Eliminating net neutrality may be good for competition and consumers, economist says
CLEMSON — History shows the repeal of net neutrality — the FCC rule requiring internet providers to give equal access to content, regardless of the source — may benefit consumers in the end, said Clemson University economics professor Thomas Hazlett, who is a former chief economist for the FCC.
Hazlett, who now holds Clemson’s H.H. Macaulay Endowed Chair in Economics, likens the debate to the one surrounding the radio spectrum in the early 20th century. Broadband technology has taken government regulators by storm, much as radio did when entrepreneurs first started filling the airwaves with content.
The technology has moved so fast that it’s left government regulators in the dust, Hazlett explained during a chat in his Sirrine Hall office. There are floor-to-ceiling shelves of books on one wall of his office with a poster of radio frequencies next to a dry erase board scrawled with humorous messages from his daughters on another.
“We live in a rapidly evolving sea of communications,” he said. “These communications technologies have always had a social impact and controversy associated with them. Many of these issues have been with us for essentially 100 years.”
For example, the Radio Act of 1927 was the government’s attempt to partition the invisible, omnipresent waves on which electronic communication travels. As wireless technologies boomed prior to the act, the impact of the new media was controversial and regulation was sought by key interest groups — including incumbent policymakers and, most importantly, the broadcasting companies themselves. A political system for doling out radio spectrum was enacted that was often hostile to competition and innovation — and lasts to this day.
“No matter its infirmities, the spectrum allocation scheme was locked in,” writes Hazlett in his book, “The Political Spectrum: The Tumultuous Liberation of Wireless Technologies, from Herbert Hoover to the Smartphone” (Yale, 2017). “That these old institutions still today determine the bandwidth that wireless markets will have to work with is a crime against science. The 1927 regime is hugely over-restrictive, needlessly limiting economic efficiency and free speech. But it lives on. Some scholars call this path dependency. Incumbents and policymakers call it the public interest. Communications lawyers call it a living.”
In the days prior to the mass market internet, the U.S. government classified telecommunications services as public utilities and regulated them in ways similar to electricity, gas and the water providers. That regime loosened, however, permitting “information services” to compete without the old “common carrier” rules or restrictions. Through the 1980s, 1990s and 2000s, the new services blossomed and the broadband internet, along with deregulated mobile wireless, largely displaced traditional networks.
But several regulatory attempts were made, beginning in 2007, to re-impose common carrier regulations on broadband Internet Service Providers. The most recent, in April 2015, saw the FCC issuing its Open Internet Order, reclassifying broadband ISPs as public utilities. On Dec. 14, 2017, the FCC voted to repeal the main part of that 2015 order, although retaining its disclosure rules. The thinking was that it was important for regulators to ensure that subscribers understood the services that networks were supplying, while deregulating the “neutrality” regulations would spur competition among business models and enhance consumer interests.
Hazlett offered an example of how similar deregulation has benefited consumers in the past.
“When we took regulations off the fare-setting and competition rules for airlines, we very quickly got enormously more price reductions and utilization,” he said. “The standard empirical estimates in recent years show at least $20 billion a year in annual consumer savings are attributed to eliminating the regulations, and it hasn’t been a safety problem as some feared. Competition amongst the airlines has been a real boon.”
Similarly, added Hazlett, broadband communications have transitioned drastically from a situation 30 years ago where a government-sanctioned monopoly, AT&T, dominated the communications space.
“We do have much more robust competition and much more dynamic innovation — whether it be in fixed line, featuring rivalry between phone companies and cable operators and broadband suppliers, or in wireless between alternative mobile carriers.”
Common carrier rules were enacted to regulate the AT&T monopoly long ago, and were initially extended to telephone company networks offering DSL (digital subscriber lines) or fiber-to-the-home as the broadband era emerged. The rules tended to be problematic, said Hazlett, and it was seen that the less-regulated technologies moved faster, introducing advanced services more rapidly.
“The common carrier rules tended to be very staid, very rigid,” he explained. “And they protected incumbents, blocking industry disrupters. MCI — Microwave Communications Inc. — sought to attack the AT&T long distance wireline monopoly by going wireless in the early 1960s. But the FCC stood in their way even though a common carrier regime is ostensibly imposed to guarantee an open market.”
Hazlett says that in the ’70s, ’80s and ’90s, society benefited from the consensus that evolved, through Republican and Democratic administrations, shifting away from common carrier rules. Entrepreneurial technologies and business models were increasingly given free reign. Markets were transformed and whole new industries were unleashed.
