Trainwreck - the danger of upending net neutrality

Profile picture for user denis_pombriant By Denis Pombriant April 20, 2017
Net neutrality is a central pillar of Internet freedom that has come under attack - again. Efforts to rollback hard won rights cannot and should not be ignored because any attempt to mobilize monopoly power affects everyone.

net neutrality
A couple of years ago I wrote Solve for the Customer, in which I used United Airlines of “United breaks Guitars” fame and Comcast AKA Xfinity, a cable and Internet provider, as sterling examples of how not to treat customers. United was then renowned for stonewalling a customer whose guitar had been broken by baggage handlers who were seen throwing the guitar (the catch was debatable). Assault and battery on customers came later.

Comcast was known for its aggressive tactics in swallowing up smaller cable providers to eliminate competition so that it could raise rates. Customers in the Philadelphia area formed a class action in an attempt to get some of their money back. Unfortunately, in a case that went all the way to the Supreme Court (highly unusual for a class action) the class formation was overruled in a 5-4 decision and the suit evaporated.

In dissent Justice Ruth Bader Ginsberg, wrote that the majority had produced a ruling that “…is good for this day and case only,” and “…sets forth a profoundly mistaken view of antitrust law.” Now both companies are back in the news for more or less the same things and their story is almost Dickensian, harkening back to A Christmas Carol.

United has spent a rough week largely suffering from self-inflicted wounds because it forgot, or maybe never knew, its responsibilities to its customers. We don’t need to rake over United’s travails here though Stuart Lauchlan provides a succinct appraisal of where we are today:

Whether United has learned enough from its social media mauling to manage this next phase with appropriate customer service for a digital age is far from certain.

Think of United as the story of Christmas Present involving a ruthless monopoly treating its customers with contempt because it could and because there’s no one standing up for the customer.

Now fast forward to today and the ongoing controversy about net neutrality and the U.S. Federal Communications Commission chairman Ajit Pai’s effort to roll back settled law making the likes of Comcast, Charter (now Spectrum), Verizon, CenturyLink, and AT&T utilities answerable for their actions to the public. In this effort Pai seems to be working hard to get out of the way.

The previous FCC had quite sensibly decided to get in the way because these companies could wield near monopoly power. But in exchange for submitting to common carrier rules that effectively meant servicing all customers in a territory and treating them the same the FCC allowed the furtherance of the monopoly.

The anti-net neutrality crowd prefers a system in which, much like airlines, a monopolist entity can dominate a market deciding service levels and fees. Of course one of the big issues in net neutrality is giving this oligopoly the ability to set up a multi-tiered system for delivering Internet services. Another way to look at it would be institutionalizing slow Internet.

In Donald Trump’s Multi-Pronged Attack on the Internet an article in the New York Times, Harvard Law School professor and the author of Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age Susan Crawford warns of dire consequences—think of it as Christmas Future, if Pai’s deregulation effort succeeds. In a section of her article that could be retitled, “How to Build an Oligopoly” Crawford notes,

Comcast bought NBCU a few years ago. Now behemoth AT&T, which already swallowed up DirecTV, wants to buy HBO’s and CNN’s programming through an $85 billion merger with Time Warner. Verizon already bought AOL, is about to absorb Yahoo and is rumored to be considering the purchase of Spectrum, the second-largest internet service provider in the country.

Crawford also notes that,

These five companies account for over 80 percent of wired subscriptions and have almost total power in their territories. According to the Federal Communications Commission, nearly 75 percent of Americans have at most one choice for high-speed data.

The parallel between today’s airlines, where one carrier often dominates a hub freezing out competition, and tomorrow’s Internet providers can be chilling. What’s more amazing is that other nations, sensing that communications is the heart of competitiveness, have made high speed Internet a priority for all citizens and businesses.

My take

In his 2010 book, The Birth of Plenty: How the Prosperity of the Modern World Was Created, author William J. Bernstein referenced the work of the late Scottish economist, Angus Maddison in which he observed that there are four essential ingredients for any nation aspiring to developed world status including the rule of law, effective capital markets, efficient communications, and private property. Until all four are in place, there’s not much hope of producing an economy that everyone can share in thus creating a middle class and all that goes with it.

It’s worth repeating that all four elements have to be in place, not three of four in any combination. You can test this hypothesis simply by observing countries around the world today. Western European nations have all four, Japan does too and so do many of the G20 nations. But take away the rule of law and you have Russia, take capital markets and you get China, take private property and you have a large basket of failed or failing states.

This leaves efficient communications, which technically includes the Internet but also a transportation system that can move goods and people with minimal fuss. Countries with inefficient communications are many; think Yemen for starters. Creating a communications system with built in friction is a terrible idea. It is now being tested in the US by disinterest infrastructure and disrespect for the free flow of ideas. If you think the net neutrality debate is all academic and not impactful on your life, think different.