The illusions of Net neutrality

Since the early 2000s, a small but influential cohort of policy wonks and pundits has argued that the Federal Communications Commission should prohibit Internet service providers (ISPs) such as Verizon, AT&T and Comcast from charging differential rates for high-speed connections to digital content (or “edge”) companies such as Amazon, Netflix and Google.

Rallying around the banner of “Net neutrality,” these activists believe that ISPs should treat all content on the Internet equally, charging everyone the same amount of money for equally fast (or slow) access to all websites. If ISPs and content providers can negotiate performance standards, they presume, today’s lumbering incumbents could obtain an inequitable advantage over tomorrow’s insurgent upstarts: faster connections, better prices, maybe even preferential access. To prevent this from happening, they contend that the Internet ought to be a common carrier that is regulated in accordance with ostensibly time-honored norms — standards that shaped the regulation of the railroad, the telephone and the telegraph.

The ISPs contend, in response, that they have a right to charge what the market will bear. Verizon has even ventured the dubious argument that it has a First Amendment right to operate its business free from federal regulation.

On Tuesday, Judge David S. Tatel of the U.S. Court of Appeals for the D.C. Circuit struck down an FCC ruling that had previously blocked Verizon from experimenting with differential pricing. Net neutrality activists warn that Tatel’s ruling will slow innovation by preventing up-and-coming edge companies — the next Facebooks, Craigslists, and eBays — from reaching customers by giving an unfair edge to established sites. FCC critics, led by ISP giant Verizon, challenged this theory as fanciful, underscoring their commitment to preserving open access to the Internet, and adding that to expand broadband access ISPs need additional revenue, which could be generated through differential pricing.

With this ruling, the Net neutrality debate is entering a new phase that will oblige both the FCC and its critics to revise the rules of the game. This discussion is shaped by competing visions not only of the future but also of the past. The Net neutrality enthusiasts make expansive claims about the historical role of federal regulations — in particular, those that fall under the rubric of “common carrier” law, which in their view requires ISPs to treat all users equally to foster competition, ensure equity and guarantee political accountability. To assess their claims it may be useful to provide a perspective on communications regulation in ages past.

Common carriage has indeed been important in coordinating the movement of information, people and goods in the United States. But it has not been as ubiquitous, innovation-friendly or uniformly progressive as its champions assume. The telephone network would not come under common carrier regulations until 1910, decades after the first startups had emerged in the 1870s, and at the end of a period of enormous growth and innovation. The telegraph network, which dates back to the 1840s, eluded common carrier regulation for just as long.

The political rules of the game for the telegraph and the telephone were very different, but that shouldn’t lend much comfort to either side in today’s Net neutrality debate. The telegraph was loosely regulated in accordance with anti-monopoly dogma that favored competition and discouraged regulation in the hope that new entrants would dislodge the incumbents. The telephone, in contrast, was tightly regulated, first by the municipalities and, eventually, by the states and the FCC. 

Which kind of regulation prompted more innovation? Telephone regulation — hands down. The U.S. telephone network was tightly regulated throughout much of the 20th century, and among its byproducts was innovation hothouse Bell Labs. The telegraph network, by contrast, was loosely regulated in a manner that today’s neoliberal free-marketeers might well admire, and mostly remained a technical backwater. 

Another historical analogy that just might provide a new perspective on the present-day debate is the way that flat-rate pricing impeded innovation in the U.S. telephone business in the 1890s. Only when municipal authorities permitted operating-company managers to experiment with differential pricing (then known as “measured service”) would the new medium be transformed from a niche service for an exclusive clientele into a mass service for the entire population.

Consumers, it turned out, were perfectly able to differentiate between high-speed, medium-speed and low-speed telephone access, and to choose whichever calling plan suited their particular needs. Unlike messaging today, telephone service was synchronous: A key selling point for operating-company managers a century ago was the length of time it took to make a connection. The longer the on-line wait time, the cheaper the service. High-powered businesspeople clamored for virtually instantaneous hookups; residential users favored the lower rates — and accepted the lower quality of service — that differential pricing encouraged. Had lawmakers forced telephone companies to stick with flat rates, telephone service would have remained the prerogative of the few. In the telephone business, at least, differential pricing was a public good.

Differential pricing could conceivably bring analogous results today. Facile historical analogies and glib assumptions about competition should not be permitted to obscure the potentially positive disruptive potential of the current crop of edge providers, or the enormous market power of ISPs such as Verizon. If Tatel’s ruling stands, the United States in a few years might once again be a world leader in broadband, as it has not been in the 21st century. Challenged by differential pricing, edge providers such as Google, Amazon and Netflix could find themselves obliged to experiment with new genres of digital content, creating employment opportunities for a new generation of content providers.

All of this, of course, is speculation. Yet it is high time for everyone concerned about our digital future to abandon inaccurate assumptions that have made it virtually impossible to have an honest discussion about how the digital economy works. 

Common carriage is a venerable legal precedent, but it is by no means the only regulatory tool in U.S. policymakers’ toolkit. Net neutrality is predicated on a cartoonish caricature of the history of American communications, which has long exaggerated the importance of garage-based startups while discounting the innovative potential of the digital behemoths that dominate cyberspace today. Differential pricing could conceivably cost Google, Netflix and even Apple a bundle, an outcome that might well spur innovation in ways that few today can predict. Innovation is too important to be left to the economists — or the lawyers. Changing the rules of the game to foster disruptive innovation may not be a panacea, but it is more realistic than waiting breathlessly for the next new thing to emerge from a geeky teenager’s Silicon Valley garage.

If additional regulation is necessary, lawmakers can segment markets while encouraging massive investments in infrastructure and research and development, a tried-and-true strategy that U.S. policymakers have relied on to drive innovation in the communications market for more than 200 years. Market segmentation and government entrepreneurship cannot match anti-monopoly as a rallying cry for the digerati. But these policies have the virtue of having worked in the past, creating a constellation of highly innovative institutions — from the Post Office Department to the Bell System and the Internet — that, for much of the nation’s history, has made its communications networks the envy of the world.