Net Freedom Instead of Net Neutrality For a Successful Digital Market

Op-ed published on June 3, 2015, on the European Centre for International Political Economy (ECIPE) website.

The Digital Single Market (DSM) strategy for Europe includes several initiatives to be delivered by the end of 2016. Among them, an essential step is the adoption of the Telecoms Single Market package, which the European Commission expects will provide clear and harmonized rules for net neutrality. There has been much debate around this issue recently in Europe as well as in the United States.

Indeed, in the U.S., the Federal Communications Commission (FCC) has recently ruled in favour of net neutrality by reclassifying broadband Internet service as “common carrier.” At the European level, the issue is not settled yet, as the European Council up to now has left open the possibility for “providers of content to conclude agreements with providers of electronic communications to the public.”

This immediately created an uproar from many Members of the European Parliament who believe, like Dutch MEP Marietje Schaake, that “net neutrality is key to ensure that consumers are protected, innovative start-ups can develop and competition on the open internet is fair.”

That the issue is not settled yet is very good news because, contrary to what many seem to believe, the future and growth of the digital economy will not be made possible by nationalizing or socializing the Internet. And this is what net neutrality actually means. Indeed, its proponents think that Internet infrastructure should be a public commons accessible to all in the same uniform manner and with no pricing differentiation. This would be implemented either through government ownership or heavy regulation. For example, we should not allow Internet service providers to discriminate between websites or services on the Internet by offering different speeds or capacity in exchange for a fee.

However, restricting the ability of network owners to manage the infrastructure more efficiently through differentiated pricing solutions has no economic justification and would bring dire consequences. It would reduce incentives to invest in the infrastructure and lead to a waste of a scarce resource, in this case bandwidth.

First, net neutrality has it backwards. This is because it was never decreed that the Internet would become the marvel it is today. The Internet has evolved from pricey dial-up service paid for by the hour to broadband speeds hundreds of times faster and available at a fraction of the price. It all happened without any enforcement of net neutrality. The enormous leaps in technology that we have seen in recent decades were brought about by market competition and made possible by billions of euros in private investments. These have created the abundance we all take for granted today, while scarcity is the everyday battle networks have to fight in order to open the myriad new possibilities the Internet can offer. Adopting net neutrality would take us far from what made this progress possible because scarcity is part of the world we live in. This is a battle we must continue to win. It is the utmost reason that network management is needed.

Second, prohibiting Internet service providers from managing infrastructure or, more specifically, telling them precisely what they can do (as we still want them to manage and combat harmful intrusions and infections such as viruses, worms, malware, etc.) is more or less to consider them as “digital commons.” But the public utility model may not be the right one for broadband – for many reasons. In the words of James G. Lakely of the Heartland Institute, “The evidence clearly shows that broadband is not a candidate for public utility regulation of prices, terms and conditions.”

Broadband networks are actually very different from public utilities because they have been made available universally at reasonable price via telephone, cable, and satellite without the need for such regulation. Also, “conventional utilities are based on single-use facility, while broadband provider facilities are multi-use,” Mr. Lakely notes.

Another difference between the two types of networks is that utilities deliver uniform units such as electricity or gas, whereas broadband delivers variable units. It thus needs a different type of management. Besides, broadband consists of “smart” networks rather than “dumb” ones, as they “can detect when an edge connection is functioning or not, and can be managed to prioritize to help first responders in an emergency.”

There are other reasons for utilities and broadband to be regarded as different types of networks. For instance, broadband needs high investment both at the start and on a continuing basis, whereas heavy investment in utilities occurs mostly upfront.

All in all, it appears that the utility model cannot easily be applied to broadband networks. To try to regulate them in this way could be highly counterproductive: the key issue in broadband is innovation, adaptation and competition. This is how we can what it is capable of delivering, from remote surgery to e-learning, videos or web-conferences. For this to happen, providers must keep investing in their infrastructure, and they need the right incentives to do so.

The best way to fuel innovation is to allow consumers to choose the best technologies, voting with their pocketbooks every day in the marketplace. This is not to deny the need to consider transparency and censorship as genuine issues to be dealt with. However, they will be better solved by competition, consumer choice and public scrutiny.

Cécile Philippe is Director of the Institut économique Molinari.