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Who Benefits from FCC's "No-Blocking" Rule?

The Federal Communications Commission’s (FCC) 2015 Open Internet Order included a “no-blocking” rule that prohibits Internet service providers (ISPs) from charging content providers a fee to avoid having their content, service, or applications blocked from reaching the ISP’s end-user customers.

Advocates for regulation explain that this stops, for example, Verizon shaking down Netflix for money by threatening to cut off House of Cards to Verizon broadband customers.

In reality, end-user customers could always switch to a broadband provider that did offer the content the consumer wanted. Market forces protected end-users from blocking for decades with very few (and ultimately unsuccessful) exceptions.

But maybe the real question is, would it really be so bad for ISPs to charge content providers for access to their end-users?

Economic literature suggests that banning ISPs from charging access fees to content providers may actually harm end users by precluding various pricing structures from taking shape.

Case in point is the possibility of a two-sided pricing arrangement for ISPs. A parallel example of this pricing structure is the way credit card companies charge their customers on both ends of their service; merchants pay fees to the credit card firms and card holders also contribute to revenues.

Similarly, ISPs could charge content providers fees for access to their end-users. It’s plausible that content provider revenue would allow ISPs to lower their fees to end users out of motivation to attract more subscribers.

This idea, called the, “waterbed effect,” holds that if prices on one side of the broadband service are suppressed (revenue from content providers), then, like a waterbed rises on one side when the other side is pushed down, prices on the other end of the broadband service (end-users) will have to rise to compensate.

Hass Business School Professor Michael Katz goes one step further and suggests that if two-sided broadband pricing was allowed, those pricing changes could even, “increase broadband penetration, especially if (ISPs) developed a targeted offering that is particularly attractive to underserved groups.”

So if allowing innovative pricing structures to develop could lead to consumer benefit in the form of lower broadband subscription prices and increased access, why would net neutrality advocates seek to ban these voluntary arrangements? If consumers don’t benefit from the blocking prohibition, then who does?

Content providers certainly stand to gain from a no-blocking rule and, accordingly, they have been advocates for net neutrality regulations for years. But what’s their justification for paying nothing and passing those increased costs on to end-user consumers?

Columbia Law School Professor Tim Wu, coiner of the “net neutrality” phrase itself, has admitted that the higher prices paid by end-users because content providers are shielded from ISP revenue streams, “is a subsidy to the creative and entrepreneurial at the expense of the passive and consumptive.”

It’s unclear how making a website guarantees someone is “creative and entrepreneurial,” how accessing the Internet indicates someone is “passive and consumptive,” or why these seemingly arbitrary opinions would lead to sound public policy. But it is clear that these regulations favor some groups over others and, in this way, distort the market to the detriment of consumers.

Before broadband customers support net neutrality regulation, they should understand they might actually be advocating for higher prices and fewer incentives for ISPs to innovate.