Federal Communications Commission (FCC) Chairman Julius Genachowski stirred up the Net neutrality pot last week with his speech at the Brookings Institution where he pledged to create new rules for governing the Internet. While the chairman’s comments were delivered eloquently, they were problematic for a number of reasons.
The FCC boss implied that because the Internet is such a big part of the lives of Americans, its management cannot be left to the marketplace. He noted that “millions of us depend upon it every day: at home, at work, in school” and argued that “the FCC must be a smart cop on the beat preserving a free and open Internet.”
This is an odd conclusion, since one of the greatest drivers of the Internet’s success has been its freedom from the eyes of government and the regulatory burden that such oversight brings. Some writers, such as GigaOM’s Stacey Higginbotham, have argued that “a lack of regulation can also slow innovation.” She laments “the eight-month time frame for the FCC investigation into Comcast’s (Nasdaq: CMCSK) decision to block P2P files.” This is also a strange argument.
The FCC did act to address Comcast’s failure even without clear rules on the books, and government bodies can still take months to respond even when rules allowing them to do so exist. Perhaps more importantly, new regulations often increase costs and slow innovation. Those who think that the FCC’s rules on Net neutrality won’t be burdensome haven’t spent much time following how the FCC works or its history in attempting to be a “competition cop.”
It is ironic that the FCC chairman said that “history’s lesson is clear: Ensuring a robust and open Internet is the best thing we can do to promote investment and innovation.” He’s right that history is clear, but he’s wrong about the appropriate lesson. The reality is that politically generated rules in the name of freedom or competition often result in the exact opposite.
Consider, for instance, the 1996 Telecom Act, which authorized the FCC to “create competition” by forcing phone companies to share their telecom infrastructure with rivals at low, government-set prices.
Such a program certainly opened up the network to rivals — but in the long run it failed, because it reduced incentives for the owners of the networks to continue upgrading their property.
Indeed, one of the biggest problems with the discussion about Net neutrality is that advocates seem to forget that the Internet’s infrastructure is not publicly owned like most of our highways. Instead, most of the system is private, and investors expect a return for the risks involved in creating new products and services.
Changing the Game
Another big problem with the chairman’s speech was his suggestion that the government needs to set rules in order to ensure confidence in the marketplace.
“Saying nothing — and doing nothing — would impose its own form of unacceptable cost. It would deprive innovators and investors of confidence that the free and open Internet we depend upon today will still be here tomorrow,” Chairman Genachowski said.
Since when do ever-changing government rules, particularly in this space, create investor confidence? There are so many examples of the government altering the rules in the middle of the game that it’s hard to know where to start. The most recent example involves AT&T’s (NYSE: T) purchase of spectrum last year.
The block of spectrum that AT&T bought was “sold with the promise that the spectrum would not be subject to the open rules,” said Chris Guttman-McCabe, VP of regulatory affairs for CTIA. “Now the Commission is considering changing the rules after the auction — impacting companies’ confidence in the auction process — just as carriers are facing a brewing spectrum crisis.”
The block of spectrum that Verizon bought was subject to open access rules, and as a result was much cheaper. Changing the rules of the game now would be unfair, and it would create investor uncertainty in the future. What unexpected changes would be next? Price and usage controls set by the government? Given the FCC’s history, that is not an unthinkable outcome.
Wrong Sort of Protection
Yes, there have been a small number of problems with some Internet providers in the past, but it is hardly realistic to expect something as vast as the Net to be free of all problems.
The reality is that once these provider problems surfaced, the situation was fixed — without the imposition of a new regulatory regime deceptively packaged as “neutrality.” The Internet doesn’t need Washington’s help to “save” Americans from the companies that are trying to meet their needs.
On the other hand, Americans do need protection from pro-regulatory officials such as Chairman Genachowski. A much greater worry is that government involvement will move the Internet from being market-driven to politically driven. If that were to happen, consumers would see a shift from services based on demand to services based on what a few bureaucrats in D.C. think is good for the country.