"Net neutrality" sounds like a good idea. It isn't.

As political slogans go, the phrase net neutrality has been enormously effective, riling up the chattering classes and forcing a sea change in the government's decades-old hands-off approach to regulating the Internet. But as an organizing principle for the Internet, the concept is dangerously misguided. That is especially true of the particular form of net neutrality regulation proposed in February by Federal Communications Commission (FCC) Chairman Tom Wheeler.

Net neutrality backers traffic in fear. Pushing a suite of suggested interventions, they warn of rapacious cable operators who seek to control online media and other content by "picking winners and losers" on the Internet. They proclaim that regulation is the only way to stave off "fast lanes" that would render your favorite website "invisible" unless it's one of the corporate-favored. They declare that it will shelter startups, guarantee free expression, and preserve the great, egalitarian "openness" of the Internet.

No decent person, in other words, could be against net neutrality.

In truth, this latest campaign to regulate the Internet is an apt illustration of F.A. Hayek's famous observation that "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." Egged on by a bootleggers-and-Baptists coalition of rent-seeking industry groups and corporation-hating progressives (and bolstered by a highly unusual proclamation from the White House), Chairman Wheeler and his staff are attempting to design something they know very little about-not just the sprawling Internet of today, but also the unknowable Internet of tomorrow.

Origins of a Regulatory Meme

"Network neutrality" was coined in a 2003 paper by the law professor Tim Wu. A "neutral" Internet, Wu postulated, "is an Internet that does not favor one application (say, the world wide web) over others (say, email)." For Wu, "email, the web, and streaming applications are in a battle for the attention and interest of end-users. It is therefore important that the platform be neutral to ensure the competition remains meritocratic."

Over time, Wu's notion has morphed from vague abstraction to regulatory imperative and even article of faith. Net neutrality has come to represent a set of edicts aimed at constraining Internet Service Providers (ISPs) to a specific, static vision of the Internet in which they treat all data equally-not charging differentially (or "discriminating," in activists' parlance) by user, content, site, platform, application, type of equipment used, or mode of communication.

Along the way, the movement acquired some radical political baggage: to "get rid of the media capitalists in the phone and cable companies and to divest them from control," in the 2009 words of media activist Robert McChesney, founder of the anti-media-consolidation group Free Press. Not coincidentally, Free Press, which has been at the vanguard of net neutrality activism, was long chaired by Tim Wu.

But the net neutrality movement has had less to do with class struggle than with the familiar delusion of technocrats everywhere: that government can "design" a better future if only it pulls the right levers. The goal, in theory, is to "save the Internet" from big corporations, ensuring (in Free Press' words) that "it will remain a medium for free expression, economic opportunity and innovation." According to a group of pro-net-neutrality startup investors, this can be accomplished only by locking in yesterday's business model. They want new Internet applications, like their favorite Internet companies of the past, to "be able to afford to [make] their service freely available and then build a business over time as they better understand the value consumers find in their service." In the name of innovation, net neutrality proponents want the Internet to remain just as it is.

But even without government's guiding hand, neutrality has long been an organizing principle of the Net. The engineers who first started connecting computers to one another decades ago embraced as a first-cut rule for directing Internet traffic the "end-to-end principle"-a component of network architecture design holding that the network itself should interfere as little as possible with traffic flowing from one end-user to another. Yet the idea that this network "intelligence" should reside only at the ends of the network, has never been—and could never be—an absolute. Effective network management has always required prominent exceptions to the end-to-end principle.

Not all bits are created equal, as the designers of those first Internet software protocols recognized. Some bits are more time-sensitive than others. Some bits need to arrive at their destination in sequence, while others can turn up in any order. For instance, live streaming video, interactive gaming, and VoIP calls won't work if the data arrive out of order or with too much delay between data packets. But email, software updates, and even downloaded videos don't require such preferential treatment-they work as long as all the bits eventually end up where they're supposed to go.

