January 21, 2015
Greater regulation not necessary for Internet, Stanford public policy expert says
The historical record is a cautionary tale when it comes to net neutrality, according to Stanford economist Bruce M. Owen. Too much regulation, he says, may repeat a policy error that causes harm to consumers and fails to promote innovation and competition.
By Clifton B. Parker
Philadelphia protesters in September call for Federal Communications Commission regulation of Internet traffic to support net neutrality. (AP Photo / Matt Rourke)
The government should not impose new regulations on how broadband companies treat traffic on their networks, a Stanford economist says.
Bruce M. Owen, the Morris M. Doyle Centennial Professor in Public Policy, Emeritus, wrote in a new policy brief that the Internet should not be over-regulated. He cited calls for similar regulation for other industries – phone companies, railroads and trucking in the 19th and 20th centuries. The rail and trucking industries developed elaborate price discrimination schemes in response to government regulation.
"Such regulation in the past has caused more consumer harm than good, partly by enhancing industry influence on politicians and regulators, and partly by distorting prices and discouraging investment and innovation," said Owen, who studies telecommunications and mass media policies and is a senior fellow at the Stanford Institute for Economic Policy Research.
Owen was invited to testify on net neutrality before Congress in June 2014. The Federal Communications Commission may vote on new net neutrality rules in February. As Owen pointed out in his article, much of the net neutrality debate has focused on whether the FCC should reclassify broadband as a utility under Title II of the federal Telecommunications Act, which would open it up to much greater regulation. There are indications that the FCC is leaning toward doing so.
Net neutrality is the principle that Internet service providers do not have any stake in the information being passed through their wires. In other words, the speed at which users can access a certain website should not be faster or slower than access to another website.
Currently, broadband providers are not classified as "common carriers," like most utilities, Owen said. Common carriers are defined as services that are legally bound to cater to all, without discrimination, upon reasonable demand.
The 1934 Telecommunications Act gave the FCC broad powers to regulate telephone companies as common carriers. In 2002, however, the FCC defined broadband services as "information services," which are subject to fewer limitations.
"Put simply, many net neutrality proponents apparently propose that it should be unlawful to pay extra for faster or heavier transmissions, even if higher service quality costs more to provide," he wrote.
Ignoring past failures
In an interview, Owen said, "I think members of the general public who support net neutrality have no clear idea of the concept beyond wanting the government to prevent monopoly abuses and assure fairness."
As Owen said, some proponents of net neutrality argue that if there is an actual or potential market failure, government regulation will by definition make consumers better off.
"Sadly, our democratic system does not work that way. Imperfect regulation may easily be worse than imperfect competition."
Under net neutrality, Owen said, Internet service providers are unlikely to offer costly service improvements to anyone if they cannot recover the costs.
"At least on the surface, it seems that net neutrality would condemn all users to the same not-terrific and slow-to-improve service," he said.
By the end of the 20th century, Owen said, a broad consensus developed among economists that price regulation of industries was unlikely to improve consumer welfare.
"Maintaining efficient prices and providing incentives for progressive management of regulated firms rarely works," he wrote.
Producers vs. consumers
Owen said that this is partly because the political economy of regulatory interventions tends to favor producers, not consumers.
"Using Title II of the Communications Act to reach the goals of net neutrality (non-discrimination) requires price regulation of competing suppliers of Internet services," he added.
A focus on cable television companies as potential threats to Internet freedom is misguided, he said. The next generation of Internet access service has already arrived in the form of broadband mobile providers.
Access to Internet content, including video, is available increasingly, especially in urban areas, from three or four additional suppliers such as cell phone companies, according to Owen.
"To its credit, the FCC has been trying to support increased competition by reallocating spectrum from broadcast television to mobile services," he said.
Owen argues that such an industry with many competitors is likely to behave competitively and more efficiently – they will respond more ably to consumer needs and make better investments in new technologies that improve and expand service.
"An industry with this many competitors is unlikely to have its performance improved by regulatory interventions of the types associated with Title II regulation," he wrote.
Who would get hurt the most by net neutrality? The answer is consumers and innovation, according to Owen.
"The nearly universal history of common carrier regulation in this country is that it stifles competition and innovation," he said.
Barbara van Schewick, a professor at Stanford Law School and director of the Stanford Center for Internet and Society, has written on why the FCC should adopt net neutrality.
For more Stanford experts on commmunications law and other topics, visit Stanford Experts.