Don't Be Afraid of the Net Neutrality Repeal
(Bloomberg View) -- Now that the U.S. Federal Communications Commission has killed net neutrality, what happens next -- assuming appeals fail -- depends on the economic incentives for internet service providers. These incentives make it unlikely that there will be significant changes to the user's experience.
In at least two ways, the internet in the U.S. wasn't completely neutral even while the 2015 regulation reigned supreme. Netflix, which accounts for about a third of peak time internet traffic in the U.S., still linked its network to ISPs in so-called peering arrangements. These exclusive "fast lanes" are also leveraged by Google and other big traffic generators.
The other way net neutrality fell short is owed to the ability of mobile internet providers to "zero rate" certain content services -- that is, exclude their traffic from a mobile plan's data limits. Examples include all music streaming services in the case of T-Mobile's Music Freedom offer and video services under the same network's BingeOn plan.
Net neutrality is not disappearing because it didn't really exist in the first place. But companies need no longer fear the threat of FCC intervention in certain cases -- say, if large internet providers started demanding unreasonably high fees for peering with large content providers (such disputes were common before the 2015 regulation took effect) or if a mobile operator decided to zero-rate a certain content provider and imposed high fees on others. (Earlier this year, former FCC Chairman Tom Wheeler objected on these grounds to sponsored data plans from AT&T and Verizon).
That interference was never meant to be as heavy-handed as efforts in Norway or the Netherlands, which banned zero-rating altogether. Rather, the FCC served as a judge of reasonable ISP behavior. It's possible, however, that current Chairman Ajit Pai is right and the market can take care of that.
It's highly unlikely that any ISP, no matter how big, would dare to throttle Netflix or Google and demand unreasonable payments from them. They are so universally used that such a client-unfriendly gesture would surely get the ISP in hot water. It could theoretically happen to new services that stream heavy video. But, first, these firms are at a disadvantage anyway because established ones already have peering arrangements, and second, the barriers to entry into video streaming market are already high because of intellectual property rights. It's unlikely that a small player trying to outcompete Netflix could get any traction given that market environment.
Zero rating, by contrast, could well take off. It did among poorer customers in emerging markets without strict net neutrality regulations, such as Brazil and India. (The latter banned it last year, largely to drive out Facebook's Free Basics program, which partnered with operators to provide free access for its users to select sites).
Ideally, a mobile operator offers a range of plans -- from very cheap but limited ones for poorer clients to relatively expensive ones for heavy users who can afford them. The 2015 net neutrality regulations made it difficult to provide the nearly-free options by charging content providers and not customers for the traffic. Now, mobile providers are likely to have more freedom to go low while still making a profit. It's not easy to see how they'll be disincentivized from selling "neutral" data services at full price to those who want it, or even why they'll be able to raise prices given the presence of cheaper options.
It's likely that those mobile operators which have their own content divisions -- such as Verizon and AT&T -- will zero rate these divisions' products and not competitive ones. That sounds monopolistic, but the U.S. is not an emerging market. There will always be tens of millions of people who will pay, as they do today, for a "neutral" plan. The prices will be kept down by competition among the mobile operators, which is far heavier in the U.S. than among fixed broadband providers.
In other words, it's likely that the fixed broadband ISPs will continue favoring big content providers over small ones as they do today, and mobile providers will roll out more sponsored offerings for customers with less willingness to pay. That doesn't sound like an apocalypse.
I am concerned about one potential threat. In today's deeply divided politics, ISPs will be moved by one outrage campaign or another to block "offensive" websites. The repeal of the 2015 regulation leaves that to their discretion. But then the regulation didn't save The Daily Stormer, a neo-Nazi resource, from being booted out by one provider after another earlier this year. I'm not sure the FCC would have intervened on behalf of fringe sites even under Wheeler.
The reason net neutrality safeguards may have been useful in the U.S. is the insufficient competition, especially among fixed broadband providers. But that problem cannot really be regulated away. The U.S. has chosen not to take the same path as Australia, where the government is building a fast internet network, entry barriers for service providers are relatively low and competition is rife. The other way to stimulate competition is to relax regulation. If current market participants get too greedy and start doing things that displease customers, they will create an opportunity for new entrants who won't do that. I doubt the repeal of the 2015 rules will boost the number of internet providers in middle America -- but it's possible that the threat of disruption will stop existing ISPs from worsening their current offerings.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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