Anticipating the needs of future real-time applications, early Internet engineers developed differentiated services ("DiffServ") and integrated services ("IntServ") protocols, which have discriminated among types of Internet traffic for decades. The effect on less time-sensitive applications has gone virtually unnoticed. Does anyone really care if their email shows up a few milliseconds "late"?

But these are engineering prioritizations, and they come without an associated price mechanism. As a result, there's little incentive for anyone to mark these packets accurately: In the face of network congestion, everyone wants the highest priority as long as it's free.

Here, as throughout the economy, prices would make everyone reveal the value they place on a transaction, thereby allocating scarce resources efficiently. An Internet characterized by business prioritization, offering fast and slow lanes for purchase by end-users or content providers, could make all applications work better, significantly increasing consumer satisfaction while also promoting broadband adoption and deployment.

Thus far the demand for these types of business models has been fairly limited for the simple reason that congestion (scarcity of bandwidth) is, for now, an infrequent problem. To be sure, ISPs offer consumers varying tiers of service, and mobile broadband providers (facing far more frequent congestion) are increasingly experimenting with prioritization schemes, such as AT&T's Sponsored Data program and T-Mobile's Music Freedom service. But the current lack of uptake doesn't mean that a market for prioritization wouldn't develop without rules preventing it. And it will be the unknown applications of tomorrow (say, holographic video streaming) that will most likely lead to-and benefit from-this type of prioritization.

Generally speaking, neutrality advocates don't spend much time in the weeds of boring traffic-flow engineering and network prioritization. What has animated everyone from HBO comedian/anchor John Oliver to millions of irate FCC commenters has been an angry suspicion that somewhere, some rich corporations are on the verge of hijacking the Internet's architecture to profit themselves while excluding others. In Oliver's pointed words, net neutrality rules are code for "preventing cable company fuckery."

But attempting to bureaucratically manage the technical and economic realities of building, operating, and constantly improving a flexible, modern communications network is a daunting challenge for even the most capable and fair-minded of administrators. Doing so at the behest of ideologically motivated partisans is a recipe not just for failure, but disaster.

On Whose Authority?

The Communications Act of 1934 (as amended) authorized the FCC to "make available so far as possible, to all the people of the United States, without discrimination on the basis of race, color, religion, national origin, or sex, rapid, efficient, Nation-wide, and world-wide wire and radio communication services with adequate facilities at reasonable charges." When Congress finally got around to updating the Communications Act in 1996, it added that the government should "promote the continued development of the Internet and other interactive computer services and other interactive media" and "preserve the vibrant and competitive free market that presently exists for the Internet...unfettered by Federal or State regulation."

The added language expressed a policy preference, but didn't grant the FCC any direct authority to regulate the Internet. And the most successful push in Congress to expand the commission's authority over the Internet—the Communications Decency Act of 1996—was mostly shot down by the Supreme Court in 1997 on First Amendment grounds.

Yet none of this stopped the George W. Bush–era FCC from trying to cobble together the legal authority to more robustly regulate the Net. In 2005, the agency released an "Internet Policy Statement" to "Preserve and Promote the Open and Interconnected Nature of Public Internet." A declaration of policy orientation rather than a set of new regulations, the statement outlined four principles: "(1) consumers are entitled to access the lawful Internet content of their choice; (2) consumers are entitled to run applications and services of their choice, subject to the needs of law enforcement; (3) consumers are entitled to connect their choice of legal devices that do not harm the network; and (4) consumers are entitled to competition among network providers, application and service providers, and content providers."

In 2007, Free Press and other media activists petitioned the FCC to enforce the policy statement against Comcast after the cable giant intermittently slowed or blocked certain peer-to-peer activities among its users-despite the fact that, according to a study by Princeton computer scientist Ed Felten, up to 99 percent of such content is illegal, and thus unprotected under any version of net neutrality. The agency agreed with the critics, issuing a cease-and-desist order. But in the 2010 decision Comcast v. FCC, the D.C. Circuit found that the commission had no authority to enforce the policy.

