An Effective Referee for the Internet

The Internet is the model of a competitive market particularly because our referees have a narrowly defined and limited role. Let's keep it that way. We enjoy watching the competitors, not the referees.
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With football season upon us, we are reminded of what makes a competitive contest: clear rules, a level playing field and an effective referee. And we know what we want in a referee -- someone with a clearly and narrowly defined role, who intervenes only when necessary, calling penalties with discretion and without unduly slowing play, who allows the competitive contest to play out. That is an invaluable lesson for the Federal Communications Commission (FCC) as the agency considers new rules to preserve an open Internet.

The Internet has evolved as a model of competition and innovation, refereed by the strong hand of the consumer with little government micro-management. Some activists and industry lobbyists would like to change that and instead impose antiquated, telephone-type regulations that were created in the 1930s to the Internet. That would make the referee king, tossing out endless penalty flags, bringing wholesale regulation to the Internet for the first time.

These advocates want a stronger and more interventionist regulatory regime -- a game in which lawyers and lobbyists win, but consumers and innovators lose. Their public argument is that telephone regulations from 1934 will give the FCC a stronger legal footing to prevent Internet service providers (ISPs), like CenturyLink, from doing things like blocking competing services, degrading connections, and engaging in other anti-competitive activity. Despite there being no record of consumers being harmed by bad behavior, the netizens are charging down the court with their calls for regulating the Internet. Ironically, the very activists calling for such an approach also point out that the Internet is a "success today because it's open to anyone who has an idea." Then why would public utility regulation be necessary if success occurs without it?

What's being overlooked in the media hype is the impact this new regulatory regime will have on edge companies whose services will likely be subject to the same regulations applicable to the ISPs.

Consider the following. A company like Netflix, which interconnects directly with broadband Internet access service providers via its own facilities would very likely be considered a common carrier under the telephone regulations. This means they would have to contribute to federal subsidy programs like the universal service fund. When a search engine like Bing or Google connects an advertising network to a search request or effectuates a connection between a search user and an advertiser, the service would likely be deemed a telecommunications service, triggering a cascade of federal subsidy payments and reporting obligations. Further, such services may trigger limits on what sort of advertising and customer contact the search engine could engage in.

This would be like penalizing an interception with a pass interference.

Worse, telephone-like regulation applied to the Internet will stifle economic growth and innovation at a time when the U.S. cannot afford another economic slowdown. Don't take my word for it. In Europe, regulators applied a telephone-style regulatory structure to the Internet years ago, and they are now left with slower networks, less investment and more anemic competition. Only half of the households there can access 30 Mbps speeds -- well below U.S. norms -- and investment has retrenched as employment in the nine leading markets fell 26 percent. In yesterday's FCC open Internet roundtable Daniel Pataki, executive director of the European Telecommunications Network Operators Union, stated that "several studies show that Europe is lagging in broadband investment because of its regulatory regime."

Pataki spoke forcefully against Title II, saying, "you got it right, so don't spoil it." Pataki believes that "one of the pillars of U.S. success has been it's light regulatory touch."

The numbers support Pataki's statements. In the U.S., jobs supported by the broadband sector grew 40 percent as network builders invested approximately $50 billion per year to expand their infrastructure. That investment enables and supports innovations happening at the edge. As the White House explained in its report last year, the multibillion-dollar app economy is premised on robust, high-speed digital infrastructure and any regulations coming out of Washington that inhibit that ought to be shunned as the tech killers they are.

When the FCC last tried to apply telephone regulation to the Internet in 2010, the country witnessed a 9 percent drop in the market value of the four largest ISPs -- a contraction that served no purpose and jeopardized the sustained capital investment the country needs to support the tech innovations coming out of Silicon Valley.

Rather than taking on the role of the Internet's nanny, a wiser tactic would be to adopt an approach using the FCC's existing authority granted by Congress, which charges the FCC with:

"encourage[ing] the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans... by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment."

Under these powers, often referred to as those conferred by Section 706, the FCC can ensure non-discrimination and equal access as well as investment in high speed, digital infrastructure, without the boomerang on tech that applying telephone regulations would cause.

What would Internet in the U.S. look like under this approach for crafting new Open Internet rules? It would look essentially like it does today. The unfounded fears that are pushing us towards heavy-handed Internet regulation are simple fear-mongering. None of these worst-case scenarios have yet to materialize even though there have not been net neutrality rules on the books since they were struck down by the D.C. Circuit in January. The truth is that the FCC already has the tools to deal with potential market failures. Section 706, which was reauthorized by the Court in January, can protect the Internet of today without the pitfalls of overregulation. This path affords the FCC a variety of actions it can take, in conjunction with the backstop of antitrust laws that prevent anticompetitive behavior. If market failures present themselves, the FCC and antitrust enforcers can and should correct them.

We should continue the path first paved by the Clinton administration by using a flexible regulatory approach which is designed to stimulate ongoing innovation and investment while protecting customers from anticompetitive conduct. Changing course by adopting Title II would be akin to recklessly charging the field without considering where the other players are and how they have been playing. Worse, it would be adopting regulations meant for the static world of monopoly utilities, not the dynamic and fast changing world of Internet technology. Any pro athlete will tell you that you have to act according to the game that is actually happening, not the game you thought you could have before you got on the field.

The Internet is the model of a competitive market particularly because our referees have a narrowly defined and limited role. Let's keep it that way. We enjoy watching the competitors, not the referees.

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