If it ain’t broke, fix it till it is

March 24, 2015 – 1:13 pm by John

That saying doesn't perfectly apply to the broadband internet and telecommunications industry in the U.S., because I think there's plenty wrong with that industry now, but I feel completely certain that the FCC's new net neutrality rules will fail to fix or prevent whatever the advocates of such rules imagined (might) exist and will in fact create new, worse problems.

One of the FCC's commissioners, Ajit Pai, sees it the same way:

The plan saddles small, independent businesses and entrepreneurs with heavy-handed regulations that will push them out of the market. As a result, Americans will have fewer broadband choices. This is no accident. Title II was designed to regulate a monopoly. If we impose that model on a vibrant broadband marketplace, a highly regulated monopoly is what we’ll get.

(I would hardly call our broadband marketplace vibrant, given that most consumers have either one or two ISPs to choose from and the competing ISPs offer similar options, but his main point stands.)

Elsewhere, Pai has called net neutrality "a solution that won't work to a problem that doesn't exist."

The problem, as supporters imagine it, is that internet service providers could slow down content that the ISP either competes with or disapproves of, or could deny its customers access to that content altogether. But this hasn't been a problem yet, and it's bad policy to write rules and regulations, much less reclassify the regulatory scheme of an entire industry, because of something that might happen.

I've heard of two actions by an ISP, both Comcast, that net neutrality advocates cite in support of these new regulations. The first is when Comcast slowed bittorrent traffic specifically, instead of, say, slowing all traffic of its heaviest users equally. This discrimination was resolved and never repeated without re-classifying the regulatory framework of the entire broadband industry.

It should be noted that there is nothing per se wrong with an ISP limiting the speed of certain types of traffic (or instituting a monthly or yearly data cap), as some people might prefer to pay less (or more) for slower (or faster) bittorrent traffic. What was wrong with Comcast's throttling of bittorrent traffic is that it was done in secret, without any type of notification or agreement with its customers, and therefore violated both the letter and spirit of their contracts with customers.

Net neutrality advocates are completely right to point out that Comcast throttled bittorrent speeds not only to prevent some super-torrent-downloaders from hogging all the bandwidth (at the expense of other paying customers) but also because everyone knows those users are mainly downloading copyrighted movies, music, and TV shows, and large ISPs typically have a strong interest in protecting the profits of their friends and partners in the entertainment industry. This is more true than ever for Comcast, which now owns NBC/Universal and several cable channels.

At this point it is salutary to note that net neutrality advocates want the federal government to prevent ISPs from hindering access to intellectual property...property that is an artificial monopoly created by the federal government and that is protected by laws enforced by the federal government. Good luck with that.

The second incident was when Comcast slowed Netflix service because Netflix and Comcast stalled in reaching a financial agreement under which Netflix would enjoy heavy use of a large part of Comcast's bandwidth. In the Cato daily podcast for November 12, 2014, Berin Szoka of TechFreedom.org dispelled the myths that (a) this happened the way it has been represented and (b) that what happened is even bad:

Caleb Brown: [The Oatmeal author Matthew Inman] writes, "Last year Comcast demanded that Netflix pay them millions of dollars or they were going to slow down the internet speeds of customers who were trying to stream Netflix movies. During negotiations, Comcast throttled the bandwidth of Netflix users in order to bully Netflix into paying massive fines."

Berin Szoka: Completely untrue. Dan Rayburn, independent industry analyst here, has explained this very well. What really happened is that Netflix is trying to pass on things that it's always had to pay for to people who don't use Netflix service. Netflix made a mistake last year when they started offering higher speeds: they didn't buy enough bandwidth in their deal with Cogent. And they were able to get a better deal from Comcast, one that allowed them to stream more cheaply than what they would have been able to get from Cogent. And they turned around and have suggested that broadband companies are holding them for ransom when in fact they're offering a more efficient, cheaper solution, which means lower bills for consumers. It's a cynical manipulation on Netflix's part, and it has nothing to do with net neutrality.

