October 27, 2009 3:53 pm

Net neutrality at the crossroads

Few issues in recent years have generated as much passion—and confusion—as the debate over net neutrality for broadband transmissions. To be sure, the idea of “neutrality” exudes positive vibrations in many contexts. To combat arbitrary power, governments, for example, must apply neutral principles in drafting legislation and in resolving judicial disputes.

The harder question is whether private parties, who don’t exercise state power, should be subject to similar neutrality constraints. The presumptive answer is no. The basic idea of private property is bottomed on the view that any owner has the right to exclude everyone else in the world, which in turn gives him the right to selectively admit whomever he pleases on terms to their mutual likely. The existence of multiple owners with different agendas spurs innovation and creativity, so long as the neutral state backs the owners right to exclude and to enforce, both ways, the contracts with the owner’s contracting partners.

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The key debate in broadband policy is whether to adopt this regime of universal exclusion and selective admission. The defenders of net neutrality cite the dominant position of broadband carriers as reason to reject the private property model. The populist claim is that net neutrality guarantees equality of service to the mom-and-pop store who otherwise could never compete when retailing behemoths hog the fast lane. Alas, just that type of thinking led to the passage of one of the most reviled pieces of depression legislation, the Robinson-Patman Act, which sought to imposed antidiscrimination norms in order to level the playing field between family business and the chain store giants of the 1930s. The resulting regulatory quagmire because no one could say with confidence what differences from perfect price parity were justified when the cost of service differed widely across customers.

We can expect the same difficulties under any modern systems of regulation, as the complexity of ongoing business methods will quickly overwhelm all efforts to restore parity to the marketplace. The basic insight is this: early on in the formation of markets, a parity of access and prices sets a default regime that is easy to implement. But as systems become larger and more complex, it now makes sense in cost terms for providers to implement more complex terms of service to wring maximum value out of their networks. Multiple tier pricing is a fixture for hotels, airlines and real estate, which update prices continuously in response to fluctuations in supply and demand. Those extra profits in turn generate incentives for providers to build out their network, so in the not-so-long-run greater capacity generated by price differentiation leads to overall declines in price levels.

Unfortunately, FCC Chairman Julius Genachowski thinks he has a better idea, which is, in his role as “smart cop,” to implement a net neutrality plan that rests on three pillars: broadband providers may not favour their own content; they must “explain” away variable speeds of service; and they cannot limit customer access lawful content because they object to its point of view.

Each pillar is cracked. First, favoritism comes at a price. In a world without regulation, broadband providers are always caught on the horns of dilemma. By favoring their own content, they give themselves a stronger incentive to build out the network in the first place. By the same token, however, they could easily turn away potential customers who prefer a greater range of choice. How much to favor becomes a tough business decision left to market forces. It is hard to think of how the FCC can improve the process without micromanaging the entire cycle of information generation and transmission. Why even try?

Second, the FCC should steer clear of the pricing swamp needed to figure out what speed preferences are allowed at what cost differential. Regulators do horribly with questions of degree. Each fresh advance in the technology of the production or transmission of information will require recalibration of the basic formula. FCC proceedings that take years to complete can’t begin to keep up with new advances whose useful economic life may be over before the FCC can convene new proceedings.

Last, there is a tense debate over the free speech pillar. Jeffrey Rosen thinks that AT&T’s to mute the sound on a Pearl Jam concert critical of George Bush constitutes the greatest danger to free speech since the huge judgments that Alabama courts entered against the New York Times at the height of segregation. Whoa! It is worth remembering, as Randolph May of the Free State Foundation insists that the First Amendment applies to government censorship, not private exclusion. It has long been settled that newspapers don’t take on the role of common carriers that require them to publish opposing points of view. That same prohibition against forced speech could easily apply to broadband, especially today when broadband carriers have entered the content business. So why court the dangers of coerced government speech, which will inevitably have to address questions of decency and pornography, when a market response is available? Customer protest will see companies backpedal when they go too far.

All in all, the presumption against state interference holds up. The explosive growth in broadband in the absence of net neutrality has continued to confound the doomsayers. But the old maxim, if it ain’t broke, don’t fix it, surely applies with special force to an FCC whose toolkit is filled with expensive, blunt, and broken instruments.

Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law, the University of Chicago, the Peter and Kirsten Bedford Senior Fellow, the Hoover Institution, and a visiting professor of law, at the University of Chicago

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