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FTC Humility and Clarity on Net Neutrality

By Ray Keating August 08, 2007
Ray Keating

Federal regulatory agencies are not generally known for their humility when it comes to the power of regulation and the skills of regulators. For good measure, the very nature of the regulatory endeavor - that is, to fix something wrong (actual or perceived) in the market - does not normally lead to a clear understanding of or respect for the workings of the free market.

Along these lines, it's usually difficult for regulators to see any ill effects of regulation. For example, might more regulation just make matters worse?

This regulatory reality makes a Federal Trade Commission (FTC) staff report released in late June titled "Broadband Connectivity Competition Policy" quite exceptional.

The report was in response to cries for more regulation of broadband service providers by the "net neutrality" crowd. It's worth highlighting a few key points as laid out in the document.

First, the report notes that regarding telecommunications policies from the Federal Communications Commission (FCC), "since about 2000, the FCC has undertaken a substantial and systematic deregulation of broadband services and facilities, concluding that cable, wireline, powerline, and wireless broadband Internet access services are ‘information services' that are not subject to common carrier requirements." There have been considerable benefits from this policy direction. The report points out later on that "broadband deployment and penetration have increased dramatically since 2000. The FCC estimated that by 2006, broadband DSL service was available to 79 percent of the households that were served by a telephone company, and cable modem service was available to 93 percent of the households to which cable companies could provide cable television service."

Second, when considering additional regulation, the FTC study focuses correctly "on the consumer welfare implications of enacting some form of net neutrality regulation."

Third, the study adequately presents the arguments of those in favor of more regulation and those against. It sums up the pro-net neutrality regulation arguments:

"Proponents suggest that, with deregulation of broadband services, providers of certain broadband Internet services have the legal ability, as well as economic incentives, to act as gatekeepers of content and applications on their networks. Principally, these advocates express concern about the following issues: (1) blockage, degradation, and prioritization of content and applications; (2) vertical integration by ISPs and other network operators into content and applications; (3) effects on innovation at the ‘edges' of the network (that is, by content and applications providers); (4) lack of competition in "last-mile" broadband Internet access markets; (5) remaining legal and regulatory uncertainty in the area of Internet access; and (6) the diminution of political and other expression on the Internet. Not all proponents of net neutrality regulation oppose all forms of prioritization, however. For example, some believe that prioritization should be permitted if access to the priority service is open to all content and applications providers on equal terms; that is, without regard to the identity of the content or application provider."

As for the opponents, their positions are summed up as:

"They maintain that net neutrality regulation will impede investment in the facilities necessary to upgrade Internet access and may hamper technical innovation. They also argue that the sorts of blocking conduct described by net neutrality proponents are mainly hypothetical thus far and are unlikely to be widespread and thus are insufficient to justify a new, ex ante regulatory regime. Principally, opponents of net neutrality regulation argue that: (1) neutrality regulations would set in stone the status quo, precluding further technical and business-model innovation; (2) effective network management practices require some data prioritization and may require certain content, applications, or attached devices to be blocked altogether; (3) new content and applications are likely to require prioritization and other forms of network intelligence; (4) allowing network operators to innovate freely and differentiate their networks permits competition that is likely to promote enhanced service offerings; (5) prohibiting price differentiation would reduce incentives for network investment generally and may prevent pricing and service models more advantageous to marginal consumers; (6) vertical integration by network operators into content and applications and certain bundling practices may benefit consumers; and (7) there is insufficient evidence of either the likelihood or severity of potential harms to justify an entirely new regulatory regime, especially given that competition is robust and intensifying and the market generally is characterized by rapid technological change."

So, where did the FTC come down? Clearly on the side of regulation opponents. Consider the following from the report:

  • "In evaluating whether new proscriptions are necessary, we advise proceeding with caution before enacting broad, ex ante restrictions in an unsettled, dynamic environment."

  • While acknowledging that the degree of competition might vary by market, it was stated: "There is evidence that the broadband Internet access industry is moving in the direction of more, not less, competition, including fast growth, declining prices for higher-quality service, and the current market-leading technology (i.e., cable modem) losing share to the more recently deregulated major alternative (i.e., DSL)."

  • "Based on what we have learned through our examination of broadband connectivity issues and our experience with antitrust and consumer protection issues more generally, we recommend that policy makers proceed with caution in evaluating proposals to enact regulation in the area of broadband Internet access. The primary reason for caution is simply that we do not know what the net effects of potential conduct by broadband providers will be on all consumers, including, among other things, the prices that consumers may pay for Internet access, the quality of Internet access and other services that will be offered, and the choices of content and applications that may be available to consumers in the marketplace."

  • "With respect to data discrimination, broadband providers have conflicting incentives relating to blockage of and discrimination against data from non-affiliated providers of content and applications. In the abstract, it is impossible to know which of these incentives would prove stronger for each broadband provider. Further, even assuming such discrimination were to take place, it is unknown whether the net effect on consumer welfare would be adverse. Likewise, it is not possible to know in the abstract whether allowing content and applications providers to pay broadband providers for prioritized data transmission will be beneficial or harmful to consumers."

  • "Policy makers also should carefully consider the potentially adverse and unintended effects of regulation in the area of broadband Internet access before enacting any such regulation. Industry-wide regulatory schemes - particularly those imposing general, one-size-fits-all restraints on business conduct - may well have adverse effects on consumer welfare, despite the good intentions of their proponents. Even if regulation does not have adverse effects on consumer welfare in the short term, it may nonetheless be welfare-reducing in the long term, particularly in terms of product and service innovation. Further, such regulatory schemes inevitably will have unintended consequences, some of which may not be known until far into the future. Once a regulatory regime is in place, moreover, it may be difficult or impossible to undo its effects."

  • "Two aspects of the broadband Internet access industry heighten the concerns raised by regulation generally. First, the broadband industry is relatively young and dynamic, and, as noted above, there are indications that it is moving in the direction of more competition. Second, to date we are unaware of any significant market failure or demonstrated consumer harm from conduct by broadband providers. Policy makers should be wary of enacting regulation solely to prevent prospective harm to consumer welfare, particularly given the indeterminate effects that potential conduct by broadband providers may have on such welfare."

    The FTC staff deserves enormous credit for emphasizing caution regarding the unknowns and potential negative consequences of more regulation. While many of us who have spent years noting the costs and unintended consequences of government regulation, and observing the importance of incentives in the marketplace, are far more confident in predicting that net neutrality regulation will produce economic negatives, this was a rare and welcome case of regulatory humility.

    Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

    • Category: Economy
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