Despite the court's ruling, the Obama-era FCC regrouped and took another swing at enforcing net neutrality. Its 2010 "Open Internet Order" advocated stricter and more detailed rules, written in language designed to justify them before the courts. The Order—the first real net neutrality rule at the FCC—drew scathing and prescient dissents from the agency's two Republican commissioners, Robert McDowell and Meredith Attwell Baker. McDowell's dissent, in particular, captured the essential defects of the FCC's effort, which he summarized as follows:

  • Nothing is broken in the Internet access market that needs fixing;
  • The FCC does not have the legal authority to issue these rules;
  • The proposed rules are likely to cause irreparable harm; and
  • Existing law and Internet governance structures provide ample consumer protection in the event a systemic market failure occurs.

The inevitable legal challenge followed, and in early 2014 the FCC lost yet again at the D.C. Circuit for imposing rules that exceeded its statutory authority—although the court, for the first time, did accept the Commission's assertion that it had authority to issue some form of rules to regulate Internet access buried within Section 706 of the Telecommunications Act.

Undeterred, and bolstered by the court's acknowledgement of his agency's claimed authority, Chairman Wheeler introduced the latest iteration of net neutrality rules in February 2015. Tellingly, it took over 300 pages of notes and argument to explain and defend a grand total of eight pages worth of rules. It's significant, too, that Wheeler touted his plan as enacting the specific vision laid out by President Obama the previous November. (The White House's intervention in the decision making of the ostensibly independent FCC is currently being investigated by committees in both the Senate and the House of Representatives.)

Having already been run through the wood chipper of interest-group politics and years of litigation, the FCC's net neutrality push now turns entirely on the relative merits of two potential legal bases for its rules that are, at root, far more similar than they are different.

On the one hand, Section 706 would permit the FCC to regulate broadband under a purportedly "light touch" regime in which the FCC would have to justify the enforcement of its rules on a case-by-case basis. Title II (the section of the 1934 Act authorizing regulation of common-carrier services), on the other hand, would presumptively impose on ISPs a set of rules designed for 19th century railroads and the early telephone monopoly. Under Title II, ISPs would be saddled with rate regulation and a host of other antiquated burdens. Although Wheeler has proposed to forbear from enforcement of some of Title II's provisions, the remaining rules still impose on ISPs the fundamental attributes of traditional common-carrier regulation.

The courts are likely to strike down the assertion of authority to regulate broadband providers under Title II. Yet even then, Wheeler's rules could still bar ISPs from entering into most commercial arrangements with content providers for preferential treatment under Section 706.

For many activists, the substantive debate over such handcuffing of ISPs has been settled. But it's not.

A Better Vision

One would think that after 10 years of political teeth-gnashing, regulatory rule making, and relentless litigating, there would by now be a strong economic case for net neutrality—a clear record of harmful practices and agreements embodying the types of behavior that only regulation can pre-empt. But there isn't.

In fact, after poring over hundreds of thousands of pages of comments in the public record, the FCC in its 2010 Open Internet Order could identify just four actions in the history of the Internet that might have been prevented by such rules. Even these four are questionable, and all of them were resolved without the heavy hand of net neutrality.

To simplify, the Internet marketplace can be analytically split into three categories: content providers (Google, Netflix, porn sites, your friend's blog), ISPs (Comcast, Verizon, CenturyLink), and end-users (you and me). The end-users are consumers, whose consumption preferences ultimately determine the value of content. ISPs interact directly with consumers by selling the high-speed connections that allow their customers to access content.

ISPs interact with content providers by managing the networks over which information flows. Thus ISPs are resource owners, because they own the networks, but they are also entrepreneurs, insofar as they strive to maintain the profitability of their networks under rapidly evolving market conditions. To be successful, ISPs must serve consumer demand in a cost-effective manner.

FCC regulation of the Internet is rooted in the belief that a "virtuous circle" of broadband investment is ultimately driven by content providers. The more good content that providers make available, the more consumers will demand access to sites and apps, and the more ISPs will invest in the infrastructure to facilitate delivery. Minimize the financial and transaction costs imposed by ISPs on content providers, and content will flourish and drive the engine.

