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Tom Wheeler Makes His Big Move on Net Neutrality…Maybe
The latest bulletin in the net neutrality wars comes in the form of widely circulated story on Wired with the breathless title “FCC Chairman Tom Wheeler: This Is How We Will Ensure Net Neutrality.” One-man rule is not in the cards at the FCC, but it seems highly likely that the three-member Democratic majority on the FCC will support this rule, virtually verbatim, regardless of what the two Republican members say or think. The point in this case seems exceptionally clear in light of the major intervention of President Obama and his youthful White House team, who are plumping for the strongest possible forms of net neutrality protection — a gambit which, according to a Wall Street Journal story, was explicitly designed to force Wheeler’s hand.
In dealing with this issue, it is useful to track the arguments that Mr. Wheeler made in his Wired essay, which show something of the confused state of the intellectual debate over the topic. As is often in these cases, Wheeler begins with a story of the bad old FCC during the 1950s and 1960s when he writes:
The internet wouldn’t have emerged as it did, for instance, if the FCC hadn’t mandated open access for network equipment in the late 1960s. Before then, AT&T prohibited anyone from attaching non-AT&T equipment to the network. The modems that enabled the internet were usable only because the FCC required the network to be open.
There are a couple of things seriously wrong with this account. The first point is that AT&T did not, on its own motion, block all attachments to its equipment. The initial mischief maker in this storyline was the old FCC, which, in the 1956 HUSH-A-PHONE case, construed the AT&T monopoly so broadly that it allowed AT&T to block an external ear piece from being attached to the phone on the grounds that such an attachment could deteriorate the signal quality over AT&T lines. It was the District of Columbia Court, not the FCC, that put an end to that nonsense. The sad truth about the story is that the FCC’s willingness to maintain the monopoly position of AT&T was the dominant story line.
The thought that the FCC “required the network to be open” in a timely fashion is just not true. The real spur for dismantling the old system really began only in the late 1970s, when MCI successfully challenged the AT&T monopoly with an antitrust action by trying to open a private line for bank data between banks in Chicago and St. Louis. The irony here could not be more palpable. Whatever the stance of the FCC today, to treat it as the historical defender of open entry into the market is a major distortion of the record.
The warning bells in this case should be loud and clear. If the FCC did so badly the first time around, why think that its next round of intervention—in this instance imposing the tighter common carrier rules of Title II on the broadband carriers—is likely to do any better? One distinct possibility is that the FCC is still in the game of carving out of monopolies on the strength of special interest claims. The only difference is that it has a new set of clients that it is trying to serve.
Things do not get better in looking at the rationales that Wheeler offers for his ‘tough stance’. He says that it is not his job to do “what is reasonable for commercial interests, not consumers.” But the preference for consumers over producers is every bit as misguided as the reverse. The correct measure of social welfare is the sum of consumer surplus plus producer surplus. It would be silly, for example, to impose $1 million in costs on producers if it generated less than a $1 million in benefits on the other side. The point here is that there are always tradeoffs at the margin. Getting them right is difficult even when the correct standard is invoked. Getting them right when the problem is misstated at the outset is far harder indeed.
Unfortunately, Wheeler’s inflated rhetoric seems to embrace the wrong standard:
My proposal assures the rights of Internet users to go where they want, when they want, and the rights of innovators to introduce new products without asking anyone’s permission.
At one level, this statement is a proposition that allows Internet users to get whatever services they want to have for free. To use a simple example, it is as if Wheeler told members of the public that they could walk wherever they wanted, whenever they wanted, without asking anyone’s permission. Farewell to the law of trespass to land. Clearly there has to be a price component in this mix, and that can only be enforced if there is a right to exclude if the price demanded is not met. The question then is how those boundaries will be enforced and how that price of entry will be set. In the traditional rate-regulation scenario, it is done by a public utility commission.
As I have explained recently on Forbes.com (in a discussion of the Comcast merger), that system may work (fitfully, to be sure) with respect to traditional public utilities with territorial monopolies in which entry and exit is not possible and transformative technological innovation comes slowly. But the Internet morphs at a far faster rate, so that any serious form of heavy-handed regulation will kill off (and quickly) the vast sums of capital that are needed to spark the next generation of investment.
