The Entrepreneurial View #473
"How to Hurt the Internet" by Politicians and Regulators
by Raymond J. Keating
Politics often is bewildering to those who understand markets, economics and history. Thus, many heads are being scratched in perplexity over the recent fit of lobbying and political posturing in favor of government regulating how the Internet operates.
Doesn't economics and history inform us that this would be a very bad idea? After all, it is extremely hard to think of any endeavor throughout history that was well managed by government.
Oh sure, there have been worthwhile and necessary endeavors by government - such as defeating the Nazis in World War II, the Reagan arms build up that helped topple the Soviet Union, and policing local streets. But that's not the same as saying that such ventures have been run in an efficient way. Recall, for example, the very expensive hammers and toilets that the Pentagon wasted tax dollars on in the 1980s.
Government's inefficiencies are even more glaring when moving away from security matters. For example, lots of people like Medicare and Social Security. But the reality is that the design of each of those government programs, from the moment of inception, meant that costs would hurdle out of control, and ever greater demands would be made on the taxpayers.
Spend other people's money, and such outcomes are inevitable. The idea is to keep government limited to its essential duties in order to limit such waste.
But, of course, some theoretical limit exists, as individuals and businesses are willing to fork over only so much of their hard-earned money in the form of taxes.
More insidious, therefore, is government regulation. With government regulation, one gets all of the special interest politics and governmental incompetence that come with spending and taxing, but the costs are hidden from consumers. Those costs are just as real as taxes, but regulations allow elected officials to make businesses deal with the costs. But in the end, one way or another, consumers pay the price.
This brings us back to the current push to have government regulate how the Internet works. Very few people would think that it is a good idea to have the government explicitly operate and spend tax dollars running the Internet. Think of the Postal Service running the Internet - not a pretty picture. But that doesn't mean that certain interests and various politicians still don't want to have government doing some of that managing.
This governmental Internet intervention is dressed up in the phrase "net neutrality." That sounds so ... well ... neutral, doesn't it? And the latest legislative vehicle for net neutrality is the Internet Freedom Preservation Act of 2008 (H.R. 5353), introduced by U.S. Rep. Edward J. Markey (D-MA). Who could be against freedom?
The stated legislative purpose is "to establish broadband policy and direct the Federal Communications Commission to conduct a proceeding and public broadband summits to assess competition, consumer protection, and consumer choice issues relating to broadband Internet access services, and for other purposes." Later, the legislation continues:
It is the policy of the United States-- (1) to maintain the freedom to use for lawful purposes broadband telecommunications networks, including the Internet, without unreasonable interference from or discrimination by network operators, as has been the policy and history of the Internet and the basis of user expectations since its inception; (2) to ensure that the Internet remains a vital force in the United States economy, thereby enabling the Nation to preserve its global leadership in online commerce and technological innovation; (3) to preserve and promote the open and interconnected nature of broadband networks that enable consumers to reach, and service providers to offer, lawful content, applications, and services of their choosing, using their selection of devices, as long as such devices do not harm the network; and (4) to safeguard the open marketplace of ideas on the Internet by adopting and enforcing baseline protections to guard against unreasonable discriminatory favoritism for, or degradation of, content by network operators based upon its source, ownership, or destination on the Internet.'.
Golly, and how will all of this be accomplished? Well, certainly not through competition and consumer discipline in the free market, according to supporters of this legislation, but instead via more government.
The legislation then goes on to lay out how the Federal Communications Commission (FCC) would be empowered to regulate how Internet service providers - or ISPs - run their networks, namely, regulating traffic management and prices.
This, of course, has nothing to do with net neutrality or Internet freedom. Instead, this is Internet regulation.
We got a taste of this at a hearing in Cambridge, Massachusetts, on February 25. FCC Chairman Kevin Martin grilled an executive from Comcast due to a complaint that the cable provider slowed down some Internet traffic from the file-sharing service BitTorrent. The New York Times noted: "The commission has been considering complaints made by the downloading services Vuze and BitTorrent and several consumer groups that Comcast has violated a policy statement issued by the commission in 2005 that permits Internet service providers to engage in ‘reasonable network management.' The term has become a focal point in the revived debate over what is called network neutrality."
