not so for broadband regulation under title II of the Communications Act. The new rules will not achieve much, but they do raise risks for investors, blunting positive momentum behind U.S. broadband growth. And first the lawyers get paid: The FCC rules will be litigated and likely be tossed by the current Supreme Court, assesses Robert Kaminiski of Capital Alpha Partners. If they do survive, either a GOP presidential win (bringing a Republican FCC) or GOP control of Congress would flip the card to Round 8. The net-neutrality bounce house yet offers plenty of thrills for the kids in Washington.
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April 26, 2024 14:46 ET (18:46 GMT)
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