finally a few words on "net neutrality"

So I've had several people ask me to comment on the recent joint proposal by Google and Verizon for the FCC to regulate broadband internet while leaving wireless internet essentially unchanged.  I have wanted to comment on so-called net neutrality for a while because in my opinion a lot of the talking points involving this issue are very abstract and have little connection to reality.  Moreover, I think the debate comes down to the same issue that many of our current problems unfortunately come down to: a large company tries to sell the public that a regulation is "for the common good," but in reality it is simply a way to strengthen their business model or bottom line.  And enter Google.

So what is net neutrality?  According to its most fervent supporters the idea is that no internet traffic should be discriminated against based on the user or type of information.  And anyone who believes in discrimination is evil.  Hence net neutrality is a good idea because discrimination is bad.  But in all reality discrimination can be highly beneficial with regards to internet traffic.  Broadband providers have extremely complex networks that send an unimaginable amount of data from literally billions of sources.  Some is email, some is video, some is porn.  In order to keep the network from being hogged or to prevent a few high bandwidth users from slowing the access of others, it is perfectly reasonable to allow the providers to discriminate in order to properly maintain their networks.

And what's more is that the end goal of net neutrality supporters, an internet where packets are effectively treated the same regardless of source, size or user, is essentially exactly how broadband internet operates right now.  The free market has provided their end goal.  Absent a few examples like when Comcast chose to block ports used by torrent websites (in order to prevent bandwidth hogs from distributing copyrighted material illegally) or forcing people who operate email servers to upgrade to a commercial subscription, there is no serious packet discrimination that net neutrality supporters can point to and say "This is wrong.  The consumer is being hurt."  The reason for this is obvious: its not an actual problem to begin with.  There is nothing inherently wrong with forcing someone who needs to use more bandwidth to pay more.  

And like I said, enter Google.  This is company who owns youtube, provides over 8 GB of storage to anyone who uses their email service and who major source of income is based on people looking at and clicking online ads.  They are not only a bandwidth hog, but their entire business model is based on generating large amounts of traffic.  They understandably see a move by the government in the name of stopping discrimination as a way to prevent them having to realize the true costs of their network usage, and it would prevent broadband providers from either charging them more for the right to the priority access or slowing Google's packets to prevent network congestion.  In effect, people who use less bandwidth would be subsidizing google.

Now at this point, the FCC decided to step in.  Although the D.C. Circuit Court of Appeals slapped down the FCC in April when it ruled the FCC didn't have the authority to impose its net neutrality rules on Comcast based on broadband's definition as an "information service" under the Telecommunications Act of 1996, the FCC decided to simply redefine broadband as a telecommunications service under the act, giving it ample authority to regulate.  In fact, by doing so the FCC would be allowed to impose as much regulation on broadband providers as telephone companies, which includes price controls, right of access rules, and the ability to force geographical divisions and terms of service on providers.  In other words, we are taking one of the few industries that has been left unregulated, and has hence lowered prices, improved speed/service, and has grown by leaps of bounds, and imposing the heavy hand of government in order to protect the market position of a large multinational corporation.  There is little doubt that the internet is one of the great success stories of the market policing itself, both on the content side and on the access side.  Yet, according to net neutrality supporters all hell is set to break loose if the government doesn't get in there and .... ? That's just it, there isn't anything they can point to.  If it's not broke don't fix it.  They are fighting imaginary battles against imaginary villains down the road.

So although I don't believe that there are many, if any, benefits that could be derived from the net neutrality framework, I do believe it could impose a large number of negative consequences on access, competition, market efficiency, and costs of internet access.  In short, I have three major objections to the proposed regulations:

1) Network neutrality regulations threaten to set a precedent for even more intrusive regulation of the Internet;
This one is pretty obvious.  Once the FCC get their greasy little paws on something and it starts believing that it is what it does, and not the work of entrepreneurs and capital stake holders, that makes the internet open, free, expansive and a source of growth, it will inevitably argue for more control.  Sure right now they are claiming that they will regulate with a "light touch" so as to provide maximum freedom from regulation, when something inevitably goes wrong they will of course argue that they could have prevented it only if they had been in control.  They will never claim that any of these future bad consequences were due in part to their own regulations becuase that never happens - I'm pretty sure that is some kind of GOP myth or something.  If we don't nip this in the butt now, don't blame me when your transactions on amazon will be subject to FCC approval in about 15 years in order to "prevent fraud" or some bullshit along those lines.  And don't forget that little old surcharge on you bill that pays this "protection money."  But don't worry it will be hidden so that you won't be too disturbed by it.  It will come in the form of higher prices for both services and access.

