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A Magazine of Ideas

The Internet Doesn’t Need More Regulation

Tuesday, September 25, 2012

Two cases on data roaming and net neutrality deal with similar economic issues: Will more regulation improve the market for Internet-based communications?

Last Thursday, the D.C. Court of Appeals heard oral arguments on whether to uphold the Federal Communications Commission’s so-called “data roaming” rules, which would impose new open-access regulations on wireless broadband companies. The issues at bar—including whether imposing such a requirement on an Internet carrier amounts to “common carrier” regulation—are similar to the issues the court will face when it rules on the FCC’s net neutrality regulations next year. The economic issues in the two cases are also closely related: Simply put, will more regulation improve the market for Internet-based communications?

The case for a heavier government hand is grounded in the idea that the U.S. market for broadband services is insufficiently competitive. As a result, critics say, the United States is lagging behind the rest of the world, and broadband Internet Service Providers (ISPs) have incentives to discriminate against their competitors. But the facts don’t support either argument.

According to the National Telecommunications and Information Administration (NTIA), nearly nine out of ten U.S. households have a choice of fast broadband connections from at least two wireline broadband providers. Consumers clearly know they have choices: According to the FCC, one out of six switch companies every year, and 37 percent switch every three years. The numbers are even higher for wireless: Somewhere between a fifth and a third of all subscribers switch carriers every year. For context, that means consumers switch carriers about twice as often as they switch operating systems (e.g. from iPhone to Android or Windows).

Competition is intensifying with the rollout of 4G wireless networks, which are delivering speeds of up to 12 Mbps, fast enough to compete with landline connections.1 At least six major mobile providers are in the process of deploying such networks.

The fact that consumers can and do switch providers helps explain why ISPs are constantly upgrading their networks. According to the FCC, during the last year, “the actual increase in experienced speed by consumers was even greater than the increase in advertised speed—from 10.6 Mbps to 14.6 Mbps—an almost 38 percent improvement.” 2 The fact that consumers have choice is also evidenced by the fact that ISPs are among the biggest ad spenders. If you have heard the terms U-verse, Xfinity, and FiOS, it’s because AT&T, Comcast, and Verizon are all among the ten largest U.S. advertisers.

Supporters of the FCC’s rules are hard pressed to point to any actual examples of market failure.

What about the international comparisons you’ve read so much about? The facts are that there are more homes connected to optical fiber in the United States than any other Western country,  that the United States has the world’s largest and fastest cable modem networks, that the United States leads the world in the number of 3G wireless subscribers by a wide margin, and that nearly half of the world’s next generation wireless 4G subscribers are Americans. In short, the United States is a world leader on every front.

Critics like to draw comparisons with small, densely populated countries like Hong Kong and South Korea, where big government subsidies combined with low build-out costs led to early deployment of fiber networks. But that was then and this is now. According to recent testimony by FCC Chairman Julius Genachowski, more than 80 percent of U.S. households have access to 100 megabit or faster Internet connections (from the cable company, the telephone company, or both), a statistic which puts the United States “at or near the top of the world.”

The United States is also at or near the top when it comes to consumer satisfaction. According to the FCC, a remarkable 93 percent of U.S. consumers are satisfied with their home broadband service, and more than half are “very satisfied.” UK regulator OFCOM reports that more U.S. consumers are “very satisfied” with their fixed and mobile broadband providers than in any other country surveyed.

Supporters of the FCC’s rules are hard pressed to point to any actual examples of market failure. The major wireless companies had negotiated data roaming deals even before the FCC issued its new rules; and when it comes to net neutrality, the only example of an actual problem (a small North Carolina company temporarily blocked access to VoIP services) occurred more than seven years ago.

Value creation in the Internet ecosystem depends on firms working together to generate the products and services consumers want. Broadband networks are only valuable when combined with content, devices, applications, and other broadband networks. The more compelling these combinations of products are, and the more seamlessly they work together, the more people will sign up for broadband connections. Arguably the biggest development in the mobile broadband world this year is the release of the iPhone 5, which will dramatically increase the demand for the mobile carriers’ new LTE networks.

If you have heard the terms U-verse, Xfinity, and FiOS, it’s because AT&T, Comcast, and Verizon are all among the ten largest U.S. advertisers.

Handwringing aside, in the real world ISPs aren’t likely to discriminate, even against their competitors. Consider, for example, the success of Amazon, Hulu, iTunes, Netflix, and other over-the-top video distributors (OVDs). Despite the fact that these firms compete directly with ISPs (like Comcast and Verizon) for video revenues, their traffic continues to flow unimpeded over the Internet, and OVDs are growing by leaps and bounds. In November 2011 alone, 167 million unique online video viewers streamed 21.9 billion videos.

Open access is not the exception, it’s the rule: Broadband ISPs carry traffic that “competes” with their own products every day, from ring tones and music to map applications and online games. They do it for the same reason that Microsoft makes a version of Word that runs on Apple computers, and that text messages originating on iPhones can be read on devices that run on Android and Windows: Consumers expect it.

In its reply brief in the net neutrality case, the FCC claims the authority to engage in “prophylactic” regulation—as well it might, since it certainly hasn’t demonstrated the sort of market failure that would justify government intervention. To the contrary, the Internet marketplace has been working just fine without the FCC’s new rules, and it will continue to do so if the court wisely decides to strike them down.

Jeffrey Eisenach is a visiting scholar at the American Enterprise Institute and a managing director at Navigant Economics LLC. He sometimes consults for Internet and communications companies.

FURTHER READING: Eisenach also writes “Theories of Broadband Competition” and “The Role of Independent Contractors in the U.S. Economy.” Bret Swanson contributes “Obama Administration Snatching Defeat from the Jaws of Victory” and “Technology and the Growth Imperative.” Norman J. Ornstein says “Spectrum Auction Deal May Haunt Congress.” Nick Schulz adds “The Obama Administration Creates a New Political Market.”

1. See here and here.
2. “2012 Measuring Broadband America,” p.6. By comparison, in the United Kingdom, the average was only about half as fast, at 7.6 Mbps, and was increasing only about half as quickly (22 percent per year).

Image by Darren Wamboldt / Bergman Group