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!!