The Case for Net Neutrality

For all the withering criticism leveled at the White House for its botched rollout of HealthCare.gov, that debacle is not the biggest technology-related failure of Barack Obama’s presidency. That inauspicious distinction belongs to his administration’s incompetence in another area: reneging on Obama’s signature pledge to ensure “net neutrality,” the straightforward but powerful idea that Internet service providers (ISPs) should treat all traffic that goes through their networks the same. Net neutrality holds that ISPs shouldn’t offer preferential treatment to some websites over others or charge some companies arbitrary fees to reach users. By this logic, AT&T, for example, shouldn’t be allowed to grant iTunes Radio a special “fast lane” for its data while forcing Spotify to make do with choppier service.

On the campaign trail in 2007, Obama called himself “a strong supporter of net neutrality” and promised that under his administration, the Federal Communications Commission would defend that principle. But in the last few months, his FCC appears to have given up on the goal of maintaining an open Internet. This past January, a U.S. federal appeals court, in a case brought by Verizon, struck down the net neutrality rules adopted by the FCC in 2010, which came close to fulfilling Obama’s pledge despite a few loopholes. Shortly after the court’s decision, Netflix was reportedly forced to pay Comcast tens of millions of dollars per year to ensure that Netflix users who connect to the Internet through Comcast could stream movies reliably; Apple reportedly entered into its own negotiations with Comcast to secure its own special treatment. Sensing an opening, AT&T and Verizon filed legal documents urging the FCC to allow them to set up a new pricing scheme in which they could charge every website a different price for such special treatment.

Obama wasn’t responsible for the court’s decision, but in late April, the administration signaled that it would reverse course on net neutrality and give ISPs just what they wanted. FCC Chair Tom Wheeler circulated a proposal to the FCC’s four other commissioners, two Democrats and two Republicans, for rules that would allow broadband providers to charge content providers for faster, smoother service. The proposal would also authorize ISPs to make exclusive deals with particular providers, so that PayPal could be the official payment processor for Verizon, for example, or Amazon Prime could be the official video provider for Time Warner Cable.

Word of the proposal leaked to the press and sparked an immediate backlash. One hundred and fifty leading technology companies, including Amazon, Microsoft, and Kickstarter, sent a letter to the FCC calling the plan a “grave threat to the Internet.” In their own letter to the FCC, over 100 of the nation’s leading venture capital investors wrote that the proposal, if adopted as law, would “stifle innovation,” since many start-ups and entrepreneurs wouldn’t be able to afford to access a fast lane. Activist groups organized protests outside the FCC’s headquarters in Washington and accused Wheeler, a former lobbyist for both the cable and the wireless industries, of favoring his old clients over the public interest. Nonetheless, on May 15, the FCC released its official proposal, concluding tentatively that it could authorize fast lanes and slow lanes on the Internet. Although the FCC is now officially gathering feedback on that proposal, it has promised to adopt a final rule by the end of this year.

Despite the missteps so far, the administration still has a second chance to fix its Internet policy, just as it did with HealthCare.gov. Preferably working with policymakers of all stripes supportive of open markets, it should ensure that the FCC adopts rules that maintain the Internet as basic infrastructure that can be used by entrepreneurs, businesses, and average citizens alike -- not a limited service controlled by a few large corporations. In the arcane world of federal administrative agencies, that guarantee comes down to whether the FCC adopts rules that rely on flimsy legal grounds, as it has in the past, or ones that rely on the solid foundation of its main regulatory authority over “common carriers,” the legal term the U.S. government uses to describe firms that transport people, goods, or messages for a fee, such as trains and telephone companies. In 1910, Congress designated telephone wires as a common carrier service and decreed that the federal government should regulate electronic information traveling over wires in the same way that it regulated the movement of goods and passengers on railroads across state lines through the now defunct Interstate Commerce Commission, which meant that Congress could prevent companies from engaging in discrimination and charging unreasonable access fees. When the FCC was created in 1934 by the Communications Act, those common carrier rules were entrusted to it through a section of the law known as Title II. Today, the broadband wires and networks on which the Internet relies are the modern-day equivalent of these phone lines, and they should be regulated as such: like telephone companies before them, ISPs should be considered common carriers. This classification is crucial to protecting the Internet as public infrastructure that users can access equally, whether they run a multinational corporation or write a political blog.

