Regulatory Panic Considered Harmful

The crushing defeat of the FCC’s Comcast order in the DC Circuit Court has advocates of strict net neutrality regulations scrambling to place their implicit regulatory framework on a solid legal footing. The case for legal jurisdiction seems so urgent that larger questions about the value and purpose of Internet regulation are in danger of being lost in the shuffle. FCC Chairman Julius Genachowski warns that the FCC has no means of protecting consumers from harm until the legal questions are resolved.  Amidst this background of regulatory panic, it’s worthwhile to ask whether the case for sweeping Internet regulations is as strong as many seem to believe.

According to the Court, the FCC’s theory of its jurisdiction over the consumer-facing edge of the Internet has been wrong all along. For all practical purposes, the Internet has been largely unregulated from end to end since it was privatized under the Clinton Administration.  Despite a lack of regulation, the consumer Internet experience has steadily improved from the advent of broadband networks in the mid-90s to the present, with speeds increasing and prices falling or holding steady. The price per megabit of Internet access in the United States today is ten times less than it was in the early broadband era, and 400 times less than it was over dial-up. By almost any measure, this is dramatic progress.

 Some advocates insist that the FCC must enact net neutrality regulations immediately because, in a nutshell, without such regulations, providers of Internet services will suddenly impose extortionate fees on consumers or blackout large swathes of the web. They frequently cite former Bell South CTO Bill Smith’s famous 2006 speculation that his company might offer various kinds of expedited IP packet delivery services for a fee, despite the fact that this hasn't happened (and that it wouldn't necessarily be bad if it did.)  Some advocates insist that other service providers harbor plans to deploy a variety of anti-consumer practices, simply because they can, leaving aside the effect that such practices would have on the competition for subscribers.

At the FCC’s 2^nd public hearing on the Comcast/BitTorrent controversy, professor Lawrence Lessig offered a somewhat lurid visual argument in favor of anti-discrimination rules. Lessig presented the Commission with an image of a tiger, literally red in tooth and claw, devouring its prey. It is in the nature of firms, Lessig said, to maximize profits by any means available, hence regulators must place restrictions on profit-maximizing behaviors that harm markets and reduce consumer welfare. As history is certainly rife with examples of monopolistic firms who exercised undue control over markets until their positions were undermined by the advance of technology or government action, Lessig’s theory is plausible in the abstract.

The question that has to be answered, however, is why American broadband providers aren't already charging application service providers for access to their customers. The D. C. Circuit Court decision notwithstanding, the FCC has never regulated cable-based Internet services under the strict non-discrimination rules that apply to monopoly telephone services, and Comcast and its fellow cable operators have offered Internet services since the mid-90s. Internet service over DSL and fiber has shared the same regulatory status as cable since 2005, and we haven't seen a “degrade the customer experience” program there either. Is it possible that the current status quo of facilities-based competition is just competitive enough to deter extortionate practices all by itself? The evidence suggests that it might well be; after all, significant numbers of customers switch providers - as many as 30% per year by some estimates - and broadband providers spend enormous amounts in customer acquisition campaigns.

The traditional telcos, primarily AT & T and Verizon, invest heavily in fiber deployments to compete with cable, on the apparent assumption that the revenue that comes from retaining old customers while winning new ones is the primary key to success (Verizon has invested over $20 billion in FiOS alone.)  

Comcast has meanwhile increased the speed of its basic tier of Internet service by 14 times over the past eight  years while maintaining the same $42.95 monthly price.[i]The incremental profit gained by taxing applications, like Bing or any other one, is unlikely to compensate Comcast for the loss of customers appalled by the practice.

Adapting the Lessig analogy, the success of a competitive business depends on eating ones competitors, not ones customers. And yes, there was one example of a DSL provider blocking access to Vonage and other VoIP providers, the Madison River case in 2005, which the FCC settled by consent decree based on its authority to regulate competitive telephone services such as Vonage. That authority is still in place, and Madison River didn't offer access to its customers for a fee in any case, it simply blocked the Vonage service, full stop.

Reasonable people may differ on the nature of the regulatory framework that best suits the rapidly evolving Internet and the relevance of a body of law devised for the single-purpose networks of the past to the emerging multi-purpose networks of the future. Protections need to be in place to assure that Internet Service Providers behave rationally, that Internet users are well informed regarding the nature of the services they purchase, and that the underlying technologies that enable Internet service to be provided over cable, fiber, and wireless continue to improve. The discussion around this framework and the processes that effectuate it should be grounded in fact and free of hyperbole. In that regard, regulatory panic is not helpful.