Before Net Neutrality Eats the World (Part 13): What FCC Should Do Now

(Note: On September 9, the U.S. Court of Appeals for the D.C. Circuit will hear oral arguments in Verizon’s challenge of the Federal Communications Commission’s December 2010 Order on “Preserving the Free and Open Internet.” This series explores fundamental issues at stake.)

While hiccups during the arduous process of emerging from a heavily regulated telecommunications past are inevitable, market failure as such is not stalking the United States’ communications industry.

Even if there existed numerous instances of blockage by Internet access providers, today’s dispute should focus not on the mechanics of how best to implement top-down regulation, but on the very relevance and capabilities of a man-made, imperfect entity like Federal Communications Commission (FCC) in liberalizing infrastructure for tomorrow’s users.

Extending the institutions of property is a hallmark of civilization, the utmost challenge; There needs to be a way to make regulators answer for failing at that task and undermining the industries they oversee.

The reality is that net neutrality amounts to the compulsory abolition of certain proprietary business models and is hostile to the concept of private property in long, thin assets.

Networks do not belong to the hive or collective; at the very least we need to establish that government rules are limited in scope, and do not apply to whatever alternative networks or online services might emerge in the future.

Policy must allow for political rules to be dislodged and replaced by private arrangements; but there is little leeway for that in the Order.

Indeed, if it did not already exist in today’s era of communications abundance and potential, we would not create an FCC to rule in the manner tolerated today. The FCC’s willingness to erect neutrality barriers to the creation of infrastructure wealth indicates disdain for future consumer welfare online and for the very concept of liberalized communications and further separation of state from speech and communications.

FCC should be at the forefront of creating and articulating the case for preserving and expanding the scope for competing network business models — open and proprietary. Instead, its philosophy is hostile not merely to legacy wireline, but to wireless and the yet-to-be.

The neutrality impulse is not unique, having been implemented or advocated in power grids, operating systems, various interoperability mandates, instant messaging, search results and more.

The rationale is wrong even pertaining to “monopoly” communications networks, since, as photographs from the early telecommunications and electricity era illustrate, massive redundancy and duplication of wires prevailed. Rather than “natural monopoly” — which is not found in nature, only in politically managed trade — congestion and aesthetic outrages plagued the era. Both of those are “good” problems. The capital and incentives available to build infrastructure are vastly greater today.

The regulated open access paradigm assumes away the problem of ignorance and relies on government force to solve problems about which there can be no permanent agreement. Disagreement is appropriate in market settings; that discontent is a source of new profit opportunity. It is wrong to exalt neutrality as a “good thing” rather than one of many network features.

In reality, policymakers haven’t the vaguest idea how communications grids should develop, and certainly have no basis to presume that any given paradigm is sacrosanct and worthy of being locked in by regulation. A regulated access regime would inflict the very technological “lock-in” that FCC and the Federal Trade Commission otherwise claim to abhor (NPRM, page 34, paragraph 81).

Meanwhile, we face a quandary with respect to the legacy bureaucracy. Industry itself sought regulation in exchange for the outlawing of competition, and future heavy regulation will entrench powerful (or merely lazy) interest groups whose self-interest will depend upon impeding future network and content liberalization. Indeed, an irony of neutrality, anti-discrimination and disclosure rules is that, the more meddlesome rules there are, the more likely that entrenched incumbents get to run tomorrow’s show.

Public policy decisions need not lock in or prejudice the emergent competitive mix of open and proprietary approaches for future generations. Governments often presume to pick winning technologies, the “racehorses,” so to speak, when governmental focus should be on improving the “track” (the regulatory, tax, policy, legal and competitive environment) on which all the horses run.

That stance would counsel keeping out of private decisions about whether networks remain stupid and dumb. Smart networks do not mean a subservient future of “seeking permission from the owner of the broadband pipe” as the NPRM put it (p. 26, paragraph 63). Providers and customers are simply not inherently at war, as this proceeding implies.

To move forward the Agency would need to grapple with limitations noted throughout this “Before Net Neutrality Eats the World” series and liberalize telecommunications in a way that promotes actual (not forced) competition and consumer welfare. But the Order lacks any exploration of the deregulatory means of achieving these same ends.

The Order justifies rulemaking to “promote Internet investment and to protect and promote voice, video, and audio communications services” as if neutrality is the unquestioned means of doing that, and as if we have these things because of government rather than sometimes in spite of it. It’s worthwhile to note that this directive refers to infrastructure and “broadband capability,” rather than broadband content itself. In that reading, the real charge if this mandate were taken seriously would be to ban neutrality mandates and central management of telecommunications as such, so that broadband capability could genuinely flourish.

Numerous ways of dealing with holdout and legacy monopoly power well short of imposing “high level” open access rules exist that would instead reduce agency power rather than entrench it.

The principle of neutrality should be replaced by a new principle, that of fostering competition in the creation of networks. Today’s challenge is that of lowering transactions costs of building large-scale infrastructure of every kind. In the instance of communications specifically, the best way to start to repudiate the Order. Then other options, in no particular order, exist:

• Short of repudiating the Order, ban compulsory net neutrality on wireless and all future wireline networks.
• Ban any future regulation of unregulated or managed and special services. As they dominate and perhaps incorporate traditional broadband access, regulation of that capacity could also be banned.
• Emphasize spectrum auctions with no strings attached.
• Where invoked, incorporate mandated access only on a rifle-shot basis rather than impose as a principle. Ensure any rules apply only to the existing public Internet, and leave any future privately owned online services that may emerge and gain any modicum of dominance in the marketplace free of these requirements.
• Work to reduce environmental and zoning restrictions that impede infrastructure build-out.
• Antitrust regulations should be relaxed so that content firms could foster infrastructure options. Note that this proceeding occurs seemingly disconnected from the FCC’s opposite approach, a series of hearings around the country challenging “big media” and free choice in media ownership — these are the very kind of alliances that, if not themselves restrained, could help offset market power in infrastructure that spurs calls for neutrality. (See “A Defense of Media Monopoly.”)
• Work with other federal agencies and state regulatory bodies to reassess and reduce exclusive franchises in industries like electric power.
• Aggressively liberalize and tear down regulatory silos between infrastructure industries to cross industry investment in mutual infrastructure (communications, power, water, rail, etc); In this manner, the competitive infrastructure process flourishes not only at the communications sector level but but across industry sectors.
• Explore the state of and remove barriers to user ownership of grids and infrastructure as alternative to “neutrality” and as a means of alleviating market power where it may remain a concern. Office parks, real estate developers, corporate campuses, all have a role to play in wealth-creating network innovations.

Conventional antitrust could of course address any residual monopoly power without invoking net neutrality. I do not support this approach, because antitrust is even more of a malicious anti-consumer and anti-property rights institution than neutrality is. Antitrust substitutes limited, transitory always-non-monopoly market power in trade with vastly greater political monopoly (the only variety) that distorts entire industries and the free enterprise system itself.

The NPRM had already noted some (unfortunate) neutrality-style conditions imposed on mergers during the past decade (p. 13, paragraph 33). Antitrust intervention is worse than the alleged monopolization because its abuse creates entities that do not resemble what they would in a free, competitive market. Antitrust, like neutrality, hampers infrastructure wealth creation and cannot substitute for competitive market discipline. In fact both destroy market competition because they deprive consumers of whatever actual competitive response would have otherwise inevitably occurred. Markets are not static.

Antitrust must be relaxed, not deployed, to expand infrastructure.

Next Time: What Should Congress Do?