Why a Focus on Internet Innovation May Be the FCC’s Best Option

The FCC should provide incentives for ISPs to innovate, rather than focus on price controls.

By Jack Karsten
Staff Writer
January 7, 2015

On November 10th, President Obama urged the Federal Communications Commission (FCC) to adopt strong rules to enforce net neutrality. His statement further elevated the debate over regulating internet service providers (ISPs) that put the FCC in the spotlight in 2014. The argument over net neutrality pits ISPs against content providers, two industries that face radically different market conditions. The Obama plan would apply Title II of the 1934 Communications Act to ISPs, classifying them as “common carriers” that must treat all content the same. The internet requires better regulation than an octogenarian telecommunications law can offer, however.

Rather than stretch old laws to fit a rapidly evolving technology like the internet, the FCC should encourage continual technical improvements in the speed and quality of service. New regulations should balance innovation for internet content and internet infrastructure. At home, policymakers should look to cities with high-speed internet projects as blueprints for expanding faster service nationwide. Choosing innovation over regulation would also add credibility to arguments for abandoning controls on internet traffic in foreign countries. The net neutrality debate proves that technology advances far faster than the federal government can draft new regulations.

Many internet service providers have large market shares in some cities because they act as natural monopolies. They do not compete locally because they have high capital costs and sell the same product. By contrast, content providers must compete with every other website for the attention of internet users. For ISPs, competition on price alone would minimize their profits and discourage investment in additional infrastructure. A similar scenario exists for water and electrical utilities, which is why many utility companies have regulated price ceilings. Internet service providers have no such regulations, allowing companies to offer high prices, poor customer service, and little innovation. The dead-last ranking of Comcast and Time Warner Cable in the 2014 American Customer Satisfaction Index conveys the extent of the problem. The federal government should seize this opportunity to promote a more dynamic market for internet service.

Regulating internet service as a telecommunications utility has its own problematic implications. Imposing a price ceiling lowers costs to consumers, but does nothing to encourage innovation or competition. Utilities are already far from the most innovative companies, and the telecommunications industry is no exception. For instance, the telephone has always allowed two people to communicate instantaneously over long distances; the service itself has not undergone radical improvements. Rather than incremental product innovation, the industry has seen great leaps in performance as entire new technologies replace old ones. Broadband internet service replaced dial up service over telephone lines, providing a substantial improvement in speed and functionality. Rather than enact regulations for existing technology, government policy should promote innovation that completely replaces it. This technology-neutral strategy will eliminate the need to tailor regulation to specific technologies.

While traditional service providers have mostly sat on their hands, other actors have stepped up to increase internet delivery speeds across the country. In 2012, Google launched its Fiber project in Kansas City, which offers gigabit internet (1 gigabyte-per-second download speed). Google and Kansas City officials are now jointly sponsoring prizes for software developers to find new applications for internet connections that are one hundred times faster than average internet speeds. Chattanooga, Tennessee and other cities have publically funded fiber-optic networks to provide gigabit internet to local residents and businesses. It remains unknown exactly how much this speed increase will benefit local businesses, but if past growth in internet commerce is any indication, the payoff could be enormous.

The federal government has precedent for improving the coverage and quality of communication technology. The United States Postal Service is tasked with delivering mail and packages to every address in the country, something that private carriers would find cost-prohibitive. Since the dawn of broadcast radio and television, network stations have been required to air public interest programming in exchange for their use of public airwaves. By contrast, the internet has so far received very light regulation outside of curbing criminal activity. There are no mandates on any internet service providers to expand access or improve speeds for customers, despite the internet’s many benefits. In today’s knowledge-based economy, innovation depends on a quick and reliable flow of information via the internet. Well-crafted incentives would address shortcomings in internet access and speed.

Net neutrality regulation also has implications for foreign policy, where the Obama administration has argued against government oversight of the internet’s technical functions. The United States scored a victory when the International Telecommunications Union (ITU), a UN body that sets standards for communications technology, decided its mandate did not include internet governance at their 2014 Plenipotentiary Conference. Expanding the ITU mandate would have given authoritarian member nations more control over internet governance. Now the White House must tread a fine line between limiting government control of the internet abroad and maintaining an open internet at home. Obama’s statement on net neutrality equates internet and telephone services to justify increased regulation, but in many countries traditional telephony is operated as a state-owned monopoly. Regulating the internet like a telephone service in the United States could undermine arguments for removing state controls on the internet in other countries.

The internet has already delivered innovations in the ways we access information, communicate, and conduct commerce. Internet speeds have also come a long way since the days of dial-up. Net neutrality rules must strike a balance between innovation in both digital content and the physical infrastructure of the internet. Local gigabit internet rollouts prove that broadband is not the end of the line for internet service, but strict regulations could delay the widespread installation of fiber-optic cables. True innovation does not merely compete against old technology, but eventually replaces it. Rather than regulate the business practices of service providers, the federal government must create incentives for expanding coverage and for faster service. The alternative is a regulatory environment that allows ISPs to continue their slow service and discourages the diffusion of competing technologies.

Jack Karsten is a second-year graduate student in the International Science and Technology Policy program at the Elliott School of International Affairs. He earned his bachelor’s degree in Economics at Boston College. His current focus is on innovation policy, how technological change enhances economic growth. Jack has completed internships in the United States Senate, the Council on Competitiveness, and the Department of State. He can be contacted at karsten@gwu.edu.

Photo by Adrian Black is licensed under CC BY-NC 2.0. Image cropped.

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