The Economics of Network Neutrality: Are "Prophylactic" Remedies to Nonproblems Needed?

By Faulhaber, Gerald R. | Regulation, Winter 2011 | Go to article overview

The Economics of Network Neutrality: Are "Prophylactic" Remedies to Nonproblems Needed?


Faulhaber, Gerald R., Regulation


Since "network neutrality" first appeared in policy debates, its meaning has been less than crystal clear. Some advocates have argued that net neutrality demands that broadband Internet service providers (ISPs) treat all bits equally: "a bit is a bit is a bit," while others make exceptions for malware bits, spam bits, child pornography bits, etc. Some advocates have argued that net neutrality must apply not only to wired broadband ISPs, but to wireless broadband providers as well, while others recognize that wireless broadband has a unique technological structure that requires more stringent and flexible capacity management than is consistent with "a bit is a bit is a bit."

The Federal Communications Commission has recently issued a Report and Order (R&O) promulgating its network neutrality rules. As might be expected, the R&O strikes a middle ground between purists on each side of the debate. (Curiously, the FCC itself seems to have foresworn the use of the term "network neutrality," preferring to adopt phrases such as "preserving the Open Internet" and "Open Internet rules." In this article, I continue to use the traditional terminology.)

In this article, I describe the FCC's recently enacted regulation on network neutrality and then I ask three questions:

* What economic problem is net neutrality designed to solve? What is the empirical evidence concerning this problem?

* What can economic theory tell us about potential problems in the broadband ISP market?

* What can empirical political economy tell us about likely outcomes of net neutrality policy interventions?

Current FCC Net Neutrality Regulations

The R&O specifies four "principles," each of which is discussed below.

Transparency | Under the new regulation, "broadband Internet access service shall publicly disclose accurate information regarding the network management practices, performance, and commercial terms of its broadband Internet access services sufficient for consumers to make informed choices." This means that broadband ISPs are required to disclose publicly the following:

* Network practices, such as congestion management, application-specific behavior, device attachment rules, and security.

* Performance characteristics, such as technology, speed, usefulness for certain applications, and what other specialized services are available.

* Commercial terms, such as pricing, privacy policy, and redress options should disputes arise.

The transparency rules are relatively flexible; some advocates had argued for much more specific and detailed disclosures and are now disappointed in the flexibility of the adopted rules. But generally, this principle of disclosure is rather close to best practice in the broadband ISP industry today and the principle is strongly supported by scholarly work. The transparency principle is the least controversial of the FCC's network neutrality rules.

[ILLUSTRATION OMITTED]

No blocking and no unreasonable discrimination | Under the new regulation, a "broadband Internet access service [provider] ... shall not block lawful content, applications, services, or nonharmful devices, subject to reasonable network management." This rule is also interpreted to prohibit broadband ISPs from degrading service (e.g., slowing it down) for a specific application. Broadband ISPs are also prohibited from charging a fee in order to carry an application (i.e., blocking the application unless a fee is paid).

Also under the regulation, a "broadband Internet access service [provider] ... shall not unreasonably discriminate in transmitting lawful network traffic over a consumer's broadband Internet access service. Reasonable network management shall not constitute unreasonable discrimination." This rule contains a blockbuster clause: broadband ISPs are not permitted to charge application and content providers for access to their customers. …

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