President Obama has announced that the Federal Communications Commission should reclassify Internet service providers (like Comcast, Time Warner, and Google Fiber) from “information service” to “telecommunication service.” This would impose (among other changes) common carrier obligations, potentially transforming these companies into something more like a utility (like your local gas and electric company) than the competitive businesses you know today. The FCC is an independent agency, so Obama’s announcement isn’t policy, but of course the president’s words have weight and meaning.
Of course, some readers are already scoffing. “Competitive business? What competition? Most local Internet service provider (ISP) markets are one-provider affairs. There’s no competition from the user’s perspective.” That’s of course correct. I personally have the “choice” of Comcast or paying the same amount of money to AT&T for one-fifth the speed. Some choice, right? Real competition, eh? Hardly.
Precisely because many Americans are in the same situation as I, the suggestion that government will regulate these carriers for basic fairness and service non-discrimination has been met with a fair amount of cheer. Understandably so! The recent dust-up between Netflix and the ISP companies is fresh in everyone’s mind, and it seems patently unfair that a middle man (your Internet company) should choke off services consumers select (Netflix) to extract additional profit when the consumer has already paid for both the service (Netflix) and the freight (the cable bill). From the consumer’s point of view, it’s as if the U.S. Postal Service slowed delivery of Amazon’s boxes (despite postage already paid) until Amazon made an additional payment. It seems no better than banditry, or extortion, and refueled the raging net neutrality debate.
Obama’s announcement was not met with universal acclaim, however. Without going engaging in inflammatory rhetoric, there’s genuine concern that innovation will slow, or that once a local ISP becomes a regulated utility company, they’ll capture their regulators as surely as banks and phone companies have. I think both fears are well founded.
The Tug-of-War Between Universal Access and Low-Cost Innovation
Regarding innovation, let’s remember that the old AT&T monopoly was a regulated utility for decades and, while this resulted in the whole nation getting phone services, it also produced high prices and stagnant feature development for decades. Many of you reading this were probably born (or at least, made the majority of your phone calls) in the post-Ma Bell Era, so I’ll remind you that long-distance calling rates used to be quite expensive, and features like voicemail and three-way calling weren’t rolled out until governments unbundled the local phone loop and local phone companies had to compete for consumers’ business.
Competition and innovation is good. Having only one Internet utility (even if it acts as a common carrier) could produce a lack of discrimination in the present, but it could also produce a lack of innovation and feature development at the physical level of cables and switches. If we could prevent this latter problem, we should, right?
Another concern is that a single, regulated company could become a control point for the Federal Bureau of Investigation or the National Security Agency to easily spy on all Americans. I don’t think anyone reading this should take this civil liberties threat lightly. We all live in the post-Snowden era, and we see the headlines about how the FBI wants a back door into every phone and mobile device. The government does not prioritize our privacy. If we can arrange our affairs such that all Americans have a choice of ISP, and they can choose one that respects their privacy the most (within the law, but not an inch more), we should do that, right?
Competition between ISPs would have one further salutary effect, which brings us back to Netflix. If the average American had several ISPs to choose from, and switching between them was relatively painless, do you think those ISPs would intentionally degrade service to extract payments from Netflix or whomever? Not likely! They’d know that if they did this their customers would all just leave for the ISP that wasn’t. Market competition, when combined with clear consumer information and meaningful power to switch and choose, is both a source of discipline against bad behavior and an incentive to develop better service and greater features over time.
Is Internet Service a Natural Monopoly?
But can there actually be competition between ISPs, or is Internet service a natural monopoly? It seems like common sense that if someone is running a pipe to your house (whether that pipe is for cars—roads are sort of like a pipe—natural gas, water, sewage, telephone service, or electricity) it should be a single common form instead of installing two pipes and making them compete with each other. The basic logic of natural monopolies is that the “one pipe as common carrier” route is always more efficient.
However, let’s recall that one of those things I just mentioned (telephones) was successfully made competitive at one point. And it’s possible to make Internet service competitive. as well, without paying a significant penalty. The logic is as follows:
- The most significant source of Internet service deployment isn’t the wire, it’s securing the rights of way for poles and underground pipes, both in terms of monetary payments to the utility that owns them and the time required to seek approval.
- Wires and optical fiber are small. They’re not like a road or sewer where you can only fit one between houses.
- Wires and optical fibers are relatively cheap. They’re glass, copper, and plastic sheathing, sold by the kilometer.
- TCP/IP traffic (the computer protocol used to route Internet traffic) can route photons and electrons around obstacles much faster and more cheaply than physical commodities like water, trucks, gas, or sewage. This means Internet networks don’t need to be as efficiently laid out as a water main; they can wander a bit if necessary.
Taken together, the above points lead to a possible solution where competition between Internet networks provide the consumer protections we all crave, while keeping prices low and innovation high. However, it will be necessary to change the law to remove certain barriers to healthy competition.
When Google Fiber considers entering a new market, they provide a checklist to the cities that want their service. One of the three main points they emphasize is “access to infrastructure.” Putting up poles and buying rights of way is expensive, and it’s also unnecessary because local electric and telephone companies have already done this. If Google Fiber can run its cable over those poles (or through other conduits, depending on the exact nature of the local infrastructure), then deployment can happen quickly and cheaply, and residents gain access to 1 Gb/s Internet speeds for less than the price of a 50 Mb/s cable modem connection.
Local Monopolies Stroke Each Other and Hide Their Evil Effects
That’s a key part of what’s holding back American Internet deployment. Many suspect that the cable companies keep their pricing much higher than their costs, but few Americans realize that the cable companies can only get away with this because local utility companies are complicit in maintaining the sole Internet company’s local monopoly. Local utility companies, rather than acting as public servants, act as profit maximizers, and they enter into exclusive contracts with Comcast, Time Warner, or [insert your local ISP monopoly here] to get a cut of the monopoly profits said ISP extracts from the end users. Your local ISP/utility duo is no better than a police department that works with red light camera companies to increase ticket revenue (while making the roads less safe, to boot). Currently, utilities are not looking out for the public good—they’re just in it for the money and taking what they can get. They are betraying public trust.
My proposal for fixing these problems is fairly simple, and relies on a mix of civic organization and free-market entrepreneurialism. The goal is to break the current monopoly on ISP service held by local cable companies in most of America, force local utility companies to act in the public’s best interest, and bring some competition to the ISP business to keep prices low and innovation high.
Here it is.
Require utility companies to lease space on their rights-of-way to at least four ISPs, at cost.
Call it infrastructure neutrality, or open leasing. This proposal should independently provide most of the benefits in changing the Internet companies’ status to “telecommunications service,” as mere competition between local firms will discourage them from withholding any service or level of service offered by their local competitors. This competition would thus provide the consumer protections that voters are looking for, while allowing Internet companies to remain more lightly regulated (and thus more innovative) “information services.”
Americans should also demand this proposal over and above any requirement that existing local Internet companies unbundle their networks and allow competing Internet service companies to operate on top of their physical networks, as AOL and EarthLink operated on top of the phone networks back in the 1990s. Although an unbundled network would produce more competition on service than today’s Internet landscape, it would fail to produce the competition at the level of cables and switches that we need to update our aging infrastructure from copper and coax to fiber optics and whatever comes after that.
I have no doubt this suggestion will collect a lot of opposition, both from private-sector Internet companies and local governments. They both stand to lose a lot of money if Internet service becomes much cheaper. But the American people should not let that stop them. Existing Internet companies do not have a right to those profits, only the right to seek them and try to earn our business. And local governments and utilities, as stewards of our common spaces and public goods, should be seeking maximum utility for their citizens, not maximum revenue for themselves.