The hype surrounding broadband socialism has grown over the past year. New political alliances have begun to promote regulations that will allow the federal government to use its seemingly idle hands to touch private pies.
Not only do presidential candidates such as Barack Obama seek to subsidize technological rollouts at the expense of coerced taxpayers, but, along with Representative Ed Markey, they want to regulate what network property owners do with their own infrastructure. All of this is done under the guise of the new populistic policy called network neutrality.[1][2]
And while the political rhetoric will almost certainly pick up pace throughout the election year in 2008, the joke is once again on statolatrists: it has already been tried numerous times.
It could have been GrayBar
At around the same time the modern-day FCC was being erected, the nationalization of independent telecom networks was being implemented. [3]
Beginning in 1907 and under the rhetoric of "national security" as well as the fallacious belief that everyone should have a phone, AT&T was granted geographical monopolies by each state. This was done despite the fact that at the turn of 20th century more than 50% of local telephone service was controlled by rivals.[4][5]
This insulation from competition also took place under the auspices of federal legislation including the Mann-Elkins Act of 1910 and the calculating Kingsbury Commitment of 1913. These edicts effectively cemented AT&T's role as the central telecom firm for the entire country.[6]
In addition, for 70+ years AT&T's international long-distance business was also protected by federal laws. Yet despite the landmark "break-up" of AT&T in 1982, the Baby Bells were and are still given many of the same monopolistic perks that were enjoyed by their predecessor. [7][8][9]
As noted above, while outright nationalization has already been a deleterious path once traveled, two FCC commissioners recently argued "that the US is in dire need of a national broadband strategy."[10]
Much akin to Vladimir Lenin's impassioned battle cry for nationalizing the "commanding heights," some pundits now argue that the telecom infrastructure is too important to be left to the whims of the marketplace.[11] However, as Peter Klein and others have argued, the only reason the Internet became useful in the first place was due to commercial activities by entrepreneurs and for-profit companies.[12]
Universal Service Fund
The business model for the USF fraud is literally no different than robbing Peter to pay Paul. Up front it was devised as a "Robin Hood" collection method to solely tax long-distance carriers. However, its levying authority grew in 1997 to purportedly finance the far-reaching subsidies enacted in the re-regulation of 1996. It now essentially gives various levels of government the authority to impose taxes on nearly every form of telecommunication. [13][14][15]
If you currently live in an urbanized area, both your phone and ISP bills can serve as purposeful exhibits of this fleecing. The monies are purportedly collected to finance the deployment of technologies to rural America. Thus, a variable percentage of the taxes you pay are collected in a "Fund" in a similar method that FICA redistribution taxes end up in a "Fund." This typically amounts to more than 10% of the overall bill.[16][17]
Again, though, as Techdirt has noted, unsurprisingly this deployment has not occurred, since neither the rural residents have received the technology nor have the unsupervised companies been admonished for their irresponsible, negligent accounting practices. At least $7 billion each year has done little more than line the pockets of companies that promised to fulfill the seemingly tenable goals. And guess who lobbies for yet more taxpayer funds?[18]
The USF has served to subsidize rural and residential customers at the expense of urban and business use. Arguably we might have very different patterns of land use if this subsidy had never existed. And like all rights artificially concocted by the state, it set forth the disingenuous precedent that everyone has an invented right to service regardless of location — which was taxing enough in the days of POTS, let alone broadband.[19]
Great Leap Forward
Unlike the largely unseen consequences of the monopolistic rent-seeking practices of Ma Bell or the wealth redistribution schemes of Universal Phone Service, arguably the most visible criminal endeavor in this industry has been the National Information Initiative spurred in part by then Senator and later Vice-President Al Gore.
It too was developed as a centrally managed endeavor to help spur the development and deployment of new telecom technologies.
