I wrote a blog in the spring about the net neutrality debate, saying companies should be allowed to capture the value they deliver. Recently President Obama stated emphatically that he favors regulations that would preserve net neutrality, Obama pressures FCC for strong net neutrality rules; and of course the debates are back on the front pages of the newspapers again. From my perspective, the debate is mischaracterized. It is not a question of whether ISPs will be allowed to discriminate against certain users, but rather a question of whether they will be required to subsidize the huge users of bandwidth, or be allowed to set prices that reflect the value provided.
The President said ISPs should be regulated like utilities, and should be prevented from striking “fast lane” deals with content providers that would offer faster service for higher fees. Of course, that ignores the fact that those same deals are struck with consumers every day. The cable and phone companies offer internet packages to consumers with prices that vary according to the speed. The slower the speed you can tolerate, the lower your price. Conversely, if you want higher download speeds, you have to pay more. It makes perfect sense. Some customers want to stream movies and download huge files, while others are content with using email and search and reading things online. The more people that stream movies, the more capacity and bandwidth required. If everyone had to pay the same price, the non-streaming users would have to subsidize the streaming users. And if the price went up enough, many of the non-streamers would decide it is not worth that price to get the service, effectively pricing them out of the internet market.
The argument I hear that discounts my consumer analogy is that high bandwidth consumers are already paying more for their faster service. If ISPs charge content providers different prices for different speeds, the ISPs would be double dipping. That is one way to look at it, but by recognizing that streaming content providers are reaping value and therefore charging them accordingly, ISPs can avoid increasing prices to consumers. Ultimately, the more bandwidth is demanded, the more bandwidth must be built, and the ISPs will need profits to do that. Netflix, as an example, is generating huge income from their streaming services. It is worth it to them to pay more and ensure a higher level of service, although I am sure Netflix would appreciate a subsidy.
If we move away from the electronic spectrum and consider other businesses, they all work best by identifying needs of different segments of customers, creating offerings that address the needs of those segments, and setting prices that reflect the needs of and value provided to those segments. Companies and individuals can select different levels of services for employee benefits, and the monthly fees are higher for greater services. Even Obamacare offers bronze, silver, gold, and platinum service levels; and the fees increase for higher-service packages. Business credit reporting is available in a variety of packages with limited numbers of reports up to a subscription for all you can use. Fedex, UPS and the USPS all offer package delivery services that range from several days to overnight. Of course the overnight services have higher prices.
Perhaps I am cynical, but when politicians ask for net neutrality, I believe it is because their donors are looking for subsidies. The politicians say they are trying to preserve a level playing field, but whenever the government tries to control prices, one group has to subsidize another. In Obamacare, they recognized that young healthy consumers would not want to subsidize others and would not participate, so the law included penalties for those who do not buy insurance. Without those subsidies, the prices for everyone else would be too high. If prices are held down for everyone, the content providers get rich off their content, but the ISP providers don’t generate enough income to invest in more capacity, slowing down the growth of the internet for everyone. If prices were raised for everyone, the users who get marginal benefit would stop buying service completely, furthering their economic disadvantage versus the high-bandwidth users.
Net neutrality is counter to the principles and practices of nearly all competitive industries, and it is just bad economics.