Why Business Should Oppose Net Neutrality

Most business executives likely have never come across the concept. Yet despite its limited reach to a small audience of policy wonks, President Obama made it a campaign issue in 2008, the Federal Communications Commission (FCC) is determined to make it the law, and industry analysts are concerned that its passage would undermine investment by Internet service providers (ISPs). A recent pact on the subject between Google and Verizon — the largest representatives on both sides of the debate — made the covers of the nation’s major newspapers this week. What’s the fuss over this thing called “net neutrality“?

At its core, net neutrality seeks to ensure that ISPs (like Verizon) do not advantage one content provider (like Google) over another (like Yahoo!). But instead of looking to the widely accepted and proven non-discrimination provisions in other areas of communications (such as cable programming), the FCC has crafted a brand new concept of non-discrimination. Non-discrimination under the FCC’s net neutrality proposal means that ISPs cannot offer enhanced services beyond the plain-vanilla access service to content providers at any price.

As a concrete example, under a net neutrality regime, if Sony wants to purchase special handling of the packets for its online gaming portal, then it must look beyond ISPs for a supplier. So long as ISPs are barred from charging for that service, they will refrain from offering it. The business community should recognize this rule as a form of price regulation.

Up until now, the debate over net neutrality has largely focused on how broadband consumers would be affected by net neutrality. But for at least two reasons, businesses — even those outside of the communications sector — have a dog in this fight too.

First, businesses need ISPs to continue investing in their broadband networks. It is well established that price regulation often truncates the returns on an investment in a regulated industry, and thereby decreases investment. According to the Columbia Institute of Tele-Information, ISPs are set to invest $30 billion annually over the next five years to blanket the country with next-generation broadband networks, nearly half of which ($14 billion) will support wireless networks. It is difficult to estimate with precision what portion of the $30 billion would be neutered in the presence of net neutrality rules, but the direction of the impact — negative — is clear. Noted telecom analyst Craig Moffett of Bernstein Research opined that, with the imposition of net neutrality rules, Verizon FiOS “would be stopped in its tracks,” and AT&T’s U-Verse “deployments would slow.” Outcomes like these clearly would not serve the interests of the business community.

Second, businesses need the opportunity to innovate. The ability to purchase priority delivery from ISPs would spur innovation among businesses, large and small. Priority delivery would enable certain real-time applications to operate free of jitter and generally perform at higher levels. Absent net neutrality restrictions, entrepreneurs in their garages would devote significant energies trying to topple Google with the next killer application. But if real-time applications are not permitted to run as they were intended, these creative energies will flow elsewhere.

The concept of premium services and upgrades should be second-nature to businesses. From next-day delivery of packages to airport lounges, businesses value the option of upgrading when necessary. That one customer chooses to purchase the upgrade while the next opts out would never be considered “discriminatory.”

So if net neutrality regulation is bad for businesses, what should policymakers be doing to encourage investment by both Internet providers and content providers? To continue upgrading their broadband networks, ISPs need assurance that their investments will not be appropriated by the government. Accordingly, the FCC needs to alter its course on many proceedings that seek to limit the returns to broadband investment in the name of “leveling the playing field.”

At the same time, independent content providers need assurance that they will not be discriminated against when it comes to accessing broadband subscribers or buying enhanced quality of service from ISPs. The best way to do this is to use a case-by-case analysis.

In fact, the FCC already uses a case-by-case process to adjudicate discrimination complaints brought by independent cable networks against vertically integrated cable operators. It seems odd that the FCC would use one process to adjudicate discrimination claims in the Internet space and a different process to adjudicate discrimination claims in the cable programming space.

The recent Google-Verizon framework represents a large step in the right direction. In particular, it would:

  • bolster the FCC’s authority to enforce its open-Internet principles based on Congressional authority;
  • establish the concept of a case-by-case approach,
  • forbid the FCC from promulgating detailed rules on the kind of conduct that is permitted, and
  • immunize wireless ISPs from any net neutrality requirements.

Despite these important advances, the proposed Google-Verizon framework has one significant drawback. It advocates a “presumption against prioritization of Internet traffic — including paid prioritization.” This is a mistake. It would mean that no enhanced service offerings would be permitted unless an ISP could prove that it was not discriminating. Imagine the rent-seeking behavior that such a provision would encourage, as ISPs would be forced to go to the FCC on bended knee to seek an exemption from the general ban!

In contrast, under our preferred approach, all deals for priority delivery would be presumptively procompetitive, which would place the burden of proof on the complaining content provider. In particular, a content provider who objected to some ISP conduct would have to prove it has been discriminated against on the basis of affiliation, and as a result of that discrimination, the content provider has been materially impaired in its ability to compete against the affiliated network. (The pending Comcast-NBCU merger implicates the first provision regarding affiliation, as Comcast is set to inherit NBCU’s must-have online content.) In the meantime, ISPs would be free to contract — at a positive price — with content providers for enhanced services offerings.

Most importantly, the benefits to businesses that flow from such contracting, including a stimulus from ISP investment and the opportunity to innovate, would be preserved.

Because businesses have a dog in this fight, they should express their opposition to net neutrality. If not, then regulators will likely ignore the impact on the business community.