That's the theory, anyway. But in practice, there's no good evidence that myopically favoring content providers over infrastructure owners is beneficial even to content providers themselves, let alone to consumers.

Rather, the two markets are symbiotic; gains for one inevitably produce gains for the other. Without an assessment of actual competitive effects, it is impossible to say that consumers are best served by policies that systematically favor one over the other.

Somehow, even absent net neutrality regulation, ISPs have invested heavily in infrastructure and broadband. End-users have benefitted immensely, with 94 percent of U.S. households having access to at least two providers offering fixed broadband connections of at least 10 megabits per second, not to mention the near-ubiquitous coverage of wireless carriers offering 3G and LTE service at comparable speeds. Comcast may not be one of the nation's most well-loved companies, but it's misleading to describe an economy-of-scale marketplace with two or three major providers as one lacking competition. And while activists claim that the U.S. lags behind in broadband speed and deployment, the truth is almost exactly the opposite. Controlling for size and population density, the U.S. compares very favorably with the rest of the world. In fact, if you look at slightly smaller geographical units, 5 of the top 10 (and 9 of the top 15) fastest places in the world would be U.S. states or Washington, D.C.

Broadband networks are expensive to build and, particularly for mobile networks, increasingly prone to congestion as snowballing consumer use outpaces construction and upgrades. In order to earn revenue, economize the scarce resource of network capacity, and provide benefits to consumers, ISPs may engage in various price-discrimination and cross-subsidization schemes—i.e., the much-maligned "paid prioritization" motivating net neutrality activists.

The non-Internet economy is replete with countless business models that use similar forms of discrimination or exclusion to consumers' benefit. From Priority Mail to highway toll lanes to variable airline-ticket pricing, discriminatory or exclusionary arrangements can improve service, finance investment, and expand consumer choices.

The real question is why we would view these practices any differently when they happen on the Internet. When T-Mobile began offering its subscribers free data use for Spotify, Rhapsody, and a few other streaming music services, but not some of their more obscure competitors, net neutrality activists decried the program for its presumed effect on the excluded services. But T-Mobile presumably benefits from this program—capitalizing on consumer demand for particularly popular content to attract users to its service—and consumers obviously benefit as well.

What about music services that aren't included in T-Mobile's package? Even they stand to benefit, since users now have more spare data capacity to experiment with new streaming content. Meanwhile, T-Mobile isn't the only (or remotely the most significant) source of marketing or distribution for these companies. There is, in other words, no evidence that the excluded music services are unable to compete.

The depredations that net neutrality seeks to eliminate—blocking, throttling, and discrimination of online content by ISPs—are species of exclusion, allegedly impeding valuable transactions between content providers and end-users. But a host of other Internet entities have the theoretical power to control users' access to content (and vice versa) as well. Content providers such as Netflix, Spotify, and iTunes mediate relationships between content and users, buyers and sellers, frequently in a non-"neutral" fashion. So do online platforms such as eBay, Etsy, and Kickstarter. Amazon finances and promotes its own content and offers it to its own subscribers exclusively. Google Maps offers users direct access to Uber (but not Lyft) from its app. Why do ISPs deserve special rules?

The usual answer is that ISP competition is limited or non-existent, while competition among content providers is plentiful. But if the underlying problem is an absence of competition, then antitrust laws—or even adjudication of alleged net neutrality violations on a case-by-case basis, assessing actual effects after the fact—would be sufficient. The logic of prophylactic regulation simply doesn't hold up. In fact, the real competitive constraints are usually imposed by local government franchise regulations, including the imposition of substantial build-out requirements and restrictions on broadband providers' access to government-owned utility poles.

Meanwhile, the existence of other Internet intermediaries undermines claims that ISPs are unfettered by competitive forces. Bob Loblaw's Law Blog may seem to be at the mercy of its Internet provider, the way your kitchen appliance is at the "mercy" of your local power company. But if Loblaw uses WordPress to publish and host his site, an ISP would have to take on WordPress itself—not just a single blog—to impede access to the site.

