Against Net Neutrality

(reposted from: https://weposthere.blog/julien-delacroix-iii/2017/12/12/against-net-neutrality)

There has been a noticeable rise in public consternation following the lead-up to the FCC very likely scrapping Net Neutrality. Given that prior to 2015, I don’t remember any Netflix binges being throttled, any news outlets being censored, or any velociraptors jumping out the bushes, I think the topic merits some discussion.

Before we begin, let’s define our terms. By ‘Net Neutrality’ we mean the decision to regulate Internet Service Providers under Title II of the Federal Communications Act of 1934 as Common Carriers – in other words, like a landline telephone or telegraph operator whose prices can be controlled – rather than under Title I. So, for example, blocking access to a competitor’s services is a blatant Antitrust violation and has nothing to do with Net Neutrality. What Net Neutrality actually means is the combination of price controls and something rather creepier called the ‘general conduct standard’ which is so deliberately vague as to give the FCC carte blanche to politically punish anything it doesn’t like, but in keeping with the tactics of the proponents of Net Neutrality, we will ignore that part …

So we do not mean the concept of Net Neutrality, which of course is a paradise of puppy dogs and rainbows, but the fact of it, which is top down Federal regulation of pricing arrangements on the Internet. That this regulation was given the Orwellian title ‘Net Neutrality’ is, to my mind, the root of the dire misunderstandings surrounding it. It should be called ‘content delivery price controls’, but then nobody would be moved to feel passionately about such a thing, even though that is as accurate a concise description as could be offered. It doesn’t evoke as idealistic defences as such concepts as ‘a free and open internet’, ‘equal access for all’, ‘a level playing field’ or the like, as if to imply that this is some kind of civil rights issue. The topic also quite naturally comes with an evil-corporate-lobby-baddy figure, who, as I will explain, will actually benefit from the repeal, but this fact makes it even more difficult to disentangle the desired emotional response from the facts.

Finally, it is also in large part John Oliver’s fault.

What Net Neutrality means is that there are price controls on Internet content, irrespective of bandwidth usage, determined by the Federal Government. As with all price controls, this is a horrible idea. I offer three analogies to tease out why it is such a horrible idea, which I will call ‘the analogue analogy’, ‘the digital analogy’, and ‘the biological analogy’. ‘The analogue analogy’ is designed to demonstrate the incentives created by the demands of the regulation and its outcome on the marketplace. ‘The digital analogy’ is designed to demonstrate why the emotional impetus given to the Net Neutrality debate is thoroughly misplaced. The ‘biological analogy’ is designed to terrify you as to the kind of progress your position has potentially been engineered to halt. (The basis of the analogue analogy is borrowed from Jeffrey Tucker of FEE)

The Analogue Analogy: ‘Post Neutrality’. Delivery companies must charge the exact same rate for delivering something from Producer A to Customer B, regardless of whether the product is a letter, a wardrobe, or anything else. Why? Because we require a free and open postal system with equal access to deliveries for all! Can you imagine if a logistics company decided to charge their customers more for one kind of product than for another? They could create a fast lane for the millionaires and billionaires who want their things delivered right away, while the rest of us wait in the slow lane! They could censor deliveries that they don’t like or that criticize their business practices! New creators of postal content (that happens to be extremely heavy) could never compete against corporate behemoths like Wayfair and IKEA! Having stuff delivered is part of the fundamental infrastructure of modern life and this cannot be left to the chaos of the marketplace. All deliveries must cost the same, be delivered at the same speed, and be overseen by the Government. (And I mean this in 1800, by the way)

Now why is this dumb? Because clearly it costs far more to ship a wardrobe than it does a letter and the existence of price controls means that the shipper has to bear this cost rather than the producer and, ultimately therefore, the customer. Hurray! The customer doesn’t have to pay! Well, no. The shipper bears the cost and makes a massive loss on heavy items meaning that they are forced to charge extremely high fees for light items in order to avoid making a loss overall, and certainly do not make enough of a profit to make any investments to improve the service. No entrepreneurs enter the space because there are no profits to be made, no matter how good an idea they may have for a new method or a good business model. So the customer does have to pay. They pay completely out of line costs for anything other than the heaviest items, and it never ever gets any cheaper because nobody is incentivized to invest in what has been declared to be an ‘infrastructure fundamental to public life’. If it is so fundamental then this would not be a desirable outcome.

(Interesting historical aside: something not far from this was the case in the early days of the United States Post Office Department, which has since become the independent US Postal Service. First Class mail was deemed such an important public good that competitors were barred from competing on this basis. Naturally the entire service was terrible and UPS emerged to offer customers an alternative – they just didn’t call it First Class! The fact that UPS, and now FedEx and DHS too, exists at all – never mind has a multi-billion dollar market capitalization– is down to how terrible an idea ‘Post Neutrality’ is. If they had taken it really seriously then this wasteful ‘railway’ nonsense would never have been allowed!)

