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Regulating Our Way to Freedom?

From the Magazine: Thursday, January 8, 2009

A new Congress may be tempted to add a new layer of regulation to the Internet.

Information wants to be free, or so it is said. But information isn’t of much use unless people have access to it. And to Rep. Edward Markey (D-MA), the powerful chair of the House Subcommittee on Telecommunications and the Internet, the best way to insure that access is to add a new layer of regulation to the supreme purveyor of information, the Internet.

Earlier this year, Markey crafted a bill called (in the best Orwellian tradition) the Internet Freedom Preservation Act. And it offers some insight into how a post-election Congress may be inclined to take a far harder line on telecommunications regulation. For those of us who believe that the Internet has flourished largely because it is so lightly regulated, the prospect is more than a little disturbing.

So, what could be wrong with legislation that seeks “to maintain the freedom” to use the Internet “without unreasonable interference from or discrimination by network operators”?

Plenty, actually. The bill never identifies a problem worth fixing. And the fixes contemplated could slow the spectacular pace of innovation on the Internet that is revolutionizing industries from entertainment to software to healthcare.

But I get ahead of myself. Today, the market for Internet services is shaped by a 1996 law that aimed “to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies.” That broad language could be used to justify all manner of intervention. But, at least in the case of the Internet, the Federal Communications Commission has generally chosen to use it as a mandate for a light hand on the regulatory rudder.

By no coincidence, there is robust and growing competition in the market for Internet services, offering enormous flexibility to both users and suppliers of content. One key is the pace of expansion of broadband. Virtually the entire U.S. population lives in places in which some form of high-speed service is now available. In 2006 alone, the number of high-speed lines increased by 31 million. Meanwhile, the average price of service (adjusted for speed) has fallen significantly since 2001.

Of course, the telecommunications industry has consolidated over the last decade, and this is not necessarily a matter of indifference to policymakers. Indeed, concentration has in some cases given providers at least temporary capacity to exercise market power. But the impact of consolidation on service prices and quality has been limited because numerous providers do compete for customers in major population centers. And where there is little or no competition among providers, rapidly changing technology—remember that only yesterday DSL from the phone company was the only game in town—has undermined their ability to extract excess profits for very long.

It makes good economic sense to allow Internet service providers to experiment with pricing models that cover the costs of their multibillion-dollar infrastructure.

In any event, the Internet Freedom Preservation Act does not focus on classic antitrust concerns. It would, by contrast, ask the FCC to report on the merits of restricting prices that Internet providers could charge to distribute various sorts of content—in particular, limiting the networks’ discretion to practice what economists call price discrimination.

Yet, price discrimination has proved the key to increasing efficiency in industries like airlines in which huge investments must be recouped from a variety of sources with varying willingness (and ability) to pay. Business travelers get the frequency of service they value because airlines have the flexibility to fill otherwise empty seats with vacationers paying lower fares. General Electric pays less to fly than you or I because it is willing to commit to buying several thousand tickets from a single airline each month. In the same vein, it makes good economic sense to allow Internet service providers to experiment with pricing models that cover the costs of their multibillion-dollar infrastructure—say, by guaranteeing faster service (for a higher price) to banks processing credit card sales or TV networks streaming high-definition video.

The second kind of regulation contemplated in the Internet Freedom Preservation Act relates to “openness.” Openness requirements would mandate Internet service providers, including the owners of cell phone networks, to support a very broad range of applications and hardware. But there’s no cheap lunch to be had here: Someone must pay to assure that networks have the capacity and flexibility to serve functions that don’t pay for themselves. If, for example, wireless companies are forced to allow Skype to make voice-over-Internet-protocol phone calls on their networks, then somebody will have to pay more to cover the costs of sustaining the network.

The Internet is special, and the appeal of easy access to it goes way beyond convenience. As countless sellers have discovered, the Internet is a bulwark of economic competition because it expands markets to encompass the whole world. And as the masters of authoritarian states from Syria to China understand very well, the Internet is a bulwark of liberty because it makes it so difficult to hide information.

Government plainly has a role to play in maximizing the societal value of the Internet, just as it has a role in keeping free markets free. What’s more, that role is likely to change with time and circumstance. But Rep. Markey and others who are eager to tinker with the rules would be wise to remember that the regulators did not create the Internet as we know it.

And there is no reason to believe that more regulation in the name of assuring freedom will make it better.

Robert Hahn is the founding director of the RegMarkets Center and a senior fellow at the American Enterprise Institute.

Photo Illustration by Matt Selva. 

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