What's Wrong With Net Neutrality: Counterarguments to the FCC

Last Updated Jun 18, 2010 12:10 PM EDT

On June 17, the FCC opened to inquiry its plans for net neutrality regulations. We all know the platform: unbiased access for all computers to any Web site or service. Sounds great on the surface, and it's being backed by lobbying from Google (GOOG), Amazon (AMZN), Facebook and other Web entities. But does net neutrality actually do users any good?

There are various counter arguments, most of which take issue with the the definition of "freedom" on the Web. Does freedom mean freedom from regulation, or freedom to go to any site you wish? It's Isaiah Berlin's Cold War-era positive/negative liberty debate gone digital. Here's what academics are saying.

New York Law School's Advanced Communication Law & Policy Institute has come down against regulation. In a new report, the Institute says the FCC's planned regulations will vitiate the transition from old media to new media if the companies involved can't monetize by partnering with telecoms. The problem is "explosive" demand:

Unless a long-term plan is put in place that addresses and manages the traffic at a very granular level, the cost incurred due to an explosive demand will become unsustainable by 2013. At that point the revenue being generated could fall below the cost of sustaining such traffic. However, if the operators attack the problem using several different strategies, the growth can be managed and brought in line with the technology evolution such that the industry can take advantage of the falling per megabit costs.
The report predicts job losses: 100,000 or more every year til 2015, because of lost opportunities for innovation. Presumably, it also believes the cost to users would be high -- unmanageable demand means fewer free services and an end to all the free cloud storage we've come to love.

A Penn State study argues that the big companies can afford to suffer -- it's the small businesses we should be protecting. Coming down in favor of the FCC's regulations, the Penn State study says that entrepreneurs will be at a competitive disadvantage if they need more capital to get the same quality services as larger peers.

Service providers should not be able to discriminate between packets based on who originates them. Otherwise, small businesses which may not be able to secure advantageous terms may not be able to compete effectively--.
As SaveTheInternet notes, other studies (like this one from the Free Press) have said that a level playing field, as begotten by net neutrality regulations, could actually spur more entrepreneurial activity and investment.

Other academics -- like this group of economists, biz school professors and computer scientists from George Mason, Carnegie Mellon, Georgetown, UVA, Kansas State and others -- claim that net neutrality laws are solving a problem that doesn't (yet) exist. Right now, the paper argues, no one is being charged differently because of the origin or destination of their data, so why make a law preventing it? As the abstract says:

... [T]he economic evidence provides no support for the existence of market failure sufficient to warrant ex ante regulation of the type proposed by the Commission, and strongly suggests that the regulations, if adopted, would reduce consumer welfare in both the short and long run.
To the extent that telecoms behave badly, the report says, they should be handled on a case-by-case basis using existing "doctrines and procedures." Whether potent enough "doctrines and procedures" exist to actually censure or prosecute a telecom for discriminating are, of course, up for debate.

The famously libertarian Ludwig von Mises Institute, intellectual home to Representative Ron Paul, amongst others, believes that by enforcing net neutrality, the FCC is removing the incentive for big Web services to please their customers in order to earn usership. In short -- Google, Facebook and Amazon may be inflicting damage upon themselves by lobbing for the FCC's regulations:

Google, Facebook, Amazon, eBay, and the rest of the big Internet companies will have to rely on lobbying instead of on merits. The network, managed by the government (of course, not directly, but by increasing regulation of telecom operators), will be assigned according to arbitrary policy criteria not necessarily related to the actual preferences of people. For example, Spanish movies could be given priority over Google contents due to cultural issues (or due to better lobbying by those stakeholders).
If network operators have to cede control to the government, they'll stop investing in their services, says the writer of this Mises post, economist Fernando Herrera-Gonzales. That, in turn, will put a cap on growth:
The capacity of the network will not grow and it will not be able to carry the vast and growing amount of data demanded. Once again, this does not look good for Google and its allies, whose businesses rely so heavily on the increase of data traffic.
The FCC is still at the early stages of its regulatory procedure, and it has plenty of strong voices like AT&T (ATT) informing it of the downsides. But leaving the Web unregulated is a tacit admission that it is somehow different than other media -- television, radio, and telephone -- all of which are heavily regulated. The source of regulation, of course, is the notion of scarcity: in a world of limited radio waves and channels, who should get to broadcast what? Network capacity is just as limited a resource. But does that mean we should treat them all the same?