However, as technology pundits such as Robert Cringely have detailed, the NII has been nothing short of a $200+ billion corporate subsidy to telecom incumbents — to big business.[20]
In exchange for continued monopolistic protections via the federal government, many of the regional bell companies were to develop and deploy multi-megabit connections to millions of households throughout the '90s. However, not only did it fail to deliver, it redirected and consumed vast swathes of productive resources that could have been used elsewhere.[21]
Like their South Korean counterparts, these companies received billions of dollars in tax-financed inducement packages. Yet, unsurprisingly it amounted to very little being accomplished. Or as Cringely noted,
[T]he FCC tried to control deployment centrally while states and cities tended to view video dial tone as just another cable company to be taxed and regulated.
[…] the FCC says America has the highest broadband deployment rate in the world and President Bush has set a goal of having broadband available to every U.S. home by the end of this year. What have these guys been smoking? Nothing, actually, they simply redefined "broadband" as any Internet service with a download speed of 200 kilobits per second or better. That's less than one percent the target speed set in 1994 that we were supposed to have achieved by 2000 under regulations that still remain in place.
And while this subject deserves much more attention than this article can afford, readers are encouraged to peruse the copiously detailed "$200 Billion Broadband Scandal" by Bruce Kushnick.
As noted by Kushnick, the very same fallacious incentives and grandiose plans envisioned by Obama were spelled out more than 10 years ago,
Almost at birth, the Baby Bells pitched a series of new regulations, called "alternative" or "price cap" or "incentive" regulation to the Public Utility Commissions. By 1997, the Bells had convinced almost every state regulator to grant some form of alternative regulation.
From the telephone company perspective, alternative regulation has been the buzzword for giving incentives to the telephone company to give new technology to the masses sooner. (p. 198)
In his "Christmas list," not only does Obama endorse giving companies tax-financed subsidies, but he would appoint a technology czar to help guide the assumedly unguided — or in short, to take on the role of CTO and entrepreneur in the marketplace. By every historical measure, this will result in planned chaos. More to the point, America unfortunately already has a tech czar through the National Telecommunications and Information Administration. Their economically myopic plans have obviously worked wonders.[22][23][24]
Beating a dead horse
In terms of network neutrality, B.K. Marcus has arguably done the best work on detailing the monumental missteps taken by the FCC throughout its chronically tumultuous tenure.[25]
Here is the scenario: you are a Tier 1 ISP. You purchase or rent land and place miles of fiber optics or radio antennas throughout a city. You also purchase routers, switches and servers. However, with "net neutrality" legislation the owners of the hardware would no longer be allowed to do whatever they want with their own property.[26]
Again, an ISP in a free market has every incentive to attract as many customers as its capacity can handle. In order to remain profitable, it would have to satisfy their wants.[27][28]
Every piece of legislation under the banner of "net neutrality" would be a gigantic step backwards for the industry. And while independent ISPs would certainly be in the losing category, the biggest losers would again be consumers.
Let us ignore the scarcity involved in transporting bits of data across switches and routers: the consumers would end up being taxed to enforce these provisions, their data would be snooped on by at least one government agency (what happened to the cries against the NSA wiretapping?), and whatever is ratified would be yet another barrier to entry for new competitors.[29][30]
The only long-term solution to this issue is deregulating the entire industry: remove all of the subsidies that incumbents receive, remove the state-enfranchised monopolies, and legalize competition.[31][32]
Or in short, do the complete opposite of what Obama, Markey, and others are advocating.[33]
Neither Congress nor the FCC would even need to take anything physical away. No need to "break" them up or "force" them to unbundle (i.e., offer a la carte services). Just stop protecting them, insulating them, subsidizing them (loans and handouts from taxpayers), stop giving them preferential treatment and no-compete geographies. Decriminalize all competition.[34]
In fact, it is arguably the deregulation of the industry and privatization that has spurred the ever-growing, break-neck speeds in technological innovation.[35]
Meet the new boss, same as the old boss
One wonders why politicians like Obama do not endorse increasing capacity via free-market competition. The taxpayer does not have to finance it and only those that want the services have to pay for it.
