Assessing the Costs of a More “Closed” Internet

I had the pleasure of moderating a panel at a very interesting and informative OECD workshop this week in Washington, DC, on how to better measure the benefits of the open Internet and the costs of restricting access to it. This is a critical question, because a growing number of governments around the world are blocking Internet flows or prohibiting access to certain content. There needs to be a stronger case for how, why, and to what extent these policies stunt economic growth and inhibit social progress. Yet marshaling such an argument requires not only better data and analysis but also the right conceptual framework.

People often use the terms “open” and “closed” Internet without defining them. Here, fully “open” means everyone is free to share and access any information they wish, and more “closed” means governments or other third parties are blocking or prohibiting vast troves of information. A draft background document that the OECD distributed to panel participants was helpful in that it rightly acknowledged that the Internet is not fully “open,” nor should it be. As ITIF has argued, the Internet is not fully open anywhere, because every country bans something (for example, child pornography). If we don’t acknowledge that the Internet is not fully open, then it becomes harder to argue against unreasonably “closed” policies. Nations seeking to erect barriers would be able to simply dismiss calls for necessary and appropriate openness (for example, not banning VOIP or YouTube) as a reflection of ideological bias reflected in some view of “Internet exceptionalism.”

Benefits of Openness vs. Costs of “Closed-ness”

Perhaps the most important question to be decided in crafting a research agenda on this issue is whether the focus should be on the benefits of openness or on harms that come from “closed-ness.” The problem of focusing on the benefits of openness is that it runs the risk of being both everything and nothing. It leads to an analysis that focuses on the myriad ways Internet access produces benefits: the Internet improves education; the Internet improves government; the Internet enables entrepreneurship; etcetera.  These and other claims like them are all true. But defining the open Internet as “the Internet” does little to answer how a more open Internet or a more closed Internet are different.  So the focus should instead be on the costs of particular types of “closed” policies. The advantage of taking the “costs of being closed” approach is that the things to be measured are much narrower and more manageable, and therefore more likely to provide solid evidence to push back against particular types of “closed” policies.

In addition, any discussion about the economic benefits of Internet openness needs to narrowly define the space of policy issues. Otherwise, it is easy for the discussion to quickly expand to incorporate a wide array of Internet policies that are important for the development of the global Internet ecosystem, to be sure, but not directly related to the question of Internet openeness. These include things like the legal liability regime for copyrighted content, broadband policy related to network investment, digital opportunity policy, competition policy, and others. In other words, in order to develop a manageable research agenda, the focus should be on policies that make the Internet more closed or more open, not just the Internet policy per se.

Defining “Closed”

Next is the question of what kinds of content should be readily available. Clearly, it is a problem when governments erect barriers to legal content. But what is legal and illegal? There should be a global consensus that it is not only permissible for some aspects of the Internet to be closed, but desirable. This would include classes of Internet content such as malware, copyrighted works that are posted without the permission of rights holders; child pornography; and spam (unsolicited commercial email). Indeed, a growing number of countries are rightly instituting policies to encourage or require blocking websites dedicated to digital piracy. But there are other areas that are more ambiguous. Some nations seek to block all pornography. Others block Internet hate speech. While these choices don’t comport with U.S. values, it’s not clear that these particular U.S. values should be or can be universal, at least now. Finally, there are other kinds of “closed” policies that are technically legal in a particular country, but which most people would say are wrong. This would include authoritarian governments blocking certain types of Internet access, as when China blocks access to Western news sites, social media sites like Twitter and Facebook, and search engines like Google.  In short, as ITIF argued in its report “Beyond 2015: An Innovation-Based Framework for Global Economic Policy,” we need a more sophisticated and nuanced approach, one that favors neither complete openness nor capricious or mercantilist blocking.

There is a second type of blocking or limiting of openness and that comes from companies blocking others’ flows of data or Internet access. Cases in point are the policies of incumbent telecom providers in some developing nations that block access to VOIP applications such as Skype.  There has never been any real risk of this kind of blocking in the United States, since ISPs have a wide variety of strong incentives to not block or degrade Internet applications, even without formal rules like the FCC’s current Title II regime (which as a forthcoming ITIF report will show will have negative impacts on broadband investment and innovation). But in other nations with state-backed, dominant ISPs, it can be a problem.

Finally, the private sector can “block” some of its own cross-border data, which some call geo-blocking. But, as ITIF has shown, geo-blocking often is pro-competitive and pro-consumer. As a result, the choice an individual organization makes about whether it wants to make its content or applications available to all nations is an issue that should be entirely its own. To use an ITIF example, if ITIF for some reason chose not to allow access to www.itif.org from individuals in North Korea, that should be our choice alone.

Other Issues in the Research Agenda

There are several other framing issues. One is  differentiating between cross-border openness and national openness. Nations can and do block access to cross-border data flows. But some also block access to Internet sites and data that originates within their borders. Both can lead to a more closed Internet.

