Net Neutrality: Pushing on Another Side of the Balloon

Yesterday I blogged on President Obama’s ill-conceived and statist call for the Federal Communications Commission (FCC) to regulate the Internet so as to prevent Internet Service Providers (ISPs), companies like Comcast, Time Warner, and AT&T, from charging differentially higher fees to Netflix, Amazon Prime, and other broadband “hogs” for subscribers’ access to online content. Here are some additional thoughts.

Because Google and other content providers will likely undermine the monopoly powers of today’s cable-based “gatekeepers” in the near future, it seems odd that “net neutrality” lately has become a clarion call of Barack Obama’s failed presidency. Moreover, the issue is hardly new.

The source of today’s online bottleneck can be traced back to local and regional government authorities, who quickly recognized the benefits (to them personally) of creating and granting exclusive franchises to one ISP that would, for the term of the contract, be a monopolist. (Government officials can extract more rents if they negotiate with only a handful of contestants.) Given that only one ISP would “win” the right to provide online content to local customers, the local monopolists also recognized a benefit of exclusive franchises: They would have the freedom to discriminate against some content suppliers by adding extra fees for privileged access.

So, a simple solution to the absence of net neutrality is readily available: Foster competition between ISPs.

Some people might raise the objection that, in this realm, robust competition for consumer dollars is unlikely because the suppliers of connections to the Internet are “natural monopolists”. In fact, ISPs are not “natural monopolists” as some commentators would have us believe. They are local government-granted monopolies. (Even Frederic Scherer, the author of the influential textbook Industrial Market Structure and Economic Performance, wrote that such claims of “natural monopoly” are “trumped up.”) Competition between ISPs nowadays is a contest for the favors of mayors and city councils who ultimately will determine who will win the exclusive franchise; it is not competition for the business of paying customers.

If public policy were to encourage competition between ISPs at the local level, the debate about net neutrality would die in short order because each of the rivals would have incentives to provide content at the lowest possible price.