David R. Henderson  

The Unseen Effects of "Net Neutrality" Regulation

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Various friends on Facebook have been venting, quite justifiably, about the Federal Communications Commission's vote to regulate the Internet as a public utility. Some of the more extreme venters have claimed that it will slow down communication and reverse much of the incredible progress the Internet has created.

One friend, though, Steve Fritzinger, pointed out a much more likely scenario, one that Frederic Bastiat, were he alive today, would probably predict. That scenario is that we continue to see progress with the Internet and that, say 5 years from now, things will be better than they are now. Many people, seeing this, will say, "See? Regulation didn't harm anything. We're still progressing."

But, said this Facebook friend, regulation will have slowed the rate of progress. So it's Bastiat's "unseen" at work. We won't know for sure that regulation slowed progress because we will still see progress. But we will be right to suspect that regulation has been harmful. There will probably be empirical ways to test for the effect. But very few people will read those studies and, 5 years from now, not 1 person in 20 will believe that regulation slowed progress. That's better than the "one man in a million" that John Maynard Keynes said would be able to diagnose the debauching of the currency. But it's the same principle. It's the unseen.


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CATEGORIES: Regulation




COMMENTS (23 to date)
MikeP writes:

This line of thinking actually points to a middle ground that can be walked here.

The net neutrality proponents' big issue is with last-mile carriers.* So how about the FCC mandating that each carrier provide the option to the end consumer to choose Type I or Type II? If you believe that the Internet should be regulated like Ma Bell, choose Type II for your house. If you believe the hundreds of thousands of services the Internet could provide in the future have yet to be exhausted, choose Type I. It's not at all hard for the last-mile providers as well as the backbone providers to segregate the two types if it needs to be done end-to-end.

I know which I'd bet on in this battle of the now-seen options. Which is, of course, why it will never be allowed.

Ryan Schmidgall writes:

I've been disappointed in the number of people I've heard praising the move by the FCC even though, as far as I know, no one outside of a few people at the FCC have even read the rules. I am a cynical person and the way in which the rules passed even surprised me as outlandish and ridiculous.

David wrote "... not 1 person in 20 will believe that regulation did not slow progress."

I have trouble understanding sentences with more than one negative. I have to linger to think it through. My analysis suggests that you probably need to remove one of the two "not"s to convey your meaning, assuming you want to say (roughly): 19 out of 20 believe the regulation was good.

David R. Henderson writes:

Oops. Right, you are, Richard. Change made.

kczat writes:

Why is there more concern for potential damage caused by internet regulation than for damage caused by government-sanctioned monopolies extending their monopoly power onto the internet?

The only policy detail I have seen discussed so far are "fast lanes", which seem clearly like damage of the second kind: monopolies can say "pay us extra or your traffic goes in the slow lane" and use their monopoly power to get payments internet companies.

Both kinds of damage should be of worry to libertarians. But from where I sit, damage of the first kind seems entirely hypothetical while damage of the second kind seems real and imminent.

Brad writes:

Nearly everyone,including me, is guilty of looking at the world and seeing "what is" not what it could be.

Imagine a world where 20 years ago the government decided to regulate microprocessors under similar Title II rules. Does anyone dare suppose we'd have the speed and other technological advances that we enjoy today had the heavy hand of regulation been present?


How much better would the seat belts in your car be if government didn't mandate the 3-point harness? And how much better would the external mirrors be without federal regulation?

The list is endless.

Steve Fritzinger writes:

I don't remember where I first saw this, but it bears repeating.

If the FCC had taken over the Internet 20 years ago we'd all still be using dial-up and saying, "Without the government, we won't have any Internet at all."
Andy writes:

What are the alternatives to FCC regulation? Those opposed need to consider this, which I think is a good explanation of the ISP's would like:

Imagine that your power company went to Frigidaire and GE and demanded that, unless they paid your power company a fee, they’d produce brownouts and intermittent power outages in every home that had a Frigidaire or GE refrigerator. Frigidaire and GE cough up and raise the prices of their refrigerators. BTW, this is one of the reasons we shouldn’t want the Internet of Things.

How about a third option?

What I want is for consumers to get what they’ve contracted for and what they’re paying for. The ISPs shouldn’t be able to demand protection money from the Googles, Facebooks, and Netflixes of the world. What’s next, Vinnie the Leg Breaker? Cable companies and telephone companies merely getting into the ISP or content businesses are classic examples of the abuse of monopoly power. The Justice Department should be breaking up Comcast and Time-Warner.

From Dave Schuler's Blog.

Sam Thomsen writes:

Isn't this just more of the same? Through policies intended to protect society from the harmful effects of the free market, the Left has repeatedly destroyed and continuously suppressed the creation of vast amounts of productive capital, leaving the world much poorer than it would have been. The losses, compounded over more than a century, would be difficult to estimate and have hurt most those very people the movement intended to help.

