Mises Wire

Net Neutrality Advocates are Asking the Wrong Questions

The World Wide Web was born in Geneva, Switzerland, in December of 1990. It went live on (now Sir) Tim Berners-Lee’s desktop and promised to provide his organization, CERN, with a non-hierarchical information sharing system.

To Berners-Lee, the web serves as a space for unlimited communication with transformational potential. Yet according to him, it also should remain “open,” a term that has come to mean ‘regulated at the national level.’ Berners-Lee is active in writing and speaking about the dangers of leaving internet service providers free to conduct business as they see fit.

His worries concern the immense power that ISPs have over the web and its users. Many Americans share a fear of these corporations and their alleged plans to play favorites among websites.

Net neutrality advocates typically take the size of ISPs as a given and proceed to argue for their regulation as a way to limit their power. Yet no one questions how these mammoth companies came to be in the first place.

As with many American industries, a handful of ISPs dominate the market, so much so that 67% of American households have two or fewer options when it comes to purchasing internet service, and nearly a third only have one option.

How is it that a few corporations have gained such a high market share within 30 years of Tim Berners-Lee’s invention?

Startup ISPs face significant regulatory burdens. Any company that wants to install cable throughout a city or county has to deal with loads of red tape, construction permits, and even FCC regulations on the type of cabling used. ISPs also face reporting requirements that can burden small providers with costs amounting to $40,000 per year.

Most of the regulatory burden originates at the local level, though. ISPs have to negotiate access to public utilities and pay “pole attachment” fees before doing any construction. Local governments see this as a revenue stream, but the inevitable result is higher prices and less competition.

When Kansas City was chosen as the first location for Google Fiber, some scratched their heads. Why not Silicon Valley? The explanation came straight from Google’s Vice President of Access Services in his Congressional testimony: “It’s clear that investment flows into areas that are less affected by regulation than areas that are dominated by it.” Unlike their Californian counterparts, Kansas City officials simply got out of the way.

That’s not to say that regulatory challenges are the only hurdles facing would-be ISP providers. There are also the natural costs. Internet cabling runs underground, and even after installation, it must be maintained and serviced. This makes starting an ISP a capital-intensive process. Google, for example, spent between $500 and $650 per home when it built out its fiber network in Kansas City. This investment typically doesn’t pay off for several years, so it requires patient capital. And of course, there are the established interests to compete with.

In this case, many of the established interests are telecommunications companies that figured out how to use their existing infrastructure to deliver internet services. This gave them a huge advantage over newcomers and allowed them to rapidly dominate ISP provision. This, in turn, begs the question: why are there so few telecommunications companies?

The answer is simple: a legal monopoly. Namely, AT&T’s Bell System, which functioned as “a legally sanctioned, regulated monopoly” from 1913 to 1984.

1913 was a banner year for Progressives, who cheered the ratification of the 16th Amendment and the introduction of the first income tax in US history, created the Federal Reserve System, and set up separate departments for Labor and Commerce.

These developments were ostensibly based on the principle that central authority, wielded by the right people, would improve the lives of the common citizen. It went without saying that the right people were experts — so bankers led the Federal Reserve, railway men led the Interstate Commerce Commission, and so on down the line of new bureaucratic agencies and authorities.

Perhaps unsurprisingly, AT&T executives were eager to achieve government-granted monopoly status in this political climate. In 1907, AT&T president Theodore Vall said that regulation, “provided it is independent, intelligent, considerate, thorough, and just,” was an improvement over the market because it offered experts the chance to maximize efficiency.

Talk of efficiency was especially appealing to the champions of Progressivism, and AT&T got its monopoly under the Kingsbury Commitment. It then proceeded to become the biggest telephone company in the world.

In 1984, AT&T negotiated a settlement to an antitrust suit by which the Bell system was dismantled into a smaller AT&T and seven “Baby Bells.”

No one calls them Baby Bells anymore. Instead, they have names like Verizon, CenturyLink, and of course AT&T. Other giants like Comcast and Charter benefited from Baby Bell mergers, acquisitions, and customer swaps as well.

The above companies are a testament to the legacy of centralization spawned by Progressive legislation. They are the five biggest ISPs in America, and some of its most hated firms as well.

We still see arguments for regulation being made by AT&T. Chief Executive Randall Stephenson “proposed an ‘Internet Bill of Rights’ that could help guarantee an open Internet” in full-page ads that ran in the Washington Post and the New York Times recently.

Fact is, if you’re a leading telecom company, regulation is bound to help you because it disproportionately burdens smaller competitors and stymies disruptors. As community energy advocates across the Western world have discovered, bureaucratic red tape that was erected to ensure the efficiency of large-scale production is slow to change when a new technology comes along.

So while the debate about net neutrality rages, we should remember that the only reason these companies are so big is because of government regulation. Rather than erect barriers to competition and resort to administrative determinations of “fair” pricing, we should instead allow the pressures of the market to foster innovation. That way, ISPs can follow the lead of energy production and begin the long path toward decentralization.

Image Source: GettyImages/ipopba/672310452
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