That market for interconnection is thriving. Prices for interconnection have fallen 1000-fold in the last—I believe it's 14 years. And it's highly competitive. There's no problem there except that Netflix would prefer to pay zero than to have to pay anything at all.

(Here's a good blag post by the aforementioned Dan Rayburn on Netflix, Comcast, and peering. In the first paragraph, he links to another, very informative post on Netflix/Comcast peering.)

Elsewhere, Szoka has written:

Title II means the very opposite of net neutrality. Even under Title II, the FCC can’t legally ban all paid prioritization — only regulate it to make sure that prices are just and reasonable. In fact, Title II would authorize broadband providers to charge some price to content and service providers for carrying their traffic to users — and there’s no precedent for the FCC from “forbearing” from this requirement in a market that it claims is a “terminating access monopoly.” Title II would raise a host of other problems, including choking broadband competition, inviting regulation of the rest of the Internet and validating Russia and China’s push to have the International Telecommunications Union regulate the Internet as a telecom service.

Yet elsewhere, Szoka has explained that

Title II also wouldn’t help Netflix get free interconnection. What Netlix calls “Strong Net Neutrality" has nothing to do with Net neutrality. Someone’s got to pay for Netflix’s streaming infrastructure, and Netflix is trying to pass that cost on (through broadband companies) to people who don’t even use Netflix (in higher broadband bills). Contrary to what Netflix claims, it (like every other large content company) has always had to pay for interconnection...."

Szoka also quotes Fred Campbell, who wrote:

Even if the FCC were to reclassify broadband Internet access as a Title II service while leaving Netflix unregulated, the FCC would lack legal authority to require Internet service providers to interconnect with Netflix at no charge.
Unlike net neutrality, interconnection has been expressly addressed by the Communications Act since its inception in 1934, and in the past 80 years, the FCC and the courts have developed an enormous body of precedent governing interconnection. That precedent indicates that Netflix would not be entitled to the type of interconnection it seeks even if ISPs were subject to regulation under Title II.

To summarize, the FCC's reclassification of broadband internet service under its Title II regulations will most likely do nothing to prevent ISPs from charging Netflix (or other content providers) for access to its bandwidth.

And why shouldn't they? Why should ISPs and content providers be prevented, or even discouraged, from reaching such agreements? I am aware of no principle or convention of business or economics that would suggest that Business B can't or shouldn't charge both Business A and Customer C for its service as middleman connecting A to C. Grocery stores charge food and drink companies for access to the store's shelves, even charging more for the right to place their products at the front of the store, at eye level, or in other highly desired spots. (These are called slotting fees or slotting allowances.) Restaurants negotiate deals with, say, Coca-Cola or PepsiCo to sell one company's drinks and not the other's. Landlords or property managers often pay rent to the real estate company that owns the land while in turn charging rent (or other fees) to tenants (or customers). There are probably better analogies to internet service and peering agreements that I'm not aware of.

The pay-to-play or paid-prioritization aspect of our supposedly non-neutral internet would seem to encourage investment in and expansion of broadband infrastructure. An even more important function of the price system than allocating present resources efficiently is to direct future production most efficiently. If content providers are willing to pay high prices for certain peering or interconnection deals, then that tells ISPs and infrastructure operators to invest in more infrastructure so that more customers will have more, faster, better internet service in the future.

Given the reality of Title II regulation and its irrelevance to what many advocates consider net neutrality, it was disappointing to see Mike Masnick of Techdirt.com approvingly repost a bunch of pro–net neutrality cartoons. In each of them, a Tumblr user replaced some words with "the cartoonist has no idea how net neutrality works." I know that Masnick has been a vocal net neutrality convert, but the reason that particular post was disappointing is that those cartoons' refrain smugly implies that supporters know how net neutrality will work, when in fact the main point is that we don't know how the "net neutrality" regulations will work. We don't know how the federal government will use its new Title II powers and we don't know how those regulations will hamper the broadband industry. The government-skeptic position holds that the law of unintended consequences is called a "law" for a reason and that the way to improve customer choice, purchasing power, and freedom is to remove regulations, not add them. Mike Masnick, you don't know how "net neutrality" will work, because what we've gotten is an expansion of the FCC's authority in the form of Title II powers over the broadband internet industry, not "net neutrality" per se, and a good reason to oppose this expansion of power is that everything the government touches turns to crap. The form that crap will take, contrary to your smug admonitions, is something we definitely don't know.

