Been there, done that on broadband

A DC federal court struck down the FCC’s “net neutrality” regulations earlier this year, but did nothing to resolve an ongoing debate over whether or how the government should regulate the Internet.  At the heart of the controversy lies a central question – should we regulate the Internet as we did the old telephone network and other so-called “common carriers”? 

In a paper to be released this week by the Progressive Policy Institute, I examine the past two decades’ experience to shed light on this question.  And the answer that keeps coming up is that proposals for strict utility-style regulation of the Internet have two things in common.  First, they are based on the presence of a “natural monopoly” for broadband that simply does not exist.  And second, where they have been tried, utility-style rules have been the greatest single obstacle to investment in broadband infrastructure.

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From the earliest days of the Bell monopoly, our telephone system was built around an explicit bargain.  In exchange for a guaranteed and low-risk profit, the Bell system would provide quality, reliable phone service to the nation.  This bargain was deemed necessary because it was assumed that phone service was a “natural monopoly” where the costs of infrastructure were so high that competition wasn’t possible.  But by the 1990s, those assumptions had completely broken down.  Microwaves and coaxial cable could carry phone calls, phone lines could deliver video, and an “information superhighway” loomed in the future.

The Clinton administration’s Telecommunications Act of 1996 sorted this mess out and launched the age of modern Internet policy – trusting market forces and technological innovation to the maximum extent.  It was an act of incredible political maturity.  Its authors knew something remarkable was about to happen and that government could best serve it by stepping back and letting private investment happen.

So the 1996 Act drew a line – the old phone system would remain regulated as a “common carrier,” but the emerging new world of “information services” would be allowed to develop on its own free from utility-style requirements such as government oversight of prices, forced sharing of infrastructure with competitors, or rigid traffic management rules.  As a result, we have seen over $1.2 trillion in investment since the 1996 Act, and the innovation, growth and new services the Act’s framers imagined. 

Further light is shed by the treatment of the incumbent phone companies.  As a transitional measure, the Act preserved the utility model for the telcos, which were forced to share any infrastructure they built with all comers at a government supervised price (well below its long-term cost).  That requirement smothered investment since no one would build new infrastructure if they had to share it with competitors at a loss.  The result was initial stagnation in DSL broadband.  And when that requirement was later –overturned, investment followed there as well – more evidence of the dangers of the utility model in this space.

Europe still relies on these utility-style regulations and has used its state post and phone monopolies to build out broadband.  The results haven’t been pretty.  Since 2007, broadband capital spending is up by 75 percent in the United States but has actually declined in Europe.   

As a result, our major European trading partners are anchored near the bottom of the Internet speed charts – Germany is 27th in the world on the most recent Akamai speed rankings, France is 34th, Italy 48th.  The US by contrast is 8th, trailing small, dense, and highly urbanized places like Japan, South Korea, and Hong Kong, in contrast to the U.S.’ sprawling geography.  No one wonder EU Digital Policy chief Neelie Kroes says the continent “needs to catch up” in broadband.

The “natural monopoly” pro-regulation arguments depend on clearly does not exist.  America now has three different broadband technologies fully deployed and competing for customers (cable, telco, and 4G wireless).  The U.S. is near the top of global rankings in both high-end service, with 85 percent of households served by networks capable of 100 mpbs or more, and the most affordable entry-level wired broadband of any nation in the OECD.  Imagine what would ensue if we were to change course and regulate the Internet as a monopoly utility?  Which of the three technologies would regulators adopt?  How would we ensure continued investment? 

The Internet is undeniably incredibly important.  But that importance doesn’t mean that we should treat it as a public utility.  Bringing back the days of Ma Bell won’t fulfill broadband’s remarkable promise.

Ehrlich is president of ESC Company, an economics consulting firm, and former Under Secretary of Commerce in the Clinton administration.