network owners, such as telephone and cable TV companies, be
required by law to treat everything sent on the Internet
"neutrally"? Until recently, this question was of interest only to
a few technology geeks, but in recent weeks it has been the subject
of intense debate from Capitol Hill to Silicon Valley.
The key issue is
how the bits of information that make up Internet transmissions are
handled. Traditionally, these bits have been transported on a
first-come, first-served basis. However, many broadband network
owners would like to manage this traffic more actively-for instance
by offering priority delivery, for a fee, to Web content providers
who want it.
Now Congress is
considering legislation to limit network owners' ability to offer
such differentiated service. Such "net neutrality" regulation would
be both unnecessary and harmful:
managing traffic flow, network owners could use scarce Internet
capacity more efficiently. At the same time, traffic fees
could spur some much-needed investment in broadband networks.
network owners would abuse their discretion by impeding or
even blocking services and Web sites that they disfavor are
unfounded. In today's competitive broadband market, network
abuse would quickly send consumers to another provider. Moreover,
if a network owner somehow does abuse its power, existing
competition law-with its decades of precedent-is more than
sufficient to address the problem.
regulation would hurt competition. If all providers were forced to
act alike, network owners' ability to distinguish their services
from one another-and smaller networks' ability to challenge
established rivals-would be reduced.
Imposing a new,
separate set of rules on the Internet would invite endless
uncertainty and litigation. Inevitably, regulators would be drawn
into years-long, lobbyist-driven policy quagmires as to
whether this or that action is allowed or banned and what prices
can be charged. This would be a bonanza for lobbyists and lawyers
but would hurt innovation, investment, and Internet users.
The basic idea of
net neutrality was formulated in the early days of the Internet as
an engineering concept often called the "end-to-end" principle.
This principle holds that the intelligence (i.e.,
functionality) of the Internet should be at the ends of the
network, where transmissions originate and are received. In between
should be only "dumb pipes" that transmit data without any
modification or prioritizing. This reduces the intermediate
processing that information undergoes, reducing complexity and
Some tout this
concept as the "First Amendment of the Internet." Aside from the
engineering involved, they argue that end-to-end has allowed
content providers almost complete flexibility in what services they
provide, with no need to be concerned about compatibility with
the networks that carry the data.
The principle is a
useful tool in many ways. However, it was never meant to be
inviolable. As explained in a seminal 1981 article, the end-to-end
argument was "not an absolute rule, but rather a guideline that
helps in application and protocol design analysis." Similarly, David
Reed, Jerome Saltzer, and David Clarke, the most frequently cited
early proponents of the end-to-end argument, wrote in 1998 that
"There are some situations where applying an end-to-end argument is
counterproductive" and that it should be applied on a
case-by-case basis. In other words, net neutrality is a useful
guideline, but not without exception.
concept was never enshrined into law. Long-haul Internet "backbone"
networks have never been regulated and in fact often negotiate
access on an individualized basis through private contract. The
shorter-haul networks of cable television companies, whose cable
modem services provide broadband connections to the majority of
residential users in the United States, also have never been
subject to legal restrictions on how they manage traffic (although
they have generally managed traffic without
the exception was telephone company broadband services
(digital subscriber line or DSL service). As regulated common
carriers, telephone companies for a long time were banned from
differentiating traffic in any way not specifically approved by
regulators. In August 2005, however, the Federal Communications
Commission (FCC) reclassified telephone companies' broadband
service from a "telecommunications service" to an "information
service." This change frees telephone companies' broadband networks
from common carrier and many other requirements, giving them the
same flexibility as cable firms and other broadband
The current debate
over neutrality regulation began in earnest several years ago.
Restrictions imposed on subscribers by several cable
companies, such as Cox Communications and AT&T, drove this
early interest. The restrictions ranged from bans on reselling
bandwidth to others to limits on how much a customer could
download per day. Because cable broadband service operates on a
shared basis-that is, the more bandwidth each subscriber uses, the
less is available for others- cable firms argued that these
restrictions were necessary to protect their customers.
concerns raised by these restrictions, then-FCC chairman
Michael Powell articulated four principles of neutrality,
calling them the "four freedoms" of the Internet. These were not
binding rules; rather, he "challenged" broadband providers to live
up to them. In August 2005, the FCC, by then under
Chairman Kevin Martin, adopted as policy a slightly revised version
of this statement. Specifically, it declared that consumers are
"to access the
lawful Internet content of their choice";
applications and use services of their choice, subject to the needs
of law enforcement";
their choice of legal devices that do not harm the network";
among network providers, application and content providers, and
statement, like Powell's, did not impose binding rules on network
owners. Instead, the FCC declared that it would incorporate the
principles into its "ongoing policymaking activities."
