The Economic Case for Net Neutrality

A series of tubes

Photo by John W. Adkisson/Getty Images

So-called network neutrality principles took a blow this week, but the fight rages on. You ought to understand this regulatory wrangling as first and foremost a dispute between different classes of firms. On the one hand you have broadband companies, and on the other hand you have online services companies. What broadband companies want is to use price discrimination tools to capture a larger share of the flow of money out of your wallet and onto the Web. Online services companies want to stop them from doing that, leaving a larger share in their own pockets.

So why should you care?

You should care because, fundamentally, the structure of those two industries is very different. Think about a major segment of online services such as video. I regularly watch major video content from Netflix, from Amazon, from Apple, and from Hulu. What’s more, there are smaller-scale video enterprises such as YouTube and Vimeo that clearly have the technical capacity to serve content.

Or take audio. I use Rdio, iTunes, and Amazon regularly. Spotify and Google are also out there as options.

Now take broadband. I use Comcast. If I don’t want to use Comcast, I can opt for drastically inferior Verizon DSL. There are no other options. For fast broadband Internet, I can use Comcast or I can go without fast broadband Internet.

And this is generally what you see. In almost any online services marketplace you see a few competing firms, and you see opportunities for new firms to get into the game. The online services also to some extent compete with offline services (going to the movie theater, etc.) or cross-modally (play games rather than watch movies). Broadband Internet, by contrast, is a profoundly uncompetitive marketplace. So a regulatory shift that pushes money out of the online services sector and into the broadband sector is a regulatory shift that pushes profit opportunities out of a competitive sector and into an uncompetitive sector. That’s bad news for the economy.

At least that’s how it looks to me. Now maybe you think that making the broadband sector more profitable will be enough to spur massive infrastructure investment and the creation of a robustly competitive marketplace where the vast majority of customers have three or four broadband providers to choose from. To me that sounds like a fantasy that flies in the face of the basic economics of infrastructure construction. And that’s why the broadband industry needs to be regulated in such a way as to prevent it from swallowing all the surplus that exists on the Web.