The Times also noted a response from one Comcast officer:
But David L. Cohen, an executive vice president of Comcast, told the commissioners that the growing popularity of peer-to-peer applications was straining the network. "Independent research has shown that it takes as few as 15 active BitTorrent users uploading content in a particular geographic area to create congestion sufficient to degrade the experience of the hundreds of other users in that area," he said. "Bandwidth-intensive activities not only degrade other less-intense uses, but also significantly interfere with thousands of Internet companies' businesses. Far from managing our network in a discriminatory way to benefit our own offerings - other than managing our network to make our high-speed Internet service faster and better - our limited network management practices ensure that everyone else's applications and services, even those that may compete with our services and use P2P protocols, work," Mr. Cohen said.
Imagine that, a company managing its business.
And that management promises to only become more challenging in the coming years. A recent study from the Discovery Institute tells the story of astronomical growth in Internet traffic. "Estimating the Exaflood: The Impact of Video and Rich Media on the Internet" was written by Bret Swanson and George Gilder. The authors found the following:
From YouTube, IPTV, and high-definition images, to "cloud computing" and ubiquitous mobile cameras-to 3D games, virtual worlds, and photorealistic telepresence-the new wave is swelling into an exaflood of Internet and IP traffic. An exabyte is 10 to the 18th. We estimate that by 2015, U.S. IP traffic could reach an annual total of one zettabyte (1021 bytes), or one million million billion bytes. We began using the term "exaflood" in 2001 to convey the vast gulf between the total traffic on the nation's local area networks, then 15 exabytes a month, and the thousandfold smaller flows across the Internet. We predicted then that the deployment of broadband networks would bring exafloods of data to the Net. Today it is happening. We estimate that in the U.S. by 2015:
• movie downloads and P2P file sharing could be 100 exabytes
• video calling and virtual windows could generate 400 exabytes
• "cloud" computing and remote backup could total 50 exabytes
• Internet video, gaming, and virtual worlds could produce 200 exabytes
• non-Internet "IPTV" could reach 100 exabytes, and possibly much more
• business IP traffic will generate some 100 exabytes
• other applications (phone, Web, e-mail, photos, music) could be 50 exabytes
• The U.S. Internet of 2015 will be at least 50 times larger than it was in 2006. Internet growth at these levels will require a dramatic expansion of bandwidth, storage, and traffic management capabilities in core, edge, metro, and access networks. A recent Nemertes Research study estimates that these changes will entail a total new investment of some $137 billion in the worldwide Internet infrastructure by 2010. In the U.S., currently lagging Asia, the total new network investments will exceed $100 billion by 2012.
The obvious question is: Who would possibly make this investment if the government was regulating Internet traffic and pricing? It's hard to think of many risking big dollars under such a regulatory regime.
But what about those big bad ISP providers? After all, in a recent release, even the Christian Coalition reiterated its support for net neutrality regulation, proclaiming, "Americans should be in control of the Internet and not the monopoly cable and phone companies." (Hmmm, "monopoly cable and phone companies" - if there's more than one competitor, last time I checked my economics textbook, that's not a monopoly.)
It's hard to think of why ISPs would do something truly nefarious that would displease the two market segments they serve, that is, Internet content providers and consumers. After all, wouldn't there be a huge outcry, political fallout, and consumers choosing other ISPs. It's simply really bad business.
But, of course, the best check against bad business decisions is more competition, not more government. Let the consumers, not politicians and their appointees, have the final say.
If elected officials are really concerned about consumers in this ever-expanding Internet age, perhaps they should focus on removing regulatory obstacles to competition. For example, tens of thousands of local governments across the nation regulate cable television franchising. Municipality-by-municipality franchising is not about economics. Instead, this is a matter of political control. It allows politicians to extract payola - in one form or another - from telecommunications companies looking to compete in providing broadband services. In the end, it raises costs and reduces choice.
Some states have taken steps to move from local video franchising to state level. That makes sense. Why not more sweeping federal deregulation on this front?
The Internet has been a critical tool for entrepreneurs and small businesses by opening up new opportunities and markets. And the future looks even brighter, unless government gets in the way and mucks things up. Net neutrality regulation certainly looms as a major negative that could diminish investment and innovation, and thereby, restrain entrepreneurial opportunities.
Indeed, markets, economics and history tell us that government regulating traffic and pricing on the Internet is a very bad idea. Net neutrality will only serve to neutralize opportunity on the Internet.
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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