Has anyone done a study of "what could have been?"

R Richard Schweitzer writes:

@ Sam Thomsen


"Has anyone done a study of "what could have been?"

Niall Ferguson

LA Raymond writes:

"The Justice Department should be breaking up Comcast and Time-Warner."
Too busy exacerbating the race issue and ignoring the "scandals".
"How much better would the seat belts in your car be if government didn't mandate the 3-point harness?"
There would be no seat belts in cars today. The public, at the time, did not want them. The auto industry responds to customer desires (think $$$)only IF there is no one to FORCE them to perform. Insurance companies would have forced them to if UNCLE had not.
The internet seems to be running fine, but then I'm happy with 50/50, since I don't stream anything ...anymore.

Tom West writes:

I probably worth noting that the level of support seen on the Internet may be much higher than the general populace because support is heavier among current high speed Internet users.

Anyway among the supporters: (1) high speed Internet is seen as an absolute necessity and (2) 28% do not have multiple carriers, and by the time you are talking about the speeds required by those supporting, it's probably closer to 50%.

So, given that the supporters are faced with the situation that they are entirely at the mercy of the high speed Internet provider in a monopoly position, it's little wonder they are far more concerned about avoiding things getting worse than about missing out on theoretical advancements that the provider has no incentive to make.

I'd bet money on the fact that the vast majority of supporters of this legislation would trade (in a heartbeat!) having Google in their area (i.e. real competition) for their current provider being classified as a utility.

MikeP writes:

...it's little wonder they are far more concerned about avoiding things getting worse than about missing out on theoretical advancements that the provider has no incentive to make.

Since things have only gotten better by any measure at incredible and, frankly, unprecedented rates, I find the concern that things might just get worse mind-boggling.

I'd bet money on the fact that the vast majority of supporters of this legislation would trade (in a heartbeat!) having Google in their area (i.e. real competition) for their current provider being classified as a utility.

Presuming by "legislation" you mean "rules made by three commissioners," I'll take that bet. The proponents of net neutrality are profoundly anti-market and are thinking of the long run regime rather than their particular competitive options at the moment.

Poster writes:

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Tom West writes:

The proponents of net neutrality are profoundly anti-market and are thinking of the long run regime rather than their particular competitive options at the moment.

Maybe we travel in different blog-circles. Almost everyone I've read who considers this a big win mostly just wants their Netflix and torrents unimpeded, and is enraged that Comcast/whatever is standing in their way and there is no choice.

Almost all of them are pleading for Google to come save them. (Or a municipal service ala Chatanooga.) They're not particularly pro-market, but mostly they hate being stuck with Comcast choosing exactly what they're to be given with no choice.

And of course, Google being willing to loss-leader their Internet makes them even more convinced that Comcast et al are fleecing them *and* are now intent on fleecing those providing content.

It also doesn't help that Comcast et al are fairly anti-market themselves and attempt to suppress competition wherever possible. (Personally, I find this understandable. After all, a company's job is to make money, not support competitive markets.)

But the whole thing is muddied by requirements to provide service to all, etc. So a complete market solution is off the table in contemporary society anyway.

MikeP writes:

Maybe we travel in different blog-circles.

My impression comes from media rather than blog circles. The majority of technically knowledgeable people appear to support net neutrality. The best of them authentically believe that no byte is more valuable than any other byte. The worst of them just want to screw Comcast.

So a complete market solution is off the table in contemporary society anyway.

Indeed, the best thing the FCC could do is break up the municipal franchise system. Regardless, a person either believes that price discrimination is a good thing, or he doesn't know what price discrimination is.

Charging premium prices for premium services is the only way to provide premium services without either charging standard users higher prices or degrading standard services relative to what they would otherwise be. This is almost tautologically true, whether there is one player in the market or many. Proponents of net neutrality therefore strike me either as incredibly ignorant or as willfully free-riding on others' goodwill.

MikeP writes:

Now that we have established that net neutrality is all about a resistance to price discrimination, we can come back to this comment from above:

Imagine that your power company went to Frigidaire and GE and demanded that, unless they paid your power company a fee, they’d produce brownouts and intermittent power outages in every home that had a Frigidaire or GE refrigerator. Frigidaire and GE cough up and raise the prices of their refrigerators.

I'm sorry, but I can't imagine that. Frigidaire isn't at all like Netflix: Every watt of electricity is exactly like every other watt, so a brownout does not affect only the refrigerator. It is blatantly obvious who is to blame when the refrigerator is not getting enough electricity. So of course Frigidaire would refuse to cough up the money.

