Net neutrality is on death row — Why we should let it die

David Nelson
David Nelson

By David Nelson, CFA

 Net Neutrality is on death row. With a 3 to 2 vote all but certain don’t expect a call from the governor saving the Obama administration’s utility style approach to broadband. Chairman of the Federal Communications Commission Ajit Pai’s push for change has set the internet on fire with frightening soundbites being tossed like political hand grenades.

The end of the internet as we know it?

“The end of the internet as we know ita return to the dark ages,” along with some not fit for print, streak across social media websites creating a firestorm of debate. Like most things in life the truth rarely lives on the extremes so let’s examine what’s going on and why you should care.

The modern day internet owes its early origins to scientists’ and laboratories’ development of a wide area network in the 1950s and later the Defense Department who contracted to build out Arpanet. Today, those efforts have morphed into what is arguably the most dynamic communications platform ever known to man. It sits at the center of our universe socially, economically and, yes, politically.

FILE – In this Feb. 26, 2015, file photo, Federal Communication Commission Commissioner Ajit Pai speaks during an open hearing and vote on “Net Neutrality” in Washington.  (AP Photo/Pablo Martinez Monsivais, File)

Some of the largest Fortune 500 companies like Netflix and Amazon owe their very existence to this technology so it shouldn’t be surprising that the powerful would lobby to protect their turf and if possible manipulate the system — maybe saving money along the way.

Classified as an information service, the internet saw staggering growth as government gave it a light regulatory touch. While spawned inside a lab, the cutting edge infrastructure needed to build it out came through the innovative entrepreneurial spirit of risk-takers willing to commit at-risk capital for the opportunity of profit somewhere down the road.

Turning the internet into a regulated utility

In 2015 the FCC under then-President Obama launched Net Neutrality putting broadband under the same Title II regulatory framework as telephone companies a century earlier. In an open letter that year President Obama wrote; “Today’s FCC decision will protect innovation and create a level playing field for the next generation of entrepreneurs…”

The word innovation doesn’t often come to mind when you’re talking about a regulated utility which is just what the government wanted to achieve with the FCC decision. Leading up to that decision and perhaps influencing its outcome were calls from internet giant Netflix that service suppliers like AT&T and Verizon were throttling delivery of content. (Editor’s note: Verizon owns Yahoo Finance.)

As it turns out, Netflix’s claims from that period may have been fraudulent and self-serving. In 2014  Fred Campbell former head of the Wireless Telecommunications Bureau to the FCC and adjunct professor in the Space, Cyber and Telecommunications Law program at the Nebraska College of Law challenged the streaming behemoth.

In a detailed series of  articles he took you through the process on how Netflix deliberately let their service degrade switching to settlement-free routes letting congestion build rather than continuing to use CDNs with paid transit arrangements. I reached out recently to Mr. Campbell to confirm and was told Verizon did nothing to slow down service. This was about Netflix trying to save money and influence lawmakers hoping a change in the regulatory framework would enhance profits.

Complaints from irate customers including yours truly were intense and given the timing had to grab the ear of regulators. Even the Wall Street Journal points out that Netflix has been throttling their own content for years for a variety of reasons.

Was this done to influence or speed up the Net Neutrality decision? We can only speculate but nothing gets politicians to support a cause more than voters demanding action or a contribution to your favorite campaign fund.

Is broadband investment rising or falling?

The battle over the numbers from operatives on both sides of the debate is raging. In a recent Forbes article, Hal Singer, an adjunct professor at Georgetown University’s McDonough School of Business and a senior fellow at George Washington’s Institute of Public Policy, discusses how capital investment has declined since 2014. Chairman Pai himself points to a 5.6% decline in capex from 2014 – 2016.

On the other side you have the Internet Association representing companies like Google, Netflix and Facebook saying quite the opposite. Citing passages from earnings reports of large ISPs like AT&T and Verizon, they claim investment is rising. Unfortunately, separating broadband investment from other line item Capex is likely problematic.

Assuming for the moment there is some measure of truth on both sides of the debate one concept rings true. If we’re ever going to move to next-generation broadband capabilities maintaining the status quo with modest improvements at the margin isn’t going to cut it. The demands of Augmented and Virtual Reality along with an ever-increasing deployment of the internet of things is going to require significant investment into the infrastructure. Last time I looked, the greatest incentive to investment is the opportunity for profit.

“Greed is good… Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.” – Gordon Gekko.

The passage above from movie director Oliver Stone’s Wall Street character Gordon Gekko may overstate the point but government regulation can’t compete with a profit incentive.

The battle lines are drawn

The battle lines are drawn pitting some of the largest Internet Service Providers like Verizon, Comcast and AT&T which stand to benefit from the end of Net Neutrality against internet giants like Google, Amazon and Facebook. The combined market cap of these 3 large ISPs is $573 Billion. IMHO the  Trinity of internet giants with a combined market cap of $1.8 Trillion and annual revenue over $300 Billion don’t look like they need any help from Washington.

Removing the heavy hand of the FCC doesn’t end enforcement and regulation. The burden switches to the Federal Trade Commission whose principal mission is the promotion of consumer protection and the elimination and prevention of anticompetitive business practices, such as coercive monopoly.

Look, if you believe the internet is as good as it can get and the only thing that matters is uniformity of service, then Net Neutrality is your bible. If on the other hand you’d like to see the industry fund investment adding more advanced services pushing the edge of the envelope, ignore the fear mongering and let the chains of regulation fall away.

*David sits on the advisory board of freeourinternet.org

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