By S. Yvette Shaw, PhD Part 2 of a two part series.
How does this affect LIBERTY?
Economist Peter Klein explains that consumers perceive bandwidth as a free, unlimited resource unaffected by traffic congestion like highways. Since online streaming has consumed bandwidth faster than available capacity, the best allocation is price, the same process used for other scarce resources. For example, suppliers pay a premium for shelf location and space in grocery stores, but there is no outcry for “grocery store neutrality.” The same logic applies to events (premium boxes at arenas), property, and services. Should high bandwidth users like Netflix be subsidized by the low bandwidth users? Net Neutrality ensures that no one gets what they want since perfect competition does not exist in any market, nor does neutrality. Without price pressure, the incentive for growth is hampered.
It is a downward spiral…..
Increased cost to consumers
Regulation adds legal and compliance costs and creates a higher barrier to entry for entrepreneurs and small companies. Large corporations can afford these additional costs as well as the lobbying machine to eliminate competitors. In this static model, there is no incentive to lower the cost of existing services or products as enjoyed by consumers in past decades. Government controls pricing and access: the winners and losers are chosen. Additional cost and taxes are passed to the consumer.
Regulation freezes existing structures and business models. With government protection, existing companies have no incentive to change or innovate. R&D capital is absorbed by regulatory and lobbying costs. Quality of existing products and services declines as new entrants are discouraged.
AT&T as Ma Bell fought innovation for decades, even prohibiting consumer ownership of the phone. The breakup of the Bell System in 1982 sparked a surge of competition in telecommunications. Today, European telecoms complain that heavy regulation of the internet has hobbled infrastructure upgrade and seek flexibility on rules: higher prices for faster connections. In December 2014, the large US content providers (Google, Facebook) proposed working with the European telecommunications companies to pursue deregulation in the EU. Their position on deregulation in the EU contrasts with that in the US, regulation, since the EU currently regulates all content providers. Google faces an anti-trust inquiry while Facebook is being investigated for its privacy practices. Both are targeted for new regulatory proposals from France and Germany.
Crony capitalism rises
As government assumes control of the internet, services and products available to consumers will be determined by the relationships between corporations and government, not the free market. US regulatory history is filled with examples across industries from the Federal Reserve Bank of New York to EPA, FAA, and FCC, the entire alphabet soup of government agencies. Remember the Wright Amendment to protect Fort Worth and DFW Airport?
The FCC can control content just like radio and network TV decades ago which supported the government view. Note comedian George Carlin’s 7 Words You Can’t Say On TV. The mechanism now exists for progressives to resuscitate the Fairness Doctrine, opposed by Libertarians and conservatives as violation of first amendment and property rights. Politicization of the internet can induce fear of government retaliation for disagreement, like the Internal Revenue Service, an allegedly “independent agency.” The IRS has pursued groundless charges with citizens or businesses that contribute to pro-liberty candidates and non-profit groups that advocate smaller government. With control of the internet, the FCC is an important political tool.
Been there, done that……don’t we ever learn?
In the 19th century, the railroads reached this same point as the internet today. The industrial revolution of 1790-1830 transitioned the US from an agricultural to an industrial economy. With increasing dependence on corporations, especially railroads, for transportation and goods, the public grew concerned with the power of the corporations and perceived lack of competition. In response, the government passed the Interstate Commerce Act of 1887, which created the Interstate Commerce Commission (ICC), the first “independent” regulatory agency.
Initial regulations: 1) rates are “reasonable and just”; 2) shipping rates are published; and 3) discrimination in fares between short and long hauls are prohibited.
Sound familiar? Here is the next step….
Shortly thereafter, the ICC claimed it did not have enough power so the act was amended. The Hepburn Act of 1906 allowed the ICC to set maximum fares and expanded regulatory control to ferries, bridges, trucking, express companies, and oil pipelines. By 1915, the ICC controlled ALL aspects of railroads: passenger accounting, boilers, safety, speed limits, etc. Jurisdiction later extended to telegraph, telephony, and cable companies. Milton Friedman has eloquently described how the creation of the ICC had well-intentioned advocates, but these advocates were used by the railroads to achieve regulatory capture. In this form of political corruption, regulators do not act in the public interest but align with the dominate players in an industry to advance their business agenda.
The Commission… is, or can be made, of great use to the railroads. It satisfies the popular clamor for a government supervision of the railroads, at the same time that supervision is almost entirely nominal. Further, the older such a commission gets to be, the more inclined it will be found to take the business and railroad view of things.… The part of wisdom is not to destroy the Commission, but to utilize it.
