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Feb 2, 20186 min read

Net Neutrality, Competition and Economic Forces: A Contrarian Analysis

Introduction

The issue of net neutrality mobilized significant public discourse in India, and found its way to the USA last year. On December 14th, 2017, the U.S. Federal Communications Commission under the leadership of Ajit Pai voted in favour of repealing net neutrality, much to the furore of millions of netizens across the US[1]. The vote in many ways reinvigorated the debate on net neutrality in the US and around the world. In the US, the nature of discourse on net neutrality is staunchly partisan, with the Democrats advocating for it and the Republicans opposing it.

The immediate reaction following the vote was that of paranoia and blind outrage, with many prematurely calling it the ‘death of the internet’. Those who harbor this sentiment most likely ignore that the legal enforcement of net neutrality happened as recently as 2015[2]. The internet in the US has historically been free from any sort of regulation on its ‘neutrality’. In 2015, the internet was declared to be under Title II of the Communications Act thus allowing the FCC to enforce stricter regulations on the same. Before 2015, the internet was under the category of “information services”, which provided less scope for governmental regulation.

The term ‘net neutrality’ was coined by Tim Wu, a law professor at the Columbia Law School[3]. It can be argued that the semantics behind net neutrality have played a significant role in shaping public perception. At its essence, net neutrality is a concept that all traffic on the internet must be treated equally and the Internet Service Providers must refrain from any actions or policies to the contrary. Internet traffic is  composed of packets of data. Under a net neutrality regime, all data packets are to be treated equally. The practical ramifications of this principle are that ISP’s cannot offer policies which include differential pricing, traffic shaping, etc.

In order to analyse net neutrality, this post shall focus on two dimensions which are related to each other, i.e. the economics behind net neutrality, and the market forces behind net neutrality.

Existing Legal Frameworks

In India, there is no formal legislation enforcing net neutrality. However, the Telecom Regulatory Authority of India is the independent regulatory body which regulates the Internet and telecom framework in India. In February 2016, Telephone Regulatory Authority of India (TRAI) published a notification titled, the ‘Prohibition of Discriminatory Tariffs for Data Services Regulation, 2016. Chapter II of the said notification contains Sections 3 and 4[4]. Section 3 prohibits discriminatory pricing while Section 4 gives exemptions only to emergency services or in situations of grave public emergency.

In the United States, the debate on net neutrality was reinvigorated in December, 2017, following the FCC’s vote to remove the Internet from the ambit of Title II classification of the Communications Act of 1934. Under Title II classification, the internet was deemed to be a public utility and thus empowering the FCC with greater regulatory power over it. Title II of the Communications Act concerns something called “common carriers,” which also covers utilities like landline phones and electricity[5]. The 2015 Open Internet Order reclassified broadband internet service under Title II (it was previously classified under Title I as an “information service), which provided the legal basis for the FCC to enforce net neutrality rules. With the FCC’s net neutrality regulations backed by the authority under Title II, ISPs are forbidden from blocking or throttling data, and from enacting “paid prioritization” offerings. Paid prioritization is a subversion of net neutrality through allowing ISPs to discriminate between websites’ data. Without Title II classification, the FCC does not have the legal authority to enforce net neutrality.

This is the result of the ruling in the case of Verizon Communications Inc. v. FCC where it was held that the FCC did not have the necessary legal authority to enforce net neutrality since the internet was classified under Title 1 of the Communications Act of 1934[6]. Title 1 of the act classified the internet as ‘information services’ and not ‘telecommunication services’ which comes under Title II. Key provisions of the Open Internet Order of 2010 were struck down by the court. Subsequently in 2015, the FCC, under the control of the Obama Administration classified the internet as a telecommunication service under Title II, thereby empowering the FCC to enact heavy handed regulations in the pursuance of net neutrality.  The vote on December 14 reclassifies the internet as an information service under Title 1 of the Communications Act of 1934.

Economics Behind Net Neutrality: A Competition Assessment

At the heart of net neutrality is the assumption that all data is equal and ought to be treated equally[7]. This noble assumption cannot withstand the scrutiny of economic realities of the internet[8].

Internet traffic is composed of data packets[9]. Data packets are used in Internet Protocol (IP) transmissions for data that navigates the web, and in other kinds of networks[10]. On the other hand, bandwidth is the maximum data transfer rate of a network or Internet connection. It measures how much data can be sent over a specific connection in a given amount of time[11]. We can visualize bandwidth as a pipe, with the packets of data being the entity transferred within the pipes.

Applying the principle of net neutrality in the practical scenario effectively means that all packets are to be given the same allocation of bandwidth. This is irrespective of the fact that the data packets differ from each other in terms of their size, utility, and the rate at which they are supposed to be transferred. For instance, email packets don’t have to arrive “simultaneously” for email to “work” but Skype packets do.

What is overlooked by the advocates of net neutrality is that bandwidth is a finite resource[12]. Treating packets of data equally and thus allocating the same bandwidth leads to inefficiencies in the transfer of data or in other words, latency within the network. From the perspective of a free market, it makes sense to allow price and profit mechanisms of the market serve to direct the allocation of this resource as efficiently as possible.

As bandwidth is a finite resource, the internet can be classified as a ‘rivalrous good’. Goods wherein consumption by one entity affects the consumption of another comes under this classification[13]. Multiple consumers are vying for the limited bandwidth available. A practical instance of the internet acting like a rivalrous good is when there are large number of users using the internet as a result of which there is a reduction of speed. If bandwidth were truly non-rivalrous, there would be no variation in speeds according to consumption. All internet service providers  have the pressing need to deal with this scarcity.

The ISPs thus have an incentive to explore the possibility of throttling certain services or charging companies extra for priority treatment. Netflix for instance consumes a whopping 37% of traffic[14]. This means that other websites need to compete for the rest 67% of the bandwidth with a single website. From the perspective of the ISPs, charging Netflix a premium to access the bandwidth infrastructure of the ISP is an alternative option to allocate bandwidth. However, under a net neutrality regime, ISPs cannot charge Netflix and other high volume providers a connection fee to have its content transported to customers on a faster lane. This would mean that the bandwidth would be clogged with high volume and low volume users. The low volume users who do not consume services such as Netflix would end up subsidizing the usage of other high volume users.

Paid prioritization gives rise to an incentive to ISP’s to invest in expanding their broadband infrastructure in order to accommodate faster lanes and improve last mile connectivity with the users. Additionally, paid prioritization is not anomalous in other parts of the economy. Purchasing faster delivery options from e-commerce websites such as Flipkart or Amazon by paying an additional price is a good example. Under net neutrality regime, such a policy would not exist. Companies that need super-fast internet can pay more, and those that aren’t concerned with speed can pay less. It acts as a platform for innovation and investments into infrastructure that would enhance the quality of services offered by the internet.

The analysis will be continued in the second part of this article. Stay tuned!

This article has been authored by Ravi Shankar of first year from the West Bengal National University of Juridical Sciences. 


 

[3]  Tim Wu in the centre of the Net Neutrality Debate , http://www.law.columbia.edu/news/2017/11/net-neutrality-Tim-Wu-FCC

[4]  Prohibition of Discriminatory Data Tariffs For Data Services Regulations, 2016https://www.scribd.com/doc/298535363/Regulation-Data-Service

[5]  What you need to know about net neutrality (before it gets taken away),  https://www.engadget.com/2017/12/01/net-neutrality-faq-title-i-title-ii-2017/

[8]  Not all Internet Traffic is Created Equal, http://techfreedom.org/not-all-internet-traffic-is-created-equal/

[13]  http://www.businessdictionary.com/definition/rival-good.html

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