However, in 2002, Michael Powell, then chair of the FCC, classified ISPs not as common carriers but as “an information service,” which has handicapped the FCC’s ability to enforce net neutrality and regulate ISPs ever since. If ISPs are not reclassified as common carriers, Internet infrastructure will suffer. By authorizing payments for fast lanes, the FCC will encourage ISPs to cater to those customers able and willing to pay a premium, at the expense of upgrading infrastructure for those in the slow lanes.

The stakes for the U.S. economy are high: failing to ban ISPs from discriminating against companies would make it harder for tech entrepreneurs to compete, because the costs of entry would rise and ISPs could seek to hobble service for competitors unwilling or unable to pay special access fees. Foreign countries would likely follow Washington’s lead, enacting protectionist measures that would close off foreign markets to U.S. companies. But the harm would extend even further. Given how much the Internet has woven itself into every aspect of daily life, the laws governing it shape economic and political decisions around the world and affect every industry, almost every business, and billions of people. If the Obama administration fails to reverse course on net neutrality, the Internet could turn into a patchwork of fiefdoms, with untold ripple effects.

INNOVATION SUPERHIGHWAY

Net neutrality is not some esoteric concern; it has been a major contributor to the success of the Internet economy. Unlike in the late 1990s, when users accessed relatively hived-off areas of cyberspace through slow dial-up connections, the Internet is now defined by integration. The credit for this improvement goes to high-speed connections, cellular networks, and short-distance wireless technologies such as WiFi and Bluetooth, which have allowed companies large and small -- from Google to Etsy -- to link up computers, smartphones, tablets, and wearable electronics. But all this integration has relied on a critical feature of the global Internet: no one needs permission from anyone to do anything.

Historically, ISPs have acted as gateways to all the wonderful (or not so wonderful) things connected to the Internet. But they have not acted as gatekeepers, determining which files and servers should load better or worse. From day one, the Internet was a public square, and the providers merely connected everyone, rather than regulating who spoke with whom. That allowed the Internet to evolve into a form of basic infrastructure, used by over a billion people today.

The Internet’s openness has radically transformed all kinds of industries, from food delivery to finance, by lowering the barriers to entry. It has allowed a few bright engineers or students with an idea to launch a business that would be immediately available all over the world to over a billion potential customers. Start-ups don’t need the leverage and bank accounts of Apple or Google to get reliable service to reach their users. In fact, historically, they have not paid any arbitrary fees to providers to reach users. Their costs often involve nothing more than hard work, inexpensive cloud computing tools, and off-the-shelf laptops and mobile devices, which are getting more powerful and cheaper by the day. As Marc Andreessen, a co-founder of Netscape and a venture capitalist, has pointed out, the cost of running a basic Internet application fell from $150,000 a month in 2000 to $1,500 a month in 2011. It continues to fall.

In some ways, the Internet is just the latest and perhaps most impressive of what economists call “general-purpose technologies,” from the steam engine to the electricity grid, all of which, since their inception, have had a massively disproportionate impact on innovation and economic growth. In a 2012 report, the Boston Consulting Group found that the Internet economy accounted for 4.1 percent (about $2.3 trillion) of GDP in the G-20 countries in 2010. If the Internet were a national economy, the report noted, it would be among the five largest in the world, ahead of Germany. And a 2013 Kauffman Foundation report showed that in the previous three decades, the high-tech sector was 23 percent more likely, and the information technology sector 48 percent more likely, to give birth to new businesses than the private sector overall.

That growth, impressive as it is, could be just the beginning, as everyday objects, such as household devices and cars, go online as part of “the Internet of Things.” John Chambers, the CEO of Cisco Systems, has predicted that the Internet of Things could create a $19 trillion market in the near future. Mobile-based markets will only expand, too; the Boston Consulting Group projects that mobile devices will account for four out of five broadband connections by 2016.