In recent months,
the net neutrality controversy shifted focus after several
major telephone companies announced their intentions to offer
priority service to content providers for a fee that would enable
these providers-such as Internet phone service operators, broadband
video providers, and others-to purchase express service.
priority services are not yet available, the telephone
companies' statements triggered significant opposition and a
renewed push for neutrality mandates. Supporters of these
mandates include many of the largest Internet content
providers, from Google and Microsoft to Yahoo! and Amazon.com. In
addition, a number of advocacy groups have organized an
intensive grassroots campaign in support of regulation.
pending in Congress would address net neutrality. Foremost among
them is H.R. 5252, the Communications Opportunity, Promotion, and
Enhancement Act of 2006, introduced by Representative Joe
Barton (R-TX), which was approved on April 26 by the House
Committee on Energy and Commerce. The bill's main thrust is to
streamline cable television franchising to speed
competition in that market. However, it includes a net
neutrality provision that would require the FCC to enforce its
currently non-binding statement of principles on net neutrality.
Furthermore, the legislation specifies that it must be
enforced via individual adjudications, prohibiting the FCC
from writing extensive new rules on the subject.
sponsored by Representative Edward Markey (D-MA), would regulate
broadband networks far more heavily. Based on amendments to
H.R. 5252 that were proposed and rejected in committee, the
bill would, among other things:
network owners from blocking, impairing, degrading, discriminating
against, or interfering with (1) subscribers' access to lawful
content, applications, and services or (2) subscribers' ability to
use any equipment that they choose to connect to the Internet,
provided that it does not damage the network or harm other
network owners from favoring their own traffic and services over
broadband links or in interconnection;
owners to offer service to unaffiliated content providers that is
equal in quality to the service that it provides for its own
for priority or enhanced service.
would be subject to a number of exceptions, including services
that would enhance computer security, parental controls, and cable
A third House
bill, S. 5417, sponsored by House Judiciary Committee Chairman
James Sensenbrenner (R-WI) and Ranking Member John Conyers
(D-MI), was approved by that committee on May 25. This bill
broadband network owners to provide other content providers
with network access equal to what they provide for their own
Require them to
interconnect to other networks on "reasonable and
impairing, discriminating against, or interfering with lawful
broadband network owners to allow customers to use any device to
connect to the Internet as long as it does not damage or degrade
others' ability to use the network; and
for priority or enhanced service.
In the Senate, Ron
Wyden (D-OR) has introduced a similar bill, S. 2360. This
legislation would completely ban charges to application and service
providers so that all fees for broadband would be paid directly by
consumers. It would also impose price controls on broadband owners,
requiring them to charge "just, reasonable and
Finally, in late
May, Senators Olympia Snowe (R- ME), Daniel Inouye (D-HI), and
Byron Dorgan (D- ND) introduced their own proposal, with
provisions largely similar to those of the Markey bill.
However, their bill would also require that Internet service be
offered on a "reasonable" as well as "nondiscriminatory"
basis, raising the prospect of price regulation.
consideration, net neutrality regulation sounds reasonable and
unobjectionable. After all, what could be wrong with requiring
neutrality? The answer is a lot, as it turns out. Not only is this
mandate unnecessary, but it also would be counterproductive by
harming consumers, discouraging investment, and even reducing
Growth. Supporters of net neutrality regulation often say that
their goal is to "save the Internet as we know it."
The reality, however, is that the Internet is constantly changing,
and for the better. More and more people are using the Internet for
more and more uses, straining the ability of the system to handle
the traffic. As Craig Moffett of Bernstein Research testified to
Congress last year:
critical, because despite a great deal of arm waving from
"visionaries," our telecommunications infrastructure is woefully
unprepared for widespread delivery of advanced services, especially
video, over the Internet. Downloading a single half hour TV show on
the web consumes more bandwidth than does receiving 200 emails a
day for a full year. Downloading a single high definition movie
consumes more bandwidth than does the downloading of 35,000 web
pages; it's the equivalent of downloading 2,300 songs over Apple's
iTunes web site. Today's networks simply aren't scaled for that.
