A light-handed approach to the Internet, not regulation

I had thought that, at the end of the day, the Federal Communications Commission (FCC) would pull back from subjecting broadband to public utility-type regulation by reclassifying it as a Title II telecommunications service. I couldn't imagine that Chairman Tom Wheeler and his colleagues would want regulating the Internet to be their legacy.

But now I'm not so sure.

As part of its deliberations, the commission staff has held a series of roundtables, one of which focused on economic questions. Toward the end of the session, Wheeler asked the assembled economists whether the Internet economy, because of its unprecedented ability to foster rapidly scalable innovation from widely distributed sources, is fundamentally different from the industrial economy. The chairman wanted to know what regime would ensure a continuation of that success.

The obvious answer is the one offered by one of the panelists, Clemson University economist Tom Hazlett: To celebrate the success of the Internet, and then discard the regime that produced that success is not logical. We should stick with the light-handed regime that got us to where we are.

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The chairman pushed back, suggesting that perhaps we need a "new" economics for the Internet. Wheeler, a student of history, should be wary of such claims. The last time people believed in a "new economics" was during the dot-com era. Such beliefs deflated along with the bubble.

But even if you believe that the Internet has somehow changed the fundamentals of supply and demand, there is nothing new about public utility regulation, and its history is not a happy one. Virtually all economic studies of regulated industries have concluded that they did not serve the interests of the consumers. Prices were often higher, innovation slower and decision-making more politicized than otherwise. Public utility regulation is especially unsuited to the rapidly changing Internet ecosystem Wheeler described.

Indeed, the economics literature is ambivalent about the benefits of such regulation even for a pure monopoly. Monopolies create economic inefficiencies, but so do regulatory interventions. So regulating a monopoly may be more costly than leaving it alone. While there are disagreements about how competitive the broadband sector is, it clearly is not a monopoly.

In a bizarre way, much of the discussion at the roundtable, and in the proceeding itself, does reflect a "new" economics, because it focuses on issues that are difficult to envision being discussed in any other context: mandatory zero pricing and the related issue of prohibiting paid prioritization.

Mandating a blanket zero price for edge providers to access an Internet service provider's (ISP) network would be new, but not in a good way. No single, specific, price can be the correct economic answer. There is no precedent of a regulator specifying a zero price for an entire class of services. It would also be new to prohibit a firm from offering a higher quality service and charging for it.

If infrastructure providers can't charge edge providers, consumers may be the losers. Payments by edge providers could help defray infrastructure costs and therefore lower prices to consumers, increasing subscribership, particularly among more price-sensitive users.

Innovation at the edge may also suffer. Fewer end users decreases revenues to edge providers, potentially offsetting the benefit of a zero price. The virtuous circle goes both ways, as suggested by the roundtable's moderator, FCC chief economist Tim Brennan. The most one can conclude is that the net effect on incentives to invest and innovate at the edge is ambiguous. However, the effect on incentives to invest and innovate in the infrastructure is unambiguously negative.

The economic support for blanket rules prohibiting paid prioritization and mandating zero pricing is weak. There are many aspects of the Internet that make analysis complicated, especially the rapid rate of change and the complexity of the two-sided market arrangements. Those features call not for new regulation, but a humble, light-handed approach.

Lenard is president and senior fellow at the Technology Policy Institute.