NOT NEUTRALITY

All this innovation has taken place without the permission of ISPs. But that could change as net neutrality comes under threat. ISPs have consistently maintained that net neutrality is a solution in search of a problem, but this often-repeated phrase is simply wrong. In the United States, both small and large providers have already violated the very principles that net neutrality is designed to protect. Ever since 2005, the FCC has pursued a policy that resembles net neutrality but that allows enough room for interpretation for firms to find ways to undermine it. From 2005 to 2008, the largest ISP in the United States, Comcast, used technologies that monitor all the data coming from users to secretly block so-called peer-to-peer technologies, such as BitTorrent and Gnutella. These tools are popular for streaming online TV (sometimes illegally), using cloud-based storage and sharing services such as those provided by Amazon, and communicating through online phone services such as Skype. In 2005, a small ISP in North Carolina called Madison River Communications blocked Vonage, a company that allows customers to make cheap domestic and international telephone calls over the Internet. From 2007 to 2009, AT&T’s contract with Apple required the latter to block Skype and other competing phone services on the iPhone, so that customers could not use them when connected to a cellular network. From 2011 to 2013, AT&T, Sprint, and Verizon blocked all the functionality of Google Wallet, a mobile payment system, on Google Nexus smartphones, likely because all three providers are part of a competing joint venture called Isis.

In the EU, widespread violations of net neutrality affect at least one in five users, according to a 2012 report from the Body of European Regulators for Electronic Communications. Restrictions affect everything from online phone services and peer-to-peer technologies to gaming applications and e-mail. In 2011, the Netherlands’ dominant mobile carrier, KPN, saw that its text-messaging revenue was plummeting and made moves to block applications such as WhatsApp and Skype, which allow users to send free texts. Across the Atlantic, in 2005, the Canadian telecommunications company Telus used its control of the wires to block the website of a union member taking part in a strike against the company.

Opponents of net neutrality insist that efforts to enforce it are unnecessary, because market competition will ensure that companies act in their customers’ best interests. But true competition doesn’t exist among ISPs. In the United States, local cable monopolies are often the only game in town when it comes to high-speed access and usually control over two-thirds of the market. In places where there are real options, users rarely switch services because of the penalties that providers charge them for terminating their contracts early.

Some skeptics of strong regulation have proposed rules requiring companies merely to disclose their technical discrimination policies, but those wouldn’t solve the problem either. Even in the United Kingdom, which boasts both healthy competition among ISPs and robust disclosure laws, companies still frequently discriminate against various types of Internet traffic. Indeed, wherever you look, the absence of rules enforcing net neutrality virtually guarantees that someone will violate the principle. As it stands now, after the FCC’s rules were struck down in January, U.S. law does little to protect net neutrality. As companies push the boundaries, violations will become more common -- and not just in the United States.

If the FCC doesn’t rein in U.S. ISPs, there is likely to be a domino effect abroad. Some foreign officials view the net neutrality movement as nothing more than an attempt to protect U.S. technology companies, since given their size, they are the main beneficiaries of net neutrality abroad. (Twitter, for example, does well in foreign markets only where the government doesn’t block it and carriers don’t charge extra for it.) Foreign ISPs have long hoped to exclude U.S. companies from their markets or at least charge them for access, and if U.S. providers are allowed to play similar games in the United States, it will give foreign governments the perfect excuse to give their ISPs what they want. Similarly, if the U.S. government continues to allow American ISPs to block or charge foreign technology companies, such as Spotify, which is based in Sweden, then sooner or later, other countries are likely to retaliate by giving their own providers a similar right. The result would be a global patchwork of fees and discriminatory rules.

Another danger is that if the Internet becomes less open in the United States, some forward-thinking foreign governments could enhance their net neutrality protections as a way of luring U.S. entrepreneurs and engineers to move abroad. Soon after the U.S. federal appeals court struck down the FCC’s net neutrality rules in January, Neelie Kroes, a vice president of the EU Commission who is responsible for its digital agenda, asked on Twitter if she should “invite newly disadvantaged US startups to [the] EU, so they have a fair chance.” By early April, the European Parliament had adopted tough net neutrality rules. Likewise, Chile, the first nation to adopt net neutrality rules, in 2010, has sought to attract global entrepreneurs through a government initiative called Start-Up Chile, which has invested millions of dollars in hundreds of foreign technology companies, most of which hail from the United States.