Another dimension to the question of open versus closed is the difference between open Internet access and no Internet access.  At one level, a world in which one billion people have access to a closed Internet is similar to a world in which one billion people have no Internet access at all. If someone doesn’t have access to the Internet (either because there is no Internet access, or they can’t afford it, or they aren’t digitally literate), then the Internet is for all intent and purpose fully closed to them. Moreover, the value of the global network goes down because there are fewer users. So the agenda of getting more people and organizations around the world to be robust Internet users is intimately linked to, but not the same as, the agenda of limiting unreasonable policies that close off access.

A third aspect is to define what we mean by data flows and how we measure them. Some have used th

e volume of bits flowing across borders as a measure of global Internet connectedness. But this assumes that a 10 gigabyte movie file crossing a border is 100 times more valuable than a 100 megabyte Excel file. So we need to consider other measures, such as the economic value (either direct or imputed) of particular data flows.

Fourth, any discussion of assessing the value of the open Internet needs to be first grounded in a better framework for understanding the motivations for closing the Internet. If not, the discussion and research quickly shifts into a broad focus on why the Internet is a force for economic growth and social progress. As ITIF has shown in “Digital Quality of Life” and “Digital Prosperity,” this should no longer be up for debate. Internet use clearly drives economic growth and social progress. The real question is what harms do various “closed” policies cause. There are three main, often interrelated motivations for closed Internet policies.

• Privacy. Europe and some other regions/nations seek to limit cross-border data flows out of concern for privacy and access to personally-identifiable information by both the commercial sector and government. While they may defend these policies on social grounds, there is no doubt that they lead to a more closed Internet.

• Political control and social protections. For example, China’s Great Firewall is all about limiting free speech and protecting the Communist Party interests.

• Mercantilist and commercial motivations. For example, the growing number of countries that impose data center localization policies or policies to require domestic clouds (e.g. potentially the “EU cloud”) are doing so out of the belief that they will protect local industries and grow jobs. As ITIF has shown, focusing economic policies on growing the IT industry through these kinds of policies almost always comes at the expense of broader Internet adoption and use.

Types of Costs Associated With “Closed-ness”

Finally, we need to better define the different types of costs that can come from closed-ness.  It’s relatively easy to speculate on the broad benefits of openness on innovation, productivity, and societal progress. But without better understanding the specific threats to the open Internet, it’s difficult to make progress on analysis and evidence. In this regard, there are at least five types of costs from closedness.

The first is network inefficiency. When some nations’ ISPs block access to Skype, they raise the cost of citizens communicating internationally on digital networks. By raising the price, they also lead to significantly fewer international “calls.”  Both have clear costs. The first is relatively straightforward to measure—for example, by examining international long distance costs in nations that block and do not block VOIP. The second could potentially be measured using the number of international VOIP calls that are not made and then assessing people’s willingness to pay (even though Skype is free) for free international calls.

The second concerns restricted access to information.  For example, when nations block YouTube, they are limiting access not just to funny cat videos, but also to a vast array of educational material and other beneficial content. There are two kinds of costs from restricting access to information. The first is the cost in and of itself. Assessing the willingness to pay for these kinds of applications and then measuring the likely use rates if they were not blocked (it should be relatively easy to measure access to the top Internet domains around the world) could produce an estimate of direct costs. But there is also an indirect cost. When individuals decide to be on the Internet or be on it in a more robust way (such as paying for higher speeds, choosing both fixed and mobile, owning more computers and other devices, etc.), they make that decision in part based on their perceived value of being online.  If some legal content is blocked, then by definition the value of being online is less and it can retard the progress toward global Internet usage.

A third cost category is transaction efficiency. This would include international data transfer restrictions that limit Internet behavioral targeting (a more efficient way to do Internet advertising) or limits on e-commerce providers (which would raise the price for consumers and reduce consumer choice).

A fourth category is restrictions on data flows for internal organizational efficiency or innovation. As ITIF has shown, cross-border data flows are increasingly critical to firms in traditional industries, like mining, aviation, banking and insurance, and retail. Getting empirical data on this can be hard. But one place to start would be for national statistical agencies to incorporate such questions in their annual surveys of business.  Another approach would be to conduct case studies of value creation from particular kinds of cross-border data flows and ideally the specific harms to firms from limits on these flows.

A fifth cost category relates to the effects of closed policies on the ability to collect large pools for big data analysis. As ITIF’s Center for Data Innovation has shown, the ability to do data analytics on large pools of data is producing major societal benefits in areas like health, education, and commerce.

Finally, a sixth cost category is wasted-duplicate hardware costs.  For example, if nations require data center localization, then it by definition raises costs beyond what private sector firms would incur without these restrictions, and that should result in somewhat higher prices. Similarly, if nations impose discriminatory, national standards for the Internet (as China is doing, for example), then it is a barrier to global Internet openness, and it raises hardware (and software) costs. As ITIF showed in its report on ICT taxes and tariffs, these increased costs lead to reduced demand for ICT services in the domestic economies.

In summary, Internet supporters need to do more to push back against those who would enact Internet policies that restrict access to legal content. But making the case effectively will depend in part on developing better empirical evidence and analysis.