(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.)
Net neutrality as a concept exists to prolong government control of a major modern productive sector.
Market failure cannot be a problem in telecommunications and the Internet, since communications has been a comprehensively regulated industry almost since the outset. If anything, political Failure is the matter at hand.
But let’s look at market failure a little more anyway.
In the prior installment (Pt. 5) of “Before Net Neutrality Eats The World,” some fallacies motivating net neutrality were itemized. These fallacies rely on the notion that market failure exists, but that political failure and pressure group activity do not exist in the Internet communications sector.
In its Notice of Proposed Rulemaking that culminated in the Order on “Preserving the Free and Open Internet,” the Federal Communications Commission (FCC) asked for “fact-based” answers and data about network practices (p. 5, paragraph 6). But FCC itself presented no fact-based evidence of market failure as such, only instances of residual effects of distant government granted monopoly power. Those are political and regulatory failures.
Controversial instances of market power are rapidly dealt with via… other forms of market power, interestingly enough.
There can be no fact-based answers about general abuses that have not even occurred of course. To the extent a general abuse exists, it is the governmental delay of communications competition.
During the rulemaking proceeding, the Department of Justice weighed in on the apparent absence of market failure, as well as noted in gentle terms the absurdity of expecting marginal-cost pricing.
What facts demonstrate are great advances in Internet and mobile communications services in terms of the rise in mobile multimedia usage and declining costs of storage, availability of access, emails and texts sent.
So we conclude that if net neutrality were to be rejected upon the demonstration of absence or relative unimportance of market failure, this proceeding would have ended long ago.
That’s not how the regulatory process works, however; enough economic analysis and study of political failure exists to assure the skeptic that merely holding out the prospect of regulation attracts rent seeking, often against vibrant and thriving industries precisely because of their successes.
Rather than an inquiring into market abuses, the FCC might have inquired into political failure and sought “fact-based” questions of who specifically gains from net neutrality wealth transfers.
Since it did not, an upcoming installment of “Before Net Neutrality Eats The World” will address questions that FCC needs to be asking instead of imposing neutrality.
Rather than reacting to market failure, everything about the net neutrality campaign is about pre-intervening in market processes as such, pre-regulating on the part of some bureaucrats and pressure groups who want to control the choices others make, rather than allowing competitive communications to unfold.
We need not even rely on “self-regulation” as it’s often improperly described–there is no such luxury for firms.
Assume bottleneck behavior happens. Great wealth is at stake, and brutal, savage competitive responses to every such attempt are assured. To stop “bottleneck” behavior is to stop or make unnecessary the competitive response. Consumers will be worse off without that reaction.
A particularly worrisome FCC claim was that “Making these rules apply to particular entities will also provide certainty to all Internet participants as to what to expect and who bears responsibility for what types of actions” (p. 38, paragraph 90, italics added).
There’s no question that whimsical rulemaking hurts innovation; but another interpretation is that regulatory “certainty” targeting “particular entities” is also a policy that tells where not to invest. If this occurs, we will have erected a grave political failure when it comes to expanding broadband infrastructure and large-scale deals. And particular will become general; we noted earlier in Part 4 that net neutrality will make the content industry vulnerable to political predation as well.
The FCC’s stance would not “provide certainty”; it expresses an intent to intervene that sooner or later at some unknown time, will be aimed at others. Uncertainty, and political failure, again.
(Note, incidentally, that conditions being imposed for accepting government National Telecommunications and Information Administration and other federal funding for future investment are also a foot in the door for regulation (p. 18, pargraph 45); providers beware. More political failure will result from that too.)
While there need not be numerous rivals in competitive capital markets to maximize consumer welfare, the possibility of profits would attract new competitors and forms of competition.
But given FCC’s inclination to specify terms for network technologies management, such future competition is less likely to emerge if the final Order is upheld.
So the end result of neutrality will be a regulated grid and massive political failure; good for regulators, bad for the consumers regulators claim to speak for.
Next time: Dumb Pipes? But What About The Possibility Of Genius