LIFE IN THE SLOW LAND

Imagine if, years ago, MySpace had cut deals with cable and phone companies to block Facebook, if Lycos had colluded with AltaVista to crush Google, if Microsoft had contracted with service providers to protect Internet Explorer by blocking Mozilla Firefox. If ISPs are allowed to block, discriminate, and charge for different applications, such scenarios could become commonplace. The main reason they have not been is because the FCC, in 2005, stated that Internet access should be “operated in a neutral manner” and subsequently stepped in a few times to enforce that policy: against Madison River Communications regarding Vonage, against Comcast regarding peer-to-peer services, and against AT&T and Apple regarding Skype. The enforcement has not been completely consistent -- in-store payments from Google Wallet are still being blocked on AT&T’s, Verizon’s, and T-Mobile’s wireless networks -- but it has still largely succeeded in imposing some discipline on the market.

Without that FCC regulation, the Internet would have come to look very different than it does today -- a lot more like the cable industry, in fact. For decades, cable companies, such as Comcast and Time Warner Cable, and satellite TV providers, such as DirecTV, have acquired equity stakes in channels as part of their carriage deals. That arrangement has resulted in disputes over price tiers, with smaller channels claiming they get put into more expensive, limited service packages than a cable company’s own channels. In a lengthy dispute with Comcast, for example, the independently owned Tennis Channel argued that it should be placed in the same basic service package as the Golf Channel and the NBC Sports Network, two sports channels that Comcast owns and provides to all its subscribers. In May 2013, a U.S. federal appeals court ruled in Comcast’s favor; the Tennis Channel appealed to the Supreme Court, which in February declined to hear the case. Internet companies have never had to give up equity stakes as part of service deals to reach users or had to compete with firms that are owned by ISPs and thus given preferential treatment. And most of them would have run out of funding during the years of litigation if they had taken legal action like the Tennis Channel has.

A scenario in which websites have to acquiesce to ISPs in order to secure competitive access to the Internet would kill innovation. Small companies would no longer be able to reach every segment of the market at no extra cost. A new company’s rivals, if they could afford it, would be able to pay for better service, thereby reducing consumers’ choices. Many start-ups would be unable to pay expensive access fees and would simply not start up in the first place. Investors would end up putting larger sums in fewer companies, and with no clear limit on how much ISPs could charge, the potential rewards from successful investments might be smaller and would certainly be more uncertain than they are today.

It is unrealistic to expect competition among ISPs to prevent or limit such fees; it hasn’t done so in the United Kingdom and other European markets. Nor can one argue that ISPs need the money. They already enjoy comically high profit margins on broadband delivery, and their operating costs continue to decrease. In weighing the potential damage to entrepreneurship against the financial gains of a few huge telecommunications companies, the U.S. government should back the entrepreneurs.

That’s especially so since without net neutrality, telecommunications and cable companies could also stifle free expression by favoring the websites and applications of the largest media conglomerates over those of nonprofit news organizations, bloggers, and independent journalists and filmmakers. Permitting media giants to pay for a fast lane unavailable to all online outlets would raise the barriers to entry for all new publishing and sharing tools -- eliminating innovations along the lines of Twitter, Tumblr, and WordPress. These tools, most of which started with extremely small investments, have helped citizens find new ways to petition and protest against their governments. New and better tools of this kind will continue to emerge only if the field is left open.

KEEPING THE INTERNET OPEN

The Obama administration needs to get the rules governing the Internet right. Obama’s initial, feeble attempts to do so came during his first term, when the FCC was chaired by Julius Genachowski, a law school classmate of Obama’s who demonstrated a distinct lack of political insight and courage on the job. In 2010, the FCC adopted a set of net neutrality rules know as the Open Internet Order, which barred providers from blocking or giving preferential access to particular websites and applications and required more disclosure about their policies. Moreover, in the order, the FCC effectively prohibited ISPs from creating and charging for fast lanes, declaring them unreasonable. But under pressure from ISPs, Genachowski punched two gaping loopholes into these rules. He exempted mobile access from the order, even though more people now go online through their cell phones than through their home computers. He also made it possible for ISPs to violate net neutrality through connection deals that they make directly with websites -- a loophole that Comcast has exploited in its shakedown of Netflix.

