Don’t Extend the Dead Hand of the FCC to the Internet


On February 26, the Federal Communications Commission (FCC) will vote on a proposal to regulate companies that provide Internet access as public utilities. Spearheaded by President Obama and reluctantly embraced by FCC chief Tom Wheeler, this plan is undoubtedly the U.S. government's most brazen effort yet to police the Internet—which, until now, has thrived thanks to the absence heavy-handed federal mandates.

If the FCC's Democratic majority approves Obama's rules, Internet providers will invest less in their networks, hurting Americans who appreciate faster Internet speeds at lower prices. In turn, these providers won't compete as vigorously, setting up the FCC to justify further encroaching on the Internet in years to come. This vicious cycle might not end until the government effectively controls the wires that connect Americans' homes and mobile devices to the Internet.

Why the sudden march to regulate? In 2008 and again in 2010, the FCC tried to impose somewhat less onerous rules on Internet providers, but both times, a federal court found that the agency exceeded its authority. Rather than admit defeat and move on, the FCC took a third stab at rulemaking in 2014—this time proposing more modest rules that hewed to the court's rulings. But last summer, the White House began making its own plans for the Internet, as if it were a "parallel version of the FCC itself." In November, Obama outlined his plan to regulate Internet providers as utilities in a YouTube video. FCC Chairman Tom Wheeler, a top bundler for Obama's presidential campaigns, took the hint.

The rallying cry behind the FCC's impending rules can be summed up in two words: net neutrality. According to this superficially benign concept, coined by the left-leaning law professor Tim Wu, Internet providers should be barred from discriminating against applications, services, content, or devices without an extremely good reason. Over time, net neutrality has morphed into the broader notion that Internet providers shouldn't even be allowed to accept payment from content companies such as Netflix or Amazon for priority traffic handling.

In practice, therefore, net neutrality means that content companies can't partner with Internet providers to fund improvements to the last mile—that's the portion of the Internet closest to individual subscribers' homes and devices. In the name of fairness, net neutrality declares unlawful a wide swath of voluntary arrangements that have the potential to fuel lower prices and better services for consumers.

Interestingly, some big content companies seem content with this outcome, perhaps because household names like Netflix already have the attention of consumers. But as Berin Szoka and Geoff Manne presciently observe, net neutrality is especially harmful to the little guys—Internet startups—who strive to differentiate themselves from entrenched players, perhaps through paid prioritization. Predicting the Internet's killer app two decades hence is a fool's errand, but whatever it is, it will surely entail unprecedented volumes of data. We should embrace commercial deals to fund network expansion, not declare them illegal.

Why the drive to handicap Internet providers' business models? Because, the argument goes, infrastructure is special—so much so that it deserves comprehensive federal oversight. Internet service providers are supposedly all-powerful gatekeepers with the incentive and ability to pick winners and losers online.

This flimsy rationale for regulation is easily extended elsewhere in the tech sector. Apple is the gatekeeper to iPhones and iPads, for they depend on Apple's notoriously restrictive App Store—derided by the Electronic Frontier Foundation as a "crystal prison"—for apps. Similarly, Netflix is the gatekeeper to its popular streaming service, which enjoys far more U.S. subscribers than the largest home Internet provider. And Google is the gatekeeper to its search engine, which accounts for roughly two-thirds of Americans' Web searches.

Still, for now, these companies do not face the prescriptive regulation Obama now wishes to impose on Internet providers. For instance, the U.S. has no Federal Search Commission—much to the chagrin of some academics—nor do we need one. Though Apple, Google, Microsoft, and Facebook are large and profitable enterprises that face few imminent competitive threats, each firm nonetheless continues to invest in risky and seemingly fanciful gambits, such as virtual reality, driverless cars, wearable devices, and holographic displays. These companies realize that long-run success depends not only on their ability to plan for the future, but to make it happen. It's no coincidence, then, that Google Chairman Eric Schmidt urged the White House not to regulate network owners as utilities.

Compared to Silicon Valley's giants, Internet service providers may seem like sluggish behemoths, but they too are gambling big on an uncertain future. In 2005, Verizon stunned the market by launching its fiber-optic network, FiOS, which now reaches about 20 million homes and businesses (though Verizon has put FiOS expansion on hold due to lackluster consumer demand). Even Comcast, despite its iffy customer service, has upped its standard tier Internet speeds seven times since 2003—an eightfold cumulative increase—while the cost of service has dropped in inflation-adjusted terms. All told, U.S. Internet providers are investing twice as much per household as their European counterparts, according to Penn law professor Christopher Yoo.

To be sure, the broadband market isn't the poster child of perfect competition as it's taught in college microeconomics, with lots of firms cranking out undifferentiated products for negligible profits. But so what? The fact that relatively few firms account for most Americans' Internet subscriptions is no justification for letting bureaucrats in Washington dictate how broadband is priced and delivered. Indeed, markets are remarkably capable of self-correcting when firms think they can act like monopolists and get away with it.

Just five years ago, Google announced it would join the broadband game with a cutting-edge fiber-to-the-home service. Today, Google Fiber has been deployed or announced in seven metro areas, including Atlanta, Kansas City, and Charlotte. And Google will announce plans to bring fiber to up to five more cities later this year. Top Internet providers like Comcast and AT&T have no choice but to keep up with consumers' evolving desires, lest they lose subscribers to their competitors—both extant and potential.

The FCC's upcoming vote is about much more than net neutrality. Unlike the agency's two failed attempts to regulate Internet providers, Obama's new plan would have the FCC reverse its longstanding decision to treat Internet service providers as lightly regulated information services. Instead, if the FCC gets its way, these providers would face strict regulation as telecommunications services—de facto public utilities. Although FCC Chairman Tom Wheeler has pledged he will abstain from imposing outright price controls on broadband providers, a future FCC cannot be trusted to do the same. The very authority Obama and the FCC now wish to seize for the Internet has been used in the past to force Internet providers to make their networks available to competitors at government-regulated rates—a policy aptly described by Adam Thierer and Wayne Crews as "infrastructure socialism."

President Obama's brazen decision to embrace Internet regulation should send a clear signal to Congress as it rewrites the nation's communications laws for the first time in nearly two decades. Entrusting the FCC with broad and ambiguous powers to regulate America's telecommunications sector was, and remains, a grave mistake. Congress should start from scratch on telecom laws, identifying which FCC functions—if any—cannot be sorted out by markets or courts, and vest such authority elsewhere in the federal government. Otherwise, broadband providers will soon look and act like power companies and the old Ma Bell telephone monopoly: stagnant, slow-moving, and anything but innovative.