Hello. My name is Adam Thierer.
I'm a senior research fellow at the Mercatus Center
at George Mason University.
This is a presentation on network economics and net neutrality regulation.
In an earlier presentation, Jerry Brito, also of the Mercatus Center,
discussed net neutrality as an engineering principle.
You should consult that slideshow for more background if needed.
The goals of this presentation are as follows:
I want to couch the debate over net neutrality regulation
in a broader economic context
by exploring basic network economics
and discussing traditional forms of network regulation.
And then, outlining a case for and against
economic regulation of broadband networks
through net neutrality mandates.
First, let's discuss some basic network economics.
The value of any network grows in proportion
to the number of its users.
Basically, the more users, the more success and or profitability.
Also, networks tend to be high fixed cost low marginal cost goods.
That is the initial investment to serve consumers is significant.
But, the cost to serve each additional marginal customer is very low,
perhaps even zero, after that initial investment is made.
Here is another way to look at that.
Again, the cost of the initial investment to serve a community,
say, with just a couple of homes,
is likely to be quite high and fixed,
regardless of the initial number of subscribers
that take the service.
However, as each new subscriber comes online,
costs become fairly trivial at the margin.
That is, adding another household after the initial ones
is going to be much less expensive.
These high-fixed costs, low-marginal cost realities
lead some to claim that broadband is a natural monopoly
and that we should apply public utility-style regulation to it.
Most net neutrality proponents propose to regulate the core
of broadband networks to quarantine them and their supposed monopoly power
to protect the companies and technologies at the edge of networks.
Stated differently, this is an application of what's called Baxter's Law
or the Bell Doctrine to broadband.
Baxter's Law is named after William Baxter, who was an economist
who served in the anti-trust division during the Reagan administration.
Basically, as applied to AT&T,
during that period,
the idea Baxters Law, or the so-called Bell Doctrine,
is to quarantine the supposed monopolistic segment of a network
through some sort of structural separation or administrative regulation,
and then to free up the rest of the network.
So, in this case, for all telecommunications networks,
specifically, Ma Bell, the AT&T system;
it was the local loop or the local transmission services
that AT&T provided that were quarantined and considered monopolistic.
Long-distance was largely deregulated, as were devices and equipment.
The same model can be seen in the electricity world,
where generation and transmission, although not completely deregulated,
are far less regulated than local distribution,
which is tightly regulated and even price-controlled.
Baxter's Law would essentially be applied to broadband networks
through net neutrality regulation.
Internet service providers would be quarantined and regulated
as natural monopolies,
whereas websites, and applications, and devices, and equipment
would be, at least in theory, largely left deregulated.
The requirement for ISPs of fair and non-discriminatory service and pricing,
and likely some sort of mandate for universal service
across the entire territory that that ISP served.
In other words, net neutrality regulation is really an extension
of traditional common carriage regulation,
and or, public-utility style regulation.
The model would be some sort of a hybrid between
electricity or postal service, and the highway system.
So what are some of the arguments against this sort of net neutrality regulation
of broadband networks?
Well, since deregulation in the mid-1990s,
broadband competition has continued.
Competition exists in most areas between at least two wireline competitors.
Plus there is inter-modal competition from wireless providers,
plus cellular services and satellite services, continue to innovate.
So, in this market, it's at least duopolistic
and the threat of new entry and innovation remains very real.
So, is that a contestable market?
Is it competitive enough to allow for deregulation
if it's duopoly or even oligopoly?
Net neutrality proponents say no, it isn't, and they demand regulation.
Net neutrality opponents say yes
and they raise the issue of future investment and or innovation.
Specifically, there are two major investment considerations raised
by net neutrality regulation.
First, how should broadband services be managed and new investments paid for;
and second, what impact does net neutrality regulation have
on those future investments and network quality?
Generally speaking, net neutrality regulation would limit the ability of ISPs
to manage traffic and congestion directly.
For example, video and peer-to-peer services place
an enormous burden on networks, especially wireless networks.
But net neutrality regulation prohibits carriers from managing such traffic
by curbing or shaping its use.
Proponents of net neutrality regulation argue
it would be unjust and discriminatory to shape traffic, or curb it, or limit it,
and that would hinder innovation at the edge of broadband networks.
But if net neutrality regulation limits traffic management,
what are carriers to do?
Well, it's likely to lead carriers to manage traffic
using price discrimination techniques instead,
such as tiered-base pricing, usage-based pricing,
some sort of Ramsey two-part tariff, where you have a flat rate
for a certain amount of services, and charges over that amount.
And then, maybe even data caps,
which is what a lot of broadband carriers are using today
to limit overall bandwidth usage by consumers.
Now, many net neutrality proponents argue that usage-based pricing of any form
is unnecessary, or represents unjust discrimination.
Net neutrality opponents, on the other hand, argue flexible pricing is necessary
to cover the significant fixed costs associated with network investment
and ongoing innovation.
There are a few other considerations that mostly net neutrality opponents raise.
Regulatory capture is something that many people are concerned with
since the Federal Communications Commission has a fairly
long and ugly history of regulatory capture.
There is also bureaucratic sloth problems,
which is that the FCC, as a regulatory agency, just tends to move slower
than the industries it regulates.
There is also first amendment considerations here
because we're regulating speech platforms
and that raises questions about editorial discretion of platform owners.
And then finally, there is the question of self-regulation.
Are there voluntary multi-stakeholder approaches to
creating engineering standards for the internet?
Can watchdog groups and academic oversight help in this context?
Net neutrality opponents say yes.
So, the net neutrality debate will likely continue
to be a heated issue for many years to come.
If you're interested in doing some additional research on the issue,
here are some leading books from net neutrality proponents,
as well as skeptics.