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Solving Network Neutrality

Much has been said in regard to the recent Google-Verizon proposal on Network Neutrality and the collapse of talks at the FCC.  The rough consensus is that the deal would create a two-tiered Internet.

Is a two-tiered Internet a bad thing?

Honestly, I don’t know.  On one hand, it offends my basic sense of fairness.  On the other, my economics training tells me the price discrimination is a good thing (in competitive markets).  I have been thinking, writing, and speaking (in that order) on Network Neutrality for about four or five years.  My work has been published in English, Japanese, and Italian is forthcoming.  The one thing I have consistently said is that Internet subscribers, when well-informed, with real competitive options, and faced with low switching costs, will punish ISP who are not giving them what they want.  Competition is deputizes consumers to vote with their wallets.  If a two-tiered Internet is a good thing, then a competitive market will support it.

Almost all commenters agree that the cause of Network Neutrality issue is the reduction of competition in Internet access in the US.  This follows from a series of FCC decisions which basically eviscerated its local competition rules (mostly in the form of unbundling) in favor of “market solutions”.  The major proceeding which changed these rules was the Triennial Review.  In the proceeding, incumbents told the FCC that unbundled network elements (UNEs) were bad because they discouraged investment.  The competitors argued that UNEs were good because they were necessary for network competition.  I find both of those statements true and not mutually exclusive.  It is possible for a well-intentioned, well-informed regulator could split that baby down the middle, and still throw out the bath water.  In other words, regulators can create an effective unbundling regime which mitigates the disincentives to invest while still enabling competitive entry.  Indeed, nearly every other industrialized country has some form of unbundling for local competition.

What makes this difficult in the current political climate is that UNEs and TELRIC are incredibly dull.  It is much easier to get people excited about a topic like Network Neutrality than long-run incremental costs.  So, you cannot generate the political will for a return to unbundling.

Insight: There is now a unique opportunity to move beyond the Network Neutrality debate.  However, regulators should regulate, not negotiate.  The FCC should take this opportunity to revisit its unbundling rules to craft rules which can enable competition in Internet access networks while mitigating disincentives to invest.  Time to get excited about subloops!!

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This entry was posted on Thursday, August 12th, 2010 at 12:23 pm and is filed under Network Neutrality, Optimal Regulation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

  • Anonymous

    The Net Neutrality movement as a whole is devoid of logic and goes against the wishes of the end user. http://bit.ly/aefl4OnnUnbundling isn’t all that it’s cracked up to be because it’s very difficult to achieve scale as a small ISP which means you’re going to underprovision for backhaul bandwidth while paying a lot due to lack of quantity. This problem is especially true in the UK and a lot of those DSL-based ISPs can’t nnThe unbundling vision of Net Neutrality is one of the more extreme views and it is often seen as an alternative to the other extreme forms of Net Neutrality (http://bit.ly/9JG8LA). Unbundling is essentially the government grabbing private property with full blown Title II but it’s clear that the FCC doesn’t even have the authority to mandate Title II lite which leaves out the unbundling provisions. The whole unbundling movement is incoherent http://bit.ly/bVy5bI.

  • http://kennethrcarter.com/CoolStuff Kenneth R. Carter

    George, thanks for your comments. While I agree with much of what you say, let me take issue with a few things in order to bring the debate into sharper focus.nnI would not go so far as to say that Network Neutrality is devoid of logic. There have been some serious deviations from neutrality in previous years. To my mind the most serious has been the AfterDowingStreet.org kerfuffle. That said I am not prepared to substitute my judgment in lieu of the market as to what is the appropriate level of prioritization and product tiering. That said, the market must be sufficiently competitive. nnI am not sure exactly what you mean by the unbundling vision of Network Neutrality. I assume you mean network unbundling to achieve competitive entry. Unbundling, in and of itself, is not a taking. Even if it were, it would be permissible under the power of Eminent Domain. Nonetheless, you may not use your property in an anti-competitive manner. That is not a property right you have. The government can set appropriate constraints on the market place. Indeed, most telecommunications networks are built using public rights of way. Are you suggesting that this public domain has been transferred to private ownership and cannot be undone? Unbundling is an effective tool used (with different levels of success) by regulators in nearly all industrialized countries.

  • Anonymous

    I’ve explained my comments on unbundling (mandatory wholesale at government regulated prices) in detail in the links I provide. I would not be able to paste all of it here.nnWhen you change the rules of the game and require wholesale of fiber at government set prices after a provider builds the network under a regime that didn’t require unbundling, that is essentially taking private property and giving it to someone else at a non market rate.nnAlso, the current US FCC and congressional debate isn’t actually around unbundling or the reversion to a Title II regime. Some people would like to see that happen but it’s extremely unlikely the courts would allow this.nnThe regulatory issue boils down to an arbitrary and capricious targeting of ISPs but not other premium content delivery providers that use CDN technology. My first link makes all of this very clear (or so I tried).

  • Anonymous

    I should also point out that the actual regulatory fight in the US is not over whether ISPs can block or degrade (in undue ways other than fair responses to normal Internet congestion) certain websites. We know that it would be suicidal of an ISP to do this on a PR level and political level.nnThe real impetus comes from companies that invested in CDN prioritization technology (e.g., Google) who want to kill off competing router prioritization technologies through regulatory or legislative means. That’s why they specifically want to target ISPs offering these services to Business to Consumer (B2C) websites.

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