The same is true for independent artists plying their music or videos on the Web. It isn't Adele vs. Comcast; it's YouTube vs. Comcast. That's a very different situation, one in which YouTube is by no means at an obvious disadvantage.

The sources and dynamics of competition in the Internet ecosystem are complicated, evolving, and poorly understood. One of the central defects of net neutrality rules is that they simply ignore these complications and assert a fanciful, one-dimensional conception of market competition that has never really existed.

Net neutrality would also imperil another powerful source of consumer benefit on the Internet: cross-subsidization. Certain apps, for example, make money through subscriptions and purchaser fees, while others depend on advertiser-supported revenue but are otherwise "free" to users. Diverse business models frequently coexist where different consumers pay in different ways for the same or similar services.

Is there any good reason that AT&T customers should only be permitted to purchase data directly from AT&T but prohibited from having their data usage sponsored by advertisers that enter into deals with AT&T? Some mobile providers offer free Facebook and Wikipedia to encourage broadband adoption in the poorest parts of the world. Strident net neutrality supporters, such as the Harvard law professor Susan Crawford, are sharply critical of such arrangements, claiming that "no Internet" is better than "some Internet"—even, apparently, if "some" comprises nearly all of what a user wants. By presuming to know that only one business model is appropriate and to impose that model across the board, net neutrality activists risk obstructing access, impeding innovation, and stifling the very content providers they purport to protect.

It is also often claimed that continued non-neutrality would imperil Internet startups that don't have the resources of their incumbent competitors to purchase priority access, placing them at an unfair disadvantage. It is curious, then, that some of the loudest voices in favor of net neutrality are also some of the Internet's biggest incumbents, such as Google, Facebook, Twitter, Netflix, and Amazon.

Many a new entrant has foundered on the shoals of obscurity. In a functioning competitive market, there are mechanisms to help startups overcome such structural impediments, and they usually cost money. Which, if you follow the anti-corporate logic of net neutrality activists, is itself a kind of favoritism. But who stands to benefit more from, and be willing to pay for, promotion—the company that's already known or the one that no one's ever heard of?

In fact, ISP price discrimination is as likely to help new entrants as hurt them. Non-neutrality offers startups the potential to buy priority access, thus overcoming the inherent disadvantage of newness. With a neutral Internet, on the other hand, the advantages of incumbency can't be routed around by buying a leg-up in speed, access, or promotion.

That an incumbent content provider might enter into an agreement with an ISP to gain advantage over its smaller competitors in a non-neutral environment may be a reason to scrutinize such agreements under existing antitrust laws. For instance, if an ISP with dominant market share refused to give access to online content that competed with its own, antitrust law might look askance at such conduct. But it doesn't justify presumptively hamstringing an ISP's commercial arrangements when such conduct isn't remotely typical.

Recognizing the ubiquity of paid prioritization-like agreements throughout the economy, including in the most competitive sectors, antitrust regulators condemn such conduct only after careful analysis shows that it has resulted in real consumer harm. Net neutrality turns this evidence-based paradigm on its head, pre-emptively condemning all discriminatory arrangements between ISPs and content providers regardless of their effect, on the basis of an evidentiary record that demonstrates that such agreements have so far never been harmful.

The Specter of Net Neutrality

Google Fiber and other innovative companies are trying to build out new and faster broadband connections to compete with cable, but the regulatory costs and legal uncertainty of sweeping net neutrality rules will impede their plans. Meanwhile, incumbent Internet providers won't have an incentive to upgrade their existing networks if they're saddled with monopoly-era regulation, which is designed to thwart competition. That sort of anti-competitive regulation is for 19th century railroads, not 21st century broadband.

So you may not love your cable company. But imposing public-utility regulation under Title II means the qualities you don't like about your cable company will become more widespread. It will mean less competition, poorer customer service, reduced investment (especially in underserved communities), slower broadband for everyone, and new regulatory hurdles for startups. Title II won't even do what its adherents cite as its primary justification: banning "fast lanes." What it will do is saddle the Internet with archaic rules that will make broadband providers as inefficient and slow to innovate as your local utility company.

No decent person, in other words, should be for net neutrality.