Netflix, on the other hand, has based their entire business model on the ability to deliver their bytes to the end consumer with sufficient quality to watch a movie in real time. It is apparent to the end consumer that Netflix is performing under par relative to email, web surfing, or batch movie download. This is a premium service with premium delivery requirements beyond plain bytes that Comcast would not need to provide were it not for Netflix. Why should people who are not Netflix and are not Netflix consumers have to pay for it? Why do supporters of net neutrality who want others to pay for their Netflix believe Netflix is the last interesting service the Internet will ever see?

Tom West writes:

MikeP, I think people feel that they are paying for the bytes, regardless of source. They feel part of what you are paying for *is* for the connections to the back end of the Internet sufficient to support it.

But let's be clear. This isn't about cost to provide those bytes. Without net neutrality, it's about what can be extracted. Without it, it's entirely within Comcast's rights to block the Econlib web site unless DRH pays a fee. Or block it only to those subscribers who don't have competition. Or perhaps add advertisements to the page.

The fact that ISPs are now actually adding advertisements to pages, etc. is a bit frightening.

The point is that in all likelihood, Comcast's profit maximization is probably not made on maximizing service, but charging as much rent as the system will bear. Why on earth should tech companies innovate when the ISP's can essentially seize most of their profit?

Nothing can be solved without competition, and the ISPs are fighting tooth and nail against that.

You are right about dislike of price discrimination. Any suggestion of billing by the byte downloaded gets a lot of downvotes on Ars Technica and other techie boards. People do want their free lunch.

MikeP writes:

The point is that in all likelihood, Comcast's profit maximization is probably not made on maximizing service, but charging as much rent as the system will bear.

At least in the long run, I find that highly implausible -- save for tautological values of what the system will bear. The more content that requires Comcast to deliver it, the more profit Comcast can make. They are not going to throttle that opportunity.

Why on earth should tech companies innovate when the ISP's can essentially seize most of their profit?

Is that an echo of Yogi Berra I hear? "Nobody invests in broadband services anymore: Comcast takes all the profit."

There is virtually no way that Comcast would find it in their interest to take most of, say, ESPN's consumer surplus. Why do you think they can or will try to take Netflix's? Or the next new broadband consumerable? Or the next?

You yourself note that 50-72% of customers have an alternative broadband supplier. That alone pens in Comcast's options. And if Comcast really is fleecing the profits from content providers, then Google can come in not with a loss leader but as a competitive profit taker.

So it is neither in Comcast's interest to punish new users of their service, nor does Comcast have any real power to make such punishment stick. It represents an anti-market bias to think or fear that profits can exceed equilibrium levels for long. But one way that can happen is if, lo and behold, the government ossifies the market with legislation and regulation. You know, exactly like the FCC just did.

Ray Lopez writes:

Henderson is right. The biggest case in point in my mind is rent control in New York City. Decades of dilapidated housing and the hassles of finding a place to rent has not changed the law much. Another is zoning ordinances: Washington DC vs Houston, the former regulated the latter unregulated, but to most observers no discernible difference in layout (petrol stations are found at busy intersections, not quiet cul-de-sacs, any anyway you can use the law of nuisance if a rowdy business starts up next door to you). As a housing owner in DC, it's a constant battle as to whether the zoning board will do something batty that would result in having to escalate, and due to changes in Virginia law it's hard to sue over a zoning board mistake. But despite this, most people don't care about either rent control nor excessive zoning (except well connected developers who corrupt politicians, akin to the famous Kelo v. City of New London decision, but that's a rant for another day).

La Beets writes:

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Tom West writes:

At least in the long run, I find that highly implausible

There is no long run. Technology may destroy your market. Tastes change. Any sensible business maximizes their profit *now* (within limits, obviously) and lets the future take care of itself.

Comcast's monopoly or semi-monopoly situation will disappear with time, although Comcast works very hard to prevent that. So it makes sense for them to take maximum advantage now. Also, it sets the anchor for acceptable service before competition sets in.

I don't consider Comcast's behaviour terribly unethical, any more than landlords boosting rent on retail locations to cover the store-owner's profits (and boy have I seen a lot of that.)

Competition is anathema to a profit-making business. Perfect competition competes away all profits.

There is virtually no way that Comcast would find it in their interest to take most of, say, ESPN's consumer surplus. Why do you think they can or will try to take Netflix's? Or the next new broadband consumerable? Or the next?

I don't consider their tactics any different from Walmart's. If Walmart is essential to your delivery, then expect to be squeezed to the bone.

As you pointed out, I'm not sure the chosen course is optimal. But it's a perfectly understandable reaction to a situation of near-monopoly status for many Americans where the businesses have made it clear by their actions that they intend to take maximal advantage of their monopoly or quasi-monopoly status.

Tom West writes:

Interesting point. Apparently Comcast successfully detects attempts to access HBO Go from the PS3/PS4 and blocks it.

They will not allow their customers to access HBO Go via the PS3/PS4. Apparently Roku has already made a deal to prevent their devices being blocked.

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