Once upon a time there was an economic service central to growth and prosperity, social cohesion, and innovation. With the benefit of wisdom and foresight, government got the service going and it grew rapidly across the country. It worked rain or shine. It served as a way for far-flung families to stay connected. It was a very easy way to pay the bills. Artists could share their poems, watercolors, novels and photographs. Businesses relied on it for timely communication within companies, to exchange contracts and other agreements with suppliers, and to ship products to customers. Households used it to shop, buying in the convenience of their homes and, especially, avoiding the chaos of shops at the holidays.
It was so important that the government kept it in a firm grip. Everyone paid the same price; well almost – businesses negotiated a lower rate. Service quality was strictly mandated to ensure fairness – everyone got the same service on the same days for the same price. And over time, everybody came to despise the U.S. mail.
The massive inefficiencies of mandated services and fixed prices led to bad service and choked-off promise. Of course, it also provided a wide-open opportunity for new entrants in business package and overnight delivery. A sophisticated pricing system for size, weight, delicacy, and timeliness delivered strong competition for residential dollars. Eventually, the government was forced to relinquish the iron controls and allow flexibility in pricing and service to businesses and households. The mandated 6-day delivery schedule to every doorstep survives only through a government-provided monopoly on first class mail.
Sound familiar? If so, then look out. The Federal Communications Commission seems to have the same design for the internet. Despite no evidence of any real problem, it is set to impose “network neutrality” – whose key features are mandated one-size-fits-all service and prices. Almost certainly, this approach will lead to inefficiencies and a diminished internet. Texas Senator Kay Bailey Hutchison is right to lead the charge against this policy error.
This is an important problem because the key to the future will be delivering more network capacity. Entrepreneurs will need a robust network to deliver new content to global consumers. The demand for network capacity (bandwidth) is increasing sharply.
The impact will be widespread. If network upgrades match capacity with digital innovation, perpetual Schumpeterian competition in a U.S.-based entrepreneurial class will build a comparative advantage in the knowledge economy to continuously penetrate new markets, identify new market niches, and deliver innovative products to global consumers. U.S. manufacturers of information technology products will build on their existing technical superiority to churn out a steady supply of hardware, underpinning consumers and digital entrepreneurs. This robust manufacturing sector works hand-in-hand with a robust pool of nearby research and development that, in turn, generates an ongoing stream of new intellectual property and propels an aspiration for education in the United States and international mobility for the elite abroad.
But if there is no incentive for network upgrades the global market for innovative digital products suddenly starts to look like a bricks and mortar business model. Network congestion or security limitations raise the “transport costs” for U.S. entrepreneurs trying to reach customer markets. To compete, they must shift their “factories” abroad to be closer to profitable markets. To remain flexible, they begin to work more closely with hardware sources in these locations, which become alternative magnets for research and development budgets, innovating engineers, and intellectual property advances. In short, just as with the mail, others will seize the opportunity. But they will not be in the United States.
Some observers express concern over the potential market power of telecommunications and cable companies. With their existing connections to residential homes, the traditional players are portrayed as a threat to competition. This is a sensible view of history and there is room for debate on the present. But the recent experience of market expansion evidenced by the rapid rise of satellite and wireless communications and rapid technical advances such as the expanding capacity of a single copper wire, suggest that the market that matters – the market five or ten years from now – will be fiercely competitive. And given a choice between regulators and the market, it is better to bet on the market.
Market forces – appropriately policed for abusive monopoly practices – can handle the pricing and delivery for an enormous variety of content providers to consumer market niches.
5 responses so far
1 sinz54 // Sep 24, 2009 at 9:30 am
Even the U.S. Post Office, even before it had real competition from UPS and FedEx, had tiered pricing. Shipping a heavy package first class always cost more than sending a letter first-class, because packages represent significant weight, which costs extra money for the trucks and planes to deliver them.