One advantage of markets is that they are sensitive to the trade-offs that matter, which is one reason why Comcast announced in its merger proposal that it was quite happy to live with the no-blocking, no-throttling and no-paid-prioritization rules that the net neutrality folks want. I have no doubt that the company could bind itself to that position without taking the whole industry with them.
The open question here is who will get the last laugh now. The most important line in Wheeler’s Wired editorial may not be one of the more bombastic ones, but rather this simple declaration about some brute facts of rate regulation:
All of this [protection] can be accomplished while encouraging investment in broadband networks. To preserve incentives for broadband operators to invest in their networks, my proposal will modernize Title II, tailoring it for the 21st century, in order to provide returns necessary to construct competitive networks. For example, there will be no rate regulation, no tariffs, no last-mile unbundling.
Love that last sentence. It is an open question of what other surprises remain in store as the empty spaces are filled in by regulation, but the good news at least is that Wheeler may himself be playing a complicated game of poker in which he tries to accommodate the White House and net neutrality supporters without destroying the industry whose growth he is supposed to oversee. A lot is riding on how this saga unfolds.
Published in General
No arbitrary regulation, no act of the legislature, can add anything to the capital of the country; it can only force it into artificial channels.
J. R. McCullough, Principles of Political Economy, p 219
A wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement.
Thomas Jefferson
Too many economists treat the economy as a system akin to a machine when in fact it is more like an unpredictable ecosystem. But even an ecosystem has certain regularities. It when we imagine we can control that ecosystem in the way we control and steer a machine that we get into trouble.
Russ Roberts, Café Hayek, Jan 9, 2014
Another effect of public instability is the unreasonable advantage it gives to the sagacious, the enterprising, and the moneyed few over the industrious and uniformed mass of the people. Every new regulation concerning commerce or revenue, or in any way affecting the value of the different species of property, presents a new harvest to those who watch the change, and can trace its consequences; a harvest, reared not by themselves, but by the toils and cares of the great body of their fellow-citizens. This is a state of things in which it may be said with some truth that laws are made for the FEW, not for the MANY.
Federalist #62
As a veteran in the Telecom industry (both wireline and wireless) I can tell you without a doubt that bringing FCC regulation into the internet and broadband sphere will discourage investment and end up hurting consumers.
We are in the middle of a price war among wireless carriers, and migration from Cable TV to online media like Netflix and Hulu is accelerating. This is all good for consumers. Why on Earth would we want the FCC to step in and screw this up? How is the current model limiting innovation and investment? This is a cure without a disease.
Once the FCC steps in, we will start to see the usual cycle of actions with unintended consequences followed by more misguided actions leading to further unintended consequences.
Anyone who really understands the nuts of bolts of how the Internet and broadband connections are actually built should fight the FCC on this. If broadband providers cannot manage their networks to maximize performance for their customers and thereby maximize profits then why bother? We will end up with providers doing just enough to meet regulations and not one ounce more.
Content providers may think having the FCC step into the world of broadband is good for them, but they are being naïve. Once the Government gets involved everyone will lose in the long run.
I think Pelayo is exactly right. Even if, as Richard E. hopes, Wheeler intends to do just enough to get Obama off his back, once the FCC gets its foot in the door, sooner or later its power is going to be abused. There’s just too much money on the table for players not to lobby for special privileges.
I just saw a couple of Facebook posts promoting ‘net neutrality.’ I posted a rebuttal, and their response was along of the lines of “But this is a good thing! How can you be against a good thing?”
I’m skeptical of this, largely because it smacks of the usual DC pandering to the public (and to regulators and cartels). What I really would like to know is, what are they really trying to accomplish, and how would we know if they are effective? If it’s not effective, or even counter-productive (my bet’s on the latter) then how to do we end it?
So much of the regulatory excess is a result of the regulators defining success as ‘more regulations and oversight by regulators.’ Heads they win, tails we lose…
Richard; the very best deconstruction and reporting of what Mr. Wheeler said. Especially in context to historical perspective, unbiased (Whether net neutrality is good or bad.) and avoidance of personal experience.
When what Mr. Wheeler is taken in context of the reason, purpose, goals and history of the FCC it becomes overreach – regulation of radio frequencies in the United States and somehow (Not clear how they got into regulating wired phone service.) telecommunications. In my mind the FCC is out of it’s area of purpose as legislated, and even though a lower court has suggested and hinted how the FCC might regulate the internet they (Both the FCC and lower courts have forgotten about the power of Congress and Senate to legislate.) underestimate the ability of the other side (Whomever the current boogie corporation might be.) to fight on through the courts and to lobby for law(s) to protect their business.