Richard Olney, railroad attorney and US attorney General 1893
By WWI, with the advent of new transportation technology (gasoline engine, gear drives, improvement in transmission) and later the interstate highway system, trucking emerged as a competitor to the railroads. The railroads initially used the ICC to break strikes and limit the market share of trucking. As market forces continued pressuring railroads along with overregulation, the ICC even required railroads to maintain operations that lost money. The ICC continued this pattern in other industries with destructive results. Eventually, Congress passed deregulation measures for railroads (1976) and then trucking (1980) that diminished ICC powers.
The ICC has served as the regulatory model for other industries: state medical boards, Federal Trade Commission (1914), Federal Communications Commission (1934), U.S. Securities and Exchange Commission (1934), National Labor Relations Board (1935), Civil Aeronautics Board (1940), Postal Regulatory Commission (1970), Federal Energy Regulatory Commission (1977), U.S. Consumer Product Safety Commission (1977).
The internet is now in queue for this cycle.
WHAT happens now?
It’s not over.
Sides are chosen and the battle returns to the courts. A miasma of uncertainty.
Within hours of the decision, Marsha Blackburn (R-TN) and Senator Thom Tillis (R-NC) introduced legislation to block the decision in their respective states. Verizon published its disagreement with the FCC decision in Morse code datelined February 26, 1934: FCC’s ‘Throwback Thursday’ Move Imposes 1930s Rules on the Internet. Fearing price controls, AT&T has threatened to pause investment in its infrastructure and Comcast has already warned of a bitter legal fight and cancelling investment plans. Current discussions on 5G are conflicted since 5G requires a faster network than general purpose infrastructure. The U.S. Telecom Association and other trade groups have announced intentions to appeal the rules once they are made public. Conservative and Libertarian groups have voiced opposition. After Ron Paul’s post on Facebook received 2 million views, he issued a more detailed statement on the impact.
The most interesting responses are those of the large content providers who led the charge: Google, Facebook, and Netflix. Just prior to the FCC vote, Google’s CEO Eric Schmidt contacted the Whitehouse to oppose Title II but was rebuffed. In its recent report to shareholders, Netflix CFO admitted to lobbyists’ remorse one week after the FCC decision: “Were we pleased it pushed to Title II? Probably not. We were hoping there might be a non-regulated solution.”
Facebook – silence – crickets chirping.
Content providers know SIZE MATTERS when the FCC seeks targets.
As expected, the majority of progressive groups did a victory dance. However, as details of the rules leaked, some liberal groups have joined the opposition. The Progressive Policy Institute stated that “There is nothing ‘progressive’ about the FCC’s backsliding to common carrier rules dating back to the 1930s. Also troubling is its lack of transparency — the 317-page rule it approved has not yet been made public.”
On March 12, the FCC published the new rules titled, Open Internet FCC-15-24A1. The Whitehouse Office of Management and Budget must first approve certain aspects before the rules appear in the Federal Register. They are implemented 60 days after being published. There are eight pages of actual rules with the remainder as background and explanatory. In the interim, lawyers for both sides scour the FCC language for their challenges. Most legal observers expect that the FCC decision will endure lengthy appeals in the courts which have ruled against the FCC so far.
Some of the arguments against Title II:
- The original Title I designation in the 1996 Telecommunications Act has produced and will continue to produce “huge benefits for American consumers.”
- The FCC labeled telecoms as information providers in 2002 and cannot now view them as utilities.
- In 2005, the US Supreme Court approved the FCC to treat broadband as an information service (Title I). The FCC must present just cause to change.
- The FCC has not provided any evidence that ISPs in a certain geographic area behave as monopolistic “common carriers.” According to the last FCC report on access in 2012, 80% of US households have access to two or more broadband providers. There is even a link to check your specific address.
- Title II rules are not applicable to the myriad of services provided.
Telecoms do not trust forbearance: that the FCC will NOT regulate rates, increase taxes, or demand building of infrastructure in underserved areas, as defined by the FCC. In addition, Title II allows individuals to file complaints in district court vs. FCC regulators. Under the general conduct provision, telecoms fear continual litigation from class action suits and trial lawyers are major donors to the Democratic Party.
Amid court challenges, there are other possibilities for resolution. Congress could pass legislation to override the FCC on internet rules. However, political polarization ensures the failure of legislation in Congress (Republican) and a Presidential (Democrat) veto. Another option is a change of President in 2017 whose appointees can overturn the ruling, which belies the view of the FCC as an independent body.
Governments never learn. Only people learn. – Milton Friedman
Public opinion overwhelmingly supports freedom of the internet; however, many people remain confused by the definition and details of Net Neutrality. As of Feb 2015, Rasmussen Reports survey showed that 53% of Americans believe that the internet should NOT be regulated like radio and TV (vs. 21% who do ) and 68% are concerned that the FCC decision will evolve into government control over content or promote a political agenda.
It behooves us all – content providers, telecoms, Libertarians, liberty groups – to educate citizens on the true definition of Net Neutrality, the most serious example of false advertising.
Click here for Part 1 for introduction and history.