A court challenge to the FCC’s “net neutrality” rules may go a long way in preventing inflated costs, degraded service, stifled innovation and abridgment of freedoms that the rules would foist on the public. The rules are based on treating internet service providers (ISPs) as common carriers under the Title II provisions of the Telecommunications Act of 1934. The uncertain and potentially severe regulatory environment this creates has already led to reduced capital investment by service providers, limiting capacity needed to accommodate the usage demanded by consumers and businesses. The first arguments in the case, U.S. Telecom Association v. FCC, were heard last week in the U.S. Court of Appeals for DC.

A primary argument of proponents of net neutrality is their objection to unrestricted pricing of Internet traffic. The fear is that big carriers will discriminate against smaller users and content providers, shutting them out, despite the fact that the diffusion of internet services throughout society has taken place at a breakneck pace, and despite the existence of network externalities benefitting ISPs that encourage diffusion. In fact, some of the largest content providers have pushed for net neutrality with designs on avoiding the long-run marginal costs of network expansion required by their services, thus to gain a cost advantage over smaller competitors. This is a typical regulatory play: an entrenched private interest seeks to protect its market position, and its technologies, against new and potentially more innovative competitors via supplication to government rule-makers.

L. Gordon Crovitz discussed the U.S. Telecom case in the Wall Street Journal in “Obamanet Goes To Court” (gated — but Google it). Already, the FCC has cast a watchful eye on a competitive, “zero-rating” video service from T-Mobile under its “general conduct rule”. Zero-rating services are of great value to consumers who prefer low-cost access to specific internet features, like video streaming (see this Newscopia piece). Corvitz says:

“T-Mobile’s Binge On benefits consumers by giving them low-priced unlimited access to 24 video services, including Netflix, HBO and ESPN. This package is aimed at cost-conscious people who don’t have broadband. Net neutrality absolutists hate the idea, known as ‘zero rating.’ Susan Crawford, a former Obama special assistant for science, technology, and innovation policy, has written that it ‘is pernicious; it’s dangerous; it’s malignant.’”

Say what? Are consumers no longer capable of judging value against price, as they typically must in their day-to-day affairs? Do we need Big Brother to hem-in competitors in the marketplace who desire more than anything to meet a need in the market, thereby attracting buyers?

Crovitz discusses the legal issues facing the Court, most importantly the FCC’s authority to decide what is “fair” and “reasonable” under the Telecommunications Act of 1996:

“… the agency’s new ‘Internet conduct standard’ is so vague it exceeds the agency’s authority; … the White House’s intervention violated separation of powers and the notice period for new regulations; and the rules violate First Amendment protections for free speech by letting regulators decide what content broadband providers can and can’t make available…. in its rush to adopt Obamanet, the FCC failed to conduct even a cursory review of the costs of treating the Internet as a utility.“

Make no mistake, many of the complaints received by the FCC are from commercial interests attempting to strong-arm other players. “BlackBerry even asked regulators to force Netflix to stream videos on its unpopular phones.” Net neutrality amounts to a vehicle for croney capitalists to seek rents at each others’ expense through government regulatory action. That’s not how the internet has grown to become the tremendous communication, entertainment and transactional apparatus that it is today.

Rep. Marsha Blackburn (R-TN) is a vocal critic of the FCC’s rules, leads a group of 22 legislators who filed a brief in the case “arguing that Congress never granted the FCC the statutory authority to reclassify an industry on its own.” She is also one of 50 cosponsors of the Internet Freedom Act, which would make explicit the FCC’s lack of statutory authority to regulate the internet under Title II rules.

Blackburn believes that net neutrality rules represent a first move by the federal government to control content on the Internet. That could include political speech as well as central direction of internet resources, redirecting opportunities to favored “winners” (content and service providers, technology developers, and geographies) and away from players less favored by the political class.

Another consequence of the FCC’s new rules is likely to be the imposition of a “Backdoor Internet Tax” on users. That is the universal service fee that eventually would amount to $7.25 per month at today’s average broadband bill. Many younger users have no experience with that tax, having rejected landline telephone service in favor of wireless technology and voice-over-internet.

The cartoon at the top of this post is inaccurate in one important respect: it doesn’t come close to indicating the dead weight that government regulation will impose on the future development of the Internet. The FCC was not needed to promote the amazing growth we have witnessed to date. Its intervention is already creating burdens on providers and users. The likelihood of restricted choice and other freedoms, and distortions to an otherwise healthy market mechanism for allocating technological resources, should not be tolerated. We will never know the true potential of the internet if we allow the it to be tampered and hampered by a government bureaucracy.