How much will
Internet usage grow in coming years? Henry Kafka, BellSouth's chief
architect, estimates that the average residential broadband
subscriber today uses about two gigabytes of data per month.
But Internet-based television systems would consume 100 times as
much-some 224 gigabytes. Put the video into high-definition
format, and the average user would consume over one terabyte a
month. Overall, John Chambers, chief executive
officer of Cisco Systems, projects a fourfold to sixfold
increase in Internet traffic over the next decade.
Capacity. Given this expected growth, the first challenge for
network owners is to allocate capacity efficiently. As any
economist knows, first-come, first-served is a poor way to do this.
Treating all providers the same does not make sense when their
needs are different.
someone sending personal e-mail may be perfectly fine with an
occasional delay of a few seconds, that same delay would be
unacceptable in an Internet phone call. Such a delay could be
deadly if a hospital or health care provider was sending vital
medical information. "Fast-lane" service of the sort being
discussed by network owners addresses this problem by permitting
users to choose from among different service levels, at different
rates, based on their needs.
A concrete example
involves BellSouth, which earlier this year was reported to have
been in talks with MovieLink, which allows customers to
download movies from the Web. One of the biggest
challenges facing MovieLink is the time that it takes potential
customers to download movies at home. (This explains why Netflix,
which provides movies through the distinctly non-high-tech U.S.
mail, has been so successful.) Priority service would allow
MovieLink to compete more effectively with companies like
Netflix and high-speed piracy networks by ensuring shorter download
This is not a new
idea. In the non-Internet world, priority service is offered for
everything from package delivery to passenger trains to HOT (High
Occupancy Toll) lanes on freeways.
In fact, priority
fees are even being used by other Internet firms. Earlier this
year, AOL and Yahoo! announced that it would charge businesses a
fee to route their e-mails directly to user's mailboxes, without
passing through junk mail filters. (Ironically, Yahoo!
is a member of a coalition advocating net neutrality regulation.)
Yahoo! plans to offer a similar "certified e-mail" service for a
fee. In April, Yahoo! announced a deal with Research in Motion to
provide preferred access to Yahoo! services on BlackBerry wireless
Incentives. The second challenge for network owners is to
expand the overall capacity of the Internet. The costs
involved are huge. Verizon alone plans to spend $20 billion
over the next decade on its FiOS project to provide fiber-optic
connections to homes. As discussed above, this expansion and
more are needed to handle expected growth in Internet usage.
rules could put roadblocks in the way of raising the capital for
this new investment. The Wyden bill, for instance, would
impose price controls on the broadband industry, limiting revenue.
It would also explicitly ban charging any fees to application or
service providers. By banning fees for priority or enhanced
services, the Markey and Sensenbrenner-Conyers bills would also
impose significant barriers to investment.
Of course, the
prospect of such charges is a major reason that firms such as
Yahoo! and Google support regulation. Yet, because they are users
and beneficiaries of the investment, having them bear some of the
cost is hardly unreasonable. This is certainly no worse than
asking individual subscribers to pay.
priority service fees are not the only- or even the most
important-way that Internet content firms could help to provide
capital for Internet infrastructure investment. They could also
partner with network owners and invest directly in capacity
expansion. For instance, a content provider could finance a
certain network upgrade in return for priority treatment or first
rights to the added capacity.
neutrality rules could prohibit such arrangements even if the
content provider agrees to them. The Wyden bill would specifically
ban discrimination by the network owner in favor of "itself or
any other person." The Markey and Sensenbrenner-Conyers bills,
while not as clear, could also be read to bar certain types of
Innovation. Supporters of regulation argue that fees and other
investment arrangements would drive small Internet entrepreneurs
out of business, hurting competition and innovation, but this is
highly unlikely. Network owners themselves have every incentive to
encourage innovation on the Internet because they profit only if
the Internet prospers. Moreover, the availability of priority
services could be an opportunity for start-ups. New firms
typically need to differentiate themselves from their established
rivals, as well as to establish a good reputation with consumers.
The availability of priority service would provide a chance to do
both. That opportunity would not exist in a one-size-fits-all
start-ups have the cash to purchase priority service? Certainly,
many are cash-poor, but many are not, thanks to the strong market
for venture capital. Either way, why should entrepreneurs be
exempted from paying for this particular resource? No one would
argue that start-ups should be exempted from paying for other
resources, such as rent and equipment. In fact, many of the firms
arguing for regulation charge start-ups for services. For example,
it is unlikely that Google would post free ads, or that Amazon.com
would provide free books, for entrepreneurs.
