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Supporters of so-called net neutrality do not understand the contradiction it represents in promoting implicit subsidies to heavy users  of scarce internet capacity. And supporters fail to understand the role of incentives in allocating scarce resources. Last week the FCC voted 3-2 to classify internet service providers (ISPs) as common carriers under Title II of the Communications Act of 1934, henceforth subjecting them to regulatory rules applied to telephone voice traffic since the 1930s. With this change, which won’t take place until at least this summer, the FCC will be empowered to impose net neutrality rules, which proponents claim will protect web users with a guarantee of equal treatment of all traffic. ISPs would be prohibited from creating “fast lanes” for certain kinds of traffic and pricing them accordingly. The presumption is that under these rules, small users would not be shut out by those with a greater ability to pay.

Like almost every progressive policy prescription, this regulatory initiative insists on biting the hand that feeds. It reflects a failure to properly identify parties standing to gain from such regulation. The distribution of internet usage is highly unequal: less than 10% of all users account for half of all traffic, and half of users account for 95% of traffic. Data origination on the web is also highly unequal: “Two companies (Netflix and Google) use half the total downstream US bandwidth”.

The neutrality rules will assure that those dominating traffic today can continue to absorb a large share of capacity at subsidized prices. Price regulation may require that high-speed streaming of films and events be priced the same as lower-speed downloads of less data-intensive content. So-called “smart” technologies and the “internet of things” will be degraded or fail to reach their potential, and could possibly be of compromised safety, without always-open, dedicated data lanes, as would medical applications that would receive priority in a sane world. Without price incentives:

  1. conservation of existing capacity will not take place in the short-run;
  2. growth in capacity will languish in the short- and long-run;
  3. development of new applications and technologies will be stunted; and
  4. rationing via slowdowns, outages and imposition of usage caps may be necessary. Will these rationing decisions be “neutral”?

The unregulated development of the internet is an incredible success story. FCC commissioner Ajit Pai, who is a critic of net neutrality, makes this point forcefully. In a strong sense, internet development is still in its infancy. New and as yet unimagined web-enabled functionalities will continue to be embedded into everyday objects all around us. This process can only be impeded by government regulation, particularly of a form intended to control one-dimensional services offered by monopolists (i.e., public utilities). Competition in broadband access is growing, and it is enhanced by the ability of providers to co-mingle applications with the so-called “dumb pipe.”

The growth in uses and usage must be enabled by growth in network infrastructure. For that, incentives must be preserved through pricing flexibility and the ability of ISPs to negotiate freely with content providers and application developers. On this point, Pai says:

The record is replete with evidence that Title II regulations will slow investment and innovation in broadband networks. Remember: Broadband networks don’t have to be built. Capital doesn’t have to be invested here. Risks don’t have to be taken. The more difficult the FCC makes the business case for deployment, the less likely it is that broadband providers big and small will connect Americans with digital opportunities.

Pai also asserts that horror stories about greedy ISPs restricting the ability of small users to access the Web are largely a fiction:

The evidence of these … threats? There is none; it’s all anecdote, hypothesis, and hysteria. A small ISP in North Carolina allegedly blocked VoIP calls a decade ago. Comcast capped BitTorrent traffic to ease upload congestion eight years ago. Apple introduced Facetime over Wi-Fi first, cellular networks later. Examples this picayune and stale aren’t enough to tell a coherent story about net neutrality. The bogeyman never had it so easy.

Then there is the small matter of potential content regulation (see the first link on the list), which some fear could be enabled by the FCC’s action. This would be an obvious threat to an open and free society, and the advent of such rules would discourage growth in internet applications by giving would-be prohibitionists a new way to tie and gag those of whom they disapprove.

Net neutrality and the FCC’s “Open Internet Order” serve the interests of large content providers who would rather not have to pay the long-run marginal cost of the network capacity tied up by their end-users. It represents a distinct form of rent-seeking in data transport services. Allowing ISPs to negotiate with significant content providers allows the transport cost of individual services to be “unbundled”, thereby promoting economic efficiency and avoiding cross-subsidies from lighter to heavier users and uses. As new, intensive applications are introduced, the economic costs and benefits can then be weighed more accurately by prospective customers.