Net neutrality and Title II regulation of broadband

by Mike Rivers
The Federal Communications Commission (FCC) voted 3-2 to regulate broadband internet yesterday (under Title II of the Communications Act of 1934). This move is being heralded as a big victory for the little guy. In reality, it is the victory of those with more political influence over those with less. In contrast to the way it is being portrayed, I see this as a loss for the little guy.

(Full disclosure: I and my clients own shares in companies that provide broadband internet).

Title II regulation gives the government sweeping powers to regulate broadband internet, which is the way people access the internet through their cable, copper or wireless connection. This is being portrayed as a benefit to consumers: so that there is no interference between the providers of online content and the users who want to see that content (a concept frequently referred to as net neutrality).

The fear has been that cable, DSL and cellphone companies would throttle and restrict access to the web in order to extract “a pound of flesh” from users and content providers. In this view, access to the internet is a public good granted by the government through franchise rights and wireless spectrum. As such, the government must intervene to protect users and content providers from mean-spirited content distributors. 

Content distributors have a right to their work and investment just as much as content producers and users. Buying cable franchises (that aren’t exclusive) and spectrum doesn’t bring broadband to our doors.  It takes massive investment in cables, people, equipment, digging, stringing poles, writing software, etc.). The stock and bond holders of those companies (which are mostly little guys) deserve a return on their investment just like everyone else. They should be able to determine how their assets are utilized as long as they aren’t violating anyone else’s rights. So far, they haven’t.

It is not content users that are crying foul and asking for government interference (except, perhaps, those selling pirated movies that don’t want to have to pay for their massive bandwidth usage). Instead it is content providers who don’t want to have to pay to access broadband distribution. It is Netflix and other broadband hogs which sometimes occupy 60% of broadband at a time that are crying foul and want government intervention, not users on the whole. 

This is a fight between big guys and big guys, not little guys, and the ones who can get the government on their side wins (the profits margins of content providers asking for Title II regulation are much higher than the content distributors, perhaps this is why they can gain more influence).

And, here, we can go back to a historical analog. The Federal Trade Commission (FTC) was created 101 years ago, partly to regulate railroads who were being accused of charging unfair rates. The complaints came mostly from businesses that didn’t want to have to pay so much for railroad service, not from consumers (sound familiar). 

The result was a labyrinthine regulatory structure that strangled the railroad industry in the United States for over 60 years. When railroads found it almost impossible to charge rates to justify investment in their railroad systems, the systems went into chronic disrepair. The railroad industry limped along for years under-investing in their tracks, engines and freight cars, thus killing passenger travel (which survives today only with government subsidies and regulation that forces railroad freight companies to let passenger trains use their track). Only recently, since the Staggers Act of 1980, has the railroad industry recovered, and one of the biggest reasons is that they can charge fees that justify investment.

Turning back to broadband, I believe the same thing will happen. At first, the regulation will be used as a light touch to nudge broadband providers to be “more fair” to users who complain loudest, or at least who have the most political influence. Over time, though, it will throttle investment in the industry, hurting the very content providers and users it is supposed to help (every phone and cable company I follow has said they will reduce their investment in broadband distribution if they can’t generate sufficient return).

To raise capital and build an industry, businesses need to be able to make money. As long as no one’s rights are being violated, the market best decides where assets should go and at what prices. In the absence of that productive situation, investment and progress will stagnate. In the long run, the little guy will be hurt most (but he won’t realize this, because he’ll never know what he could have had).

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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