Heads-on-a-Pike-Economics Cannot Sustain the Internet’s Development

by Mike Wendy on April 29, 2014

Last week, reports had it that FCC Chairman Tom Wheeler was supposedly giving up on Net Neutrality.  You see, in crafting a regulatory response to the DC Circuit’s Net Neutrality rejection, it seems Wheeler’s (still unseen, leaked) plan would allow for ISPs to charge bandwidth hogs for better access to their networks.

On cue, the we-want-it-all-for-free-crowd went ballistic.  To them, such economic arrangements herald the death of the open (and free) Internet.  Consequently, feeling betrayed by a fellow progressive, the freebies all last week set about trying to get Tom Wheeler’s head on a pike.  In fact, they’re still at it.

I could see this coming back last January when the DC Circuit threw out the FCC’s Net Neutrality rules (for the second time). It was clear then that the Chairman was hemmed in by the Court’s ruling, which tossed the old rules because they illegally treated ISPs as phone companies. But, all was not lost for Wheeler and the FCC. The Court created two “outs.” One – to legally reclassify the provision of broadband access as an old Title II phone service. Or, two – to allow some room for “commercially reasonable” / individualized bargaining by ISPs and third-parties for priority access to the ISPs’ customers.

The freebies have demanded the former – the Title II model.

Wheeler seems to have sided with the latter – the “commercially reasonable” approach.

According to the Chairman, his new Net Neutrality lite proposal – which in fact won’t be seen by the public until the middle of May – will require:

  • That all ISPs must transparently disclose to their subscribers and users all relevant information as to the policies that govern their network;
  • That no legal content may be blocked; and
  • That ISPs may not act in a commercially unreasonable manner to harm the Internet, including favoring the traffic from an affiliated entity.

In defending his position (and working to avoid being fragged by his own progressive troops), Wheeler notes:

The allegation that [my proposal] will result in anti-competitive price increases for consumers is…unfounded. That is exactly what the “commercially unreasonable” test will protect against: harm to competition and consumers stemming from abusive market activity.

Translation #1: ISPs will now be allowed to sell their services to third-parties (like Netflix, YouTube or Amazon) that use or access their networks. And, this policed pricing – which the Net Neutrality rules once clearly forbade – will allow a more proper cost recovery for ISPs, thus benefitting competition and consumers because ISPs can make money on their significant investment.

Translation #2: The flipside to the Chairman’s “individualized bargaining” approach – that is, the indentured servitude of Title II phone rules for the ISPs and the Internet – would achieve the opposite. It would doom the Internet to public utility status, thwarting sustainable growth and innovation because what ISP would want to heavily invest in a market where no money can be made?

Certainly, not those that wanted to make a profit.

Now, I’d be fibbing to you if I said Wheeler’s new proposal is the greatest thing since sliced bread. It ain’t. The new regulatory schema still puts the FCC in the catbird seat when it comes to regulating the Internet. And, abuse will spring from that at some point. But I am also a realist. The politics of Net Neutrality and the current administration’s support thereof make it impossible for the FCC to do nothing. Imperfect as the Wheeler solution is, it does help rectify a crummy rule that made two-sided markets plainly illegal for ISPs. Moreover, it far beats what this bellicose freebie wants:

Wheeler [should just] say to the ISPs: “…You’ve got 60 days to get your copper out of our dirt, or we’ll pay you scrappage rates and turn it over to a company that will give people the bits they want, not the bits that pay you the most.”

Heads-on-a-pike-economics cannot sustain networks. Real profits do.

As always, the devil’s in the details; we have yet to see the actual text of the rule.  Still, Chairman Wheeler’s “commercially reasonable” proposal appears to be a step in the right direction.  It’s time to move there.

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