Highway to the (Neutral) Zone — Net Neutrality and More on Information Economics

Net Neutrality was very much in the news this week.  First, the President came out in favor of Net Neutrality on Monday.  Then later in the week the chair of the FCC, Tom Wheeler, who looked like someone caught with his hands in the cookie jar, vacillated on how the agency sees the concept of Net Neutrality.  Some members of Congress have taken exception.

For those of us in the software business, the decision of the FCC will determine whether the internet which was created by public investment, will be taken over and dominated by a few large corporations.  The issue isn’t a hard one to understand.  Internet service providers, which is an area dominated by large telecommunications and cable oligopolies, would like to take lay claim to the internet’s bandwidth and charge for levels of access and internet speed.  A small business, a startup, any small enterprise would be stuck in a slower internet, while those with the financial resources would be able to push their products and services into internet “fast lanes” by paying fees for the privilege and therefore be able to have an advantage in terms of visibility, raising the barriers of entry to would-be competitors, and to defend market share.  Conceivably, since these companies often provide their own products or are aligned with other large companies both vertically and horizontally, there would be little to stop a provider from controlling all aspects of the information that is available to consumers, teachers, citizens, researchers–virtually anyone who accesses the internet–which is virtually everyone today.  Those who claim that such use of power is unlikely because Comcast et al have committed themselves to the now defunct 2010 rules apparently haven’t read the fine print, are unfamiliar with recent economic history (such as Comcast’s throttling of BitTorrent in the early 2000s, Cox Cable’s blocking of some downloading, and other similar examples), or haven’t heard of Lord Acton.

When combined with attacks on public investments for community broadband (also known as public high speed internet) in cities and communities, we are seeing an orchestrated campaign by a few corporations to not only dictate the terms of the market, but also to control the market itself.  This is the classic definition of a corporate trust and monopoly.  It is interesting that those who constantly advocate for a free, competitive market are the first to move against them where they do exist.

Jeffrey Dorfman at Forbes–to pick just one example–falls into this category, seemingly twisting logic into pretzels to make his argument.  He addresses analogies when we only have to point out the conditions in the real world.  For example, I love the following statement:  “The key point that President Obama has missed along with all the rabid supporters of net neutrality is that ISPs and the companies that control the Internet backbone infrastructure that knits everything together do not have the power to pick winners and losers either. Consumers decide what products and services are successful because we adopt them. If an ISP blocks because of the bandwidth it requires, consumers who want Netflix will take their business elsewhere. If enough people do so, the ISP will have to change policies or go out of business.”  Hmmm.  So in large swaths of the United States where there is only one ISP, how will consumers choose Netflix or drive the ISP out of business?  What market mechanism or model applies to this scenario?  I cannot find in either Samuelson or Friedman (or Smith, Ricardo, Keynes, Classical or neo-Classical economics, etc.)–or a historical example for that matter–where a company exerting monopoly power has been driven out of business due to consumer preference for a product.  More to the point, if an ISP prevents a company like Netflix to provide its service over the internet backbone how would consumers know about it in the first place, especially if the monopoly substitutes its own equivalent service instead?

But Mr. Dorfman’s non-sequiturs get better.  He follows up with the following statement:  “As the former chief economist for the FCC, Thomas Hazlett, pointed out  this week in Time, Facebook, Instagram, Twitter, LinkedIn, (and many, many more success stories of innovation) all emerged without the benefit of net neutrality.”  Aside from committing the fallacy of argumentation from authority, he can’t get his facts right.

The internet as we know it really didn’t begin to come into existence and open up to commercial traffic until the late 1990s.  The FCC created the first voluntary net neutrality rules in 2004, but the internet was still largely open with many competing ISPs well into the new century, thus net neutrality was largely a de facto condition.  In 2008 the FCC auctioned wireless spectrum with tight rules ensuring net neutrality and followed this up with a broader set of requirements in 2010.  These 2010 rules did not apply to all ISPs because of restrictions by the courts, but functioned pretty well.  It wasn’t until 2014 that the 2010 rules were once again overturned by the courts.  Mr. Hazlett’s cited “point” then is factually inaccurate, since the companies he references did come into existence in an environment of de facto–partly voluntary and partly enforced–net neutrality.  What has changed is the use of the courts by corporations and revolving door lawyers like Mr. Hazlett to undermine that condition.  What Mr. Hazlett would like to do is shut the door to new companies succeeding under the same set of rules as those earlier ones.

So what “net neutrality” is about is addressing a problem that is supported by concrete examples where both the public interest and open market principles were violated when the fences came down.  In the scenario that Mr. Dorfman proposes to defend corporate power, consumers don’t get a vote, to use the canard by ideologues that consumers “vote” to begin with.  The market sets price.  Consumer preferences are shaped by other factors outside of the market, information being one of those factors.

As I noted in a previous blog post, research into the economics of information has revealed that it is a discipline with several unique characteristics, among these being that information is easily transferrable but, in order to determine its utility, requires some knowledge and investment of time.  Along with the insight of social scientist Martin Sklar that the capital investment required to replace the existing material conditions of civilization has been falling steadily, what we see happening is that there has been another explosion of technological innovation to disrupt capital intensive markets where information technologies substitute labor and processing.  And this is only the beginning.  A company need not be merely complacent to be overtaken–it just need to be a little less agile, a bit more inflexibly structured.

All of that can be undermined, however, if a group or organization is able to control the means of obtaining and disseminating information.  This is why non-democratic regimes in the Middle East and China go to great lengths to control the internet backbone.  Here in the U.S. Comcast has argued that it doesn’t want to undermine neutrality (with some important exceptions and contrary history, by the way); that it simply intends take a percentage of the take from what runs through the plumbing.  But, ignoring the contradictory facts of their history, their stated intent is  rent seeking behavior.  All arguments to the contrary Comcast–and the other ISPs and telecom giants–haven’t hesitated to use both the courts and government power to increase their market power, and then to leverage the financial power that comes with that new advantage to greater advantage.  Historical comparisons to the 19th century Robber Barons of the railroads is both accurate and instructive.  It’s an old playbook.

It will be interesting to see what the FCC does, given that Mr. Obama appointed a telecommunications lobbyist to run an agency formed to rein in those very industries.  The proponents of undermining net neutrality have co-opted the use of the term “innovation” so that it is meaningless unless you are a cable company or ISP that can find another fee for service scheme.  Apparently innovation is only important for those private companies who have the bucks.  Rarely, however, do those with the bucks want to see the next Buck Rogers pass them by–and that, my friends, is the crux of the issue.