Regulations almost killed the Internet

Communications history is littered with regulatory missteps that slowed the introduction of new services to consumers, impeded industry investment and job growth, and chilled innovation.  The Internet has managed to flourish when regulators have left it alone, but an increased threat of regulations and taxation may change all that. 

For several years, the Federal Communications Commission (FCC) has wanted to impose net neutrality regulations that would give the Commission authority to be the Internet’s traffic cop and to keep Internet Service Providers (ISPs) from blocking websites or giving preferential treatment of content. Courts have twice rejected the FCC’s imposition of net neutrality rules, which has led the Commission to consider a more extreme regulatory approach, despite the fact that there has been no evidence of market failure or any demonstration of exiting consumer harm that would warrant some regulatory remedy.  Now president Obama has been calling for regulating the Internet as a public utility. 

{mosads}While the Telecommunications Act was passed to “reduce regulations,” the FCC is pondering whether it should employ a 1930s-style “common carrier” regulatory framework (sometimes referred to as Title II regulations). Common carrier regulations were once used to regulate the old Bell Telephone Company monopoly, and its use to regulate the Internet would go beyond the net neutrality calls for “fairness” and “openness” of Internet traffic, and far beyond anything contemplated in the Telecommunications Act. The public should be alarmed by this prospect. 

If history of telecommunications regulations is a guide, full common carrier regulation of the Internet means that regulators can control everything about the Internet – what products are introduced and which company can sell them and at what price. While such drastic actions may have made sense 50 years ago in the monopoly world, it does not make sense in the quick paced and competitive world of the Internet, where telecommunications, cable, satellite, wireless and many tech companies all compete in the same Internet ecosystem.  

Some say that the FCC could elect to choose to a less onerous form of common carrier regulations, but that is like being “a little pregnant” – once your there, there is no hiding it.  A decision to employ common carrier regulations would trap Internet services under a framework that would breed yet more onerous regulations.   

The FCC has a long history of impeding the introduction of innovative communications services.  Delays in the introduction of cellphone services and other telecommunications service, according to Professor Hausman of MIT, have cost American consumers over $100 billion of dollars. Today, most of the 300-plus million wireless phones in service provide high-speed access to the Internet. Regulators were not helping these consumers get online.  

Like wireless services, cable TV networks were instrumental in providing broadband services.  However, history shows that the FCC blocked telephone companies from offering cable TV services from 1970 to 1992, when it agreed to allow entry, but only as a common carrier under a set Video Dial Tone (VDT) rules.  

While telephone companies tried to provide these VDT services using a new technology called Asymmetric Digital Subscriber Line over existing copper lines – essentially DSL services today – common carrier regulations prevented telephone companies from controlling their selection of content, which prevented them from competing head-to-head with cable companies that offered a full line of programming. The daunting regulatory process was described by former FCC Chief Economist Thomas Hazlett who said – “the story of VDT is summarized by a single number: 1.47 – the ratio of VDT filings to VDT subscribers.” It is hard to image how consumers were help by regulatory impediments to market entry, investment and competition.  This was certainly a setback for the introduction of competitive broadband Internet services. 

After passage of the Telecommunications Act of 1996, the FCC did away with the VDT rules, but instituted new Open Video System rules (OVS), where the “common carriers” could control only up to one-third of their video channels, thus having to set aside at least two-thirds of their channels to competitors or leave empty of content.  By no surprise, OVS never became a viable service and these networks were never available to leverage these video services into broadband services. So, how would common carrier regulations help broadband consumers? 

A review of history shows that regulators slowed the technological advancement of telecommunications services that later formed into what is today’s broadband services – wireline and wireless – all because of common carrier regulations.  That history should provide ample warning to the public that these regulations must be avoided at all costs. 

There is one more risk to common carrier regulations. Using existing state laws, these regulations would be free to tax Internet services as a regulated or public utility service. In addition, the Internet tax moratorium will end on December 11th, which will give state and local governments the right to levy Internet taxes on consumers. If common carrier taxes are any benchmark, we can expect Internet taxes on consumers to increase to a rate of 17 percent. Ironically, the increase in price would suppress consumer demand and block Internet access far beyond whatever “openness” could hope to be achieved by net neutrality. This would be regulatory mismanagement at its finest. 

The fact is that the FCC and state regulatory commissions have had a long history of thwarting market forces and making decisions that reduced innovation and consumer benefits, and common carrier regulations have been the framework to make this all happen. Indeed, given today’s Internet ecosystem – brisk technological innovation, faster speeds, devices and apps, and increasing inter-industry rivalry – putting the Internet on par with the stogy old Bell System should alarm the public.  None of it is in the public’s interest. 

Pociask is president of The American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization. He was a member of the FCC’s Consumer Advisory Committee.  The views expressed here are solely his own. For more information, visit www.theamericanconsumer.org.