Blocking, Bias, and
expressed fears that broadband network owners could abuse the
right to manage traffic on their systems by slowing or even
blocking services, such as Internet telephone service
providers and broadband video services, that compete with
them. Other firms could even pay them to slow down services offered
by their rivals.
Some have argued
that the lack of regulation threatens First Amendment freedoms,
saying that network owners could shut down Internet content with
which they disagree politically. Common Cause President Chellie
Pingree has even suggested that networks would shut down Web
sites of candidates with whom they disagree prior to an election.
however, are largely hypothetical. To date, the only instance
of Web site blocking in the U.S. occurred in 2005, when a small
telephone carrier in North Carolina briefly blocked Vonage, an
Internet phone carrier. In fact, all major network owners have
pledged not to engage in such practices.
carriers have the technical capacity to block or impede particular
services or Web sites, but they are hardly unique in that regard.
Many of the firms that advocate neutrality regulation have similar
abilities. For instance, Google could easily block or bias certain
search results to disadvantage rivals or to favor political
does not engage in systematic bias for the same reason that
network owners such as Verizon or Comcast do not: competition.
Blocking Web sites or impeding disfavored services would quickly
send customers packing to another provider.
Broadband Markets. Advocates of neutrality regulation
often dismiss the role of competition in broadband markets. In
fact, a perceived paucity of consumer choice is often cited as a
justification for regulation. However, competition
among broadband networks is quite strong and growing stronger.
telephone system of years past, there is no dominant provider of
broadband services. Nationally, cable television firms provide
the majority of broadband lines, followed closely by telecom firms
such as AT&T and Verizon. According to the most recent FCC
figures, cable firms provide 58.8 percent of high-speed lines, with
traditional telephone companies providing 38.8 percent. The
remainder is provided by firms using wireless technology,
satellites, and even power lines.
The same basic
structure is mirrored in local markets. According to the FCC, over
88 percent of ZIP codes in the United States have two or more
providers of high-speed service, almost 75 percent have three
or more, and 60 percent have four or more.
numbers, some have dismissed the broadband market as a "cozy
duopoly" because of the high market shares of the two leading
providers. However, this market structure-two major
competitors with a number of much smaller rivals-is similar to that
of many other industries in which competition is anything but cozy.
Coca-Cola and Pepsi-Cola, for instance, dominate the soft drink
market but compete intensively against one another, with several
smaller providers at their heels. Similarly, the supermarket
industry, one of the most competitive in the economy, features two
major supermarket chains in many cities, along with a number of
smaller players that often occupy specialized niches-such as club
purchases, organic and natural foods, and gourmet fare.
broadband, telephone and cable companies compete intensely against
each other for broadband customers on price and quality.
Importantly, this competition is not just in the broadband market
itself, but also in other related markets where the two industries
are rivals. For instance, using Internet-based telephony
technology, cable firms increasingly are challenging the
traditional telephone companies' share of that market. At the
same time, Verizon and AT&T are using their broadband networks
to enter video markets, challenging traditional cable
A bevy of smaller
providers also keep this market in check. Three firms provide
broadband service nationwide. Wireless broadband is available both
on mobile phones and via fixed systems. Access via Wi-Fi is growing
rapidly, as is WiMAX service, which covers larger ranges.
"Broadband over power line" service, which allows consumers to plug
into the Internet through home electrical outlets, is
beginning to be deployed. Not all of these technologies, because of
slower speeds or other limitations, are perfect substitutes for the
major services, but they do provide competitively significant
alternatives by providing niche or specialized services.
Of course, such
competition does not exist everywhere. Many areas are still served
by only one provider or no providers at all. As the FCC
pointed out in its 2005 decision deregulating telephone company
broadband services, an industry like this must be seen in dynamic
rather than static terms. The number of underserved areas is
shrinking each year, and the number with two or more providers is
growing. The technologies for delivering
broadband are changing rapidly as well. Many technologies that
have only minor market shares are expected to grow quickly. Given
this dynamism, it is too soon to write off any areas as not
potentially subject to competition.
Threatened by Regulation. Ironically, neutrality
regulation could hinder the growth of competition. The reason is
simple: By requiring all broadband networks to treat traffic in the
same way, regulation would make it more difficult for network
operators to differentiate themselves from the others. As a result,
broadband service would become much like a commodity
market, with all providers offering the same basic product. That
would favor the largest firms (i.e., those with the largest
economies of scale) and make it difficult for new challengers to
gain a foothold.
