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Show Me The Money: Does Net Neutrality Hurt Or Help Investments?

Will net neutrality hurt or help the economy? Amid a stubborn recession, that question will take center stage as critics and proponents debate how new rules at the Federal Communications Commission would impact investments in the Web.

At a high level, the arguments are straight forward. But the details supporting those views -- which will likely be debated for months at the FCC -- become vastly more complicated.

FCC Chairman Julius Genachowski and proponents of new rules say the next Google or Amazon being cooked up in some garage may not see the light of day if a policy isn't put in place that ensure they'll make it on the Web.

"There are hundreds of thousands of Americans whose small businesses rely upon the free and open Internet," Genachowski said in a Q&A last week. "The rules I am proposing seek to preserve the Internet as unparalleled engine for economic growth and prosperity."

Next week (Oct. 22), the FCC will vote on Genachowski's proposal that would codify and broaden guidelines for how Internet service providers like AT&T, Comcast, Verizon and Sprint Nextel treat content on their networks. The rules would prevent those companies from acting as gatekeeper, ensuring consumers and businesses get any legal content or services of their choice.

Opponents of his plan, say ISPs need flexibility to manage their network traffic and keep down costs. They want to make sure some bandwidth hogs aren't ruining the experience for other consumers. And shareholders need to be assured they will get a return on their investments without the uncertainty of new regulations.

Is such, net neutrality proponents like Google want "for us not to be able to differentiate but set a standard that would shift all costs of building a network to us and so that we are treated as the lowest denominator common carrier," Ivan Seidenberg, CEO of Verizon Communications said during a visit with Post reporters and editorial board members last spring. "So if you listen to the west coast crowd, they are trying to effectively quarantine what our permissible activities are," he said.

The proposal is expected to pass next week, which will launch a months-long review process at the FCC before final rules are drafted. Both sides of the debate are gearing up for a battle on the economics of broadband in a net neutrality world.

US Telecom, a trade group representing the telecommunications carriers, says growth in broadband networks has boomed over the last several years, so don't mess around with something that isn't broken. Since 2003, when the FCC began deregulating communications markets, broadband has increased (In 2008, investments were 30 percent higher than in 2003), the group wrote in a paper last MayBrogan, SPRING 2009, 18 MEDIA L. & POL'Y.pdf.

"While we do not claim direct causation, it is reasonable to conclude that the correlation is driven by more than mere coincidence and policies that encourage and facilitate facilities-based competition play a significant role in encouraging investment in facilities,"
Patrick Brogan, vice president of industry analysis at USTelecom wrote in an email as a caveat.

To show how rules can deter investment, the major carriers didn't apply for stimulus grants set aside for broadband networks because, some industry insiders said, because the grants were saddled with net neutrality conditions.

Derek Turner, the director of research for public interest group, Free Press, argues against those claims. He says AT&T increased its investments in broadband after its merger with Bell South in late 2006 (Gross capital expenditures were $11.8 billion in 2006, $17.7 billion in 2007, and $19.7 billion in 2008, Turner says) even though the merger forced the company to abide by net neutrality conditions. The conditions would prohibit the company from discriminately blocking content or applications on their networks. His research also shows that after the 1996 Telecom Act was approved, capital expenditures as a percentage of revenues reach about 30 percent. Following deregulation around 2003, those investments began to taper and are currently around 18 percent of revenues today.

"Investment decisions are incredibly complicated with so many other factors that go into them -- expectations about demand, competition, supply costs, interest rates, etc." said Turner. "Regulations factor in too, but not any more than any one of those other things, especially a light regulation like what the chairman is proposing."

He says competition has a bigger impact on investment decisions.

That's an opinion voiced also by Blair Levin, a former Wall Street analyst who is now heading the FCC's creation of a plan to bring broadband to all U.S. homes. Levin, who also worked with Genachowski as a technology advisor to Pres. Obama during the transition, said at a 2006 Senate Judiciary Committee hearing on telecommunications competition that regulation doesn't move the needle on investments.

