Net Neutrality

The issue of net neutrality is almost as complicated as the Internet (the network of networks) itself. As with so many topics, the debate over how best to maximize the development of and benefits from the Internet (email, World Wide Web, and all of the rest) broadly divides between those who support prescriptive rules to guide and govern its operations and those who support a more permissive role for the government stepping in only to correct actual problems. To overstate it a bit, it divides the statists from the free marketers.

The history of what we now call the Internet is quite amazing. History of the Internet. Though governments provided the seed money that got it going (in the U.S. it was the Department of Defense’s ARPANET and later the National Science Foundation’s CSNET and in the U.K. it was the National Physical Laboratory), the U.S. gradually stepped back and allowed the unregulated development of commercial and private uses of the connectivity that was developing and allowed private Internet Service Providers (ISPs) to develop the gateways (access) for almost all users (both content providers and consumers) to the Internet. This policy was imbedded in the Telecommunications Act of 1996 signed by President Clinton. That legislation, affirmed that the policy of the United States was: “to preserve the vibrant and competitive free market that presently exists for the Internet . . . unfettered by Federal or State regulation.”

From the beginning of its break away from its narrow military and scientific uses, all involved in the Internet’s development were committed to it being free and open. The Federal Communications Commission (FCC) promulgated guidelines to preserve this principle in November 2011. “The FCC’s rules focus on four primary issues:

  • Transparency. Fixed and mobile broadband providers must disclose the network management practices, performance characteristics, and terms and conditions of their broadband services;
  • No blocking. Fixed broadband providers may not block lawful content, applications, services, or non-harmful devices; mobile broadband providers may not block lawful Web sites, or block applications that compete with their voice or video telephony services; and
  • No unreasonable discrimination. Fixed broadband providers may not unreasonably discriminate in transmitting lawful network traffic.
  • Reasonable network management. ISPs may engage in reasonable network management to maintain a high quality of service for broadband Internet access.” FCC Openness Principles

In this permissive environment the Internet flourished, developing in directions and ways no one could have imagined only a few decades earlier. “But two years ago, the federal government’s approach suddenly changed. The FCC, on a party- line vote, decided to impose a set of heavy-handed regulations upon the Internet. It decided to slap an old regulatory framework called “Title II”—originally designed in the 1930s for the Ma Bell telephone monopoly—upon thousands of Internet service providers, big and small. It decided to put the federal government at the center of the Internet.” Ajit Pai’s Newseum Internet Freedom Speech

What happened? Were the principles of an open Internet with fair access to all suddenly being violated or under threat in 2015? Is the proposed return to the status quo before 2015 really a threat to the principles of net neutrality?

Like all other economic activities, every aspect of the Internet costs money that someone has to pay. Those who built and maintain the Internet Backbone (NTT, Cogent, GTT, etc.), the facilities and networks of the ISPs (Verizon, AT&T, Comcast, etc.), and the content providers (Netflix, Facebook, Snapchat, HBO, etc.) did so to make money (or at the very least to cover their costs). We all know about content and service providers who thought first about how to attract users and only later how to get them to pay (e.g., Facebook and Amazon). They gradually developed their business models over time and some worked and others didn’t. What worked best (most cost efficient use of Internet resources, etc.) was not and could not have been foreseen in the beginning of the Internet’s development. Had the regulations imposed in 2015 been imposed two decades earlier, it is very unlikely we would be enjoying the Web we have today. Freezing or constraining the business models of the key players with very prescriptive regulations is neither necessary nor wise. As Mike Montgomery put it in The Hill: “The digital world moves at the speed of light. To slow that growth to the speed of bureaucracy would have serious negative effects on the burgeoning tech industry which is creating jobs faster than almost any other industry out there.” (see the link below)

Markets function best when profits are maximized by providing the best service at the lowest cost. In such cases, which is the general case, incentives are aligned, i.e. what best serves the supplier/producer also best serves the general public/consumers. Two forces operate to insure that the Internet is open to all. The first was a broad public consensus that the Internet should be open to all on fair terms (no discrimination against—filtering out or blocking—any one or any idea or point of view). The second is that discriminating in any way blocks some customers and thus reduced profits. The incentives for ISPs to provide fair access to all aligned with the public’s expectations of and desires to have fair access.

Ideology enters the discussion when people disagree over the meaning of fairness. Some people think that some classes of users (the poor, IT startups, etc.) should have the cost of their use of the Internet paid by someone else (tax payers, cross subsidies from larger, established users/suppliers, etc.). ISPs, the gateways to the Internet, have no profit incentive to provide such subsidies. Fairness for most economists is when each user pays the marginal cost of their use (plus a small profit margin).

The primary legitimate concern with respect to the net neutrality I want to see is that industry consolidation has reduced the number of ISPs to the point that over half of the country has only one (i.e. no) choice. The only competition in some areas comes from your cell phone plan. Thus there is a legitimate concern with the possibility that an ISP might charge different prices for fundamentally the same service and that those ISPs that are beginning to produce their own content might favor it over competitors’ content with faster lanes or worse.

There were indeed a few problems during the long era of light touch regulation prior to 2015. Verizon’s dispute with Netflix over download speeds and AT&T’s blocking Facetime video but not Skype on iPhones (not even an Internet issue), for example. This occurred before and were resolved before the 2015 FCC regulations on the basis of existing legislation. Excessive concentration and abuses of market power can be and have been dealt with via existing anti trust laws and state and individual civil suits.

