Net Neutrality – Limited regulation

The issue of net neutrality has received a lot of attention in both the media and tech circles over the past few months. Although the term “net neutrality” implies that there is a single issue, the term is often used to represent a number of different debates centering around the role of government regulation on the Internet. Although I generally advocate for a free-market approach to technology, I believe that it may be beneficial to have limited government regulation related to how ISPs provide and charge for Internet access. However, I think that many of the reactions and alarms scrounging net neutrality are premature.

The core issue around neutrality is the idea that the Internet should be seen purely as a utility resource, akin to water or electricity. Proponents of net neutrality believe that providers of Internet services should not discriminate or even be aware of the content or type of traffic that passes through their networks. ISP’s, on the other hand, believe that such a policy places an unfair burden on their network, and ultimately will harm consumers. Their reasoning is that some companies use a disproportionate amount of Internet bandwidth, and that requiring them to treat these companies as any other user degrades network performance for all. A free market solution to asymmetric use is to charge companies more when they use more bandwidth.

Take video traffic for instance. In 2015, it was estimated that Netflix accounted for 37% of all Internet traffic worldwide. Think of the millions websites, games, and services connected to the Internet, and how much traffic they use and consume. To have a single company contribute nearly 40% of that traffic is a staggering idea. This was three years ago. As new streaming services have gained popularity, the amount of video traffic on the Internet has skyrocketed. By 2021, streaming video will account for over 82% of all Internet traffic. ISP’s believe that in order to support this increase in bandwidth they need to make investments in their infrastructure, and to do that they need to be allowed to either charge companies like Netflix more money or prioritize traffic from other companies over Netflix.

On the surface, their argument makes sense. While bandwidth is not a finite resource (since companies can always create more), it does have a finite supply. If a large portion of that supply is being consumed by a select few, then those few need to either pay more or have their use throttled or limited in some manner. The problem, as always, is in the details. Once an ISP begins prioritizing traffic and charging companies more for faster access, it opens the door for a fully tiered structure. ISPs, naturally incentivized by profit, will have no reason not to start charging all customers more for different levels of traffic, even when they may not need it. While charging Netflix more might make sense, charging Google Search more does not. Although Google search processes billions of queries each day, the amount of bandwidth consumed is relatively small and has a much less effect the available Internet bandwidth available to others. However, once an ISP is allowed to charge differing amounts for different speed and bandwidth tiers, they now have an incentive to place companies both large and small at the lowest tier, then charge for higher tiered access. This will occur even if the lower tiers have large excess capacity. In essence, the ISP’s will want to under-utilize their network at the lower tier levels in order to maximize profit.

Under ideal circumstances, there would be enough competition to limit this practice. Think of the cell phone market over the past two decades. Cellphone plans from all carriers were initially priced by the minute. Company X would provide 100 minutes at a certain monthly price, then company Y would come along and provide 200 minutes for the same amount. This competition, along with an increase in bandwidth and capacity for cell providers, led to the current state where almost all carriers offer an unlimited amount of talk time, and most offer plans with an unlimited amount of data. If there was enough competition between ISPs, the same thing could happen. ISP’s would compete with each other for business, and eventually, an equilibrium would be reached where only the traffic that actually diminished network capacity would be charged at a higher rate. All other traffic would be treated as “unlimited” and charged a base fee.

Unfortunately, there is not enough competition between ISP’s for this to occur, especially at the backbone level. Traditionally, Internet bandwidth has been created by the large telecoms: AT&T, Verizon, Level 3, Comcast, Bell, etc. In many regions throughout the U.S. one or two ISP’s control all of the backbone pipes connecting the Internet. This means companies both big and small have little choice when it comes to delivering their content. For instance, if Amazon wants to provide customers in Denver with the best possible speed, they have to route their traffic through either Century Link (a descendant of Bell), or Comcast. There is too strong of an economic incentive for this small amount of competition to overcome.

It is for this reason why I believe that limited government regulation can be helpful. The regulation should be aimed solely at the largest ISPs, and should be structured so that these ISPs can charge more for some types of Internet traffic, but only if they can actually demonstrate that the traffic is placing a strain on the network or interfering with the traffic of other users. In this way, ISPs can treat traffic from Netflix or other large streaming services differently, but will not be allowed to segment lower bandwidth traffic into paid tiers.

As it stands right now, the FCC has repealed or rescinded any net neutrality guidelines that were in place. The new policies will go into effect this year, and ISPs will be free to create any type of pay structure they want. For now, I don’t think this will have any effect on either consumers or most businesses. Perhaps public pressure and new market forces will keep a fully tiered system at bay, but I fear that unless the FCC or Congress implements some limited form of net neutrality, a tiered approach is inevitable.

Sources:

• Netflix now accounts for almost 37 percent of our Internet traffic
• An explosion of online video could triple bandwidth consumption again in the next five years
• FCC Takes Another Step Toward Repeal Of Net Neutrality