Instead of advocating new entrants and innovative technologies to expand scarce bandwidth — i.e., increase the size of the pie — the political class is merely focusing on the pie itself. It is this notable misdirected emphasis that gives rise to a key question: does it really understand the technical underpinnings of the infrastructure?[36]
While I have discussed the infrastructure issues numerous times, another issue is that many net neutrality proponents are unknowingly speaking with forked tongues.[37]
For instance, Google and other search engines have to use discriminatory filtering practices in generating useful results. Quality of service is the name of the game and complex algorithms are all used in producing the end-result. In fact, in Google's case, approximately 100 variables are used to calculate which results will be displayed, including geography and previous searches.[38]
Thus, if net neutrality proponents such as Google were to be evenhanded about the matter, they would allow all content to be displayed regardless of quality.[39][40]
The case of GameRail is also an interesting study. Their service is essentially a specialized, private backbone that caters solely to hardcore computer gamers — a game service provider (GSP). [41]
And unsurprisingly, various net neutrality proponents were aghast to discover it, believing that this voluntary service is irresponsible, unethical, and downright criminal. Yet it is difficult to see how anyone is harmed in this mutual act of exchange — the same exchange and specialization process that takes place with an ISP.[42]
Ask-A-Revisionist
The fear mongering surrounding tiered pricing is also unwarranted. One of the reasons this business model has existed for nearly two decades is because of the flexible rates.
For instance, as a former webhost provider, I would purchase a certain amount of bandwidth from an upstream provider. The more bandwidth I purchased, the cheaper each additional bit was. In turn, my bandwidth provider was purchasing bandwidth from other middlemen who in turn were also leasing, renting, and buying capacity from someone else.[43]
In the end, each customer was charged according to how much they need and will potentially use.
Thus, the popular socialist objections against tiered pricing, packet prioritization and specialization are guilty of ill-informed historical revisionism. These "diabolical" business practices (e.g., freedom of contract, freedom of association) have been the norm rather than the exception (e.g., implemented as peering agreements, QoS). In fact, the net has never been neutral as Ask-A-Ninja, BoingBoing, and others insinuate.[44]
Simultaneously, the current opaque pricing structure and vaguely stated limits used by many ISPs arguably compounds the problem by encouraging customers to overuse "the bandwidth commons." In fact, according to Time Warner Cable, 5% of Internet users use 51% of the bandwidth and 25% use 85% overall. Yet, everyone is charged the same, or in the words of NetCompetition.org, the average user subsidizes bandwidth hogs.[45]
The buck stops here
The main problem with the telecom industry is that the government created the monopolistic problems in the first place. In addition, it was the same government that directed billions of dollars of taxpayer-financed subsidies to prop up the backward business models of incumbents — all under the guise of "innovation-fostering encouragement."
This issue really is about who controls the market — free enterprises or bureaucratic governments — because those are the only two players involved. And based on history, the federal government is the one institution that technologists should never turn to for aid and one that should never be allowed to give it.
Tim Swanson is a graduate of Texas A&M University and currently lives in Seoul, Korea. He would like to thank DJC|TANSTAAFL for his comments. Send him mail. See his archive. Comment on the blog.
Notes
[1] For Obama, see his recent interview with TechCrunch, and analysis by ArsTechnica. Two months after declaring net neutrality dead, CNet recently covered Rep. Markey's latest legislation.
[2] While the importance and weight of each category is subjective in CNet's 2006 Tech Voter Guide, across the board Rep. Markey scored relatively low compared to both his Democratic and Republican peers in the House (a roughly 36% approval rating versus 45% for each average). See also: "Don't Know Their Yahoo From Their YouTube," an overview from the Washington Post on how un-tech savvy many members of Congress are; they are the same individuals that want to regulate the industry.
[3] The real monopoly began when Alexander Graham Bell was given a legalized monopoly in 1876 in the form of a patent. As the story goes, his request arrived at the patent office an hour before that of Elisha Gray (of GrayBar). See also: "Intellectual Property" by Stephan Kinsella
[4] "A Telecommunications Policy Primer" by Diane S. Katz is a must-read for any serious student of the subject.
[5] It is the same "entitlement" mentality that has created a generation of individuals that believe they deserve a slew of scarce services and resources (e.g., college education, medical care). Promoters of "Universal XYZ" have failed to study the economics of the issue (e.g., prices, supply/demand) because someone always has to pay the bill (i.e., it is not free; TANSTAAFL).