2) Imposing such regulation will chill investment in competitive networks (such as wireless) and deny network providers the ability to differentiate their services;
This one is also pretty obvious I think.  When the FCC comes in and begins to impose rules like how you can charge your customers, how much you can charge and the types of services you must provide it inevitably limits consumers choices.  This in turn limits innovation and in essence codifies a singular business model.  Additionally, as regulation becomes more and more complex, it makes it harder and harder for anyone other than large corporations from being able effectively navigate the regulation thickets.  Currently there is a lot of innovation in the internet subscription market; besides traditional cable broadband, where there can be multiple players in a single market, there is DSL, increasing wireless broadband penetration, fiber optic infrastructure and satellite internet.  These all provide competition and innovation, preventing the types abuses that net neutrality supporters so abhor.  There is also a large risk that the regulations could have the perverse effect of cementing broadband providers market positions, thereby lowering their incentive, and the incentives of others, to invest in these alternative infrastructures.  Lastly, I addressed the lack of ability to control and maintain network stability above.

3) Network neutrality regulations confuse the unregulated Internet with the highly regulated telecom lines that it has shared with voice and cable customers 
This is similar to my first argument, but I just want to add a few more points.  Traditionally broadband was provided by cable companies and shares the line with both cable TV and telephone service.  Both these are highly regulated both with regards to network penetration and content, especially cable TV.  Therefore I find it unwise to further blur the line of the two.  If the FCC can prevent obscenity from being sent on cable TV, why should they stop there and allow it for a different service running over the same line they they now are in charge of.  Now I believe that all of this censorship is fundamentally wrong, and that it should be completely abandoned, but at the very least we shouldn't impose these stupid rules of the internet as well.  Therefore we should keep them as segregated as possible, preventing the kinds of regulatory abuse described above.

At the end of the day, this whole issue comes down to one thing for me: crony capitalism.  Look at the Google-Verizon proposal.  They want to impose net neutrality rules on the broadband providers while leaving wireless completely unregulated.  This is because it fits their business models best this way.  By allowing google to profit from forcing network providers to treat its traffic the same regardless of the effects on the network, while still allowing Verizon to discriminate traffic on its wireless networks.  This allows Verizon, whose major partner on phones like its best selling Droid is Google, to discriminate based on the type of plan purchased, importance of the traffic and the type of traffic - everything it wants to prevent for broadband.  They should rename the proposed legislation the "Google-Verizon Promotion at the Expense of Evil Comcast and AT&T Act of 2010."  There is a solution, however, and it has been working great for two decades: let the consumers decide.  If they want better or prioritized service, they can pay more for it.  If they think a broadband internet provider is being to restrictive with their network, they can switch to a DSL or wireless provider.  This would allow the market to continue to police itself and would prevent the government from inching its way further into one of the truly free markets in our society.

the truth is big business loves obama

"I'm generally supportive [of the financial reform bill]. To be sure, there are details of it that I think I'm less sure of, but I think, on the whole, financial reform is, absolutely is essential and I will say that last week, in New York, I listened to a speech by Barack Obama at Wall Street, and one of the points he made resonated with me because I’d said it myself. He said that the biggest beneficiaries of reform will be Wall Street itself.” 

- Lloyd Blankfein, CEO Goldman Sachs (Homeland Security & Government Affairs, Permanent Subcommittee On Investigations, U.S. Senate, Hearing, 4/27/10)

"We continue to believe that comprehensive health care reform will benefit patients and the future of America. That’s why we have been involved in this important public policy debate for more than a year and why we support action by the House to approve the Senate-passed bill along with the amendments found in the reconciliation legislation."

- Official Statement of the Pharmaceutical Researchers and Manufacturers of America (PhRMA), is the largest single-industry lobbying group in America on 3/21/10 regarding Obamacare.

"Climate legislation is one of the critical issues that will be considered this year on Capitol Hill.  The House passed the Waxman-Markey legislation, a comprehensive, economy-wide bill [that] represents a moderate approach that was supported by a wide range of major American companies who make up the US Climate Action Partnership – including companies with a strong Indiana presence such as AES, Duke Energy, Alcoa, Dow, DuPont, GM, Ford, and Chrysler . . . Exelon has been preparing for a low-carbon future for the last decade. [We have] [s]old or closed most of our inefficient fossil fuel plants, [i]nvested billions in our fleet of 17 zero-emission nuclear reactors. In summer 2008 [we] released Exelon 2020, our plan to reduce, offset, or displace 15 million metric tons of greenhouse gas emissions per year, equal to our 2001 carbon footprint, by 2020. We are one-third of the way to our goal, and have a plan to accomplish the rest."

