Stuck in Neutral
The Wall Street Journal Editorial
March 8, 2006

Here come the telecom mergers, and right behind them come the bad ideas. With even many fervent regulators (even Reed Hundt!) now conceding that the current mergers aren't bad for consumers, the new Maginot Line for the politically ambitious is something called "Net neutrality."

If you haven't heard the term yet, you're bound to soon, as a bevy of "public-interest" groups and Web site operators push Congress to enshrine the concept in law. And as Republicans on Capitol Hill begin to rewrite the unfortunate Telecom Act of 1996, now is a good time to sort out the free-market principles from the chaff, starting with "Net neutrality."

These days, this concept usually means that phone and cable companies should not be able to charge the Googles and Amazons of the world for the bandwidth they need to reach Internet users' homes. The issue came to the fore recently after the phone companies started making noises about offering preferential treatment -- basically, faster downloads and better service -- to Web sites willing to pay for the privilege.

Of course, the phone and cable companies own the networks through which Web surfers connect to Ask.com, eBay, Yahoo, et cetera. And they say that preferential charging would allow the spread of fancy new Web features that require more speed and reliability than currently available. Think of video calling over the Internet, or high-quality, full-screen video streaming (in contrast to the tiny window on which you now watch a video clip on your PC).

The Net neutrality crowd claims this is an attempt to set up "toll roads" on the Internet, holding Web sites to ransom, keeping users captive -- and "breaking the Net," to hear one industry exec tell it. Naturally, they'd rather not pay. So, naturally, they're asking Congress to pass a law saying they'll never have to. They paraded through Washington last month to argue that charging for preferential access would turn the Internet from an open system to one more like a cable TV network, in which your provider gets to choose what you can and cannot watch.

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There's a term for this in the high-tech world. It's called FUD -- fear, uncertainty and doubt. The Web site owners are trying to scare Congress and the public with dire warnings that the Internet will be ruined by rapacious phone and cable companies. Those companies in turn swear that they would never block legal Web sites. They could be lying, but it would probably be bad for their business if they did lie. In most places in the country, a provider that "broke" the Internet would lose customers to another that didn't.

We've also seen this movie before. A decade ago, the country was told that, to promote the spread of high-speed Internet access, the Baby Bells needed to give competitors access to their subscribers' phone lines. So services, such as broadband Internet access, were "unbundled" from the network infrastructure and vibrant competition for customers was supposed to spur ever-faster and cheaper Internet access. In the process, the phone companies' property was forcibly leased to its own competitors at prices determined by regulators, but all that meddling was said to be justified by the predicted expansion of Internet services.

That little experiment didn't work out so well. Investment slowed as lawsuits tried to sort out who had the right to do what to whom and for how much. Innovation also slowed. In the end we discovered that cable and phone companies were perfectly capable of competing against each other for Internet customers -- and now increasingly for each others' phone and TV subscribers as well.

Last year, the Supreme Court affirmed the Federal Communications Commission's ruling that cable companies offering high-speed Internet access were not "common carriers" subject to mandatory federal regulation, and the FCC later extended that exemption to DSL service offered over phone lines. These decisions ended a decade in which the conventional wisdom dictated that the way to deliver the broadband revolution was to regulate the network owners (the phone and cable companies for the most part) into making it available -- or else.

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The "Net neutrality" debate has many similarities with that unbundling cul-de-sac. Both raise the question: Is innovation better served by undermining the property rights of network owners, or by reinforcing them?

In the present debate, the property right at issue is that of cable and phone companies to charge Web site operators for faster access or better service. Telling a firm what it may charge for a service -- or that it may not charge anything -- is a good way to ensure that the service won't be offered at all. Placing limits on the ability of network owners to charge for better access will mean less investment, as we learned after 1996.

Incidentally, whether the network owners could ever succeed in charging some of the millions of Web sites for preferential access is unclear. But it seems unlikely that they would do so if it so degraded users' experiences that it turned them off Web surfing or drove them to a competitor. If the phone and cable companies are the rapacious rent-seekers they're made out to be, "breaking" the Internet would turn out to be a bad way to turn a profit.