Is Net Neutrality Good or Bad for Innovation?

The Trump administration reignites a classic debate over economics and technology

7 min read
An illustration of a key lock surrounded by electrical cords to represent net neutrality.
Illustration: Bakhtiar Zein/Alamy

Update: On 18 May 2017, the Federal Communications Commission voted in favor of a proposal by Chairman Ajit Pai to review existing rules around net neutrality. Specifically, the proposal would eliminate Title II of the Communications Act, which classifies Internet service providers as common carriers. By classifying ISPs as common carriers, Title II subjects ISPs to rules such as those that prohibit carriers from speeding up or slowing down specific content on their networks. The 2-1 vote begins the process required to change that classification, and also triggers a 90-day review that includes a public comment period. Later this year, commissioners will cast their final votes. The proposal's ultimate goal is to relax regulations that Pai says have prohibited ISPs from charging extra for delivering content that requires more bandwidth. It was largely based on an economic argument that such restrictions have hindered investment across the telecom industry. Opponents have said that removing regulations would harm content producers such as Netflix and Google, and small businesses. 

The Trump administration is just days away from taking the reins in Washington, D.C. and many technologists are wondering what its arrival will mean for net neutrality. The new leadership is flanked by advisors who have opposed net neutrality in the past, suggesting that U.S. policy could be challenged or even reversed in the year ahead.

The Obama administration made the strong defense of net neutrality a hallmark of its Internet policy, based on the belief that preserving it benefits consumers and promotes innovation. Now, Trump’s administration is likely to argue the opposite, and say that tossing out net neutrality is really what’s best for consumers, companies, and the U.S. economy.

Major tech companies have also lined up on opposing sides of the debate. Google, Apple, Amazon, and Netflix support net neutrality, while Internet service providers (ISPs) including Comcast, Verizon, and AT&T have long railed against it. Everyone argues that their position will spur innovation and economic growth. So who’s right?

Unfortunately, there is no clear answer. Economists have done plenty of modeling on net neutrality over the past eight years, but there isn’t a strong consensus about whether keeping it or throwing it out would be best for consumers, innovation, or the economy. “Nobody has much data,” admits Gerald Faulhaber, an economist and professor emeritus at the University of Pennsylvania who has done his own review on the matter.

To better understand the most compelling arguments about how changing U.S. policy on net neutrality might boost innovation, or kill it, IEEE Spectrum spoke with Nicholas Economides, an economist at New York University who supports net neutrality, and Faulhaber, who generally opposes it.

Let’s start by defining our terms. As you may recall, net neutrality is a regrettably bland term for an important idea: ISPs such as Verizon and Comcast ought to deliver all online content to consumers in the same way, without granting preferential treatment to any particular content.

While it’s worth noting that this concept can be interpreted in many ways, it often means prohibiting ISPs from asking content producers, including Netflix and Google, to pay a higher rate so that their content is delivered at faster speeds.

From the perspective of ISPs, not all content is created equal—if millions of Comcast customers want to live stream the Super Bowl from NBC, that’s going to require a lot more bandwidth and network resources from Comcast than if they were all trying to load a simple website. ISPs argue that allowing them to charge content creators (such as NBC) based on how much bandwidth they consume, or how fast their content must be delivered, is more fair.

Clearly, this policy would also generate extra revenue for ISPs, which they say they will reinvest back into their own networks. This argument is tempting because right now, many ISPs have a near-monopoly in their service areas with little incentive to improve their service (a situation that has led to notoriously low customer satisfaction). If they could charge clients more to move content, ISPs may be more motivated to develop faster service.   

Skeptics say that ISPs won’t spend very much money on achieving faster speeds when they could just slow down service for any content producer who doesn’t fork over enough cash. “What matters to consumers is relative speed,” says Economides. “Being able to delay things creates artificial scarcity, for which content providers are willing to pay.”

Economides also says investors will want any profits returned to them, rather than ploughed into infrastructure. “As soon as AT&T makes money from violating net neutrality, there will be tremendous pressure to give that money to the shareholders,” he says.

Meanwhile, net neutrality supporters say the real innovation at stake is that which comes from content producers such as Netflix, Google, and Facebook. If content producers have to pay ISPs in order for their content to be delivered quickly to customers, that money is not being invested back into those companies.

There’s also a lot of concern for the little guys—small content producers who may not be able to afford the rates ISPs will charge for faster delivery. Critics fear that booting net neutrality will create a “two-tiered” Internet wherein wealthy companies pay for content to be delivered at high speeds, while content from startups or small web publishers languishes in the slow lane.

