Net Neutrality: Triumph of the Ruling Class

A triumph of “free expression and democratic principles”? How stupid do they think we are?

It’s been painful to watch the gradual tightening of government control in the name of net neutrality. The Federal Communications Commission’s decision to rewrite the rules and declare the Internet as a public utility seals the deal. It cartelizes the industry and turns a “Wild West” into a planned system of public management — or at least intends to.

All the rest is a veneer to cover what is actually a power grab.

This whole plot has had all the usual elements. It has a good name and its supporters say it is about stopping private and public control. It’s had the backing of all the top names in content delivery, from Yahoo to Netflix to Amazon. It’s had the quiet support of the leading Internet service providers. The decision to impose the rule has been declared by a tiny group of unaccountable bureaucrats operating with the support of the executive lame duck.

The opposition, in contrast, has been represented by small players in the industry, hardware providers like Cisco, free-market think tanks and disinterested professors, and a small group of writers and pundits who know something about freedom and free-market economics. The public at large should have been rising up in opposition but people are largely ignorant of what’s going on with net neutrality.

Here’s what’s really going on. The incumbent rulers of the world’s most exciting technology have decided to lock down the prevailing market conditions to protect themselves against rising upstarts in a fast-changing market. To impose a new rule against throttling content or using the market price system to allocate bandwidth resources protects against innovations that would disrupt the status quo.

What’s being sold as economic fairness and a wonderful favor to consumers is actually a sop to industrial giants who are seeking untrammeled access to your wallet and an end to competitive threats to market power. One person I know compared the move to the creation of the Federal Reserve itself: the creation of an industrial cartel in the name of improving the macroeconomic environment. That’s a good comparison.

Let’s back up and grasp the position of the large content providers. Here we see the obvious special interests at work. Netflix, Amazon, and the rest don’t want ISPs to charge either them or their consumers for their high-bandwidth content. They would rather the ISPs themselves absorb the higher costs of such provision. It’s very clear how getting the government to make price discrimination illegal is in their interest. It means no threats to their business model.

By analogy, let’s imagine that a retailer furniture company were in a position to offload all their shipping costs to the trucking industry. By government decree, the truckers were not permitted to charge any more or less whether they were shipping one chair or a whole houseful of furniture. Would the furniture sellers favor such a deal? Absolutely. They could call this “furniture neutrality” and fob it off on the public as preventing control of furniture by the shipping industry.

But that leaves the question about why the opposition from the ISPs themselves (the truckers by analogy) would either be silent or quietly in favor of such a rule change. Here is where matters get complicated. After many years of experimentation in the provision of Internet services — times when we went from telephone dial-up to landlines to T1 connections to experimenting with 4G data coverage — the winner in the market (for now) has been the cable companies. Consumers prefer the speed and bandwidth over all existing options.

But what about the future? What kind of services are going to replace the cable services, which are by-and-large monopolies due to special privileges from states and localities? It’s hard to know for sure but there are some impressive ideas out there. Costs are falling for all kinds of wireless and even distributed systems.

If you are a dominant player in the market — an incumbent firm like Comcast and Verizon — you really face two threats to your business model. You have to keep your existing consumer base onboard and you have to protect against upstarts seeking to poach consumers from you. A rule like net neutrality can raise the costs of doing business but there is a wonderful upside to this: your future potential competitors face the same costs. As an established player in the market, you are in a much better position to absorb higher costs than those barking at your heels. This means that you can slow down development, cool it on your investments in fiber optics, and generally rest on your laurels more.

But how can you sell such a nefarious plan? You get in good with the regulators. You support the idea in general, with some reservations, while tweaking the legislation in your favor. You know full well that this raises the costs to new competitors. When it passes, call it a vote for the “open internet” that will “preserve the right to communicate freely online.”

But when you look closely at the effects, the reality is exactly the opposite. It closes down market competition by generally putting government and its corporate backers in charge of deciding who can and cannot play in the market. It erects massive new barriers to entry for upstart firms while hugely subsidizing the largest and most well-heeled content providers.

So what are the costs to the rest of us? It means absolutely no price reductions in internet service. It could mean the opposite. Watch your bills. I predict that it is not going to be pretty. It also means a slowing down in the pace of technological development due to the reduction in competition that will immediately follow the imposition of this rule. In other words, it will be like all government regulation: most of the costs will be unseen but the benefits will be concentrated in the hands of the ruling class.

There is an additional threat to how to the FCC has reclassified the internet as a public utility. It means a blank check for government control across the board. Think of the medical marketplace, which is now entirely owned by a non competitive cartel of industry insiders. This is the future of the internet under net neutrality.

If you look at how all this shakes out, this is really no different from how most every other sector in life has come to be regulated by the state, from food to money to medicine to education. It always shakes out this way, with a sleepy public believing the propaganda, an elite group of insiders manipulating the regulations for their own benefits, a left-wing intelligentsia that is naive enough to believe platitudes about fairness, and a right wing that is mostly ignorant and for sale to the highest bidder.

No, I don’t believe that the net neutrality ruling means the end of times for the internet. But it does mean that progress going forward in the digital age will be slowed compared with what it would otherwise be. Future generations will laugh in bemusement: it was the dawn of a new age and yet they believed it could be controlled the same as all that came before. Fools.