Net Neutrality Is Far From Necessary

Remember, the "open internet" that regulatory rules purportedly preserve emerged from a world without net neutrality rules.

Get ready for the next stage in the never-ending tussle over "net neutrality." The Federal Communications Commission (FCC) is prepping to craft yet another regime for internet service providers (ISPs)—the seventh in 13 years.

Even by contemporary standards of partisan unpleasantness, the debate about net neutrality is acrimonious. In 2018, a man was convicted of threatening to kill then–FCC Chairman Ajit Pai's family because he didn't like Pai's approach to the issue. The hysteria does not reflect reality. The "open internet" that regulatory rules purportedly preserve emerged from a world without net neutrality rules.

Early commercial internet innovations such as AOL and voice over internet were impeded by "common carriage" and "universal service" rules, which imposed an array of costly requirements (including compliance with licensing and pricing rules, tax liabilities, and network build-out mandates). Deregulation brought progress, bountiful new networks, and a cornucopia of content. The launch of broadband was itself a product of liberalization, as unregulated cable TV operators challenged telephone franchises by building "fast lanes" to the internet.

Meanwhile, the carriers that were expected to use Bell Labs technologies to bring high-speed data to the masses lagged behind. When the phone companies were unleashed in the early 2000s, they began pressing for market share against cable systems, and both platforms upped their game.

By 2008, however, the FCC worried that cable TV would squelch streaming services, offering "walled gardens" stocked with proprietary content. Critics accused ISPs of stunting the ecosystem by taxing innovation "at the edge." Net neutrality rules were devised to pry markets open.

Even when briefly in effect, the rules had no such impact. A 2011 complaint accused MetroPCS, then the fifth-largest wireless carrier, of anti-competitively selling cheap subscriptions with unlimited YouTube videos. T-Mobile, then the third-largest mobile operator, was investigated in 2016 for "Binge On"—giving low-cost access to low-bandwidth video streams.

The companies did favor certain popular content, to the benefit of consumers. Happily, the FCC never got around to blocking such practices. Through open markets and without net neutrality, apps like Skype, FaceTime, and Zoom flourished. Google search took the internet by storm, partnering with AOL, when it was the world's largest ISP, to swamp established search engines.

Broadband ISPs ditched "walled gardens" voluntarily, since the vast content available via millions of independent websites drives demand for broadband. Americans have been gorging: From 2010 to 2020, average data consumed by U.S. households rose 37-fold. And U.S. markets, in the broadband stress test created by the pandemic, withstood massive increases in traffic. In more regulated Europe, major video streaming services had to abandon HD to save the network.

Instead of "vertical foreclosure" by ISPs, we saw the rise of independent video streams—Netflix, Hulu, YouTube, Amazon, Apple, HBO Max, etc.—come to dominate internet traffic. ISPs, competing in data delivery, built a new marketplace of remarkable diversity and choice.

Basic cable channels were tied to their wires, just as newspapers bundled news with ads. Both have become pterodactyls. Basic cable subscriptions fell from 100 million in 2013 to under 80 million in 2021. AT&T, paying $64 billion for DirecTV in 2015, is dumping it for $15 billion; the satellite platform delivers channels that no longer need it.

In 2015, the FCC announced that it would henceforth treat ISPs as "common carriers" under Title II of the 1934 Communications Act, implying that broadband networks could not treat content from rival sources differently. This presumably precluded "fast lanes" for YouTube videos or Peacock shows (especially on Comcast cable, since Comcast owns NBC/Peacock). That policy, presented as a way to counter ISPs' anticompetitive conduct, ironically implemented the scheme that AT&T used to monopolize old phone markets, provoking the antitrust suit that ultimately busted up Ma Bell.

To assuage fears that the new regime would replay the AT&T debacle, the FCC pledged to refrain from doing much with it. Rate regulation, the heart of the old system, would be avoided via bureaucratic "forbearance." In short, the commission reinstituted the threat of regulation but decried its substance.

When the FCC abandoned that approach in 2018, apocalyptic forecasts darkened the sky. New York Times tech columnist Farhad Manjoo declared that the "freewheeling internet has been dying a slow death" and that the end of mandated net neutrality "would be the final pillow in its face." This fatalism reflected widespread misunderstanding.

Consider a 2015 "explainer video" produced by The Wall Street Journal. By way of analogy, it asks whether FedEx should be allowed to charge Amazon extra for shipping because the giant retailer soaks up so much capacity. It ominously suggests that FedEx might even make Amazon "chip in" for truck maintenance by threatening to slow down deliveries. To counter such shenanigans, the narrator intones, the FCC decided to treat broadband ISPs as common carriers: "It's why FedEx can't discriminate against Amazon deliveries."

But Federal Express is not a regulated common carrier. It sometimes volunteers to be an unregulated common carrier, as when the federal government accuses it of shipping pharmaceutical products not approved for use in the United States. Still, FedEx has every legal right to negotiate terms with Amazon, and it exercises those rights: "Amazon Loses Contract With FedEx as It Builds Out Competing Delivery Network," blared a 2019 headline in The Verge.

Meanwhile, United Parcel Service states that it "is not a common carrier and reserves the right in its absolute discretion to refuse carriage to any shipment tendered to it for transportation."

The lesson: Market competition, even with small numbers (as in national package delivery), often protects customer interests so well that regulatory enthusiasts mistake those open market outcomes for results imposed by "neutral" rules.

A 2018 Burger King ad makes the same blunder. The three-minute Whopper Neutrality video, recorded with a hidden camera, shows Burger King customers surprised by a new menu: $25.99 for "Hyperfast MBPS" Whoppers delivered without delay, $4.99 for "Slow MBPS" Whoppers served after a long wait. (MBPS: Making Burgers Per Second.) "The sandwich is ready," says the counter person. "I'm just not allowed to give it to you."

Hungry patrons go ballistic. "The sandwich is ready, but you can't give it to me?" one guy exclaims. The clerk responds, "Whopper neutrality was repealed. They voted on it." The angry dude: "God, this is the worst thing I've ever heard of!" Outside, after being let in on the game, the customer tells the camera: "The Whopper taught me about net neutrality."

Sorry, but no. Under net neutrality rules, broadband providers may charge higher prices for faster service or additional bandwidth, as AT&T did back in the day. Net neutrality aims to eliminate discrimination against rival services.

With Burger King as the "MBPS" supplier, there's a tiny problem: Burger King offers only Whoppers. There is no Big Mac, Wendy's, or Triple Bonus Jack on the menu. The platform is vertically integrated, making burgers and serving them, and it "forecloses" competing products. That no one would think to ban those practices is testimony to market rivalry and to the efficiency of "burger non-neutrality."

Also, note this whopper: Burger King does charge extra for faster service. The chain delivers! That cuts out the whole waiting-in-line thing, for a fee. Not a shocker. And the option is great for customers. But when it comes to broadband, premium prices for faster service are supposed to be an outrage.

Cosmetic policy initiatives may come and go, but the price controls, licensing, access fees, access obligations, taxes, restrictions, and cross-subsidies attached to the old AT&T Title II rules are gone for good reason. Even when touting common carriage, regulators will be leery of actually following through. It is better for consumers to have companies like FedEx or Burger King, which set their own terms rather than lobbying for business models dictated by commissioners.  And that only look regulated.