Originally published: January 8, 2010
Last updated: January 8, 2010 - 12:53pm
The Federal Communications Commission has proposed rules that would keep the doors to the Internet open. The proposed rules would make Network Neutrality the law of the land, ensuring that the Internet remains free and open to content providers.
This Report analyzes federal net neutrality policy from an economic perspective in order to understand the fundamental tradeoffs: How do we maximize the value of the Internet? Who wins, and who loses? While there may be other considerations for policymakers, economic criteria can indicate which policy maximizes net benefits for society, and, thus, are clearly important.
There are five core findings of this Report that should influence the debate over net neutrality:
1) Internet Market Failure: The Internet -- understood both as the physical infrastructure as well as the content and information moving along that infrastructure -- produces billions of dollars of free value for the American public: Information is shared, reused, and reconfigured without fees or penalties.
2) Smart Policy Can Help: As a result of this dynamic, the Internet is more useful to everyone on it, but Internet Service Providers (ISPs) and content providers are at a disadvantage since they are not compensated for all the information they disseminate. This leads to systematic underinvestment in the Internet.
3) Without net neutrality rules, new technologies could lead to pricing practices that transfer wealth from content providers to ISPs, a form of price discrimination that would reduce the return on investment for Internet content—meaning website owners, bloggers, newspapers, and businesses would have less incentive to expand their sites and applications.
4) Additional investment in broadband infrastructure would also increase the value of the Internet—making it faster and accessible in more places. But charging content providers for access to ISP customers is an extremely inefficient economic tool to do that, primarily because most additional revenue generated for ISPs is likely to be transferred to their shareholders rather than invested in expanding broadband lines.
5) 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.
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This synopsis misses the key recommendation of the report, which is for government subsidization of broadband networks.
Claim (1) is that there is a market failure: present market outcomes fail to provide broadband investors with an efficient return on their investments. Frankly, that is entirely unproven, but accept it for argument's sake. Claim (2) follows.
Claim (3) is that net neutrality rules are efficient, but do not solve the problems of Claims (1) and (2). Again, accept (3) for argument's sake.
Claim (4) really is a corollary of (1)-(3), & Claim (5), in this rendition, comes out of the blue. How do we get to (5) given (1)-(4)?
The answer, in the report, is "It is relatively easy to directly support infrastructure development, but hard to provide direct support for content. Targeted government support for ISPs to expand access where needed, along with net neutrality rules to protect content providers, are the best combination of policies for overcoming the market failure of underinvestment in the Internet." (see page viii).