“That is why we get the amazing mobile ecosystem that we have today,” he said. “There are literally millions of apps that now come into those telecommunications networks, but it’s important to understand that the transformation — from the black (only), rented (only) phones of the Ma Bell wired network to the iPhones and Android devices of today — did not come about because of common carrier rules, but by their repeal.”
Hazelett uses internet service provider America Online (AOL) as an example of this. AOL specialized in giving customers access to computer networks — what later called the internet. Regulators first mandated that Internet Service Providers (ISPs) like AOL did have to be common carriers and would have to pay taxes, fees, “access charges,” post tariffs (prices), submit to rate regulations and provide universal service. This effectively prohibited the new ISPs from becoming the startups that could compete with existing phone monopolies.
The FCC in the 1980s, however, eliminated such rules. ISPs were classified as “information services” and would not be regulated like phone companies.
“The result was amazing. AOL distributed hundreds of millions of trial disks for dial-up service, massively investing the next new big thing: the mass market internet,” Hazlett said. “The company was innovative, but it was not seen as slick, by the way: It was mocked by Silicon Valley as ‘your grandma’s internet.’ It was not cutting edge, but it was really easy to use, and it featured a ‘walled garden,’ in which AOL offered its subscribers proprietary services like ‘The Motley Fool’ and ‘Parent Soup,’ along with standard fare, like Rolling Stone or The New York Times, that AOL contracted to include via its portal. So you were paying a fee to AOL for an online experience and curated service.”
When rivals started developing independent internet content, AOL customers realized they didn’t have to stop in a walled garden to get to what they really wanted. Eventually, AOL just became a connection to cyberspace, and the rest is history, Hazlett said.
“Twenty years later we say, ‘I don’t care what content Comcast or Verizon has; I’m going to go online and go to the websites I like.’ That has not been forced by law. The legal change was a relaxation of the rules for common carriage so that AOL, and the ISPs to follow, could enter the market and and compete with the phone company without being one.”
Today, when people talk about wireless technology they talk about Apple, Google, Netflix and Amazon, and well they should, Hazlett said; but it’s notable that those companies are what’s called “edge providers.” In other words, they are not the companies that build and own the network infrastructures, i.e. the satellites, the towers, the transmitters, the land the towers sit on. Network operators such as Comcast, Verizon and T-Mobile sink tens of billions of dollars annually to provide information platforms; it is inherently an industry that will feature rivalry among a finite number of large systems. On the other hand, there are almost limitless opportunities for edge providers, and Hazlett said the markets have proven extremely dynamic.
“Many economists who have looked at this are skeptical that common carrier regulations for broadband networks would support innovation and competition better in the future than they have in the past,” Hazlett said. “In the general public discussion, you get the question of ‘Why should we trust Comcast or Verizon?’ and of course the answer to that is very simple: You shouldn’t trust them to act against their financial interests. But you shouldn’t blindly trust regulators, either. In general, we should aim for rules that give all parties, in the private and public sectors, the best incentives for achieving pro-consumer outcomes.”
In particular, policies can be enacted that enhance competitive forces. The U.S. government has a lot of allocated spectrum that is used very weakly, according to Hazlett, and we would enjoy far better wireless broadband — lower prices, better service, superior market choices — if more idle bandwidth was opened for productive use.
“In 1927, when Herbert Hoover was Secretary of Commerce, we saddled our wireless sector with an overly conservative spectrum allocation system. Regulators now concede this,” he explained. “But the bad incentives are baked into the system. Innovative policy strategies are needed to overcome the inertia and put reforms into the policy process that allow for more rivalry.”
At the end of “The Political Spectrum,” Hazlett opines that restrictions rooted in outdated regulations meant for terrestrial radio and television are keeping broadband markets from reaching their full potential:
“As the dreams of visionaries grow, the drag imposed by anticompetitive spectrum regulation becomes all the more damaging,” he writes. “Wireless is a key component of the drive for a better world, so it becomes increasingly curious that society would seek to slow its progress. Wireless technologies of freedom have opened up new vistas; we can see the future from here. The political spectrum ought to stop blocking the magnificent view.”
Hazlett joined Clemson’s John E. Walker School of Economics in 2014. He has held faculty positions at the University of California-Davis, Columbia University, the Wharton School of Business at Penn and George Mason University Law School. His other book credits include “The Fallacy of Net Neutrality” and “Public Policy Toward Cable Television.”