Net Neutrality: A Dialogue With Ars Technica

CEI’s broadband reply comments from earlier this week received a generous quotation by Ars Technica’s Nate Anderson. Mr. Anderson took issue, however, with our claim that net neutrality mandates are essentially price controls:

“In particular, [neutrality rules] require ISPs to offer content providers a price of zero, and to differentiate prices to consumers only in certain limited ways,” says CEI’s filing. “The disastrous consequences of price controls are all too familiar. And while neutrality may currently align with industry best practices, that fact limits the possible benefits just as much as the possible harm.”

Content providers pay for bandwidth on the competitive market, so it’s not clear what the line about “a price of zero” refers to (that money is passed along to other ISPs along the network path through the mechanism of “peering and transit“). But it is clear what groups like CEI want from a broadband plan: nothing at all.

There’s a lot more to say about net neutrality, especially regarding antitrust and regulatory capture. (For a brief summary of CEI’s broadband comments, check out our topic-by-topic summary.) This post aims to address Mr. Anderson’s objection on net neutrality in particular.

One of most incendiary moments in the history of the neutrality debate came during a 2005 interview with Ed Whitacre, then CEO of SBC. Ars reported Whitacre’s remarks:

How do you think they’re [Google etc.] going to get to customers? Through a broadband pipe. Cable companies have them. We have them. Now what they would like to do is use my pipes free, but I ain’t going to let them do that because we have spent this capital and we have to have a return on it. So there’s going to have to be some mechanism for these people who use these pipes to pay for the portion they’re using. Why should they be allowed to use my pipes? The Internet can’t be free in that sense, because we and the cable companies have made an investment and for a Google or Yahoo! or Vonage or anybody to expect to use these pipes [for] free is nuts!

Reactions to that comment have been at the core of the neutrality debate. Whitacre was asserting SBC’s right to charge content providers directly for their use of SBC’s lines — in essence, the right to set the price of premium service quality higher than zero — and neutrality advocates have clamored ever since to prohibit that kind of pricing. CEI wasn’t the first group to recognize the dangers of price controls at the core of net neutrality. A paper by Robert Hahn and Scott Wallsten,  “The Economics of Net Neutrality,” made the same point three years ago:

Mandating net neutrality amounts to price regulation. In this case, the regulation would state, in part, that broadband providers charge content providers a price of zero.

Mr. Anderson was correct when he pointed out that content providers already pay ISPs indirectly through various transit and peering agreements, and he linked to an excellent Ars piece explaining how these payments work. The Cato Institute’s Timothy Lee raised the same point in his 2008 policy analysis, “The Durable Internet,” in reference to Hahn and Wallsten’s argument. Lee ultimately acknowledged, however, that direct and indirect payments are not perfect substitutes, and his conclusion was simply that direct payments are inefficient:

With thousands of network owners and hundreds of millions of users, it would be prohibitively expensive for every network to charge every user (or even every online business) for the bandwidth it uses. Transaction costs would absorb any efficiency gains from such an arrangement. It would make no more sense than an automobile manufacturer requiring its customers to make separate payments to the manufacturers of every component of a new automobile. One of the services an ISP provides to its customers is “one stop shopping” for Internet connectivity. This arrangement has important economic advantages and is unlikely to change in the foreseeable future.

It’s indeed unlikely that direct payments would be worth the cost to negotiate them. Net neutrality is targeting prices that would probably remain zero anyway, at least for the foreseeable future. But for the most dynamic marketplace in history, etching the business models that prevail today in stone would be unwise — especially considering how often inefficient, outdated regulations impede market evolution.

It’s impossible to predict the evolution of content and technology online or the ways in which new developments might conflict with one another, and thus with neutrality. ISPs might even invent ways to save money for consumers by “unbundling” content, like the FCC nearly forced cable companies to do. No one knows. What is certain, though, is that thwarting innovation in service and pricing will close the widest open door to competition.