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Before Net Neutrality Eats the World (Part 10): Who’s Discriminating Online?

(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.) The original four Federal Communications Commission (FCC) Policy Statement principles miscast the prerequisites of broadband infrastructure wealth development (property rights, exclusive deals and contracts and so forth) as antithetical to consumer welfare and fluid access to content. In that sense, they are philosophically flawed and harmful. Yet, the Notice of Proposed Rulemaking (NPRM) and 2010 Order on Preserving the Free and Open Internet consolidated the principles, and went beyond with an anti-discrimination mandate. The NPRM stated that “Subject to reasonable network management, a provider of broadband Internet access service must treat lawful content, applications and services in a nondiscriminatory manner” (Section 8.13, page 66). And as the Order puts it, "No unreasonable discrimination." The agency takes the term “nondiscriminatory” to mean that “a broadband access provider may not charge a content, application, or service provider for enhanced or prioritized access to the subscribers of the broadband Internet access service provider” (p. 42, paragraph 106). Indeed, the FCC intended and endorsed “a bright-line rule against discrimination” (NPRM, p. 43, paragraph 109). As expressed in the Order, "We conclude that the benefits of ensuring Internet openness through enforceable, high-level, prophylactic rules outweigh the costs." The effect of such decrees -- locked in as if something were inherently special about today, and as if the Internet’s present incarnation represented the culmination of all humanity’s network technology -- is hard to overstate. Pricing and access are the most crucial yet misunderstood, complex and critical variables for many innovative industries (See for example Ronald H. Coase, “The Marginal Cost Controversy,” in The Firm, The Market, and the Law, pp. 75-94). In terms of fundamental consumer welfare itself and the maximization of "social output" for those who speak that language, there is no more socially important mechanism than experimentation for allocating scare resources and fostering wealth expansion. That importance is not diminished however poorly understood someone else’s pricing policies may be to a regulator, or however self-servingly denigrated by a rent-seekers who prefer not to pay market price for access. Network owners and content providers must “discriminate,” or “exclude” in ways that ease network management but also operations control and competitive content creation. Discrimination is also an implementation of choice: prioritization of critical medical information, filtering, protecting kids online and so forth. If you were suddenly to transport all today’s traffic back 10 years, there’d be increased "discrimination" because it couldn’t all fit, but those shut out would not accept that "network management" was the reason. Today’s Internet stands in a similar position with respect to that of the future. Content, technology, and network infrastructure grow hand in hand, and at various times one sector may have sway over the other. Competing rivalries reveal profit opportunities, and in a never-ending stir create competitive pressures for consumer services. Those pressures dampen or work against unreasonable discrimination, and they bring service to those lacking it. Everything about the interplay between content and infrastructure is geared toward bringing about that which does not yet exist. Compulsory net neutrality renders these services and healthy competitive turmoil vulnerable to political predation. Vulnerability also stems from the blurring of lines between access providers and content providers -- between message and delivery of the message. In well functioning capital markets, content companies can become infrastructure companies and vice versa. Balances of power will shift (much like cable firms paying for broadcast content rather than broadcasters having to beg). Liberty in the institutions developed for the creation and dissemination of information, rather than governmental guidance of modes of expression, is one of our most cherished constitutional freedoms, and the true source of non-discrimination and openness. Occasionally “favoring” certain content is consistent with voluntarism, the buildup of new social and communications institutions within society, and can be a pre-requisite for the network and content wealth creation beneficial to tomorrow's consumers. Ironically, compulsory neutrality is itself inherently discriminatory: it explicitly favors one side in a battle of industry equals, damaging flexibility for everyone and undermining consumer welfare. It sets the content industry on a higher moral plane than the infrastructure industry -- despite the ever-arbitrary distinctions between them -- and creates enemies out of what are in fact natural allies, partners that could be working closely together and even integrating more to expand the Internet’s capabilities. The recent economics Nobel prize to Oliver Williamson captured the importance of such vertical relationships, which will be increasingly relevant to Internet health in coming decades. Just as consumers may desire lower electric power rates in exchange for interruptible services while industrial concerns may pay extra for premium power, one can readily envision future communications networks so prosperous and customized that content providers want to secure the very preferential treatment the Order would forbid them (or conversely pay less for non-vital transmissions). All such “discrimination” is consistent with (and indeed would improve) the openness enjoyed online now. Natural network evolution entails not only complex access and pricing policies, but making underlying networks longer, fatter, and redundant. Companies don’t get to decide or “discriminate” in isolation of course, but must heed investors, advertisers, consumers, and the constant competitive pressure of rivals and hungry network alternatives. All these strike against unreasonable blockage of any content or information flow, with the upshot that any “socially harmful discrimination” (NPRM, page 44, paragraph 114) is more likely to be privately harmful -- to the perpetrator. Pricing and access freedom will continue to result in a constant escalation in the basic capabilities of the network, an intensification of the “background hum” of the Internet as a whole, much as we’ve already witnessed without neutrality mandates interrupting the process. If one envisions a continuum with “neutrality” or “perfect competition” at 1, and monopoly or proprietary control at 100, economists have beaten to death the endpoints, but have little appreciation for the abundance of activity taking place at 2 through 99. But that’s where real creativity and competitive enterprise happens. Our descendants will be grateful for restraint here. The trap of the Order is that there’s no way to prove “non-discrimination,” since price and service differentiation technology critical to well functioning network services will become more so over time. Non-discrimination, properly understood, is not a positive state of affairs. Because it must “discriminate,” business cannot defend itself within the parameters of a mindset that overwhelmingly regards discrimination as negative and invites complaint. Note also that no exit strategy is apparent in the Order when the “need” for regulation subsides. The "agency neutrality" envisioned in this "Before Net Neutrality Eats The World" series would mean regulators must not be allowed to “discriminate” and choose sides (content over infrastructure) in any market confrontation, period. The contractual resolution that ultimately prevails informs future entrepreneurship and is essential to the broader knowledge and wealth-creating process. What’s “reasonable” when one wants something free is different from what’s reasonable when one owns infrastructure or made the investment. The FCC's Order inserts a tremendous wedge for itself to establish a permanent regulatory presence: “To be sure, the contours of our proposed exceptions [to reasonable network management] would be subject to development in future adjudications” (p. 43, paragraph 110). To its credit, the agency did ask for consequences of prohibiting charges for priority pricing (NPRM, p. 43, paragraph 112). The agency also sought to clarify that managed or specialized services would not be subject to the principles, only “broadband Internet access service” itself, although all these “may be offered over the same facilities” (NPRM, p. 43, paragraph 108). This is really just an arbitrary distinction here, in the vein of past pro-regulation-and-litigation bureaucratic distinctions like that between “information services” and “telecommunications services.” Unimpeded by neutrality constraints, broadband access itself could become increasingly more “specialized” and “managed” in a bandwidth-flush future world, a worthwhile evolution that warns against the pass for discrimination for “reasonable network management” only. The closest indication that FCC appreciates this is when it asks, “Should these [advanced and quality-dependent] services be more properly understood as managed or specialized services rather than broadband Internet access services?” (p. 44, paragraph 113). But the FCC doesn’t take the next logical step to advocate that broadband access itself enjoy exemption from regulation also. Next time: The Inappropriateness of Compulsory Transparency