The internet is not a utility, and should not be regulated like one (Part 1: net neutrality)

For over two decades since its inception, the internet has remained largely free of state regulation and control. In the U.S., where the majority of global digital innovation has originated, the federal government took a light-touch approach. This reflected both an unusual humility on the part of public officials about their ability to understand a wholly new area of economic life, and the need to let the web flourish without government meddling. A similar approach was followed in Europe, which, despite being home to promising start-ups and a growing e-commerce sector, has not yet been able to match American digital leadership.

Alas, the years of entrepreneurial freedom and unprecedented innovation in the digital sphere could well be behind us soon. On both sides of the pond, a majority of policymakers are determined to subject the web to the sort of regulation that choked off competition and innovation in other sectors. From net neutrality to unbundling and platform regulation, it looks like the internet will be the next victim of laudable intentions followed by disastrous outcomes.

Let’s start with net neutrality. If the principle is enshrined in U.S. law (and EU law as part of new telecoms regulations), internet service providers (ISPs) will not be able to differentiate tariffs on the basis of the type and amount of data used by different services. In other words, traffic from content-streaming companies like Netflix will be treated equally to traffic from e.g. e-mail services. ISPs will not be able to prioritise less data-heavy traffic, or to ask Netflix (and by extension its customers) for a premium for preferential access to its broadband network. Superficially, it seems like a good idea in terms of consumer well-being and fairness – everyone is treated the same and no one has to pay extra, right?

Wrong. The reality is that not all internet traffic is equal, and not all consumers are willing to pay the same for access to content and speed. Removing the ability of ISPs to reflect the variation in the cost of content provision, and in consumer tastes, in their prices, fundamentally distorts the market for data. The consequences are predictable: uniform pricing and content delivery structures which do not work for many users, and underinvestment in broadband infrastructure due to users’ inability to pay for premium access. This is not to mention the fundamental objection that net neutrality undermines property rights, by preventing ISPs from charging for use of their services as they see fit.

Most poignantly, because ISPs cannot discriminate on content, they are unable to offer data-light services to low-income consumers without the expensive add-ons. Think of Facebook in Africa: In the absence of net neutrality regulation, users are able to access its messaging service and post statuses without downloading pictures or videos. With net neutrality, ISPs would be forced to offer either both or none, with the likely effect of pricing lots of Africans out of the market and excluding them from the world’s most popular social network.

So, under the guise of fairness and internet access for all as championed by net-neutrality proponents, we will probably end up with a substandard infrastructure, content delivery that is not optimal for most, and a systematic preference for higher-income users. Hardly the egalitarian, frictionless digital society that internet utopians routinely promise.

Proponents of net neutrality claim that it fosters innovation – or rather, that its absence would raise barriers to entry for start-ups. They argue that if Netflix can pay for preferential access to broadband, the two MIT drop-outs who may currently be developing the ‘new Netflix’ in a garage will not be able to compete effectively, because they will lack the resources to offer the same speed to potential customers.

Yet this fundamentally misunderstands the nature of innovation. One does not innovate by bringing to market a product that is identical to what is currently on offer, but by using resources more efficiently to better cater to consumer tastes. Amazon may have lacked Barnes & Noble’s massive network of bookstores, and Uber did not enjoy the luxury of a government-sanctioned cartel on private passenger transport – yet they both turned the market for their respective services upside down in a few years by using new technologies in ways no one had thought of before.

In other words, if our hypothetical MIT drop-outs can dream up a ‘new Netflix’ that adds value over the old one, there is no reason to believe that they will not be able to challenge the incumbent. And if they don’t, somebody else will.

More fundamentally, the belief that government intervention in the form of net neutrality is necessary to secure an ‘open internet’ assumes a static world in which content access and delivery, as well as broadband technology, remain largely the way they are today. Attempts to predict the future state of technology is fanciful in any sector, and especially so when it comes to the internet. We cannot know – but what we do know is that information technology has ushered in the most dynamic and transformative age in generations, and that even the largest market share cannot shield dominant players from losing their hegemony in a heartbeat.

IBM, Apple, Microsoft, you name it – all of these at one point or another looked like a new Standard Oil, the kind of corporate behemoth that antitrust authorities needed to tame in order to ensure a ‘level playing field’. Yet in due course, market forces and innovation driven by new technologies have turned their size and incumbency into a liability, giving rise to new players.

The openness and innovation we associate with the internet has been predicated on the very absence of the sort of regulation we see in other, more physical sectors of the economy. And indeed there is no more sure-fire way of keeping an incumbent afloat beyond its expiry date than filling its area of business with requirements and controls that only large, well-established players can navigate – just look at energy, the railways or indeed large parts of the financial industry.

In the long run, only free markets ensure real competition, innovation and the well-being of consumers. Net neutrality is simply no match.

Policy Analyst at the Cato Institute's Center for Monetary and Financial Alternatives

Diego was educated at McGill University and Keble College, Oxford, from which he holds degrees in economics and finance. His policy interests are mainly in consumer finance and banking, capital markets regulation, and multi-sided markets. However, he has written on a range of economic issues including the taxation of capital income, the regulation of online platforms and the reform of electricity markets after Brexit. Diego’s articles have featured in UK and foreign outlets such as Newsweek, City AM, CapX and L’Opinion. He is also a frequent speaker on broadcast media and at public events, as well as a lecturer at the University of Buckingham.

1 thought on “The internet is not a utility, and should not be regulated like one (Part 1: net neutrality)”

  1. Posted 05/04/2015 at 20:26 | Permalink

    Outstanding analysis of a controverted issue.
    Partially because of net neutrality Europeans are subsidizing the deployment of broadband in rural areas.
    Net neutrality is not free.


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