A conversation about net neutrality

Professor of the practice in economics Michelle Connolly talks about the new FCC ruling, and what's next.

In February 2015, the Federal Communications Commission (FCC) re-classified broadband Internet as a Title II common carrier, meaning it prohibited Internet Service Providers (ISPs) from treating certain items differently from others—they couldn’t block, throttle, or prioritize content or traffic. This policy came to be known as “net neutrality.”

On December 14, the FCC, under a new chair, voted to reverse these regulations. To gain an understanding of what this new ruling means, staff writer Lucas Hubbard ’14 spoke with Professor of the Practice in economics and former chief economist of the FCC Michelle Connolly.

This conversation has been lightly edited and condensed for clarity.

Consumers and content providers have argued that net neutrality is essential to keeping the Internet open and fair; however, in 2015 you referred to the policy as “net neutering.” What did you mean by that?

The whole terming of “net neutrality” is really a marketing campaign, and it wasn’t about keeping things fair. It was essentially subsidizing very large content providers that were causing congestion and problems in terms of the amount of data they put through on the Internet Service Provider’s networks. This wasn’t about keeping things open; this was about preventing natural market mechanisms from occurring.

Let me give a parallel: No one says that the United States Postal Service can’t charge more for an overnight delivery or two-day delivery. It’s a different service, and you pay a different amount. But the net-neutrality concept says, “Oh no, it’s illegal to pay more for express delivery.”

With the Internet, you have these things called Content Delivery Networks (CDNs). When you’re using the Internet, you’re pulling information. And how far that information is from you affects the speed of how quickly you receive that information.

For some content, it doesn’t really matter all that much. But especially for content like video, or things that are big and where you want a high quality of delivery, what you can do is put content on these local (private firm) content delivery networks. And they hold your content closer to big consumer centers. If you’re asking to watch Netflix, the content might be on a content delivery network, so that when you pull it, it goes from there to your Internet Service Provider [ISP] to your TV/device. And if it’s close, you have a higher chance of getting it quickly.

If you think about that, well, that’s prioritized service. It’s not prioritized at the level of the ISP, but it is companies paying someone (in this case, content-delivery networks) to offer a prioritized, or at least faster, service to the consumer. That was considered perfectly legal under the old net-neutrality rules, but it wasn’t considered legal for ISPs to provide a similar type of service.

But there may be some services that require high-quality, guaranteed delivery of content. And for those companies, they need a priority lane. If an ISP can’t charge for a priority delivery, then that means everything is being treated in the same way, and in the same average way. Then when congestion occurs—if, say, you’re in the middle of [remotely controlled] heart surgery, but you get frozen because there’s too much congestion – sorry, you are out of luck.

So, when you don’t allow for any prioritized content, you’re actually blocking the development and sustainability of technologies that are evolving right now from being feasible, if they can’t guarantee their level of service. It’s an anti-competitive regulation in the sense that it blocks firms from being able to compete in certain dimensions.

Have you seen effects from the 2015 ruling that have concerned you?

One of the clear consequences of net neutrality ended up being a subsidy from ISPs and ultimately from consumers to really big content providers like Netflix and Hulu. In 2015, Netflix and YouTube alone were over 52 percent of data traffic on the Internet. Under the 2015 ruling, the cost of congestion from these services ends up being borne by the ISP, and some of that cost is passed on to the consumer. So that raises the price for the average consumer; and if you’re reducing profitability to ISPs, then in terms of additional investment, you should see a decrease in continued investment—both in terms of reaching out to new markets and in terms of improving qualities of existing markets.

And there’s been surprisingly strong data, starting from 2014 to 2016, around capital expenditures by the big ISP firms: Not only did they slow their rate of expenditures, but it actually fell. So at least at first pass, that looks like there was a definite response. In my lab at Duke, we’re going to look at that a little more carefully, because you want to control for everything else that was going on. This was not a recessionary period; there aren’t immediate things that would cause you to think it’s being influenced by something other than that regulation. But I want to be careful about assigning causality.

