Net Neutrality

The FCC’s Noticed of Proposed Rulemaking (NPRM) on May 15, 2014 provides a formalized structure to receive and consider comments on how best “to protect and promote an open Internet” in the United States. The NPRM comes four months after the D.C. Circuit Court of Appeals, in the Verizon vs. FCC case, struck down the no-blocking and non-discriminatory (net neutrality) rules proscribed in the 2010 Open Internet Order on the grounds that the Commission was trying to apply common carrier rules to firms not classified as common carriers.  In an attempt to develop new rules, FCC Chairman, Tom Wheeler, indicated that Section 706 should “empower it to promulgate rules governing broadband providers’ treatment of Internet Traffic.”  He offers reclassifying broadband providers as common carriers as an option.

While some lawful/regulatory framework is necessary, I would caution regulators not to go too far.

Specifically, classification of broadband providers as common carriers under Title II of the Communications Act (1934) would be an unnecessary overreach and would likely contribute to:

• Significant uncertainty in the short-run
• Diminished incentive for investment by broadband providers
• Discouraged entry by potential broadband providers
• Regulatory inefficiencies from compliance costs and encouragement of rent-seeking activities

A comparison to traditional Pay-TV might be useful:

•  In most markets and for the vast majority of households, the number of MVPD competitors is in the range of two to four.  This is true for broadband services as well.         Both services require huge start-up capital and significant size to extract economies of scale and scope in operating the businesses.
• The Pay-TV industry was regulated, deregulated, re-regulated, and then deregulated again between the years of 1984-1996.  Regulation was not effective in curbing price increases, nor was it effective in encouraging new entry or significant investment.   
• In the business contracts between Pay-TV companies (the pipe) and content providers (networks like ESPN), prices and terms are negotiated between the parties.  There is a mutual dependency.  But, higher quality, popular networks, such as ESPN, expect and receive significant premiums for their content.  Both sides take risk: risks in building and operating the network; risks in creating and marketing the content.  If networks are unpopular, the Pay-TV provider can elect to scale-back or discontinue the relationship based on the terms of the contract.  What’s different with broadband?  Shouldn’t the broadband providers, who made the huge investment, be permitted to earn a return on that investment commiserate with the risk taken and therefore determine the business relationships they have with content providers?  Isn’t broadband more like Broadcast/Pay TV than natural monopoly utility services like water and electricity? 

With that said, there should be guidelines enforced by the FCC that ensures open and non-discriminatory access to the Internet.  Basically, the government should establish the rules of the game.  But, after that, broadband provider should have the freedom to determine the terms of the business relationships with content providers.  The market, not the broadband providers or the government, should decide the winners and losers.