The United States has generally allowed markets to develop fairly freely, only applying regulations to deal with real problems when they occur. I represented the IMF as an observer at a G10 Deputies Working Group on E-money meeting at the BIS in Basel Switzerland in December of 1996. The G10 Deputies are the Finance Ministers and Central Bank Governors of the ten largest economies in the world. The meeting was chaired by a young Tim Geithner, then the Deputy Assistant Secretary for International Monetary and Fiscal Policy in the U.S. Treasury Department. The meeting was to determine the regulatory approach to the prospective emergence of Electronic Money, now referred to as Cyber money. We considered reports on developments to date and took the wise decision to stand back and watch how things developed before formulating regulatory advice.

More recently the Federal Reserve’s Faster Payments Task Force project and the Federal Reserve’s cautious approach to bitcoin and other digital currencies reflects a similar attitude. That attitude, to repeat, is that no one knows for sure the direction that the development of new technologies will take in the search for maximizing their benefits thus profits. Government can at best play a supportive role of providing a flexible legal and regulatory framework within which new products and services can be explored. If problems arise, the government can review with consumers and producers how best to deal with them. The approach to regulating bitcoin and other digital currencies is still evolving.

A counter example to the above enlightened approach is the U.S. approach to Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT), which has imposed enormous regulatory costs on payments of all sorts with no discernable benefits.

Those who believe that private sector behavior and the development and use of technology can be carefully and successfully regulated by government suffer what I have called hubris in other contexts. See, for example: https://works.bepress.com/warren_coats/38/. Nonetheless, in the case of so called net neutrality greater certainty about the legal and regulatory environment in which the Internet must operate would help further its development and evolution, especially if the light touch regulation under which it has developed is restored. Congress should write net neutrality into law.

An excellent discussion of these issues can be heard in this podcast on the Future of Internet regulation with FCC chairman Ajit Pai

More on cell phones in planes

My blog Friday was meant to contrast two attitudes toward the desired role of government—regulating our behavior for our own good (Big Brother), or regulating our behavior when necessary for the protection of third parties.  But the more I thought about the cell phones in airplanes issue, the more convoluted it seemed.

There is no evidence, despite lots of testing, of any danger from cell phones, iPads, PCs, etc. for the operations of airplanes. See the article by a WSJ staff reporter: http://www.cs.ccsu.edu/~pelletie/local/news/telecom/Cell_phones_on_planes.html. The Big Brother argument that it protects those of us preferring quite from the conversations of other passengers is also bogus. Not only are people free to carry on conversations with other (willing) passengers, but we have been able to talk to people on the ground from phones in our arm rests for well over two decades. So what is going on? Without denying that many well-meaning, public-spirited people go into government service, the answer seems to lie in the usual place. Government regulations very often come to protect the interests of the incumbent members of the industry being regulation. Most monopoly power of private companies is bestowed by government. Please save me from Big Brother.

Cell Phones on Planes: A Defining Issue

The Federal Communications Commission is moving towards allowing the use of cell phones on airplanes. Many of us have known for a long time that their use poses no safety issues (yes the government does sometimes—how shall I say it in a way that will not attract NSA attention—misrepresent things). The FCC’s ruling rests on whether it would be good or nice for us to be able to use them. Whether we want our government to establish rules on what is nice public behavior is one of those issues that help define and reflect differing attitudes toward the desirable (not to mention, because it seems largely irrelevant these days, constitutional) role of government.

As I write this note, it seems that the FCC is moving towards a compromise ruling that would allow the use of phones and other electronic devises (Mac, iPad, etc – yes I am an Apple fan) for internet access to email, text messages, and web surfing but not talking. This strikes me as odd in that it has been possible to do that for some years now. I have used the service (for a fee) to send and receive email on Delta and other planes with the equipment: http://www.gogoair.com/gogo/splash.do. Oh well.

I cringe when people base their views on whether government should control certain behaviors (pot smoking, public profanity, talking lauding in public etc) on whether such behavior is good or bad for the person doing it. For me the test (along with the constitution) is whether my behavior endangers other people. Thus the issue of whether secondary smoke is harmful and if so should be banned in the workplace, for example, is a legitimate public policy concern. The outcome should rest on the facts; is it harmful to third parties or not.

I would not like for people to talk on their cell phones on planes, but am appalled by the idea that the government would not allow airlines to set their own policies in this regard. I don’t like talking on planes in any form. I have not talked to anyone on a plane other than the flight crew for many years. No government ruling caused this or is desired. Somehow I have been able to successfully and without words communicate to anyone next to me that I do not want to talk. My loss, I am sure, but it is fortunately still my choice.

I am reminded of a flight home from a wonderful European vacation with my son, Brandon, years ago. The man and woman behind us were chattering away and their conversation became more and more homophobic. My son finally turned around and said, “Would you please shut up.”  Those lobbying the FCC to forbid phone calls on planes should probably include fines for offensive speech on planes or in other public places (the First Amendment be damned). Those, like me, who prefer a more limited, less intrusive government, prefer to rely on common courtesy as it evolves through private interactions. Perhaps because I am the oldest of my siblings I never liked the idea of a Big Brother.