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Op-ed Placement

The FCC's Mission Pivot Imperils the Internet

Originally Published in RealClearMarkets on 5/2/14.

The Federal Communications Commission has sparked controversy with talk of new broadband policies that may have granted Internet service providers (ISPs) a degree of flexibility in pricing for purposes of traffic management. While the recognition of the economic realities of broadband management is significant, proponents of net neutrality have sounded the alarm bells, decrying the creation of a "fast lane" for those companies big enough to afford it. As a result, the FCC has been flexing its regulatory authority to appease its critics.

The FCC's Open Internet Notice of Proposed Rulemaking, which exists only in draft form, is expected to be officially issued sometime in May. Its release comes in the wake of a rebuke by the D.C. Circuit Court of an earlier attempt by the FCC to regulate the Internet. The draft purportedly allows Internet service providers (ISPs) to engage in commercially reasonable pricing policies when allocating scarce bandwidth. When the net neutrality cartel cried foul, FCC Chairman Tom Wheeler's first response was a blog post to "set the record straight." While new pricing policies may be allowed under the draft rule, Wheeler's blog focused on the fact that transparency will still be required, no legal content can be blocked, and no "commercially unreasonable" behavior on the part of ISPs will be tolerated. Although the response did little to quell the outburst from the left, it raises even more concerns about an expansion of the FCC's regulatory authority over the Internet, which up to this point has evolved largely in a market-based setting.

Wheeler's follow-up blog post was even more emphatic in its assertions that the FCC will be policing the Internet for behavior that is commercially unreasonable, including a list of proscribed behaviors. And in comments before the National Cable and Telecommunications Association, Wheeler makes clear the FCC's intent to establish a new regulatory regime: "We are beyond the question of the scope of the FCC's authority; the court has decided that. Knowing that authority, we now must move expeditiously to make it manifest." He goes on to say, "We will not allow some companies to force Internet users into a slow lane so that others with special privileges can have superior service."

The debate over new Internet regulations is not trifling. Private investors pumped $68 billion into broadband in 2012, for a cumulative investment of $1.2 trillion since 1996. Broadband providers are pressed to maintain pace with the demand for bandwidth intensive apps and streaming video. Recent negotiations between Comcast and Netflix demonstrate the importance of addressing broadband scarcity. As with any market resource, allocation is the important issue, and ultimately there are only two options: the market or a government planner. History has demonstrated that markets are far superior for allocating scarce resources.

Nobel laureate Friedrich Hayek noted that the knowledge available in a market is dispersed and beyond the reach of any one individual. It is the interaction of all individuals that effectively generates the knowledge that guides behavior, and it is the price mechanism that allows this special "knowledge of time and place" to be fully utilized. Government policymakers cannot capture this far-flung knowledge, making it difficult to replicate the efficiencies of the market. Consequently, artificial restraints on network development can have unintended consequences that distort the development of new Internet technologies. Unlimited bandwidth, once thought to be a solution, is not available to address the more fundamental problems of managing packets of information.

Markets allow providers and consumers opportunities for innovation, sending important information signals that coordinate the activities of everyone involved. These signals can promote investment in existing networks while encouraging consumers to utilize scarce resources more carefully. Government allocation, such as the "common carrier" model that some advocates of net neutrality endorse, eliminates incentives to invest or innovate. One need only look at the "plain old telephone service" of the government-regulated phone system that dominated the last century, where consumers saw little change in service for decades, with every household relying on the same basic rotary phones. The smart phone emerged in a space largely unhampered by regulations that invited investment and promoted innovation.

FCC Chair Wheeler notes that the proposed rule is designed to encourage access to an "Internet that is sufficiently robust," a subtle acknowledgement that ISPs need to deal with traffic management and questions of bandwidth allocation. Yet as the FCC's mission pivots toward the Internet, there is a real danger that regulations will displace the dynamism and growth that have shaped the Internet.