The Digital Analogy: ‘App Neutrality’. Smartphones are really just content delivery mechanisms for people to get their apps. Currently, these channels are completely controlled by corporations. If Apple want to stop me getting an app, they can do it. If Google want to stop me getting an app, they can do it too. And Samsung, and Huawei, and HTC. It’s terrible. Can you imagine if they woke up one day and decided they were going to charge for the apps? That they would use their unfathomable corporate power to stand between me and the app-maker like some kind of mafia enforcer and demand money? Can you imagine if they woke up one day and decided that some apps they didn’t like they were going to ban altogether?

This is almost too scary to contemplate at all, never mind follow to its dystopian conclusions. To protect the consumer’s basic human right to apps, the Government needs to regulate them. Every decision any smartphone OS or unit manufacturer makes, regarding anything at all, must be vetted by the FCC. If you think this will slow down improvements, discourage competition, or deter investment, then you are a filthy no-good corporate shill! You don’t care about consumers! You only care about corporate profits! Consumers, clearly, will benefit far, far more in the long run by having the Government protect their interests in this regard by creating and maintaining a level playing field for everybody involved. (And I mean this in 2009, by the way)

Now why is this dumb? Because had this actually happened in 2009 there would be no Uber, Snapchat, Instagram, or Shazam, to name just the most obvious mobile native apps that come to mind. Or mobile payments, or location data, or any of the other quasi-miraculous features of mobile computing that have been built on top of the extremely expensive platform that the Unit and OS manufacturers took an entrepreneurial bet would pay off. I’d note in addition that the issues sarcastically put forward as problems already happen and nobody cares.

The Biological Analogy: ‘Sequencing Neutrality’. The ability to carry out whole genome sequencing may well be the greatest medical innovation in history. It is crucial, therefore, that all investments and pricing models be overseen by the FDA to keep the marketplace for consumer WGS open and fair for consumers. Exposing consumers to predatory pricing accessible only by the super wealthy is disgusting and elitist – and actually kind of racist too, when you think about it. Private investment is not only likely to be a waste of valuable capital, but the idea that private corporations would ever make a profit from this activity is sickening and cannot be allowed. This is for everybody’s own good. (And I mean this in 2000, by the way)

Now why is this dumb? Because it would have caused millions of people to unnecessarily die. Extended from 2017 into the future, this number would be billions or trillions depending on how far out you want to go. The analogy may be unfair in terms of suggesting that Net Neutrality will actually ‘cause people to die’. But then again, maybe it isn’t. Maybe continued investment in Internet infrastructure will make possible projects that will in fact save people’s lives. If you don’t believe this, why are you so sure? What knowledge do you have that the tens millions of people involved in the Internet ecosystem do not? What knowledge do you have that eludes people who haven’t even been born yet but who will need it in 20 years? How did you get this knowledge? (No, seriously, how did you get it? I’m a professional investor and I would really like to know). We will return to this point in the conclusion.

That the Human Genome Project was conducted with international government funding is not to be forgotten, but that doesn’t mean that pre-emptively banning Solexa, Illumina, Oxford Nanopore, 23AndMe, Grail, Counsyl, etc. is a good idea. I also like about this analogy that I snuck in a crude reflection of ARPANET: yes, I know that the Internet started as a US Department of Defence project, and that is to be praised, but 99.999% of the financial and intellectual input since then has been private. We can honour and respect the founders without insisting they are the best thing since sliced bread and everything since has been crap – a sentiment I having a sneaking suspicion will resonate with many Net Neutrality proponents …

Net Neutrality is a combination of the dumbest parts of all of these examples; it perverts the incentives of the infrastructure providers as per the analogue analogy; it places entrepreneurial innovation in what has been a dynamic environment under the regulatory remit of the FCC as per the digital analogy; and it limits productive private investment for honest yet deeply misguided social reasons, as per the biological analogy. It combines just about every popular economic fallacy floating in the ether, with a dose of Millennial narcissism thrown in for good measure.

What I mean by this is that the proponents who aren’t tech behemoths, which I will discuss shortly, but who are your average well-meaning citizen who has been tricked into supporting price controls they think are civil rights issues, have an essentially narcissistic conception of what the Internet is. They seem to think of it as a font of goodness and wealth they are entitled to use, preferably for free, and to which evil corporations are conspiring at every turn to limit their access.

