A Capitalist Argument for Net Neutrality

Photograph by Susan Trigg

Who would dare wall off the open fields of the Internet? Umm, lots of folks.

A court overturned federal rules on “Net neutrality,” potentially opening the door to big broadband providers — in this case, Verizon — charging companies like Google and HBO to access their pipes. It’s the latest wrinkle in a long-running debate on a subject that has long fired up telecom execs and theorists, and put the rest of the public to sleep.

Don’t sleep yet! The debate is important (snore…) and (wake up…) can tell you something simple and beautiful about how capitalism works.

Verizon, as Bloomberg’s Andrew Zajac and Todd Shields reported, wants a “two-sided ” market in which both consumers who subscribe to broadband and Internet content companies (say, YouTube) would pay for access. In general, supporters of such markets tend to make the case that it’s fairer for consumers to have content providers share their costs. One version of the “two-sided” market that AT&T is experimenting with has content companies subsidizing high speed data usage.

So what can be wrong with with that? There are a number of common arguments against it, the most frequent being that it could stifle innovation from new companies that can’t afford the broadband tolls. It probably wouldn’t be great for free video services in any form. It’s unlikely that in a two-sided market Verizon or other operators would shut off large swaths of the Internet; a more realistic possibility is that video-oriented heavy bandwidth users, like Netflix, would pay for what could become more or less mandatory high speed service.

You can argue until you’re blue in the face (and lord knows many folks have) about whether it’s fair for big broadband companies to charge big content companies for access to their pipes. To TMN‘s mind, the issue with Verizon’s “two-sided” markets is more straightforward. Such a market always means that one “side” (the subscriber, ie. you at home with your computer) chooses the broadband provider and pays one fee. Then the other side — the Internet content company, ie. Facebook or Yahoo or Youtube — pays another broadband toll. Both sides pay a share, but only one side gets to choose which broadband company to do business with.

So at first, consumers get to share the costs of broadband. Eventually, though, content providers will pass on those costs. Want to watch a bunch of videos on Facebook? Pay up. Here’s the rough part: Overall, in this model the costs of content go up, because when you choose a broadband service provider, you’re not likely to find out how much Facebook is paying to send videos to your computer. Folks don’t have much incentive to choose a cheaper broadband company when someone else is paying. Down the line that comes back to bite the consumer.

That’s not just theory: We have some clear real-world examples. A good one comes from Europe, where you pay to call a mobile phone. Of course, the caller doesn’t have any say in the choice of telephone company; the phone’s owner does that. So guess what? Calling a German mobile costs 16 cents a minute more than calling a landline. Since the callers pay the toll but have no say in the phone owner’s choice of mobile phone operator, there’s no pressure on the operators to lower those costs.

There’s really no better illustration of a basic principle of capitalism: Free markets work if those who are paying are also doing the choosing. So as a fan of capitalism (well, mostly) TMN doesn’t like “two-sided” markets.

An extra bit that’s worth throwing in here is that broadband companies like Verizon may ultimately find they don’t like those markets much, either. The broadband market we have has encouraged Internet providers to release more bandwidth-heavy services, giving consumers the incentive to get faster broadband plans. That has worked out awfully well for Verizon, Time Warner, Comcast and the other big broadband players, and maybe they shouldn’t be so quick to change things.

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