The case against net neutrality regulation

In his State of the Union address, President Barack Obama assured us that he intended to ‘protect a free and open internet’. To ascertain what Mr Obama means by a ‘free and open internet’, it is necessary to go back to last November, when he made an unexpected statement about the future of internet and net neutrality regulation. For Obama,

‘An open internet is essential to the American economy, and increasingly to our very way of life.  […] We cannot allow internet service providers (ISPs) to restrict the best access or to pick winners and losers in the online marketplace for services and ideas.

To achieve this, Obama called for a set of rules which he described as ‘simple, common-sense steps that reflect the internet you and I use every day’, including:

  • ‘No blocking.  If a consumer requests access to a website or service, and the content is legal, your ISP should not be permitted to block it.

  • No throttling.  Nor should ISPs be able to intentionally slow down some content or speed up others based on the type of service or your ISP’s preferences.

  • Increased transparency […]

  • No paid prioritization. Simply put: No service should be stuck in a ‘slow lane’ because it does not pay a fee […] So, as I have before, I am asking for an explicit ban on paid prioritization and any other restriction that has a similar effect.’

So, this is it: the internet should remain ‘open’, because this is what America desires, and this desire justifies the imposition of a set of limitations on broadband network providers.

The internet has so far remained ‘open’, not because of any regulations or supposed in-built principles, but because for the moment, its users prefer it to be so, and are prepared to pay for it. So any internet provider who wants to stay in the market has to offer ‘open’ access to all content, otherwise they would be expelled from the market. It is due to the absence of regulation that the internet currently reflects the desires of its users.

But what if users decide they do not want an ‘open’ internet in the future? There are plenty of platforms which are not ‘open’ and, notwithstanding, are still favoured by some consumers, such as iTunes and the Apple ecosystem. In this ‘walled garden’, Apple ‘picks winners and losers’ (to use Obama’s words) and nobody complains. It is in Apple’s interest to choose the right ‘winners and losers’ if they want to retain their customers. Indeed ‘winners and losers’ have to be picked by someone, even if the internet is open.

Obama’s underlying assumption seems to be that telecommunication capacity is infinite, and that leaving its management in the hands of ISP owners would run against social welfare. However, telecommunication capacity is limited, especially in the case of mobile networks, and, just as any other scarce resource, it requires management. And management of a resource consists essentially of blocking, throttling or prioritising uses of it.

A corner shop decides what goods to sell (thus ‘blocking’ other goods), which price to charge for them (thus ‘throttling’ or ‘speeding up’ their sale) and where on the shelf to put each good (thus ‘prioritising’ some goods over others). If the shop had infinite capacity, the owner would not have to do that. But given that this is not the case, the relevant question is not whether retail space should be managed, but who should manage it: shop owners, or politicians. In the case of the corner shop, it is a no-brainer: owners will try to manage the shop facilities in the way that best serves their customers, because their economic survival depends on that. Few people would advocate ‘shop neutrality’ regulations imposed on the corner shop. Net neutrality regulation is not fundamentally different.

The net neutrality regulation debate can be compared with the case of the corner shop. It is not a matter of whether capacity should be managed, but of who should allocate the available capacity for data transmission. If an operator were to arbitrarily block contents desired by their users, these users would switch to a different operator. There are no economic reasons why an operator should block desired content: after all, they are in the business of carrying traffic, not of blocking it.

A similar analysis applies to the other practices that Obama proposes to ban: throttling, speeding up or paid prioritisation. Once again, this would not be required in a world of unlimited telecommunication data capacity. But in the real world, throttling or speeding up things is necessary to provide services with a reasonable quality in a congested environment.

If an internet provider tries to do these things against the preferences of their consumers, it will be punished by a loss of revenues. It may be tempted to do so, for example, by favouring its own TV service against other similar services. But if its customers do not want to watch that content, and start having problems with their preferred services, they are likely to move to alternative providers. So, in order to get a small increase in revenues, the operator is actually risking a lot of connectivity revenue. It is difficult to see why they would do this unless compelled by the need to manage a limited resource.

The case against net neutrality regulation becomes stronger when adopting a dynamic perspective. When demand outstrips supply, and when supply is constrained by a lack of capacity, the owner of a corner shop would probably consider expanding their capacity, for example by acquiring additional premises. But the more limitations the government places on how they manage that capacity, the less willing the owners will be to invest.

The same logic applies to telecommunication networks. If operators anticipate they will not be able to freely manage the telecommunication capacity they build, they will invest less. So, amid the current explosive growth in smartphones and video services, we would start experiencing a decline in quality, both because management of the scarce resource is not left to those who would benefit most from managing it, and due to reduced incentives to increase capacity.

US citizens do not want or need an open internet. What we all want is free internet, which may or may not be open, depending on consumer preferences. If no net neutrality regulation is imposed, this will come about naturally, as it has in the past. If regulation is imposed, we may achieve an open internet, but we should not pretend that forcing it open will not come at a huge cost for individuals and society.