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Net neutrality and market interference

Net neutrality rules may seem appealing in a fast consolidating marketplace. I disagree, and ask whether we shouldn't hold fast to deregulatory principles and see what compromise the marketplace can work out on its own.
Written by John Carroll, Contributor

In a previous post on the subject of AT&T's proposed merger with BellSouth, I suggested "net neutrality" rules might be a better way of dealing with the concerns posed as reason to block the move. This led to a response (via email) by Matt, a web developer in San Francisco who maintains a blog that deals with the intersection between technology and economics (among other things). He opposes "net neutrality" legislation, and asked how my apparent support for it fits with a general pro-market philosophy on technology issues.

My response to him was that I'm not convinced of the utility of "net neutrality" rules, but consider it a lesser evil compared to blocking mergers in a vain attempt to build a bureaucratic vision of a competitive marketplace. The DOJ bull already crashed through the satellite market by blocking the merger of DirectTV and EchoStar on the grounds that it might monopolize the market for satellite services (how's that for an irrational definition of the relevant market). This is all the more galling in a country struggling to match levels of broadband penetration and bandwidth found in small east Asian countries (South Korea), given that the merger was explicitly intended by its participants as a way to turn satellite into a better provider of broadband services.

As Matt reminded me, however, perhaps it's too early to assume I can't have my cake and eat it, too, so I'll outline some of the reasons why I'm less than thrilled by "net neutrality" rules...

...or rather, I'll lift a few well-spoken tidbits from other blogs and expand on them. The Progress and Freedom Foundation regularly says things with which I agree, and a recent blog post is no exception. Some excerpts from that blog (which itself quotes from an unnamed person who works in some capacity in the technology industry):

Of course, the various segments of industry are also thinking about how the network should evolve. The last thing that we need is to have laws that might conflict with this evolution. And while the laws might have good intentions, they could create serious restrictions on how the network could or should evolve.
My biggest concern with network neutrality (based on which definition you select) is that it could retard the development of new classes of services in a way that ultimately would hurt the consumer. Indeed, it could retard the development of the Internet by restricting the differentiation of service offerings. This ability to differentiate is important when we think about reliability and robustness of services such as voice (John's note: though I think standard or high-definition video streaming might be a better example of a service that needs this kind of differentiation). It is clear that one needs this ability to differentiate to acquire highly reliable services
I would much prefer to see the market wrestle with pricing the differentiation (if it is needed or desired) and then have a process to address anticompetitive issues as they arise.

I noted in my last post that the competitive market into which SBC (now renamed AT&T) is growing is dramatically different than the one which existed in the 1980s. Today, fixed-line phone companies are in heated competition with cable (hence their entry into television broadcasting), and feel pressure from the spread of mobile phones. Granted, that has led fixed-line companies to buy portions of wireless service providers to shore up their bottom lines (AT&T will wholly own Cingular, the largest provider of wireless service in America, should the BellSouth merger go through), but that's not too different than what happened in Japan, where NTT is majority owner of NTT DoCoMo, the leading wireless provider in Japan, inventor of iMode, and all-around wireless technology trend-setter.  But wireless has fewer physical barriers to entry, and there are enough alternatives to make it a serious competitor to fixed-line vendors.

Not all these options are universally available, as more rural-bound Talkbackers have noted before. However, that problem applies just as much in smaller nations that make our broadband and wireless markets look hopelessly antiquated. What matters most is the level of competition in cities, and from an urbanization standpoint, America (at 77.5%) doesn't trail South Korea by that much (82.5%).

Satellite would be a better fourth option, provided our government had not already taken regulatory actions which undermined its ability to compete with existing wired and wireless competitors. Last, powerline broadband is a real option which should be available before too long. That makes, potentially, five ways for consumers to get broadband access into their homes.

That's a lot of competition in telecommunications, though it may not seem so if your point of reference is the market for corn. Obviously, telecommunications is not like corn, and there is no telecommunications market with hundreds of network connectivity options. That shouldn't be too surprising. Telecommunications tends to require large, well-capitalized companies with the ability to construct the networks needed to link large areas.

The major contenders in fixed-line access are gearing for a battle royale. Most of the traditional phone companies are pushing into IPTV, a technology that will require much higher bandwidth into the typical home. Further, cable companies are moving to counter this with bandwidth upgrades of their own, not to mention their own moves into IPTV. The debate over "net neutrality" rules is thus occuring against a background of tremendous flux in the industry.

I want to see what happens. I want to see if profit incentives, however telcos (among others) choose to find them, will accelerate the growth of broadband across the United States in ways that regulation has failed to do.

America has never really left its telecommunicatios market free to work out a market-based compromise. Though we like to talk about deregulation, the habit to interfere is so ingrained that we quickly backpedal when given the chance back up our principles with action.

Instead of trying to predict what MIGHT happen ten years down the road if telecommunications companies are left free to do what they want, let's see what happens. Trust that profits do truly attract competition (and if you think they don't, please offer examples), either from within America's borders or from large foreign telecommunications companies looking for stateside opportunities.

It's time for us to prove we actually believe in deregulation and let suppliers and their customers hash out a rational compromise.

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