The Voguish Dangers of Net Neutrality

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The idea of net neutrality is subject to many nuanced interpretations, but at its core it holds that access to the internet should be on equal terms for all comers, under a policy that does not allow the operators of any particular site to give preferential access to those who are willing to pay higher fees for their service. One implication of this vision is offered on the Harmony Institute in its publication Net Neutrality for the Win, which offers this utopian vision of the future, which embraces:

an Internet that allows users to load an infinite number of Web pages and grants developers the freedom to create sites and services regardless of their content, source, or user.

Predictably, the few dominant telecommunications companies providing Internet access to Americans today would like to capitalize off of their relationship with users and businesses. Companies such as AT&T, Comcast, Time Warner Cable, and Verizon see an opportunity to become the gatekeepers of Internet content by reserving faster, more preferential space for their own sites, and taxing other Web site owners who would like to continue to see their content reach Internet users.

To see what is wrong with the basic vision of net neutrality it is critical to ask this question: What is the best way to optimize the overall operation of the internet? That question in turn requires the integration of two tasks. The first is the creation of the pipes that allows information to travel. The second is the movement of the information in question.

The first critical error in the Harmony way of thinking is that it assumes that the only social problem is how to optimize the use of the Internet on the assumption that the pipes for transmission have already been built. That question will always receive the wrong answer if the operating assumption is that the ideal mix allows any user “to load an infinite number of Web pages.” So long as there is a finite capacity this becomes a model for letting one person, or a very few Internet hogs gain a disproportionate level of influence for which they pay only a tiny fraction of the price. The only way that this model can work is to have a huge government subsidy to create internet space, which will have to be supported by tax revenues.

The very element that the Harmony people think is the bane of the Internet is in fact its salvation. The prioritization of information flows is a necessary concomitant of scarcity. There are few people who use Federal Express to send out generalized advertisements addressed to “resident.” They reserve the fastest system for the most valuable information. Just that should be done with the Internet, which is why zero pricing or equal pricing is just the wrong way to go.

The second critical error of the Harmony vision is that it assumes that some larger player exercises dominant power of the Internet. But the situation here is quite different from that in ordinary public utilities, where a single supplier has a geographical monopoly. This so-called “natural monopolist” has its power not because it has been obtained by state charter, but because over the relevant levels of output a single producer with a heavy front-end investment is a cheaper source of supply than any two or more firms.

The mere fact that Harmony lists four dominant firms is proof positive that there is no dominant firm even if there are many large ones. Since these firms are in competition with each other the usual assumptions for natural monopoly do not hold. Any system of rate regulation is likely to be costly, and to make serious errors in pricing. The huge administrative costs would calculate the bad incentive effects, producing larger social losses. The best policy is to let as many companies start up in different ways.

The internet costs too much money to create to be free. And its operation is too important to be left to the FCC, whose record of consistent failure in regulation starts with its control over radio in 1912 and continues to this present day. The rise of an alternative technology is the best way to break the current FCC monopoly. Unfortunately, the FCC knows that as well, which is why it won’t stay on the sideline.

Full story: The Voguish Dangers of Net Neutrality