Net Neutrality Not the Savior One Might Think (Part I)

The Internet was jubilant when the Federal Communications Commission (FCC) officially issued its net neutrality rules in February.

And then, nothing happened.

Since net neutrality rules officially came into effect on June 12 Internet providers have not raced to speed up Internet speeds, and a single complaint has been filed with the Federal Communications Commission (FCC).  Now that net neutrality has become a catch-all term for anything that people don’t like, it is important to distinguish what is happening here.

Net neutrality traditionally means treating all data equally regardless of the content; no speeding up or slowing down certain content on the last mile which is the lines connecting the ISP to the subscriber.  In essence, Comcast can’t charge Netflix to speed up its service on the last mile, which is called “paid prioritization.”  The argument is that only big players, such as Google and Amazon, can afford to pay the “tolls” for paid prioritization, and in turn smaller Internet services are unable to compete.

Except, that does not really happen.

The complaint facing the FCC deals with interconnection, which is the connection between a content provider and the ISP – not the last mile. ISPs charging to connect to their network is not prohibited under the new net neutrality rules per se, but the new rules allow the FCC to determine if these interconnection agreements are “just and reasonable.”

In some sense, interconnection agreements provide a loophole for net neutrality because some large content providers, such as Google, can build delivery infrastructure and pay to send their content directly to ISPs giving them de facto faster speeds.

So when Netflix complained last year that Comcast was violating network neutrality, it really wasn’t. Comcast was demanding that Netflix pay an interconnection fee to connect Netflix’s network to theirs because Netflix was an enormous bandwidth hog.

For the most part, instances of true net neutrality violations are rare and it is not always clear if they help or hurt consumers.  For example, in 2008 Comcast did not count their Xfinity video service against Xbox 360 users’ data-caps.  This may cause consumers to dump Netflix in favor of Xfinity, but it also saves Xfinity users in data fees.

These kinds of issues with interconnection agreements and paid prioritization could be solved with a dose of the free market.

To be continued…

Comments (4)

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  1. Government Skeptic says:

    It is just like the US federal government to tell us that the path of regulation is better than the free market. The path to hell is paved with good intentions…

  2. Josh says:

    It seems, at least from my fairly uninformed perspective, that strict net-neutrality interferes with the price mechanism. The firm with the highest marginal revenue with respect to additional bandwidth or faster speeds (I may be revealing my ignorance at the moment) is going to be willing to pay the most for that marginal access. In a partial equilibrium framework societal welfare is going to be maximized at that equilibrium level.

    I suppose the only issue in a general equilibrium sense is that the ISP’s are operating effectively as monopolies, so perhaps it isn’t efficient. How does it go, it is good to be a troll in a one bridge town.

    • Josh says:

      To be clear I’m not saying the government should get involved with one end because it has created a distortion on the other.

    • Tyler Prochazka says:

      It does interfere with the price mechanism. There are two issues at hand here.

      First, the issue of “tolls” on the last mile is more legitimate because it is zero-sum. This is the traditional meaning of net neutrality. It is true that Netflix would likely be willing/able to pay ISPs to get priority access to consumers. This does pose a problem for smaller competitors that cannot afford the toll. However, in my mind this is only a problem if the market is operating as an oligopoly, which in most areas it is. As I mention, though, this is not a practice that should be banned outright because it may provide benefits to consumers in lower prices. Instead the internet plans should be calibrated by market competition.

      Second, the issue of interconnection poses a similar problem but it is not one that should be regulated even absent greater competition. ISPs negotiating interconnection agreements with transit companies (which help transmit internet content over large distances) are arguing that these companies are sending in far more bandwidth to their networks than they are receiving of theirs. As such, ISPs are demanding compensation for the asymmetric traffic and the cost of the additional ports, which is a practice that makes sense and has been done for years. It also is not zero-sum. Google directly connecting to the ISPs for a faster connection does not slowdown its competitors.

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