December 13, 2005

Thanks d.I.. The idea that Internet services must be open was done away with through the regulatory actions of an FCC sympathetic to both the telephone and cable television industries. A 2002 ruling by the FCC declared cable modem service is an unregulated information service not subject to open access rules, giving the cable television industry complete control over its customers' access to the Internet. Then on September 5, 2005, the FCC ruled DSL services is also an information service and not subject to the open access rules.

These rulings by the FCC give telephone and cable television industries the power to control consumer access to the Internet. They create an environment in which both industries can block consumer access to Internet-based competitors' services, monitor consumer online behavior, censor consumer uses of the Internet, and bend the Internet to favor products and services sold within their walled gardens. Gone is the open, diverse, and competitive Internet of the past.

I believe when we define the Internet as an information service we are using the wrong metaphor. The Internet is not an information service. Rather, it is a connection medium through which information services are delivered. The proper metaphor for describing the Internet is a road network. The Internet is the digital equivalent of the motor vehicle road network. We would never describe the motor vehicle road network as an information service just because we travel on them to Blockbuster Video and rent video information. Nor should we describe the Internet as an information service because we retrieve content and information services through its connection medium.

Seeing the Internet as a digital road network raises all kinds of questions. Society has made the decision that motor vehicle roads are an essential public service and everyone has the right to personal mobility. This is the reason government finances and runs the motor vehicle road network. Similarly if society makes the decision that the Internet an essential public service, shouldn't everyone have the right to digital mobility like they have the right to physical mobility. In which case, government should finance and run the Internet because it is a public good. I recognize that society as a whole has not yet decided that Internet service is an essential service. But I think this attitude will change over time considering that 90 percent of teenagers consider it an essential service.

The problem with a private solution for the Internet is that private concerns are not financially motivated to serve the less profitable and unprofitable segments of the market. The result is that segments of the market are denied access to a social right, and society as a whole is missing out on something that is worthwhile. A good example of this occurred when private companies were solely responsible for supplying electricity. The problem was that society benefits when everyone has access to electricity, but the private companies only benefited by serving the most profitable segments of the market. I'm afraid we are in danger of repeating this make and missing out on the benefits the Internet can bring to the whole of society.

Great point Mike. I suspect that many people looking for a legislative/regulatory solution to incumbent provider market power were looking for the same thing back in 1996. It just doesn't work. Incumbent advantages in the legislative/regulatory arena are probably greater than in the marketplace.

The only thing that will keep them in line is the threat of effective entry by an entity that isn't interested in restricting supply and raising prices.

In the following passage, Adam Smith cautions that we accept only with great suspicion laws and regulations proposed by private interests that claim to benefit the public interest.

"The proposal of any new law or regulation of commerce which comes from this order [i.e., private parties driven by self-interest], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. For it comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, on many occasions, both deceived and oppressed it."

This passage should give us pause when considering the beneficial public effects of the proposed telecom act. For the laws and regulations embodied in the act come largely from the telephone and cable television industries, which on many occasions before have both deceived and oppressed the public. The question must be asked: is Congress really examining industry proposals with the most scrupulous and suspicious attention?

As Adam Smith pointed out, pursuit of private interest redounds in most cases to public benefit. The fact that the telcos and cablecos are intent on making a profit is not by itelf a problem. The problem of monopoly is that by restricting supply and raising prices the monopolist captures rents that would otherwise accrue to consumer surplus.

The question comes down to whether entry barriers (in the form of fixed cost investments) are so high that the telco/cableco duopoly will be able to restrict supply and raise prices without causing entry to occur. To this end, municipalities should make it clear that they will monitor the practices of the incumbents and if they see blocking or other attempts to capture consumer surplus, they will sponsor entry by a wireless network.

The problem with the proposed new Telecom Act is bigger than net neutrality language. By focusing on net neutrality and what, if any, language might work, we miss the larger thrust of the proposed Act. That is namely to start us down the slippery slope of giving the FCC the power to regulate the Internet. Something I believe no one wants, except maybe Kevin Martin. Before we know it, big brother FCC will be deciding what content and services are socially acceptable.

Given the choice between doing nothing, meaning passing no legislation, and implementing the provisions of the Act, I'll take doing nothing. Let the private market supply its version of the Internet--one that maximizes profits over public benefits. At the same time, ensure that the public has the right to build an open access Internet that maximizes public benefits over profits. What we want is a competition in the marketplace between public and private visions for the Internet unfettered by FCC regulation. The worst outcome is controlled Internet competition between telephone and cable television regulated by the FCC.

What I think we should do at the Federal level is: 1) Make sure the public is given a fair opportunity to build municipal networks that compete with the telephone and cable television Internet access networks; 2) Keep the telephone and cable companies from using the FCC to get regulations passed that give them market advantage.

What I'm arguing for is a truly open and competitive market where the public through the cooperative actions of local government is allowed to compete with the telephone and cable television companies in providing commodity Internet connections at the lowest possible price. I am not in favor of local governments selling retail services in competition with the private market any more than I am in favor of municipal public works departments owning the video stores connected to the motor vehicle road network.

I agree with both Mitch and Mike that the current situation is problematic. But I think it would be going from the frying pan into the fire if federal rules of some sort mandated network neutrality...unless they are very, very simple rules. (Someone, and I think it's Tim Wu at Columbia, has suggested setting up network neutrality rules that basically say a broadband provider can discriminate among its customers, but not its customers' customers. This is brilliant because it keeps the market open without inviting in the feds.)

I spent a good dozen years analyzing the public policy impacts on communications industries and I'm sorry to say that based on my experience, I trust Brian Roberts far more than I trust Kevin Martin to do the right thing. I've seen federal regulations do far more damage to competition and innovation than the actions of the cable industry, for example.

Though it may not be obvious to most Internet users, or even many policy makers, the future of the Internet is at risk. This risk lies in giving control of the Internet to a small group of private companies, specifically the dominant telephone and cable television companies, that own the access networks linking America's homes and businesses to the Internet. Though these companies tout the benefits their broadband access networks have brought to Internet users, their approach is at odds with the public nature of the Internet. As profit-making ventures, their natural inclination is to subordinate the Internet's vast potential to produce public benefits to their own bottom-line considerations. This is a natural consequence of relying on the private market to finance and run the Internet. That people find this a surprising development amazes me.

If we want to maximize the Internet's potential to produce social and economic benefits for all of society, we need to look outside telephone and cable television for a solution. If we are not willing to do this, then we need to just grin and bear it.