Open Internet advocates celebrated long and loud in June when a federal court upheld the Federal Communications Commission’s “net neutrality” rules that prohibit broadband-access providers from blocking websites or accepting payment to prioritize traffic. But consumers and businesses should look beneath the rhetoric to see larger dangers lurking in the FCC’s actions.
The new limits and the uncertainty over how the agency will interpret them could seriously constrain future evolution of the Internet. But the bigger danger comes less in the rules themselves than in how the FCC finally got them past the courts. To overcome explicit congressional limits on Internet regulation, and at the insistence of the White House, the FCC began this time by “reclassifying” broadband access as a public utility.
For over a decade, the public-utility campaign, cynically marketed as net neutrality, has been waged by a gaggle of obscure inside-the-Beltway advocacy groups. In an article published after the court decision, the Ford Foundation, whose Internet Freedom project long served as a principle funding source for the advocates, celebrated the reclassification.
“For more than a decade,” the foundation wrote on its blog, “the organizations we support have been working tirelessly on what has until recently been a fairly obscure topic, even as the Internet has assumed an increasingly central role in our lives.” But at long last, the FCC had transformed the Internet into what the foundation believed it to be all along: “an essential public utility.”
But is it? Few could disagree that, despite its short existence, the commercial Internet has become crucial in virtually everything from business and employment to civic engagement and social interaction. It may not be the kind of basic need Abraham Maslow had in mind for human survival in his famous hierarchy, but its importance as the central communications technology of our age is indisputable.
Even so, there is a world of difference between essential services and public utilities. Food, clothing and shelter are also essential, yet none of them are regulated as public utilities. That legal designation, codified in the late 19th-century Progressive Era, has always been limited to a small class of basic infrastructure, such as electricity, gas and water, which shared unique economic features, including a need for universal availability and extremely high financial barriers for potential competitors.
For the Internet, regulation as a public utility represents a dangerously poor fit. For one thing, Internet access is no monopoly. According to the FCC’s own data, nearly 70 percent of American households have a choice among three or more wired providers, including cable, telephone companies and new entrants such as Google Fiber. One need only watch television ads for a few minutes to see fierce competition among providers. And it works: Nearly 20 percent of U.S. consumers switch networks every year — hardly the behavior of a monopoly.
What’s more, the technology of access, which began with dial-up modems only 20 years ago, continues to evolve rapidly. Consumers increasingly get their Internet access from mobile networks, of which there are several national and regional choices. And with the coming of next-generation mobile, which promises speeds as fast as 10 times what is available even with fiber optics, competition between wired and mobile providers is growing.
Still, even if the structure of the broadband industry is more similar to to your power company than your local grocer, the decision to impose public-utility regulation is far from obvious — or inert. Historically, the costs of utility treatment have proved notoriously high, increasingly exceeding their benefits even for traditional infrastructure. Consider just a few of the drawbacks:
- Public utilities don’t compete. Utilities are regulated as monopolies, even if they are not. So any benefits consumers and businesses have realized from competition among broadband-access providers will quickly disappear. And those benefits have been substantial. During the 20 years in which U.S. Internet infrastructure was left largely to engineering-driven self-governance, investors pumped nearly $1.5 trillion into competing network technologies and competing providers, giving the United States four times as many wired connections as any other country, along with the most advanced mobile networks and the most fiber. More U.S. homes have access to broadband than they do indoor plumbing. And except for the very newest high-speed services, U.S. broadband prices are actually lower than they are in price-regulated Europe.
- Public utilities don’t innovate. Regulated utilities have no financial incentive to embrace change. As fossil fuels become unsustainable, for example, disruption is now essential in sleepy power utilities. But a recent article in the New Yorker magazine describes how providers often can’t legally invest in alternative energy sources even if their regulated management wanted to, which they don’t. Utilities see increasingly efficient solar power not as a potentially better and cheaper solution but rather as an “existential threat,” the beginning, according to the trade group Edison Electric Institute, of “a death spiral” for its members. “Whereas most enterprises are about risk, utilities are about safety,” the article concludes. “Safe power supply, safe dividends. No surprises.”
- Public utilities don’t serve consumers. The cozy relationship between regulated industries and their regulators — their true customer, not us lowly rate payers — invariably leads to competitive inertia, corruption and deteriorating facilities. The American Society of Civil Engineers gives America’s overall infrastructure — both public and public utility — an overall grade of D-minus, requiring an estimated $3.6 trillion just to repair. With the FCC and state regulators already moving to apply their newly discovered regulatory powers to set prices and define specific business practices of broadband-access providers, why do advocates who gripe every time even a modest storm knocks out their electricity imagine anything better for a public-utility Internet?
The FCC and its supporters need only to review the recent history of the communications industry itself to see the mismatch between the Internet and a public utility. As the computing revolution exploded elsewhere, basic telephone service limped along for decades, with high (regulated) prices and poor (regulated) service. Prior to deregulation after the breakup of the Bell system, getting a second phone line could take years; simple information services, including caller ID and call forwarding, took decades to win approval from regulators.
Unable to respond quickly if at all to the better and cheaper networking technology of the Internet, what’s left of the analog phone network is now wheezing into extinction, with as many as 85 percent of U.S. households having already cut the cord.
Maintaining the Internet as an “open platform for free expression, political engagement, education, and economic opportunity,” as the Ford Foundation notes in its post, is indeed something to cheer. But we now have an Internet subject to the same archaic laws that crippled the phone system — all to protect net neutrality, which hardly needed the FCC in the first place. In multiple investigations, the FCC failed to identify any serious attempts to violate these principles.
That’s probably because anti-competitive and anti-consumer behavior has long been the domain of the Federal Trade Commission, which aggressively policed practices by access and content providers alike. With the FCC’s ruling, unfortunately, the FTC is now blocked from investigating broadband providers altogether, leaving Internet users with two different agencies and two different sets of regulations to traverse.
That’s one of many reasons economists and those familiar with the sordid past of public utilities had begged the agency not to exercise the nuclear option of reclassification. No matter. Judge Stephen Williams, who dissented in the legal challenge, criticized the FCC for its utter lack of economic analysis, choosing instead to “revel in populist rhetorical flourishes.” Even the FCC’s own chief economist at the time has described the process as an “economics-free zone.”
If the decision stands, it’s only a matter of time before broadband-access services exhibit the same negative side-effects experienced by every other public utility in U.S. history.