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Is the FCC Neutralizing Innovation?

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Is the FCC Neutralizing Innovation?

In a major speech Monday, FCC Chairman Julius Genachowski announced that one of his top policy goals is implementing network neutrality rules. That’s a sophisticated way of saying that he would like to tell Internet service providers how they may handle data traveling through their networks. This is no real surprise; when is the last time an agency turned down an opportunity to expand its powers?

Net neutrality advocates do not like the fact that Internet service providers treat different kinds of data differently. For example, during peak hours, Internet telephony and other time-sensitive applications go through the Internet’s “express lanes,” while less urgent data sit in traffic. In a truly neutral net, both kinds of data would be treated the same.

Like many economic problems, the net neutrality debate is really about scarcity. There is only so much bandwidth to go around; it is a scarce resource. Prioritizing data is an efficient way to use the Internet’s limited resources. That’s why companies do it in the first place.

If bandwidth were infinite, there would be no need for prioritizing. There would be room for all data to pass through at lightning speed. But new capacity is expensive and time consuming to build and maintain. The fact that service providers are spending billions of dollars improving and expanding their networks is proof enough that there is not yet enough capacity to meet rising demand. Ours is not an infinite world. Net neutrality advocates are ignoring this at our peril.

Fortunately, Genachowski stops short of wanting full neutrality. He believes that prioritization is permissible if done to manage congestion. But providers, he says, should not “disfavor an Internet service just because it competes with a similar service offered by that broadband provider.”

Fair enough. Most broadband providers would agree; not giving customers what they want is bad for business. Think of phone companies that penalize customers for calling people on other networks. There is a reason phone companies rarely do this anymore – subscribers didn’t walk away, they ran away the minute someone else offered any greater flexibility.

Wishing scarcity away through neutrality regulations is not a constructive approach. Companies already tend to gravitate towards best business practices. If they don’t, then they go out of business. If policymakers really want a faster, cheaper, more open Internet, they should give service providers an incentive to make it so.

Current law may or may not expressly forbid service providers from charging clients to give their data higher priority (the exact legality is a bit murky at this point; risk-averse companies will refrain from charging until it becomes clear). Net neutrality advocates should explicitly allow companies to charge for putting data into their express lanes. Let them make a profit doing so.

Of course, many net neutrality advocates decry the profit motive. Mere avarice, they say. And sometimes it is. But it can’t be legislated away. Like it or not, the profit motive exists. It is here to stay. Why not harness it, then? If companies can make higher profits by speeding data along as fast as they can, all of a sudden they have a powerful incentive to build ever larger, ever faster networks.

If your goal is to give all data the same priority, what you do is give companies an incentive to put all data into the highest priority category.

The process would take years. Much longer than simply passing a law and being done with it. But the results would be far better for American consumers. Genachowski’s command-and-control neutrality is a recipe for stasis that could stifle innovation. Why would a provider build a top-notch broadband network if it can’t make money off of it?

The solution is to make the market more competitive, not less.

Neutrality regulations would channel innovation in unnatural directions. Companies will concentrate on regulatory compliance, when they should be working on customer compliance.