Yoo, an associate professor of law at Vanderbilt University, points
out, "it is not unusual for small-volume producers to survive
against their larger rivals even in the face of unexhausted
economies of scale by targeting those customers who place the
highest value on the particular types of products or services they
offer." For instance, specialty stores survive
and prosper despite the existence of one-stop-shopping stores with
high economies of scale.
several ways that network operators could differentiate their
networks in this way. A network might be optimized for conventional
e-mail or Web site browsing. One might focus on security features
to appeal to business users. Yet another could employ
prioritization techniques benefiting time-sensitive applications
such as Internet-based telephone service.
differentiation would mean that "[t]he network with the
largest number of customers need not enjoy a decisive price
advantage. Instead, each could survive by targeting and satisfying
those consumers who place the highest value on the types of
service they offer." Neutrality regulation would foreclose
regulation would lead to other problems as well. While the
various proposals differ in their specific standards, definitions,
and exceptions, all would invite protracted uncertainty and
litigation. Inevitably, regulators would be drawn into
years-long, lobbyist-driven policy quagmires as to whether this or
that action is allowed or banned and even what prices can be
inevitably judge what technologies are employed (Is it
neutral? How are the bits handled? Have they been modified?) and
how much is charged (Are variations justified? Is it reasonable?).
And the exceptions built into several bills for such things as
network security and parental control features would involve
regulators even more deeply in the details of managing a network:
Is a claimed security threat real? Is it substantial enough to
justify action? Is it irreparable? Is the action intended to
protect minors from inappropriate content, or is the intent
economic gain? The resulting litigation would be a bonanza for
lobbyists and lawyers at the expense of consumers and the Internet
relatively limited provisions in the Barton bill could raise
problems. For example, what does it mean to say that consumers are
"entitled to competition?" Does that give the FCC authority to
review business practices that injure competitors, to shield
competitors who are simply losing out in the marketplace, or to
limit low prices that competitors cannot match? In effect,
this provision would give the FCC a vaguely defined mandate to
regulate broadband networks. How that mandate would be used is
Special rules for
broadband are unnecessary. Competition serves to protect consumers
from potential abuses of discretion by network owners. Even if it
did not, new laws are not needed.
technology may be new, the competition policy questions surrounding
it are certainly not, and there is already a substantial body
of law in place to deal with just such issues: The nation's
antitrust laws define the basic ground rules for competition for
the vast majority of industries in the U.S. economy. Antitrust laws
are certainly not perfect; but as interpreted and reinterpreted in
thousands of cases over the past 100 years, competition laws
provide a comprehensive and well-established framework for
evaluating business practices. Net neutrality rules, by contrast,
would impose a special set of rules on broadband firms, based on
rigid, pre-conceived assumptions about how this market should
Under a 2004
Supreme Court decision, the antitrust laws do not currently
apply to regulated telecommunications services.
However, since the FCC now classifies broadband as an unregulated
information service rather than as a telecommunications
service, broadband is likely again subject to those laws (although
the issue has not yet been presented to the courts).
More broadly, the
FCC could also apply antitrust standards-if not the laws
themselves-to broadband and telecommunications services in lieu of
current regulations. Under a proposal developed by a working group
sponsored by the Progress and Freedom Foundation, FCC
regulation would be limited largely to enforcement of "unfair
competition" rules (e.g., the antitrust standard under which
the Federal Trade Commission now largely operates).
This proposal has been incorporated into S. 2113, sponsored by
Senator Jim DeMint (R-SC).
neutrality rules would impose comprehensive, unnecessary, and
harmful mandates on broadband networks. Such unnecessary
mandates-the most extensive regulation of the Internet ever
considered by Congress-would stymie the efficient use of
scarce Internet capacity, discourage investment, and even threaten
the growth of competition among broadband networks.
Despite the grim
scenarios painted by the supporters of regulation, there is
little or no evidence of market abuse by network owners. This is
for good reason: Today's broadband market is competitive, and
any network abusing its position would quickly lose customers.
Moreover, if any abuse does occur, existing competition law is more
than sufficient to address the problem.
neutrality regulation argue that the future of the Internet is at
issue in this debate. They are correct. This is why such regulation
of the Internet should be rejected.
James L. Gattuso is
Senior Research Fellow in Regulatory Policy in the Thomas A. Roe
Institute for Economic Policy Studies at The Heritage