Last week’s repeal of net neutrality regulations by the Federal Communications Commission generated considerable controversy. Many characterized the decision as a win for telecom and cable companies at the expense of both consumers and content companies. The history of the past decade, however, is that all those companies have been winners, with a massive consolidation of control and profit in the hands of a few tech giants (such as Amazon, Google, Facebook) and a few telecom and cable companies (Comcast, Verizon, AT&T, Charter).
Zachary Karabell is head of Global Strategies Envestnet and the president of River Twice Research.
Whatever good they’ve done, and arguably they’ve done quite a lot, the need for competition and for affordable access to broadband remains. As many as 60 million Americans in cities and another 16 million in rural areas either cannot afford or cannot access high-speed broadband. That is worse than almost any developed country. Even where broadband is available, it continually grows more expensive.
Rather than fight over net neutrality, the large internet companies and telecoms should take a cue from what happened to big financial institutions after the financial crisis of 2008-2009. Seen as the culprits for millions losing homes and retirements savings, banks were subject to draconian regulations, civil suits and hefty fines. If the public perceives that those companies are reaping disproportionate rewards at the public’s expense, it will act swiftly and punitively. Instead of waiting for antitrust suits and the backlash to accelerate, the giants of tech and telecom could preemptively agree on a set of principles and on a commitment to underwrite the costs of open, fast, and affordable access for all.
In a week when congressional Republicans finalized a tax bill, the 3-2 party-line decision by the Republican-controlled FCC was easily characterized as another give-away to large corporations that would leave ordinary Americans even more at the mercy of a few broadband providers that could now charge more to access certain content, or deny it altogether.
The arguments for repeal were equally passionate, with proponents contending (based on scant evidence) that net neutrality rules were dissuading telecom and cable companies from spending on infrastructure to support the massive traffic of Netflix and their brethren, leaving rural and less affluent urban areas with poor service. Why shouldn’t the internet behemoths have to pay more for the infrastructure on which they depend? Why should Netflix, YouTube (Google), Amazon, Facebook, and Apple reap the free-rider rewards of the billions invested by Comcast, Charter, AT&T, and Verizon?
Net neutrality arose from legitimate concern that large internet providers could deny access or charge unfair prices. In that sense, telecom and cable providers act like utilities, and governments have long had a role ensuring that necessities such as power and heat are readily and affordably available to all. Telecom companies have occupied a regulatory gray zone, treated as quasi-monopolies providing a public good but allowed more latitude than electric and power companies (especially after the 1982 break-up of the old “Ma Bell” AT&T, which then had a land-line monopoly).
Net neutrality rules aimed to prevent ISPs from denying access, or setting up “fast lanes” for favored content providers. But, by creating a level playing field, the rules were also meant to foster more competition among and with content providers. Yet since 2015, the internet giants have only consolidated their dominant market position at the expense of upstarts.
They are also eating up massive amounts of bandwidth, mostly in the form of streaming video which is now estimated to account for nearly three-quarters of all internet traffic. As of last year, Netflix was by far the largest user, accounting for as much as a third of peak internet traffic. YouTube, owned by Google, is hovering near 20 percent, while Amazon video has been gaining share as has Hulu. Facebook until recently was less data intensive, but with streaming video and enhanced Instagram features, it too is consuming more, especially cellular data on mobile devices.
If broadband is to a degree a public good like roads, then it is fair to demand that the heaviest users subsidize some of those costs, just as trucks pay more for road upkeep than cars. Without net neutrality rules, the ISPs could charge Netflix for its heavy usage and establish all sorts of fast lanes. But there’s no evidence that they would use the extra money to invest in better infrastructure. Google/YouTube and the giants could certainly afford the extra charges, but that could make life harder for newer entrants.
There should be no tears for the ISPs. The cable and telecom companies are nicely profitable and have spent tens of billions building out their networks. It’s hard to blame net neutrality for their decisions to focus on more profitable regions and customers. Nor is it likely that, freed of the net neutrality rules, they’ll now rush to provide high-speed connectivity in rural areas.
As the debate over net neutrality has raged, both the internet content companies and the ISPs face new pressures that they have not really grasped. The profitability and far-reaching influence of the internet giants is causing new scrutiny of Silicon Valley, while the dominance and control of the ISPs is generating political backlash in Washington, including the antitrust action against AT&T’s proposed acquisition of Time Warner.
Unless they want to see their social license to operate further compromised, and government regulations and antitrust action stepped up, internet and telecom companies would be wise to stop fighting each other and confront the mounting animus towards all of them. The FCC decision to revoke net neutrality may have tilted the field towards the ISPs, but does nothing to offset that larger challenge.
The question is how to maintain that social license and provide for affordable access to high-speed internet. As Tim Wu, Columbia law professor and an early advocate of net neutrality rules, pointed out to me, “isn’t there a better way for the Silicon Valley winners to ensure that everyone has affordable, fast and easy access to the internet than allowing Comcast to charge Netflix for more bandwidth?”
It’s a fair point, and it raises a question about how to induce—or force, if necessary—the winners of the net economy to do more to provide for universal access to the commons of the information technology era? Google tried to help wire cities with its Fiber initiative, but met opposition from telcos and some local governments. Yet if Facebook were to be charged another $1 billion by Verizon, there’s little evidence that Verizon would use the money to provide its own fiber service or better LTE cell service to northern Vermont or eastern Texas. More likely, it would buy back shares and boost earnings.
A more audacious scenario would be for all sides to agree on a substantial subsidy for broadband rollout and affordability. With some antitrust forbearance from Washington, the players could create multi-billion-dollar pools to subsidize both infrastructure investment and customer access. That agreement might seem unlikely given years of hostility among telcos, internet companies and regulators, but here is where the lessons of 2008-2009 for the banks is instructive. Had the banks recognized that they would gain more by working together to address the mortgage crisis, they might have forestalled some of the more punitive regulations, which hurt their profitability. The same backlash is building against the internet and ISP behemoths.
Government will also need to play a role. In addition to the blessing of regulators, Congress could speed the process (an oxymoron perhaps), with tax breaks or subsidies that could be part of a grand infrastructure plan. Congress could condition those tax breaks on fast and uncensored access for all, backed up with penalties if those breaks are not used as intended.
Is this likely? Surely not. But insofar as Silicon Valley has prided itself on bold innovation, it certainly has the capacity to lead the charge. Given the antitrust action against AT&T, the telecom and cable companies might recognize their own need to break from the past and do something dramatic to gain public trust and forestall further challenges. Fighting over net neutrality allows for grand positioning, but if the web giants and the service providers don’t attend to the growing gap between their profitability and the tens of millions of people left out of the equation, they will find themselves with a much bigger fight, one that they will not emerge from unscathed.
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