I am always opposed to trying to legislate to cover up scientific truth. In this case, the scientific truth is that the Internet was never designed to handle all media equally well. The basic protocol was never designed to anticipate peer-to-peer transfers or video streaming. Video packets need guaranteed delivery in a finite time (or else you see jittery video); the basic TCP/IP protocol does not provide for that. The only way around that is to give those packets higher priority. And this becomes increasingly important as bandwidth becomes increasingly scarce, as Internet traffic continues to increase. Don’t pass a law which attempts to legislate these realities out of existence.
My compromise solution is this: ISPs should continue to be able to discriminate among different classes of service, and their pricing structure can reflect that if that’s how they can achieve maximum efficiency. Requiring video to be equal to email is as absurd as requiring the Postal Service to consider heavy packages equal to letters.
But ISPs should not be able to discriminate within a class. They should not be able to discriminate between YouTube and Hulu, or between CBS’s streaming video and NBC’s streaming video. That prevents the ISPs from entering into exclusive licensing agreements to favor one source over another, such as Comcast entering into an exclusive agreement with NBC to give NBC’s streaming video better service than CBS’s.
So we would end up with class neutrality, but not full net neutrality.
2 oldgal // Sep 24, 2009 at 11:10 am
For a more balanced view of the debate, I recommend Wikipedia: http://en.wikipedia.org/wiki/Network_neutrality
While Douglas Holtz-Eakin makes the case for the telecom companies based on a questionable analogy, he does nothing to answer the issues raised by the supporters of net neutrality.
3 hormelmeatco // Sep 24, 2009 at 4:51 pm
Net neutrality isn’t about one-size-fits all internet services. If ISPs want to offer higher speeds for more money, the FCC doesn’t have a problem with them doing so, and net neutrality doesn’t affect that.
Sinz: Net neutrality doesn’t affect priorities of packets for media, as that’s more of a technical problem than a business/political one. ISPs already prioritize packets of video over more static traffic and have done so for a long time. Net neutrality doesn’t affect that. What it DOES affect is what you discussed in your 4th paragraph.
It extends beyond playing favorites with TV networks. Comcast offers cable TV and digital phone services. Without net neutrality, they could simply shut off competing VOIP services people use on the internet connections they provide, like Skype or online TV services like Netflix or Hulu.
Net neutrality doesn’t mandate equal treatment of packets on a technical basis. It is exactly what Holtz-Eakin mentioned at the end of his post: policing against anti-competitive behavior.
I am not willing to trust the market at all when it comes to internet service. Most people have a choice between their cable company or phone company for internet service. 9 times out of 10, BOTH are unappetizing. Very few people have a viable third alternative (Verizon FIOS isn’t available in very many markets).
4 sinz54 // Sep 25, 2009 at 1:20 pm
hormelmeatco:
Yes it does.
One of the issues that gave impetus to the net neutrality movement, was ISPs like Comcast deliberately downgrading peer-to-peer services like BitTorrent. If you were downloading a 3 GB television miniseries, your downloads were slowed. Packet inspection revealed the intended purpose of the packets, and their priority was lowered.
ISPs have also been charged with inspecting packets to ensure that online games, as well as BitTorrent, had their throughput slowed too.
Total network neutrality would put an end to prioritization based on packet inspection. But as I said, the Internet is a scarcer resource than people realize, and such prioritization may be inevitable. Who wants their email or chat to be held up by a huge BitTorrent transfer.
5 hormelmeatco // Sep 26, 2009 at 1:57 am
“Who wants their email or chat to be held up by a huge BitTorrent transfer.”
No one, and ISPs already traffic-shape and load-balance to maintain quality of service in circumstances like you mention. That’s a technical issue for the ISP and not one that net neutrality addresses. What net neutrality does address is anti-competitive behavior. Traffic-shaping to maintain quality of service will not cease if net neutrality goes into effect.
You missed the last point I made: all of this is only a problem because there is no real competition among ISPs for most customers in most areas.
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