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Hey FP: It’s Industrial Organization, Not Politics

By 3 January 2011 4 Comments

The Free Press’ view of Net Neutrality, as expressed on its website, is:

We need to keep the Internet free, open and neutral. Network Neutrality is vital to ensuring that everyone can connect and share content freely, that we can access the information, visit the Web sites and say what we want online, free from discrimination or interference.

The phone and cable companies that control access to the Internet for most Americans want to get rid of Net Neutrality, the rule that prevents them from discriminating against online content. They want to become the Internet’s gatekeepers, deciding which sites go fast or slow and which won’t load at all — based on who pays them the most.

We can’t allow the information superhighway to become the phone and cable companies’ private toll road. If they get their way, the Internet as we know it — as a democratic platform for free speech and innovation — will disappear.

Given this stance, one would expect the FP to be delighted with the recent  FCC Report and Order, which cited Free Press 53 times in support of various statements and propositions. Alas, no. The FP bit the hand that cited it, calling the FCC’s result “toothless” and a “cave.” Its grievances:

But the FCC rule DOES NOT:

1) Stop the phone and cable companies from dividing the Internet into fast and slow lanes.
2) Protect wireless users from discrimination.
3) Prevent AT&T from blocking your access to third-party applications and requiring you to use its own preferred applications.

Digital Society is also unhappy with the FCC, but our view derives from our agreement with the proposition that the Internet should allow us to “connect and share content freely” and “access the information, visit the Web sites and say what we want online, free from discrimination or interference.” The surest way to destroy the capacity of the Internet as a whole to fulfill this function is for the FCC to exercise detailed control over the individual components of the ‘Net instead of letting the individual actors find the niches and develop their strategies.

The key to understanding the Net Neutrality issue is to see it as a complicated question of industrial organization in the light of the economics and sociology of complex networks. Humility is in order, because the idea that anyone understands the issues well enough to plan the system is ludicrous. The best that can be done is to establish basic rules, and the accumulated wisdom of the species is that the rules of the free market provide the best approach, perhaps with some leavening by the principles of antitrust. The main thing to avoid is a regulatory system which can be captured and corrupted by the private entities, whether these be IPSs, content creators, tech providers, or academic ideologues.

The striking thing about the FP view is that it sees the Net Neutrality issue as a totally political one. The question is not how to enable and improve the functioning of economic institutions and actors but how to thwart the evil designs of the ISPs, who are classified as opposing political actors. The FP’s cartoonish view of the ISPs leads FP (and the FCC) into advocating actions that will undermine the real goal.

This is what psychologists call projection – imputing to another one’s own characteristics or malevolence.  The FP is a political entity, one which, as stated by its web-mate freepress.org, “Believ[es] that there’s . . .  the struggle moves forward, awaiting the rise of the next left mass movement that’s willing to speak truth to power.”

In this Manichean framework, others must be equally obsessed with political ends, so FP imputes to the ISPs a political orientation that bears little connection to current reality.  The corporatist regulatory ideology of the Progressive Era was largely rejected in the 1970s, though it has hung on more in telecom than in other areas because politicians see telecom as a source of goodies to constituents, such as subsidies for universal service or other favored causes. To the extent possible, though, Verizon, Comcast, AT&T, etc. are businesses, not political organizations.

These companies exist to provide goods and services that the public will purchase, which will then make money for their investors. Along the way, the employees will be given opportunities to do interesting and worthwhile work, exercising their considerable skills for the promotion of human betterment. If governments intervene in markets they will lobby to protect their position, and if governments give away money they will rent-seek, but if the government sets up rules within which the ISPs can function as market entities, they will devote their energies to market action. They prefer to be a-political.

In this reality — call it real reality as opposed Free Press reality –the companies’ interest in discriminating against any point of view or type of site is zero. They are interested in price differentiation, because this is an excellent mechanism for improving both the efficiency and the revenues of the network, and of increasing consumer satisfaction. For example, a fundamental truisms of airline pricing is that some people will pay more for first class than the marginal cost of providing the extra amenities, so by this price differentiation an airline can collect extra from such people and use it to pay some of the hefty overhead of running an airline, which allows it to then charge less to the coach passengers and thus increase the total number of fliers. Outlawing price differentiation would make everyone, especially the coach passengers, worse off.

The Internet is subject to the same principles. Some traffic is time sensitive, some is not, and the degrees might vary. The logical action might be for the ISP to offer its users different options so that people can choose what they like and are willing to pay for. Let the customers decide whether the product is time sensitive or not, and everyone, including especially the customers is better off.

The problems of high fixed cost, low marginal cost businesses in general and networks in particular are well known, and numerous books have been devoted them, including a good, though aging, work by Hal Varian, now Google’s chief economist. Andrew Odlyzko has written specifically on The Evolution of Price Discrimination in Transportation and Its Implications for the Internet, concluding that elaborate pricing differentiation is probably ill-advised, but analyzing the considerations on all sides. Unfortunately, FP shows no sign of familiarity with these works.  (Nor does the FCC – the Report and Order does not cite them.)

The bottom line is that FP has a political agenda rather than an economic one, and that it imputes to others in the system the same subterranean motives. Its demonization of the ISPs, but not of the other corporate actors in the system, is calculated to carry out this agenda, whatever it may be.  (In my view, they are all businesses trying to make a buck, but if FP wants to see them as political actors it should at least be consistent and consider the possible political motives of Google and Dell, to pick a couple of names out of a hat, as well as those of the ISPs.)  But the cloaked nature of the motives clouds discussion of real questions.

Images from Focht’s Photostream and Tobias Higgs photostream.