Thursday, November 13, 2014

"The Internet - A Regulated Utility?"

                    Sydney M. Williams

Thought of the Day
“The Internet – A Regulated Utility?”
November 13, 2014

On Monday, President Obama spoke in favor of net neutrality. He said, somewhat disingenuously, that keeping a “free and open” internet is critical to Americans. That’s basically what we have and it’s what we would like to keep. What Mr. Obama wants to do, however, is impose a ban on all paid prioritizations – that there would be no “slow” and “fast” lanes, just one lane, and that ISPs would no longer have the right to charge content providers for faster access. A problem: once the camel that is regulation gets its nose under the tent, the rest is sure to follow.

Net neutrality, according to its advocates, means that access to the internet will always be equal. Internet service providers – usually cable, telephone, wireless and some municipal companies – have the ability to speed up or slow down access. For example, large content providers like Netflix and Google that stream large amounts of data can hog bandwidth, so have been charging higher fees. ISPs claim such fees are necessary to pay for the technology that permits faster access for those with large levels of compressed data. Content providers claim they are being gouged. In Europe, cable and telephone companies, as noted in an editorial in yesterday’s Financial Times, compete with other ISPs; thereby providing choices. That is less true in the U.S.

Those supporting net neutrality comprise an odd mixture from companies from Netflix, YouTube, Google and Skype to consumer advocacy groups, from President Obama to those favoring free speech. Those against it are the service providers like Comcast, Time Warner, ATT and Verizon and people who worry about the unintended consequences of government intervention into a business that has worked remarkably well for twenty-five years.

Large bandwidth users, like those enumerated above, argue that service providers are deliberately slowing up data from popular websites, so they can charge more. In addition, the argument is made that higher access fees retard the development of new businesses, which cannot afford the higher costs, so would be uncompetitive because of slower access.

Mr. Obama suggested that cable, telephone and wireless broadband networks be considered common carriers under Title II of the Communications Act of 1934, which would classify them as public utilities. The Federal Communication Commission (FCC) was created in 1934 to regulate the telephone and telegraph industries. Using an 80-year old agency to regulate a 21st Century industry seems odd, but, then, this is government. The FCC is an independent commission. It does not report directly to the President; however its five commissioners are appointed by the President. The chairman Tom Wheeler was appointed a year ago and confirmed unanimously by the U.S. Senate. The Agency is dependent on Congress, which controls its budget and makes the laws under which it operates. Efforts to enact net neutrality over the past decade have failed, but this is the first time the President has leapt into the breach.

The fundamental question is: will innovation, which benefits consumers, be hindered or helped by net neutrality? Will costs to consumers rise or fall? In arguing for net neutrality, Mr. Obama is claiming that government is a better arbiter than the marketplace, as to which is better for the consumer. Certainly there is a case for regulation when it protects consumers from monopoly pricing and unsafe products. But in this case (and in my opinion) the effect would be to stifle creativity, slow overall internet access and raise prices, while expanding government.

With the possible exception of the transistor, the internet has been the most significant development in my lifetime. Over the past seventy-odd years, jet planes were invented, television became commonplace, the Atomic bomb was created and we placed a man on the moon. The ubiquitous internet has had a more profound impact on our lives than any of them. Consider the ways it has changed our daily lives. It has vastly altered the way we communicate, transact financial and commercial business, navigate all modes of transportation, do research, practice medicine and protect ourselves. It has, admittedly, been harmful for some businesses, but creative destruction is elemental to progress. It has been the lightly regulated nature of the internet that has allowed it to flourish.

It is the “invisible hand” of pricing by way of competition that has always benefitted consumers. Would the smart phone be here today had the Justice Department not broken up “Ma Bell” in 1982? While there are tens of thousands of content providers on the internet today, there are only a handful of service providers. A principal reason is that the latter are very capital intensive. Nevertheless, government should encourage increased competition in the delivery of the internet to households, as Europe does. It might help resolve the problem.

New industries, such as the internet become jungles. They are Darwinian, in that only the fittest, most nimble and creative survive. Nevertheless, the consumer is the ultimate beneficiary. When government gets its paws on an industry it is reluctant to let go and generally finds reasons to cling more deeply. In this case, the worry of those favoring net neutrality has been heightened by the proposed merger between Comcast and Time Warner. I would prefer to have them compete for the same customer than have them combined. The consumer would be better served.

Regulation, when it serves to protect consumers against unscrupulous practices and people, is a good thing. However, too much regulation is stifling. Regulators justify their existence by building bureaucracies that must find something to do. The monster must be fed. FCC Commissioner Tom Wheeler, while welcoming President Obama’s words, has treaded cautiously regarding net neutrality. He has said the internet must remain an open platform “for free expression, innovation and economic growth.” I believe that is right, but I also recognize that outcomes will never be equal. They are not for individuals and they should not be for businesses.


In services such as the internet, fast is better than slow, choice is better than none and new is generally better than old. But, as Bert Lance once said, “If it ain’t broke, don’t fix it!”

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