[6] The FCC is directly responsible for stymieing competition over the years. Along with suppressing the adoption and use of FM, Declan McCullagh notes that
The FCC rejected long-distance telephone service competition in 1968, banned Americans from buying their own non-Bell telephones in 1956, dragged its feet in the 1970s when considering whether video telephones would be allowed and did not grant modern cellular telephone licenses until 1981— about four decades after Bell Labs invented the technology. Along the way, the FCC has preserved monopolistic practices that would have otherwise been illegal under antitrust law.
[7] As noted by William Anderson, the government arguably did not have to physically break-up the company, as the administration could have simply stopped giving it subsidies and/or decriminalized competition. Furthermore, it should not have given it a monopoly in the first place.
[8] As part of its push to become and remain a monopoly, AT&T lobbied for protectionist regulations to insulate it from emerging (competing) phone companies. At one point it used a "natural monopoly" argument, similar to that used against Howard Hughes' TWA.
[9] The hypocritical irony of the Sherman Anti-Trust Act is that the government only applies the strong-arm tactics when it is in its self-interest — it penalizes the private industry for acts it perpetuates itself. See also Dominick Armentano, Antitrust: The Case for Repeal and Antitrust and Monopoly.
[10] At the end of November, Kevin Martin (chairman of the FCC) attempted to impose new regulations on the cable industry based upon phony statistics of market penetration. Regardless of the exact numbers (58% versus 70%), the new regulations would have imposed caps (ceilings) to growth. This would potentially have had a chilling effect on availability and competition.
[11] The clearest example is perhaps Michael Kanellos of CNet. He recently positioned his antagonism towards libertarianism and free markets as more down-to-earth and pragmatic. In fact, he uncritically cited South Korea's generous use of taxpayer-financed subsidies to big business chaebols. In his mind, the ends justify the means. Another tangential example is William Webb, head of research for Ofcom who noted that
We are examining the cost-benefit equation and our statutory duties for UWB. There are very many licence holders between 3 and 10 GHz, and UWB will have lots of uncoordinated users. The market can't fix that.
[12] Its utility remained untapped until numerous deregulation/privatization policies were implemented. (1) In 1985 the FCC opened up the ISM frequencies (e.g., 900 MHz, 2.4 GHz, etc.). This in turn allowed hobbyists and eventually companies to create and deploy useful services in this largely unused space. (2) Decriminalized long-distance competition with AT&T in 1982. (3) In the late '80s and early '90s, various agencies sold small pieces of backbone infrastructure for commercial use; most notable were various NSF-sponsored supercomputing centers, the controversial privatization of NSFNet, and the private creation of UUNET. See also: Commanding Heights: The Battle for the World Economy
[13] The Telecommunications Act of 1996 was dualistic; it deregulated some parts of the industry and reregulated others. The most notable reregulated arena is the fight over the "last mile" — in which start-ups have attempted to wrest market share from preferentially-treated incumbent telecom firms.
[14] The original USF scheme was intended to only provide universal phone coverage to rural areas, but Al Gore and others spearheaded a new act ('96) which would extend it to subsidize broadband for schools, libraries and hospitals. One wonders when the political class will extend it again to provide 3G, DMB, satellite, and other technologies to everyone on Earth.
[15] And if you believe the USF tax will be revoked anytime soon, last year the Treasury Department finally said it "will no longer collect a 3% federal excise tax" on long-distance calls. It had originally been imposed to finance the Spanish-American War in 1898. Think your grandchildren will be counting down to 2104?
[16] The accounting reality is that Social Security receipts do not end up in an independent fund, but rather, the general revenue pot which as of this writing remains all but empty. These funds are obligations that someone will end up having to pay for.
[17] According to "Taxes and Regulation: The Effects of Mandates on Wireless Consumers," as of 2004 the average wireless consumer pays 14.29% in taxes. And according to MyWireless.org, it is as high as 22% in places like New York and Florida.