"In my view, this is like believing that a piece of a puzzle is the entire puzzle," Levin wrote.

The promise of a competitive marketplace, however, can be a bigger incentive for investment, he said.

"Ultimately, to serve the goal of stimulating a rising standard of living for Americans, the challenge for government is to assure a broadband environment characterized by survival of the fittest, as selected by the market, rather than survival of the friendliest, as selected by the network owners or government," he said.

By Cecilia Kang  |  October 12, 2009; 8:00 AM ET
 | Tags: federal communications commission, invesments in broadband, julius genachowski, net neutrality  
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As Supreme Court Justice Stephen Breyer explained in his 1999 opinion in the Iowa Utilities case, there's no question that forced sharing (which is one way of thinking about net neutrality -- allowing appls providers like Google to use telecom carriers facilities without paying) -- reduces investment. As Breyer explained, "a sharing requirement may diminish the original owner’s incentive to keep up or to improve the property by depriving the owner of the fruits of value-creating investmnt, research, or labor. ... Nor can one guarantee that firms will undertake the investment necessary to produce complex technological innovations knowing that any competitive advantage deriving from those innovations will be dissipated by the sharing requirement. The more complex the facilities, the more central their relation to the firm’s managerial responsibilities, the more extensive the sharing demanded, the more likely these costs will become serious."

Posted by: Empiricist1 | October 12, 2009 11:54 AM | Report abuse

The argument seems to be that net neutrality (i.e. regulation) will discourage investment. Well, let's consider an analogous situation: the electric power transmission and distribution networks. These are widely acknowledged to be in very sorry condition. They are deregulated, and have been so for about 15 years. There is close to zero investment in this infrastructure, and nearly zero spent on R&D by industry.

I think that this investment issue is a red herring. Imagine that almost all roads were privately owned, and that you had to pay to use them. Suppose further that the companies that owned those roads could also be in the shipping business, and maybe even sell cars. Without regulation they could (and certainly would) act rapaciously. For example, the owner of the road in front of your house might refuse access to a rival delivery company, or make restrictions that have that same effect.

Of course, the real threat is much more dire. Have you got a blog that is critical of Verizon or AT&T? My, it is loading very slowly, isn't it? Got a blog that is industry-friendly? Special low-cost rates for you! This is my prediction, unless we have net neutrality with real teeth.

Posted by: Ancaeus | October 12, 2009 1:18 PM | Report abuse

Internet and wireless law needs to balance net neutrality and free speech against online defamation. Network operators and wireless carriers should have a hands off approach to hardware vendors and content providers. Internet and wireless laws should however build in clear and concise approaches that would allow operators to remove defamatory content. Without a rule based approach to defamation on the internet and on mobile networks, free speech will get lost. --- by Internet Lawyer --

Posted by: Web20Lawyer | October 12, 2009 3:53 PM | Report abuse

Thank you for posting

Posted by: craigspr | October 12, 2009 5:51 PM | Report abuse

Ancaeus writes "Well, let's consider an analogous situation: the electric power transmission and distribution networks. These are widely acknowledged to be in very sorry condition. They are deregulated, and have been so for about 15 years. There is close to zero investment in this infrastructure, and nearly zero spent on R&D by industry."

Sorry to quibble, but electricity transmission and distribution are subject to the same type of non-discrimination regulation net neutrality advocates propose for the Internet -- and the result is precisely what Justice Breyer's wise analysis predicts: Inadequate investment.

Posted by: Empiricist1 | October 13, 2009 5:33 PM | Report abuse

Actually, the better analogy is telephone service - which STANK when you had AT&T as a monopoly, able to control your devices and without significant competition.

30 years ago, the phones were awful, there were no options, and I paid MORE for long distance than I do now.

Now you have flat rate long distance, tons of options (call waiting, caller id, tons of features) at a lower price, and much greater capacity.

The difference with electricity is that it has its rates regulated by individual states. ISPs rates are not regulated. TOTALLY different situation and a really disingenuous analogy.

Posted by: VirginiaGal2 | October 16, 2009 7:40 AM | Report abuse

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