- John Rowe, CEO Exelon Energy (Indiana Council on World AffairsMarten House Hotel, Indianapolis 1/20/2010)

So if you listen to any cable news network or read most any paper all you here is how Obama is "anti-business" and that it is for this reason that the economy is slowly recovering.  Well that is only a half truth in my opinion.  I don't think Mr. Obama is anti-business per se, although I do believe that he is anti-market, which is actually profoundly worse than being anti-business.  The three quotes listed above are all attributable to big business heavyweights: Blankfein is for financial reform, the PhARMA lobby was all for Obamacare and Exelon, one of the largest power producers in the midwest and mid-atlantic (the coal region), wants nothing more than a full cap and trade system.  Does any of this make sense?  Why would a financial giant like Goldman Sachs want more financial regulation?  Why would a power company that produces a majority of its power on fossil fuels want to have the price of those fuels increased dramatically?  The answer is easy of course: they see a future with less competition.

Take financial reform for instance.  Now I understand and agree that any sound financial system must have rules of the road.  However, I firmly believe that the rules should be clear and must be debated before they are enacted.  This is the opposite of what occurred in the Dodd-Frank Bill. There are no new clear cut leverage requirements, there are no new clear prohibitions on proprietary trading.  There are just directives.  These directives either require or authorize incompetent agencies like the SEC to issue rules it thinks are appropriate.  In total the U.S. Chamber of Commerce estimates that Dodd-Frank authorizes a total of 533 rules to be written over the next few years.  Are some of these rules probably necessary?  Of course, but instead of being written by the Congress in the full purview of the electorate they are going to be written in closed door meetings were you need to pay to play.  I bet Mr. Blankfein knows this and is happy about it.  Few firms have the regulatory, compliance and lobbying staff to compete with Goldman Sachs when the task becomes influencing the inept government agents writing these rules.  They will invariably benefit the biggest and most connected of the banks at the expense of their smaller competitors, hence their support for financial reform.  

The same can be said about Exelon's desire for cap and trade.  As Mr. Rowe mentions in his speech, Exelon has been moving away from carbon based energy for years now.  Exelon is a Illinois based power producer and was a major contributor to Barack Obama.  Now they want their reward.  Instead of having to compete on a level playing field where consumer demand requires energy companies to be as efficient and cost-effective as possible, Exelon wants the Obama administration to price its competition out of the market.  It's whole business model over the past few years is that it is trying to get into a position of strength by lowering its carbon footprint ahead of the U.S. legislation so that it could put its boot on its competitors once their costs were artificially higher because of diktats from Washington.  Now that cap and trade seems dead that are literally shitting their pants and demanding even more intervention from Washington on their behalf.  Notice how the other companies named in Mr. Rowe's comment are all major corporations with huge lobbying arms.  Their support is predicated on the belief that they will be able to influence who gets "free credits" and what parts of industry will be "exempt."  That sure is one way to compete effectively.

What these examples show is that government intervention in the economy always produces winners and losers.  For the most part the interventions most favored by Mr. Obama undoubtedly favor the largest and most connected businesses in the industries affected.  Be it the hundreds of new rules in Dodd-Frank that have yet to be written or the onerous requirement that all business entities must now file a 1099 for every supplier with whom they purchase over $600 per year in goods (courtesy one of the many unread provisions in Obamacare), red tape and government regulation most favors the largest firms with large legal departments and the funds to spend on lobbying.  Small businesses, the real economic and job growth engines in our society, have neither of those advantages.  They are forced to play by the rules negotiated by their larger competitors.  Usually this is to their disadvantage.  These same small businesses are not hiring for this exact reason.  

There are three costs that almost all small businesses face regardless of their type of business: the must pay for energy, they must pay for credit, and they pay for health care for many of their workers.  Under Mr. Obama's polices the price for all three is going up.  Throw in the fact that tens, if not hundreds, of thousands of these small business owners, who are often organized into partnerships, limited liability companies or Subchapter S Corporations, are about to see their taxes increased at the end of the year, it is completely logical that they are not hiring or expanding.  The best thing Mr. Obama could do to help the businesses is to be "anti-business" and instead be "pro-market."  Let them compete effectively with their larger competitors and stop disadvantaging them by enacting "reforms" that put these competitors in a position to write the rules of the game.  These businesses don't want handouts and special privileges, just the opportunity to compete fairly and let the market decide who has the best product.