net neutrality

Happy Veterans Day!!!

On Monday, President Obama made a strong statement in favor of net neutrality, maintaining that the provision of internet access should be a utility service like the provision of water and electricity.  Personally, I think this is common sensical and correct, and it’s the way we should do things if we were starting from scratch.

His statement comes a few days before the Federal Communications Commission will release its newest version of internet rules, one that will likely allow internet service providers to continue to charge extra to big services like Netflix.  Mr. Obama is now on record as opposing what the head of the FCC, Tom Wheeler, is about to do.

I can’t help thinking that the statement is more than a little disingenuous.  It comes just after the election, so voters don’t have a chance to weigh in on the issue.  It also comes less than a year after Mr. Obama appointed Mr. Wheeler, who spent his career working in and lobbying for the biggest ISPs, the cable companies, to head the FCC. (Wikipedia says Mr. Wheeler is in the cable industry Hall of Fame–wireless HOF, too.)  What did Obama expect Wheeler to do?

I don’t have a solution for the net neutrality issue, but I think know where the problem lies.

Government creates utilities when the public interest is best served by having only a small number of companies providing a capital-intensive service.  Certain firm are granted monopolies or near-monopolies in given service areas.  To prevent abuses, the firms’ business focus is restricted and profits are regulated.  Profit growth is (almost always) tied to the increases in new capacity the utility brings into service.

Consumers are charged by the amount of the service they use; utilities are chomping at the bit to provide more and better service.

Almost none of this applies to the cable companies, whose profits, in the short term anyway, can be maximized by doing the opposite–providing the worst service at the highest price (think:  Comcast or Time Warner Cable).  Yes, both the cable companies and their mobile brethren, ATT and Verizon, have the advantage of being able to build their internet presence using their monopoly cable/telephone infrastructure.  But that in itself doesn’t make their ISP services monopolies.

I don’t see any quick fix.  The orthodox economic solution in a case like this is to encourage competition–that is, prevent further consolidation among existing ISPs and provide incentives to new entrants.  Let’s see if Mr. Obama speaks out against the proposed Comcast-TWC merger, which would be his next logical step if he means what he said on Monday.

 

 

 

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