As a young reporter in the 1970s, I covered the Interstate Commerce Commission (ICC). Created in 1887, the ICC regulated the nation’s railroads and sought to protect the public against abusive freight rates. Congress deregulated the railroads in 1980 and ultimately abolished the ICC. The verdict was that the agency had so weakened the industry that a government takeover might be necessary. Deregulation was a desperate alternative to nationalization.
I mention all this because there are obvious parallels between the Internet today and the railroads in the late 19th century. Like the railroads then, the Internet today is the great enabling technology of the age. Like the railroads then, Internet companies inspire awe and dread. And now there’s another parallel: the resort to regulation.
Just recently, the Federal Communications Commission voted 3-2 to adopt a proposal to ensure “net neutrality.” The new rules will promote an Internet that’s “fast, fair and open,” said FCC chairman Tom Wheeler. As a slogan, net neutrality is swell. Who could oppose it? Speed is good, and hardly anyone wants an Internet that favors some users and penalizes others.
Be skeptical. The FCC’s new rules weaken — or reverse — decades of minimal regulation, during which the Internet flourished. As often as not, economic regulation has adverse, unintended side effects. That was true of the railroads, and it may be true of the Internet.
The railroads needed ICC approval for almost everything: rates, mergers, abandonments of little-used branch lines. Shippers opposed changes that might increase costs. Railroads struggled to meet new competition from trucks and barges. In 1970, the massive Penn Central railroad — serving the Northeast — went bankrupt and was ultimately taken over by the government. Others could have followed.
The ensuing deregulation succeeded brilliantly, as economist Clifford Winston has shown. Costs and freight rates both declined. Railroads shed unprofitable lines and offered pricing packages that rewarded shippers for moving more freight in bulk. Mergers consolidated railroads into four major companies. Profits rose. The industry brags that it has spent $575 billion since 1980 to improve the rail network.
Switch now to the Internet. It’s unclear what justifies new regulation. The FCC plan bars companies such as Verizon and Comcast — Internet Service Providers (ISPs) — from blocking any Internet connection. But there was never any support for this sort of censorship, and the agency’s press release contains no evidence that it is widespread. “It’s a red herring,” says Brookings Institution economist Robert Litan.
The real issue is who pays for new Internet investment. Do big users such as Netflix and Facebook bear some costs, or are these left to the ISPs — which shift them to the monthly bills of households? For example: In 2014, Netflix agreed to pay Comcast for smoother streaming of its videos. The open question is whether the FCC will permit these interconnection payments and, if so, at what level. But the FCC has weakened the ISPs’ bargaining position by requiring them to accept all comers.
Note the consequences: If Netflix doesn’t pay its full costs, someone else will. In practice, there could be massive cross-subsidization. Promoted as protecting the “little guy,” net neutrality may do the opposite.
For the moment, the FCC majority promises not to adopt “utility style” price regulation (in effect: limiting profits), which — it concedes — would discourage investment in added Internet capacity. Instead, Wheeler pledges “light-touch” regulation. But this promise is good only until some future FCC changes it. If typical telecom bills increase, political pressures for full-scale rate regulation would surely intensify.
What’s also inconsistent with the “light touch” is “a general conduct rule that,” as Wheeler describes it, “can be used to stop new and novel threats to the Internet.” Translation: Anyone with an Internet gripe can petition for relief. Though the FCC need not comply, this creates enormous uncertainty.
The Internet poses many genuine problems, led by cybersecurity; net neutrality is not among them. It is an opportunity to impose more regulation that, as the example of the railroads warns, threatens to exact a slow and growing economic toll on the Internet’s vitality.
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