Assuming the December ruling survives the courts and Congress, what do you expect the new Internet will look like?

Well, net neutrality only came in two years ago. So I don’t think that the average consumer saw the Internet looking obviously different from what it was three years ago, and they’re not going to see anything looking obviously different now from what it was six months ago.

But what we will observe at the industry level is that this is likely to spur the ISPs to pick back up their investment levels—both in improving quality and in improving coverage, at least relative to where they would have been if we maintained net-neutrality rules.

The other marketing strategy people keep talking about with net neutrality is that this is somehow about free speech. And it really isn’t. No one was blocking or slowing content because they didn’t want the information provided in content to be suppressed. They were just saying, “Well, Netflix, if you’re causing congestion, we have two choices: We can slow your traffic, or you can pay us to develop priority lanes for you.” It wasn’t about blocking every Republican website or conversely, every Democratic website.

And this notion that you need to impose these economic regulations to avoid censorship—it’s like saying that on television you need to give free advertising, because if you don’t give it for free, then that’s censorship of speech. Free speech doesn’t really mean free broadband services, and that’s kind of what the net neutrality people are saying needs to hold in order to guarantee free speech.

Consumers do have a lot of fears of what ISPs will do under the new policy—raise rates, throttle and block content, suppress speech, and so forth. Why should users believe that this won’t happen?

Because that would be really bad economic decision-making on the part of the ISPs. There is more than one ISP. People can go around them, and if a consumer isn’t happy with what an ISP is doing, then they’re going to lose market share. It doesn’t make economic sense for these groups to behave in such a fashion.

The Internet will be more efficient and will work better. This [outrage] is really about unfounded fears. Really, it’s kind of the boogeyman. This is saying, “We’re afraid of this, and we’re going to impose all these costs.” Think about this: If ISPs aren’t investing in greater deployment, who’s that hurting? It’s hurting people in the areas who aren’t getting a second ISP, or maybe not even a first ISP. It’s hurting people who otherwise might receive higher quality of service and/or a lower average cost of service.

A common refrain from net-neutrality proponents is for broadband Internet access to be treated more like a utility, like water or electricity. Why do you think letting the open market operate makes more sense?

Well, it’s not a utility. A utility is a government-sponsored legal monopoly. Most of our markets are not in the monopolistic case; in fact, the FCC Open Internet Order recognized as much. They simply said that there are costs of switching between providers, and so we [the FCC] think of that as giving them some sort of monopoly power. But that’s not usually the standard for defining monopoly power.

If you think about the technological advances with wireless, we have not just fixed broadband but we have mobile broadband. When that’s occurring, you’re greatly increasing the number of competitors. The reality is that most of the United States population has two or more [ISPs]. If you think about it, all your old telephone companies can give you give Internet service and all your old cable companies can give you good, hard-wire stuff. So most of the population should have [at least] two. And the technology is pushing it where the amount of competition that’s going to be in this area is only going to be increasing, and it’s increasing pretty quickly. 

Most of these utility regulations were written in the 1934 act. So, putting these utility regulations from the 1930s onto a very high-tech industry that’s evolving, making drastic leaps every five years—I mean, our water service is not exactly an industry that’s changed. But the speed of innovation in this industry—and the value of the industry—means there’s huge incentives for firms to come in and compete. So I want them to be able to do that.

With this FCC ruling, are you happy with the state of the Internet going forward? Are there other reforms you would like to see implemented?

I’m very happy with this rollback. There are still basic concepts of protections of speech (legal content), so that’s not gone. What’s gone is trying to regulate this industry as if it were a utility, which makes no sense.

The only problem is that unless Congress steps in and says definitively the FCC should or should not be involved in regulating broadband, then every time there’s a political change, we risk having these ping-ponging regulations. And that uncertainty is bad for investment and innovation. It would be good if Congress could create more stability for the actors in this industry to know that—whatever the regulations are—they’re going to be something that you can count on for more than just one election cycle.


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