The Gravest Threat To The Internet

by on May 11, 2014 · 0 comments

Allowing broadband providers to impose tolls on Internet companies represents a “grave” threat to the Internet, or so wrote several Internet giants and their allies in a letter to the Federal Communications Commission this past week.

The reality is that broadband networks are very expensive to build and maintain.  Broadband companies have invested approximately $250 billion in U.S. wired and wireless broadband networks—and have doubled average delivered broadband speeds—just since President Obama took office in early 2009.  Nevertheless, some critics claim that American broadband is still too slow and expensive.

The current broadband pricing model is designed to recover the entire cost of maintaining and improving the network from consumers.  Internet companies get free access to broadband subscribers.

Although the broadband companies are not poised to experiment with different pricing models at this time, the Internet giants and their allies are mobilizing against the hypothetical possibility that they might in the future.  But this is not the gravest threat to the Internet.  Broadband is a “multisided” market like newspapers.  Newspapers have two sets of customers—advertisers and readers—and both “pay to play.”  Advertisers pay different rates depending on how much space their ads take up and on where the ads appear in the newspaper.  And advertisers underwrite much of the cost of producing newspapers.

Or perhaps broadband providers might follow the longstanding practice of airlines that charge more than one price on the same flight.  In the early days of air travel, passengers only had a choice of first class.  The introduction of discounted coach fares made it affordable for many more people to fly, and generated revenue to pay for vastly expanded air service.

Broadband companies voluntarily invest approximately $65 billion per year because they fundamentally believe that more capacity and lower prices will expand their markets.  “Foreign” devices, content and applications are consistent with this vision because they stimulate demand for broadband.

The Internet giants and their allies oppose “paid prioritization” in particular.  But this is like saying the U.S. Postal Service shouldn’t be able to offer Priority or Express mail.

One of the dangers in cementing the current pricing model in regulation under the banner of preserving the open Internet is that of prohibiting alternative pricing strategies that could yield lower prices and better service for consumers.

FCC Chairman Tom Wheeler intends for his agency to begin a rulemaking proceeding this week on the appropriate regulatory treatment of broadband.  Earlier this month in Los Angeles, Wheeler said the FCC will be asking for input as to whether it should fire up “Title II.”

Wheeler was referring to a well-known section of the Communications Act of 1934 centered around pricing regulation that buttressed the Bell System monopoly and gave birth to the regulatory morass that afflicted telecom for decades.  A similar version of suffocating regulation was imposed on the cable companies in 1992 in a quixotic attempt to promote competition and secure lower prices for consumers.

Then, as now, cable and telephone companies were criticized for high prices, sub-par service and/or failing to be more innovative.  And regulation didn’t help.  There was widespread agreement that other deregulated industries were outperforming the highly-regulated cable and telecom companies.

By 1996, Congress overwhelmingly deemed it necessary to unwind regulation of both cable and telephone firms “in order to secure lower prices and higher quality services for American telecommunications  consumers and encourage the rapid deployment of  new telecommunications technologies.”

With this history as a guide, it is safe to assume not only that the mere threat of a new round of price regulation could have a chilling effect on the massive private investment that is still likely to be needed for expanding bandwidth to meet surging demand, and that enactment of such regulation could be a disaster.

Diminished investment is the gravest threat to the Internet, because reduced investment could lead to higher costs, congestion, higher prices and fewer opportunities for makers of devices, content and applications to practice innovation.


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