FCC’s New Rule is Net Neutrality Lite

Proponents of net neutrality claim that all web traffic should be treated equally. This sounds nice on paper, but in fact not all web traffic is equal. Some sites, like Netflix and Youtube, suck up vast amounts of bandwidth by hosting popular video content. Bandwidth, as it turns out, doesn’t grow on trees. It must be generated at a cost to internet service providers. The big question is: who should ultimately be forced to bear this cost?

Under the rules of net neutrality, where ISPs are forbidden from charging different rates to different sites, the bill is split evenly among all content providers. This means that an independent site with a small bandwidth requirement pays the same fees as an extremely high traffic site like Amazon.com, effectively subsidizing the costs of well-established incumbent firms at the expense of unknown ones.

When the Supreme Court struck down net neutrality rules earlier this year, the decision was met with howls of outrage, proclaiming the end of the internet as we know it. This kind of hyperbole continues today, as there seems to be a belief that allowing companies to set their pricing based on the level of service rendered instead of charging everyone the same rate is somehow unfair. It is analogous to splitting a bill at a restaurant when all you had was soup and the other guy is a glutton. Isn’t it more fair for each person to pay for what he ordered? Or at the very least, let the restaurant decide how to handle such situations instead of the federal government.

The new rule being proposed by the Federal Communications Commission takes a small step in the right direction by allowing ISPs more flexibility in their pricing. However, it wouldn’t be a government agency if there were not also accompanying causes for concern. The main worry is that the FCC reserves the right to disallow pricing policies it deems “commercially unreasonable.” Tom Wheeler, the Chairman of the FCC, describes the rule as follows: “ISPs may not act in a commercially unreasonable manner to harm the Internet, including favoring the traffic from an affiliated entity.” There are no specifics as to what constitutes “unreasonable,” so we can only assume this will be an arbitrary power to be used at the agency’s discretion.

Lest we forget what happens when government agencies are given broad discretionary power over how regulations are implemented, bear in mind that Lois Lerner is currently facing potential jail time for her refusal to open up about the IRS’ discretionary targeting of conservative groups. Discretion, in the hands of regulators, is a dangerous thing.

Wheeler’s claims that he is concerned about anti-competitive behavior by ISPs, but the authority to selectively penalize private companies on vague grounds of “reasonableness” is itself a great threat to competition. We have seen from the history of antitrust law that companies will take every opportunity to use the legal system as a means of harassing competitors with allegations of unfair treatment. If ISPs are allowed to petition the FCC to crack down on their competitors, we can expect a still greater advantage for deep-pocketed incumbents who can afford the best legal teams.

The threat of legal bullying represents a significant barrier to entry to potential startups, who must be able to fend off even frivolous accusations at significant time and cost to themselves. It is encouraging that the FCC is open to allowing more flexibility in how companies price their products, but it is concerning that they think it is their place to regulate prices in the first place. The price system is fundamental to the functioning of a free society and a strong economy. Price controls distort that system, allowing the government to pick winners and losers at will. We need to do away with net neutrality altogether and let the market for internet service work unfettered.