Weren't you tipped off by the seemingly sudden about-face of the supposedly cable industry–beholden FCC chairman, Tom Wheeler? When this former staunch net neutrality opponent became the very person to lead the march toward net neutrality, didn't that seem a little fishy to you? Of course the big cable companies and other ISPs will benefit from this, and the small companies and regular customers will lose. This is always how federal regulation works.

The other main argument in favor of net neutrality, that "internet fast lanes" are unfair or anti-democratic or otherwise undesirable, is obviously nonsense. Some data is more important and sensitive than other data, and some services should be prioritized over others. If there is any bandwidth-related conflict, I want my Netflix traffic to be prioritized over whatever other generic traffic is passing into and out of my modem. So do many others, while many disagree, so let as many ISPs and network policies as possible bloom.

An important issue that Ryan McMaken of the Ludwig von Mises Institute brings up is regulatory capture:

All goods need not be allocated in response to the human-choice-driven price mechanism of the marketplace. Goods and services can also be allocated by political means. That is, states, employing coercive means can seize goods and services and allocate them according to certain political goals and the goals of people in positions of political power. There is nothing “neutral” about this method of allocating resources.

In the net neutrality debate, it’s almost risible that some are suggesting that the FCC will somehow necessarily work in the “public” interest. First of all, we can already see how the FCC regards the public with its refusal to make its own proposals public. Second, who will define who the “public” is? And finally, after identifying who the “public” is, how will the governing bodies of the FCC determine what the “public” wants?

It’s a safe bet there will be no plebiscitary process, so what mechanism will be used? In practice, bureaucratic agencies respond to lobbying and political pressure like any other political institution. Those who can most afford to lobby and provide information to the FCC, however, will not be ordinary people who have the constraints of household budgets and lives to live in places other than Washington, DC office buildings. No, the general public will be essentially powerless because regulatory regimes diminish the market power of customers.

Most of the interaction that FCC policymakers will have with the “public” will be through lobbyists working for the internet service providers, so what net neutrality does is turn the attention of the ISPs away from the consumers themselves and toward the regulatory agency. In the marketplace, a firm’s customers are the most important decision makers. But the more regulated an industry becomes, the more important the regulating agency becomes to the firm’s owners and managers.

The natural outcome will be more “regulatory capture,” in which the institutions with the most at stake in a regulatory agency’s decisions end up controlling the agencies themselves. We see this all the time in the revolving door between legislators, regulators, and lobbyists. And you can also be sure that once this happens, the industry will close itself off to new innovative firms seeking to enter the marketplace. The regulatory agencies will ensure the health of the status quo providers at the cost of new entrepreneurs and new competitors.

In the end, the opinions that I and others put forward and our reasons for having them don't matter a whole lot. Sure, it matters that we have convincing, logical, fact-based explanations for why certain things happen or don't happen, so that others can see why we were right or wrong after the fact, or so that we can possibly sway people to our side and affect policy. But what really matters regarding my predictions is whether they turn out to be right. They will. Regardless of what you think of my opinions about net neutrality, my aversion to government regulations, or my explanations for why things will go wrong, they will. The only really good argument for or against a prediction is the future course of events, and I have little doubt that events will prove my predictions right. The government will interfere into the functioning of the internet in unjustified ways, possibly adversely affecting consumers, and the new regulations will prove anti-competitive. Innovation and investment will be hampered by the new rules, the weaker competition, and the diminished importance of consumers in the new regime. The FCC's powers will only expand, and will be much harder to dissolve than they were to establish.

The only real question is whether one-time net neutrality advocates will admit that these (and other) problems have occurred, or ignore them and whitewash them as something good and desirable.

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