The Next Net Neutrality Debate

Without two-tier pricing, telephone companies might not have ushered in mass communications more than a century ago.

It may have the answer.

Since the early 2000s, a small but influential cohort of policy wonks and pundits has argued that the Federal Communications Commission should prohibit internet service providers such as Verizon, AT&T and Comcast from charging different rates for high-speed connections to digital content (or “edge”) companies such as Amazon, Netflix and Google.

Rallying around the banner of “net neutrality,” these activists believe that the ISPs, as they are known, should treat all content on the internet equally, charging everyone the same amount of money for equally fast (or slow) access to all websites.

The ISPs contend, in response, that they have a right to experiment with differential pricing.

Now the net neutrality debate is entering a new phase. The FCC is poised to reclassify the ISPs as information providers rather than common carriers, an administrative decision that will limit its ability to regulate their operations.  

Today’s debate is shaped by competing visions not only of the future but also of the past.

One intriguing historical analogy is the impediment to innovation in the U.S. telephone business in the 1890s that was posed by flat-rate pricing. Only when municipal authorities permitted operating-company managers to experiment with differential pricing (then known as “measured service”) was the new medium transformed from a niche service for an exclusive clientele into a mass service for the entire population.

Consumers, it turned out, were perfectly able to differentiate among high-speed, medium-speed and low-speed telephone access, and to choose whichever calling plan suited their needs.

Unlike messaging today, telephone service was synchronous: A key selling point for operating-company managers a century ago was the length of time it took to make a connection. The longer the on-line wait time, the cheaper the service.

High-powered businesspeople clamored for virtually instantaneous hookups, while residential users favored the lower rates -- and readily acquiesced in the lower quality of service. Had lawmakers forced phone companies to stick with flat rates, telephone service would have remained the prerogative of the few. In the telephone business, differential pricing promoted the public good.

While the analogy is hardly perfect, differential pricing might well bring comparable results today. Glib assumptions about competition should not be permitted to obscure the positive disruptive potential of innovations impossible under current regulations. 

Challenged by differential pricing, edge providers such as Google, Amazon and Netflix could find themselves obliged to experiment with new genres of digital media, creating employment opportunities for a new generation of content providers.

Yes, all of this is speculation. But we need to abandon inaccurate assumptions that have made it virtually impossible to have an honest discussion about how the digital economy works.

Common carriage, the time-honored civic ideal enshrined in Title II of the 1934 Communications Act, remains an indispensable civic ideal. Yet it was never intended as a one-size-fits-all solution, and is by no means the only regulatory tool in U.S. policymakers’ toolkit.

Net neutrality is predicated on a cartoonish caricature of the history of American communications that has long exaggerated the importance of garage-based startups, while discounting the innovative potential of the digital behemoths that dominate cyberspace today. Innovation is too important to be left to the lawyers or the economists.

Now that it looks as if the Title II designation for ISPs is history, it is time to explore other options. What do to? 

To begin with, acknowledge that the current legal regime is anything but neutral and stop demonizing the ISPs. Amazon, Netflix and Alphabet, the parent of Google, have benefited hugely from the status quo without having channeled more than a trickle of their enormous profits into the maintenance and improvement of the existing information infrastructure. They are free-riding on a network that the ISPs built.

Lawmakers should strike down existing laws that discourage innovation in municipal broadband, increase government spending on network expansion for thinly settled regions, and institute tax incentives to nudge existing content providers to fund high-quality local journalism and investigative reporting. 

In this way, they can foster the civic ideal of common carriage without resting their argument on shopworn shibboleths that rely on faulty historical analogies about innovation and consumer preferences. 

The Title II designation for ISPs was a patchwork solution to an ongoing challenge. Differential pricing is not a panacea, but it worked for the late 19th-century telephone business, and it deserves a chance today.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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