January 7, 2010
In 2010, the Institute for Policy Integrity at the New York University School of Law released a report titled Free to Invest: The Economic Benefits of Preserving Net Neutrality. The report, authored by Inimai Chettiar and J. Scott Holladay, is a great resource - substantial and very digestible - on what net neutrality really is, how it is (or is not) regulated, and the economic possibilities policy makers must consider when moving ahead.
The Institute looks at the economic relationships between content providers, ISPs, and consumers. In addition to the current economic structure, the report examines possible alternate pricing models that are contrary to our current net neutrality policies. We have extracted just a few excerpts and encourage you to get the full report.
There are five main findings that are examined in depth:
Internet Market Failure: The report explains how ISPs lose potential dollars under today's market structure. There is ample motivation for them to find a way to charge content providers based on delivery, and open up a whole new market far beyond our net neutrality policy.
The FCC’s nondiscrimination rule would prohibit an ISP from treating any content, application, or service in a “discriminatory” manner, subject to reasonable network management. This clearly bans pure price discrimination (charging different content providers different prices to access their subscribers). The regulation also bans ISPs from offering content providers a “take it or leave it” offer on access to their users. For example, an ISP like Verizon could not charge a website of a company like The New York Times a certain price for access to its subscribers by threatening to block the website from its network and therefore from its Internet subscribers.
Smart Policy Can Help: The authors of the report stress how the Internet must be viewed as a two pronged market - infrastructure to deliver the content and the content itself - and how both are equally important. Effective policy must recognize the delicacy of that balance.
The goal of any policy should be to maximize the value of the Internet, which means choosing a policy that addresses both the quality of broadband service and the quality of Internet content. Focusing exclusively on either of the two complementary goods may lead to overinvestment in one at the expense of underinvestment in the other, thereby reducing the total surplus in the market.
...it is far easier for the government to make up the shortfall for infrastructure investment; protecting content providers’ current surplus is the best policy option given the structure of the Internet market and the difficulty of directly subsidizing the creation of content.
Transferring Wealth Through Price Discrimination: If ISPs could discriminate among content providers and extract the full amount that each content provider would be willing to pay, content providers would be forced to share their proceeds with ISPs.
At its heart, net neutrality regulation is about who will get more surplus from the Internet market. Retaining net neutrality would keep more surplus in the hands of the content providers, and eliminating it would transfer some surplus into the hands of the ISPs.
If price discrimination is allowed and our policy of net neutrality is abandoned, ISPs will have more money to invest in infrastructure, but content providers will have less to invest in content. The report notes that investment has been shown to have a direct impact on a nation's economy:
The World Bank estimates that every 10% increase in broadband penetration in a developed country increases economic growth by 1.2%…
So, for example, if eliminating net neutrality were to increase broadband penetration even by 10% (from 50% to 60%), that penetration would increase the value of the U.S. GDP by $289 billion per year.
The report also recognizes that ISPs don't make decisions based on the needs of consumers, but based on their past successes and failures. If net neutrality disappeared tomorrow, the only entities positioned to obtain the revenue to invest and expand are those that already exist. The report very frankly states that ISPs would not be inclined, based on their own investment history, to physically expand the pipes needed to connect more communities and more people. They would be more likely to filter those profits up to shareholders.
A large portion of the wealth transfer from content providers to ISPs would be essentially wasted because it would compensate for decisions that are already locked in, and most of the additional revenue would simply accrue on the basis of assets that the ISPs have already created.
Efficiently Supporting Infrastructure: A simple look back supports the idea that government should build infrastructure. From highways to electric service, the government has a track record of success in physical infrastructure. Conversely, our efforts to subsidize content have been limited. The report gives excellent examples of both and concludes:
Thus, when faced with the choice of how to correct for the externalities in the Internet market, government must take into consideration its whole range of policy options. Given the government’s historic success in subsidizing infrastructure and difficult in subsidizing content, it makes the most sense for government to correct the externalities by instituting net neutrality—a pricing policy that incentivizes market players to invest in content—and then directly subsidizing investments in infrastructure.
Problems With Prioritization: Authors of the report analyze the possible risks of allowing ISPs to divide content into accessibility tiers - speed of delivery based on who pays the most. Like price discrimination, this type of policy could stifle innovation and reduce the quality of the Internet.
For a variety of reasons, prioritization could run the risk of lowering the total surplus from the Internet market...In addition, the pure surplus effects from breaking the Internet into multiple streams is uncertain, the surplus loss for content providers in the slow lane may offset any gains from content providers in the fast lane. Perhaps most importantly, ISPs will face perverse incentives if they can generate revenue from the fast lane but not the slow lane. This misalignment of incentives could create a situation where ISPs can increase their revenue at the expense of the overall surplus from the market.
The conclusion, based on history, reason, and a realistic look at today's telecommunications industry:
By giving players the best incentives for optimal investment, net neutrality encourages a cycle that breeds more content, which in turn breeds more users. A combination of policies that protect content providers and judiciously deploy government resources to augment private investment in physical infrastructure is the right mix to ensure that the Internet continues to grow and flourish, generating massive benefits for the American public.