Ultimately, however, it was the FCC’s 2002 definition of ISPs as “an information service,” rather than a “common carrier,” that overwhelmed the weak rules established in 2010. Last year, Verizon challenged the 2010 rules, arguing that they went beyond the FCC’s jurisdiction given the commission’s own classification of ISPs as an information service. Since they were not common carriers, they could not be regulated according to Title II of the Communications Act, which would allow the FCC to treat them like telephone companies and ban unreasonable Internet discrimination and access fees. In January, a U.S. federal appeals court agreed with Verizon and struck down the 2010 FCC rules.

In legal terms, the FCC can easily address all these issues when it adopts a new order later this year. By reclassifying ISPs as common carriers, the FCC could regulate them as it does phone companies. It should not shy away from using the authority that Congress gave it; the Supreme Court, in 2005, made clear that the FCC has the power to change ISPs’ classification. Getting the legal definition right is crucial, since the FCC’s last two attempts to enforce net neutrality were struck down in court on jurisdictional grounds, first in April 2010, in a case brought by Comcast, and then in January of this year. In both cases, rather than relying on its main authority over common carriers under Title II, the FCC attempted to impose net neutrality requirements through weaker regulatory authorities, including Section 706 of the Telecommunications Act of 1996, which gives the FCC the authority to regulate broadband infrastructure deployment. Each time, the court’s ruling was sharply dismissive of the FCC’s legal reasoning, as nondiscrimination rules can be applied only to common carriers.

In addition to fixing the FCC’s legal footing, the new order should close the two loopholes in the moribund 2010 rules. First, there should be no exceptions for restrictions on mobile access. That is particularly important since many start-ups now develop applications initially or even exclusively for mobile phones, such as Instagram and Uber. The FCC should also make clear that ISPs cannot charge websites for direct connections to their networks, as Comcast has done with Netflix.

But Wheeler, Obama’s FCC chair, has indicated that he prefers a different path. In late April, in an attempt at damage control after the FCC’s new proposed rules were leaked, Wheeler wrote in a blog post on the FCC’s website that he wouldn’t “hesitate to use Title II” at some undefined future date. But instead of invoking those powers directly, the May 15 proposal tentatively concluded that the FCC would again rely on Section 706 of the Telecommunications Act as the basis for its legal authority, although it did say that it would also consider the use of Title II. Section 706 is the same flawed authority that the FCC already relied on in its 2010 rules and that the appeals court in January already held could not support restrictions against discrimination or fast lanes. Wheeler appears to have chosen this path because it is easier politically; the ISPs will not complain, since they are getting everything they wanted.

Although the Obama administration and the FCC are the main decision-makers, Republicans should recognize the need to support an open Internet. Over the years, some Republicans, including former FCC Chair Kevin Martin, who served under President George W. Bush; former House Representative Charles “Chip” Pickering; and former Senator Olympia Snowe, have supported net neutrality as the best way to promote entrepreneurship, free-market competition, and free speech. Opposing an open Internet now would put the party on the wrong side of its values and on the wrong side of history.

A country’s Internet infrastructure, just like its physical infrastructure, is essential to its economic competition and growth. According to the Organization for Economic Cooperation and Development, high-speed Internet is not only slower in New York City and San Francisco than it is in Seoul; it also costs five times as much. Suffering from an even more expensive, less robust, and more fragmented Internet infrastructure would put the entire U.S. economy in a global slow lane.

Washington faces a simple choice: allow the Internet to remain an a engine of innovation, a platform for speech in even the harshest tyrannies, and a unified connection for people across the globe -- or cede control of the Internet to service providers motivated by their parochial interests. The Obama administration should focus its energy and resources on net neutrality and make sure that the FCC does the right thing for the U.S. and global economies. If it does not, many online businesses will soon have the kinds of problems usually associated with certain failed government websites.