“The greatest threat to innovation is if new companies, innovative companies, have to pay a lot to be on the same playing field as everybody else,” Economides says. Net neutrality supporters worry there might be secondary effects from limiting the free flow of ideas and information online.

In a sense, though, we already have a two-tiered Internet. Wealthy companies can pay for web designers and software engineers to program sites that load faster and respond more quickly to commands. And a handful of publishers already own most of the sites that we spend the majority of our online time perusing.

Faulhaber doesn’t think eliminating net neutrality would deal a devastating blow to small content producers. He compares tiers of Internet speeds to the various delivery services offered by a post office. One company can pay a little extra for expedited service while others who don’t need rushed delivery simply pay the standard rate.

“We've heard this about how only large firms will be able to do it, but if you look at the way the economy works—that’s not true at all,” he says. “The only people who will buy it are those that need it, and if you’re a small firm and you need it, you’ll buy it.”

In fact, Faulhaber, thinks new services could pop up—such as in robotic surgery or gaming—if content producers were guaranteed access to a high speed lane. “I don’t see this as removing opportunities, I see this as creating opportunities for innovation,” he says.

Right now, there are still a lot of unknowns about how a post–net neutrality world would actually operate. It’s not clear how much faster or slower content might be delivered, or what fees an ISP would charge for each service. Given those gaps in knowledge, it’s hard to know how these expenses might impact small or large businesses, and affect ISPs or content producers.

And if net neutrality disappears, what might that mean for consumers? Well, if ISPs could charge content producers more to cover the expense of maintaining their network, they may charge consumers less for home service. Of course, content producers could also wind up passing along the cost of the extra fees they must now pay to consumers, zeroing out any cost savings from ISPs.

While a drop in prices for consumers is theoretically possible, no one knows if it would actually happen in a post–net neutrality world. “There’s no evidence that if net neutrality were violated today, the price would fall,” Economides says. “There could be some theoretical model in which case it would happen, but there are also other models where it doesn’t happen, so there is no bottom line on that.”

Consumers may also benefit from “zero rating,” a perk that some ISPs have already begun to offer. With zero rating, an ISP forgives any data that a customer spends on specific content. For example, AT&T said in September that it would not count programs streamed through its own DirecTV Now service against customers’ monthly data limit, much to the FCC’s chagrin.

Clearly, net neutrality is a complicated issue with many factors at play that can be tweaked to produce both positive and negative scenarios. To try to sum up all of these variables and their potential outcomes, Economides did an analysis in 2015 to search for the “total surplus” in the market for Internet service. Total surplus is an economic term that identifies the conditions that will bring the greatest benefit to both producers and consumers.

In Economides’ case, he tried to figure out whether keeping or ditching net neutrality would bring us closer to total surplus, by factoring in the profits of ISPs, the profits of content producers, and the benefits to consumers. In the end, he found that sticking to net neutrality “tends to maximize total surplus” for society.

With that in mind, he also thinks preserving net neutrality would promote innovation and economic development across the most businesses. “If you’re a Republican and you believe you should support business, then you should be pro–net neutrality because most businesses benefit from net neutrality,” he says. “The only businesses that benefit from violations of net neutrality are ISPs. If you think about it, 95 percent of businesses in the U.S. are not ISPs.”

Faulhaber, of course, sees any impact from doing away with net neutrality as simply another reasonable cost of doing business. “Just like we see in other businesses that offer different qualities of service, you get to choose what you want, and that’s fine,” he says. “This is standard in the economy.”

So what will actually happen with the new administration? For the past few years, net neutrality was preserved by the U.S. Federal Communications Commission under Obama’s watch. Now, though, Trump could change all that. His transition team includes several opponents of net neutrality, including Vice President–elect Mike Pence and Rep. Marsha Blackburn. And the trio he selected to coordinate the handoff of the FCC to his new administration are all against it.

In the coming weeks, Trump will also have the opportunity to appoint three new commissioners to lead the FCC, including a Chair. His new appointees will join two current Republican members—Ajit Pai and Michael O’Reilly—who have both criticized net neutrality. The FCC is an independent federal agency, which means it’s overseen by Congress, which is also now under Republican control.

That said, anyone who tries to reverse U.S. policy on net neutrality will likely have a difficult road ahead. Public sentiment will not be on their side—when the FCC solicited public comments on the issue in 2014, they received a record 3.7 million comments, with the vast majority in favor of net neutrality.

Discarding it, Economides says, may not be as simple as net neutrality opponents would like to believe. “I’m not saying it’s not going to happen; I’m just saying it’s not going to be easy,” he says.

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