The bigger concern on the part of the FCC is need, or does it rise to a concern necessary for a government regulating body to move in and regulate. The two arguments, paraphrasing, are every bit being passed over the internet should be transported and delivered equally without hindrance, or throttling, to allow another bit to precede it to it’s destination; if net neutrality is not protected current media providers will become so large, or have become so large, a competing service will never be able to achieve success because of the necessity of having to purchase bandwidth (The assumption is at a prohibitive cost.) to compete with the already established media streaming services. So the first can easily be debunked by showing the internet is already unbalanced. It is like saying Social Security should be fair, or Taxes should be fair. The system by it’s nature is already unfair. If a user decides to use, lets say YouTube, as a free customer the agreement is there will be ads inserted in the data stream to be exhibited on a customer’s device. So by the nature of free it is not net neutral because at times the advertisements being delivered to a customer’s device is pushed ahead of asked for content at a detriment to the stream effectively throttling the stream (If ads are inserted into the data stream then it is throttled because the extra bits being delivered to present ads on the users device is consuming bandwidth. Albeit a small percentage, or percentage below the frustration level of the user.). If a customer does not want ads they can effectively remove them by paying for a premium service and voila net neutrality is broken because by it’s nature paying provides more bandwidth and content is delivered faster (Removal from the stream of the bits to construct ads.) The second argument can better be understood in terms of future businesses. There are no businesses presently complaining about lack of net neutrality, but the argument is there might be companies in the future wishing to compete in the market place which will be unduly burdened be the lack of net neutrality. So we need to fix a problem which does not exist as of yet, for companies which may or may not appear in the future. Why do we not now do this with the two cellular phone companies Verizon and AT&T in hopes a new competitor emerges? How about hamstringing Microsoft for the open source competitor Linux? Obviously it is silly. These companies had the same chance, developed products people liked, continued to improve them; grew more popular and achieved success and market dominance. Where are the complaints about Apple being to big no one can compete. It also negates the history of all companies. Netflix and YouTube (The two companies most pointed to as dominating the internet stream.) did not start out buying bandwidth to push their content faster than other bits. They bought this advantage when their customers wanted more content, close to instant playback and a reliable stream. If this is what is needed to be successful (Make gobs of money. Gobs= billions of dollars) they are going to do it and if the infrastructure of the internet (Cable and phone companies) need to spend money on their infrastructure to make these streaming business successful, who would tell these infrastructure companies, “You cannot ask for compensation for making them successful and by the way, don’t you dare ask your clients receiving this content to pay extra!” I assume all internet companies become successful similarly. They create a service, provide free and paid subscriptions, advertise their product, improve it according to customers needs and while doing this find more customers. Finally realizing customers want better service they begin to talk to their ISP’s about increasing bandwidth, speed and reliability at an extra cost – breaking net neutrality. In my opinion there is no problem as of yet requiring intervention of the FCC and fundamentally I see no way, short of legislation from the legislative branch, for it to exercise it’s authority over the internet. Finally as I showed net neutrality has always been a myth.
The net neutrality argument appears as a way to deflect away from the real problems of the internet. If someone were to survey consumers of the internet at the top I can safely presume would be the frustration consumers have with ISP’s (Cable, phone, wireless and smaller ISP’s.). Consumers anger would be over lack of choice in ISP providers, in-congruent pricing from provider to provider, in-congruent speeds packages and add-ons from provider to provider (Difficulty determining value), the lack of choices in choosing speeds, services, and add-ons, the inconsistency of long term terms of service, the need for contracts, the inability to sign up for service with a provider at a set price without special packaging, or introductory offers, lack of customer service, or poor customer service. In looking over these difficulties I don’t see a need for federal (FCC) intervention, or legislation from the federal government. I see intervention by state attorney generals, state consumer protection, state legislative initiatives to increase competition in the infrastructure (One idea would be a local internet fee collected so when fiber optic is laid or stretched for access to the internet, whether state wide, or throughout a city there is money for the city, or state to pay for a second, or third fiber to be installed for hookup at a later date by an up and coming future entrepreneur.), or minimally good strong market forces.