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No, Scrapping Net Neutrality Laws Won’t Kill the Internet

Ryan Bourne

The decision by the US Federal Communication Commission (FCC) to
remove so-called “net neutrality” laws last week
produced a flurry of outrage.

The American media company Netflix was most vociferous,
declaring on Twitter: “we’re disappointed in the
decision to gut #NetNeutrality protections that ushered in an
unprecedented era of innovation, creativity, and civic
engagement.”

Such sentiment has echoed around the world. But all of this
seems odd.

Netflix itself has been streaming media online since 2007, and
the specific President Obama-era net neutrality laws only came into
force in 2015.

The whole reaction to
this has been overblown. Repeal of the laws will allow ISPs to
experiment in providing packages that consumers want.

Was the internet before 2015 really the barren, innovation-free
zone painted by critics of last week’s change? Or are
opponents of the FCC decision prone to hyperbole?

The economics of this debate are well-known.

The internet is a means of transporting content, or packages of
information, from one computer to another.

In essence, net neutrality regulation requires that internet
service providers (ISP) treat and price all packages of information
in the same way, regardless of origin or content.

So when we have some highly-demanded video content, such as
Netflix or adult entertainment websites, ISPs cannot charge these
providers a connection fee to have its content transported to
customers on a faster lane.

On the consumer side, ISPs are likewise unable to offer packages
that charge more for certain types of content, or restrict access
to certain sites (though they can of course discriminate via
internet speeds).

This is a textbook example of old debates about
“producers” and “transporters” of
goods.

For net neutrality advocates, an open internet requires all
content to be transported equally. Advocates worry that ISPs may
otherwise block content entirely, that consumers in areas without
much ISP competition will face higher prices, and that without the
laws there will be an incentive for ISPs to “vertically
integrate” with providers of content, potentially
prioritising their own materials.

For sure, these are valid questions. But do they require such
heavy-handed state regulation?

The reputational damage to an ISP of restricting access to
popular content is likely to be severe.

Indeed, if consumers overwhelmingly want a “neutral”
internet, then ISPs are likely to at least offer a package which
provides it.

Existing competition laws can likewise be applied to
monopolistic concerns. In fact, a non-net neutral world actually is
likely to facilitate more dynamic competition and investment in the
ISP market, since the ability to price discriminate will increase
the pay-offs by investing to serve rural or other
difficult-to-reach communities (a particularly important concern
here).

It’s worth noting that in the two years since the
Obama-era, when net neutrality laws were rolled out, investment in
broadband networks fell 5.6 per cent.

But there’s a broader principle at stake: should
transporters of content be able to price discriminate depending on
what content you access?

In other areas of life, this isn’t a particularly
controversial idea.

In many hotels, two wifi internet packages are offered based on
different speeds. One package is suitable for video streaming,
while the other is mainly suitable for basic browsing and checking
email.

Explicit packages that charge more for priority content (such as
Netflix) could in fact improve overall efficiency.

Economists recognise that charging more for use of content that
congests the network would improve efficiency. According to an IGM
survey of top economists, 44 per cent agreed that it’s a good
idea to let companies that send content to consumers pay more to
internet service providers for the right to send that traffic using
faster or a higher quality service. Just 14 percent disagreed.

Net neutrality laws essentially make those who use little in the
way of high congestion content subsidise those who do.

The key point then is ultimately the consumer will be king in
deciding what he or she wants to pay for – repeal of the laws
simply changes who determines the packages of services offered to
them from the government to ISPs.

The whole reaction to this has been overblown. Repeal of the
laws will allow ISPs to experiment in providing packages that
consumers want.

As my colleague Peter Van Doren concluded in a recent piece:
“repeal of the net neutrality rules will not be the death of
the internet. It will simply return us to the hands-off regulatory
framework that has nurtured the past two-plus decades of the
internet revolution”.

Ryan Bourne
holds the R Evan Scharf Chair for the Public Understanding of
Economics at the Cato Institute.