For 20 years, network neutrality — the idea that nobody controlled free open and nondiscriminatory access to the Internet — was the unwritten rule, and all Internet Service Providers, such as AT&T, Verizon (VZ) and Comcast (CMCSA), adhered to it. Last week, the Federal Communications Commission (FCC) formalized the non-discrimination tradition on the Internet and preserved net neutrality. This is good news to ensure that the Internet remains a free market for innovation and provides consumers with unbiased choices when it comes to content.
Traditionally, telecommunications services are strictly regulated. However, despite the fact that the Internet provides digital telecommunications services, in 2004 the FCC categorized it as providing “information services.” This implied ‘light’ regulation and prompted AT&T (T ) in 2005 to demand payment from content and applications companies to access AT&T’s customers. In return, AT&T offered to prioritize the content of whoever paid and delivered it before the content of others.
For example, if Microsoft (MSFT) paid AT&T, AT&T would show the Bing search results to AT&T customers before the results from Google (GOOG). That could result in significant distortions in the Internet search market and allow AT&T to determine the winner in that market. If the Wall Street Journal paid for prioritization but the New York Times did not, AT&T’s violation of network neutrality could determine the winner in the competition among newspapers, and similarly for other markets.
You might reasonably ask, why does competition not fix this problem? Why do we need regulation? The answer is simple. There is not enough competition among Internet service providers: typically, residential customers have only two providers. Additionally, it is not easy to switch providers especially because they offer bundles with other services such as telecom and video. Finally, practically all the major telecom and cable TV companies have stated that, if left unregulated, they would introduce paid prioritization and violate network neutrality. Without the protection of network neutrality, consumers will have fewer choices in content, video and telephone services carried over the Internet.
But the biggest consequence would be slowing innovation. New innovative companies that “live” on the Internet rely on a level competitive playing field. While Google or Microsoft could afford an Internet tax charged by telecom and cable companies for preferential treatment, the “next Google” won’t be able to afford the payments demanded by telecom and cable.
One can understand the frustration of telecom and cable TV companies. Tremendous wealth is generated by information packets flowing through their lines, but most of that “Internet gold” flows right past them to content providers and consumers. Even worse, traditional phone services are provided through the Internet by Voice-Over-The Internet services and Skype, and bandwidth-heavy television shows can be downloaded over the Internet. These services directly compete with telecom and cable TV companies and give incentives to them to slow down competing services. Here, strict network neutrality regulation ensures competition is on equal footing.
Violation of network neutrality would allow telecom and cable TV companies to defend their products and profits more effectively. But the discrimination these companies proposed in violation of network neutrality would have been devastating for innovation and choice.
So kudos to the FCC for protecting consumers and innovation.
Nicholas Economides is an economics professor at New York University Stern School of Business.