[18] While Techdirt has done an excellent job following this federal boondoggle (1 2 3 4) industry veteran Om Malik believes that the USF should not only continue to exist but be used to "set aside more money for broadband." At what point will the technorati admit that subsidies are a terrible idea? It was terrible for the Korean taxpayer too.
[19] I would like to thank DJC for this specific comment as his inside, first-hand knowledge within the telecom-industrial complex has been prescient. See also: the parable of the broken window.
[20] An unfortunate assumption is that defenders of free markets are defenders of corporate welfare. Due to conflicts of interest with lobbying firms, many free-market think tanks and individuals have suffered ethical lapses and outright astroturfing. In fact, many companies have historically lobbied to erect new regulations on competitors, just as AT&T continues to do. The Mises Institute not only refuses money from PACs but has published numerous critiques of big business: 1 2 3.
[21] These unseen consequences are the same opportunity costs that are difficult to foresee in any publicly financed endeavor. What could have been constructed instead of large pyramids in Egypt? What could have been built instead of single-use aircraft carriers? What could have been erected instead of a sports arena? These timeless questions are compounded by the fact that it is unfair to continue to manipulate and exploit taxpayers to fulfill plans of technological grandeur. For more on sport subsidies, see the following Cato publications: 1 2 3 4 (all in pdf).
[22] The Great Leap Forward was the name of Mao Zedong's disastrous plan to surpass the growth and productivity of the West. Every state tied to the Soviet Union was at one point guilty of planning and managing the economy based on these impossibly inaccurate projections. The political class of supposed bastions of "capitalism" like the United States is also guilty of using them, as is even little Bhutan.
[23] And this is beside the larger point, that even if the plan had been executed effectively, in terms of justice, it is still unfair to use funds that were coerced from the taxpayer to finance these projects. This is in addition to the seen and unseen consequences — the opportunity costs involved in reallocating scarce resources. Also, how much does a new backbone cost?
[24] Planned Chaos is also the title of a book written by Ludwig von Mises. It is a critique of government-managed economies and industries. The continued march towards telecom centralization and re-nationalization can also be observed in Europe. See also: "Theory of Price Controls" in A Critique of Interventionism also by Mises.
[25] Another concise volume is "Rebels on the Air — An Alternative History of Radio in America" by Jesse Walker. It chronicles the missteps and burdensome regulations that have plagued the industry.
[26] All told, the federal government has dodged all accountability in how it effectively prevented 100 Mbps fiber connections. Oddly enough, not every level of government has shirked its share of blame, as Governor Schwarzenegger recently chastised the stifling regulations in California. Note: so as long as it is contractually stated, private companies should be allowed to throttle and shape traffic to their hearts content; otherwise we'd have a stupid Internet. However, as Comcast has discovered, lack of transparency could result in a PR disaster and a loss of business. See also: "For Whom the Bandwidth Tolls"
[27] Interestingly enough, one entrepreneur has created an independent ISP with the goal of practicing "net neutrality" standards: "Cowabunga with Copowi?" Also, in terms of a "bandwidth crunch" like all artificial shortages, this would only occur if the government was allowed to manage it. Every industry left alone has few problems fulfilling customer demands. In fact, while Vint Cerf is a vocal advocate of "net neutrality" (cui bono: he works for Google — a possible conflict of interest), Lawrence Roberts, another co-inventor of the Internet has been hard at work engineering hardware solutions to bandwidth scarcity in the form of new routing technology: BTC and IFC.
[28] An example of doom and gloom is a study published this past summer by ABI Research which suggested that without increasing bandwidth capacity "we are headed for a crash." The problem with this study is that it assumes that ISPs will continue to offer only one-tiered pricing, which Adam Thierer suggests is short-sighted. As long as prices are allowed to accurately reflect supply and demand, a crunch will never occur. The same response can be leveled at this apocalyptical study as well, which Mike Masnick appropriately does.
[29] Among others, Wired magazine has detailed the scope of depth of the NSA wiretapping endeavors enacted at AT&T. See also "Network Nationalization: Net Neutrality in Action"
[30] In terms of privacy, secrecy and technology see ZDNet's "Post 9/11 Report Card" (pt.1 pt. 2)
[31] One extreme in monopolistic rent-seeking behavior was that of then-AT&T in South Africa. Throughout the '90s it used the government to fend off competition and charge relatively high prices — in return for little to no innovation. See also: How much should companies spend on research and development?
