What is Telecom Reform?
Over the last year and a half, several states have adopted sweeping telecommunications reform. Today, more statewide reform appears imminent. Spurred by the evolution of technology and the effect of grassroots activism for regulatory reform, national telecommunications reforms are already on the horizon. And with good reason. Since the passage of the 1996 Telecommunications Act, outdated rules and red tape have shackled the deployment of broadband Internet and cable television. As European and Asian countries surpass the U.S. in broadband deployment, legislators and scholars agree that to achieve a competitive technological market, the government must streamline its rules and get out of the way whenever possible. Unfortunately, some in the House are taking a more regulatory approach that will cost consumers and delay deployment. In this backgrounder, we will discuss and debunk some of the unfortunate proposals that are gaining ground in the debate over telecommunications reform.
Net Neutrality is the principle that network service providers [ed: originally used ISP, but reader AR correctly indicates that ‘network service provider’ is more accurate – 5/8/06] should not discriminate against different types of content on the Internet. An example would clear up what this really means. With advances in technology, broadband comapnies can pipe television programs over their broadband lines to compete with traditional cable, phone, and satellite video services. But video content is bandwidth intensive, and therefore requires more resources for a smooth transmission. Net neutral legislation would prohibit network service providers from giving premium service to video or voice content (for an added fee) over standard data transmission. It would also prohibit companies from blocking certain areas of the Internet. On its face it seems like a fair idea; after all, who could be against “neutrality”? However, on further examination, it should become clear why net neutrality is unnecessary at best and innovation-stifling at worst.
1. Net neutrality is unnecessary. Proponents of net neutrality imagine that if unrestrained, providers would block large portions of the Internet, and make other parts of the Internet accessible only behind a high pay wall. This dystopian idea is possible in theory, but only if companies were not financially punished for providing blocked or favored service. However, robust competition throughout the net will ensure that companies will be punished for egregious service. There are dozens of different network companies around the country – the local cable and phone cooperatives, telephone companies running optical fiber lines, national broadband cable companies, the regional wireless providers, and now, potentially two-way national satellite transmission. If any company adopted the draconian measures that net neutrality supporters envision, customers would jump ship to an provider that offers better service.
Currently there are no principles of net neutrality encoded into law. So companies are now free to block or favor content as they please. You might expect there to be an epidemic of the censorship net neutrality proponents envision. You might expect proponents to cite an actual problem, to which net neutrality is a solution. Yet the supposed malfeasance net neutrality proponents cite is actually quite underwhelming.
2. Net neutrality is bad for business. The Internet pipes (e.g., fiber optics, coxial cable) are built on billions of dollars of capital investment largely from shareholders. These brand new pipes are built with the specific purpose of transmitting high-end content like voice and video. Network service providers make this investment on the assumption that they can recover the costs and profit. If they knew they couldn’t recover their capital investments, the pipes would never have been built. Companies that build high speed lines ought to be able to recover their costs from high-bandwidth internet services (e.g., Yahoo) that can afford them. If net neutrality is enacted, companies will have no incentive to build new pipes. Consumers will therefore get less choice.
3. Net neutrality is bad for property rights. Broadband companies that build their own pipes with their money own those pipes. It is their property. As such, they should be able to transmit data through their pipes as they wish. The government has no right to tell other companies what to do with their own property. Infringing property rights will undermine the incentive to innovate.
4. Net neutrality is bad for competition. Differential pricing of content allows competition among providers. If a company wants to adopt a policy of net neutrality, they are free to do so and win market share from consumers that find this attractive. If a company wants to favor video or voice content, they can find consumers who use the Internet primarily for this purpose. Niche companies that only want to offer a small fraction of the Internet can flourish, too. Imagine, for example, a company that allowed cell phone users to access sports scores and only sports scores through its Internet portal. If that company were up front about restricting its service to a limited part of the Internet, this would not be a nefarious idea. In fact, many people would find it quite convenient. But it would nonetheless be banned through net neutrality. Net neutrality will destroy many entrepreneurial ideas like this one.
On the other hand, if there is a rigid rule that forbids this sort of competitive pricing, there will be fewer dimensions by which providers can compete. This means the bigger company will have more of a natural advantage because the small company can’t exploit unique business models. It will be easier for monopolies to arise. The inevitable conclusion: neutrality hurts competition.
5. Do we want the government having the power over the Internet? Thankfully, we live in America, not China. In America, Congress has virtually no power over how the Internet is run. In China, the government does. Net neutrality is a sweeping and intrusive restriction on the Internet, even if the intentions are good. It would set a horrible precedent that it is the government’s right, and even worse, it is the government’s duty to regulate and meddle with the architecture of the Internet when it finds something it doesn’t like. It would also create a spider web of laws and restrictions that generate uncertainty, and open the floodgates for bureaucrats and lawyers to exploit semantic loopholes. We have done well enough without the government’s intrusion in the Internet.
6. If history has taught us anything … it’s that the government shouldn’t create a stale ex ante rule that preemptively closes off technological and business evolution. It will lead to unintended consequences, usually bad ones. The government should not regulate the Internet according to its own preconceptions. Equality is nice in theory, but when we have the “equality” of a monopoly, that’s not so great, is it? At the end of the day, let consumers decide. Part of letting consumers decide is letting businesses experiment with new technological and pricing models, which is exactly what net neutrality forbids.
Rate Regulation by another name. A national video franchise would require only one license to transmit video programming throughout the country. However, another destructive idea gaining currency in Congress would neuter the benefits of a national video franchise. Some people are pushing the idea that cable television providers (e.g., Comcast, Cox) cannot opt into the national franchise system until the telcos achieve 15 percent of the national market share. In addition, there would be new uniform pricing restrictions regulating not only basic cable service (the status quo), but regulating prices for expanded basic as well. However, this reasoning is flawed for several reasons.
1. Competition already exists. It assumes that, until another video service provider gets 15 percent, there won’t be any competition. This is simply false, for satellite commands almost 30 percent of the video programming market. Competition already exists for video programming, and it doesn’t make sense to continue treating cable television, phone companies, or other providers like a monopoly. After all, isn’t this the entire point of franchise reform?
2. It is counterproductive. Expanding the scope of rate regulation is moving in the wrong direction. In today’s market, competition provides a strong check on prices. Removing entry barriers will do far more to protect consumers and promote innovation than new price regulations.
Increasing the Franchise Fee. Finally, some have also raised the possibility of raising the national franchise fee from 5 percent to 6 percent. The 6 percent fee would apply to new video service providers with a national franchise, and if cable providers eventually opt into the new national franchise they would pay 6 percent as well. Make no mistake: the franchise fee is a tax on video programming; any increase must be rejected. Most Americans oppose a tax of this nature, but do not realize that a franchise fee is just a stealth tax on our consumption of the cable television. To see why, consider the following:
The franchise fee is essentially a tax on video programming distributors. It forces the distributors to pay a certain percentage of earnings to the government. If the franchise fee increases, companies will look to recoup these costs. Most likely, they’ll pass on the costs to the consumers through a line item addition on their bill. This makes the franchise fee a tax on consumers. These costs may deter some consumers from subscribing. In an era where technology is critical for education and growth, it’s hardly a sound policy solution to prevent people from using technology by raising the price of access.