Unfortunately, the Internet is not clean air or a national park. It is an extremely valuable piece of private infrastructure which is extremely expensive to operate, maintain, and improve, and which therefore is leased to a variety of customers in creative agreements at competitive rates. Arguably the most incredible thing about it is that there is no defined business model for participating in the Internet ecosystem - new models are constantly emerging, because there are no barriers to attempting something you think might be profitable, whether this be using, maintaining, or improving the infrastructure. It has improved and is improving in just about every capacity at a phenomenal rate precisely because there has been almost no regulatory interference at all. There is of course a small amount pertaining to contract enforcement, fraud, and crime detection – but this is necessary and to be expected in any area of business – perhaps more so here given that the Internet facilitates financial transactions between parties who may not know each other at all. What there had not been until Net Neutrality was any real sense of regulation. It was, ironically enough, free and open.

So why all the hyperbole and emotion? Why the appeal to faux-civil rights? That seems rather unusual for something as dry as Federal price controls? Because of a massive PR campaign initiated by high-bandwidth content providers, such as Netflix, Amazon (Prime Video) Google (Youtube), and PornHub. That’s right: if you are in favour of Net Neutrality you literally want everybody else to subsidize your porn. But why do they have this position?

Think about ‘Post Neutrality’. Who benefits? Producers of extremely heavy goods who are now being unwillingly subsidized by the shippers, and therefore indirectly by all consumers. Their business functions exactly as it would otherwise, except that their costs are massively lowered for no real reason. Under ‘Post Competition’ they are charged a different rate for their exceptionally heavy items, and they need to make sure that their business model is efficient, rather than scooping up windfall profits protected by regulation.

This is the exact position of high-bandwidth content providers. Nobody has a ‘right’ to Netflix and in fact Netflix imposes an enormous cost on the infrastructure on which it runs. Under Net Neutrality, Netflix has minimal operating expenses and enormous revenues, because ISPs are forced to cover the costs. Which really means that everybody is forced to cover their costs by paying higher connection fees regardless of whether or not they use Netflix, YouTube, or, ahem, PornHub. Without Net Neutrality, Netflix would have to negotiate the rate for their obscene bandwidth congestion, which would be passed on to their customers. The cost burden would be lifted from ISPs, who would then have the profits to reinvest to improve the network, and from customers who don’t use Netflix, who … well … don’t use Netflix. With Net Neutrality, Netflix gets all the money and nothing is ever done to improve the infrastructure on which Netflix operates. To try to quantify the disparity, consider that Netflix uses around 37% of bandwidth in the US (loosely: using infrastructure), and yet Comcast, ATT&T, and Verizon each spend around 4 times as much on capital expenditure (loosely: building infrastructure) every year as Netflix has in its entire existence.

Being in favour of Net Neutrality is basically being in favour of the status quo, followed by slow and boring stagnation. There is nothing terribly wrong with the status quo – Netflix is pretty cool. But price controls that penalize all consumers of an infrastructure for the excessive use of the infrastructure by a minority and remove all incentives to improve the infrastructure are not cool. Regulations that protect rent-seeking are really, really uncool. They ensure that the infrastructure will never get any better. This makes it ironic that Netflix is leading the charge on this front, because if Net Neutrality had been adopted in 2005 instead of 2015, Netflix as we know it simply could not exist. Just as Uber and Snapchat cannot exist without the infrastructure developed at enormous expense by Apple, TSMC, Qualcomm, etc., and 23AndMe cannot exist without the infrastructure developed at enormous expense by Solexa and Illumina, the infrastructure of the Internet as of 2005 could not support Netflix of 2017. The infrastructure of the Internet as of 2017 will also not support the X of 2029. But the problem is that we don’t know what X is. The people responsible for X probably don’t even know what X is yet. So X can’t fight back against Netflix. X can’t use its gargantuan marketing budget from its gargantuan revenue stream from its regulatory loophole that stops it having to pay for what it uses.

It’s easy to be in favour of ‘freedom’ and ‘openness’ without thinking about the costs that allow these concepts to be meaningful in the first place. It’s easy to mindlessly repeat the propaganda of a sexy media company as a political weapon against a dull electrical engineering company. It’s easy to demand that the Government make everything better right away without thinking about the consequences of this interference. If you liked shipping in 1800 then you could have favoured ‘Post Neutrality’. If you liked smartphones in 2009 then you could have favoured ‘App Neutrality’. If you liked genomics in 2000 then you could have favoured ‘Sequencing Neutrality’. Would you, knowing what has happened?

If you believe in Netflix and want nothing about it to change, then you should back Net Neutrality. But if you believe in X – which is to say you believe in the innovations of anybody and everybody, that you believe in the human imagination, and that you believe in the future – then you should oppose.