[32] The call to abolish the FCC is not an idea solely owned or invented by free-market libertarians. See also: "Why the FCC should die" by Declan McCullagh and "The case for killing the FCC and selling off spectrum" by Jack Shafer.
[33] ArsTechnica approvingly cited a study that links "broadband to job creation." However, the causality is tenuous and instead it should perhaps be read that more bandwidth allows for more innovation; and as a corollary, more competition, not more bureaucracy, spurs job creation. After all, fiber optics do not inherently have some kind of supernatural property that enables them to somehow create wealth. Nor is a bureaucratic agency magically endowed with the ability to procure capital out of thin air.
[34] These are essentially the same wide-sweeping prescriptions recommended in "How can telecommunications policy be improved?" by Diane S. Katz.
[35] To counter pro-intervention statements extolled by the FCC, there is no "right" number in terms of competitors in the marketplace, only as many as can remain profitable while fulfilling consumer demand. The decision should be made by consumers — not government committees.
[36] Ever since it was first gerrymandered, the government has treated the radio spectrum as a finite resource such as water. It also claimed the bulk of frequencies for itself (e.g., for military, emergency, public service announcements). According to the FCC Spectrum Task Force Report, most spectrum goes unused the majority of the time. In fact, even under their antiquated classical model, at any given time roughly 5% of it is actually being used. It is hoped that with future deregulatory practices, smart antennas, cognitive radios and ultra-wideband emitters will be able to utilize unused spectrum vis-à-vis the rules of underlay and overlay. Also, with the expansion of white space and the advent of white space devices, a new debate between "open spectrum" proponents and quasi-property-rights proponents has begun. Be sure to read: "The Spectrum Should Be Private Property" and "Rebels on the Air: An Alternative History of Radio in America." Note: roughly 30% of all land in the US is owned by the federal government, of which most is never utilized or developed and some of which is disastrously mismanaged.
[37] See: "Who Owns the Internet?" and the following stories: 1 2 3 4
[38] Dave Girourad, a manager at Google, has stated that "PageRank relies on more than 100 variables." Why is it unfair for an ISP to use various factors to transmit and organize data? It is their infrastructure. Furthermore, Matt Cutts (at Google) and Jeremy Zawodny (at Yahoo) provide invaluable details on the minutiae involved in ranking websites of which an entire industry has germinated: search engine optimization.
[39] Malware and phishing sites would abound; however, Google and others not only use automated methods to strip malicious websites from their databases, but they are now asking for manual input from individual users as well. Thus, "search engine neutrality" would arguably diminish the utility of their services, hence the rejected lawsuits in the past. Google's hypocritical doublespeak is also found in their advocacy of OpenSocial.
[40] See also: "A Neutral Panic" by Reason magazine and "'Net Neutrality': Corporate Welfare and Price Controls Have a New Name" at Townhall.
[41] They use a combination of software and hardware to ensure relatively low pings. Members of Digg were not too keen on the idea. See also: "Does One Price Fit All? Politics, Buffets, and Scarcity."
[42] Analysts at RampRate fallaciously believe that "online gaming will be the biggest casualty if ISPs prioritize packets." Yet, by recognizing, labeling, and categorizing traffic, ISPs can route it much more efficiently and effectively. It is the principle that underlies not just GameRail, but also Akamai, a company that offers specialized caching services at a premium (typically for video webcasts).
[43] In 2003–2004 I co-owned and operated, along with David Veksler, a hosting and web design firm, Collectrix LLC.
[44] If anything, the new legislative regulations are guilty of imposing radical changes, not vice-versa. See also: "Debunking 'The Net is Neutral' Myth" at NetCompetition.org and "Neutral Net? Who Are You Kidding?" at Wired magazine.
[45] BitTorrent usage comprises 55% of all Internet traffic. Incidentally, Bram Cohen, its creator, is a vocal opponent of net neutrality.