Side Effects of the New US Net Neutrality Rules
On the 26th of February 2015, the Federal Communications Commission (the FCC) passed new net neutrality rules obliging Internet Service Providers (ISPs) to transfer traffic without restrictions based on the type of content. Thus, the regulations aim to stop the existing practice of providing “fast lines” for some providers (e.g., providers who are able to pay more for traffic) and “slow lines” for other providers. The FCC stressed the importance of the regulations by stating: “Today, the Commission — once and for all — enacts strong, sustainable rules, grounded in multiple sources of legal authority, to ensure that Americans reap the economic, social, and civic benefits of an Open Internet today and into the future.”
The new net neutrality rules will: (1) protect the right of freedom of speech by restricting ISPs from blocking or prioritizing content on the Internet; (2) enhance competition by prohibiting ISPs to restrict content and/or services provided by their competitors; and (3) stimulate innovation by providing start-ups and large companies with equal Internet traffic.
Although the new net neutrality rules may have many advantages, they may also have side effects. In this regard, the dissenting FCC commissioner Ajit Pai states that the new regulations would open the door to taxes and onerous regulations, and give the FCC “broad and unprecedented discretion to micro-manage the Internet.” Below, we will examine the possible side effects of the new net neutrality rules (Section 2). Finally, a conclusion is drawn (Section 3).
2. Side effects of the new net neutrality rules
The new net neutrality rules may have at least five negative effects, namely, hindering innovation (Section 2.1), not allowing the ISPs to cope with the increased bandwidth requirements (Section 2.2), decreasing of the revenues earned by the ISPs (Section 2.3), increasing the prices of the Internet (Section 2.4), and causing overregulation (Section 2.5).
2.1 Hindering innovation
The new net neutrality rules may prevent the ISPs from investing in innovative activities. This may happen because the ISPs would not be able to use the money paid for preferential treatment of Internet traffic for such investments. This argument is well implemented in Cisco’s opinion regarding net neutrality. An excerpt from Cisco’s position can be found below.
“Cisco and other opponents of net neutrality regulation believe that this approach is unnecessary and potentially harmful. Many of the Internet’s benefits come from its open nature and the ability of anyone to develop new and innovative devices and services that connect to it. Such innovation has created entirely new industries and has fostered competitive markets in Internet applications and equipment. Allowing broadband service providers to innovate freely and differentiate their networks will enable them to provide consumers with to enhanced service offerings and richer content.”
2.2 Not allowing the ISPs to cope with the increased bandwidth requirements
Video sharing websites such as YouTube (www.youtube.com), Vimeo (www.vimeo.com), and Vevo (www.vevo.com) take up a lot of bandwidth. According to Cisco, global Internet video traffic was 57 percent of all consumer traffic in 2012. The global Internet video traffic will be 69 percent of all consumer Internet traffic in 2017. Cisco also states that the sum of all forms of video traffic, including P2P, will be in the range of 80 to 90 percent of global consumer traffic by 2017. Thus, the ISPs may be in the need to charge more high-bandwidth websites in order to deal with the increased bandwidth requirements.
2.3 Decrease of the revenues earned by the ISPs
Net neutrality may decrease the revenues earned by the ISPs because they would not be able to charge for preferential treatment. The decreased revenues of the ISPs would increase the unemployment rate and have a negative effect on the country’s GDP. The concerns of the ISPs are well expressed in the following statement made by Scott Belcher, a representative of the Telecommunications Industry Association:
“Such a move would set the industry back decades, and threaten the private sector investment that is critically needed to ensure that the network can meet surging demand.”
2.4 Increasing the prices of the Internet
In order to recoup the decreased revenues, the ISPs may increase their prices. Thus, the price of net neutrality would be actually paid by the millions of U.S. residents who regularly use the Internet. Perhaps if those residents knew that they need to pay such a price, many of them would protest against net neutrality. The crash of the communistic idea of planned economy needs to be a message not only to the ex-communistic countries. The main lesson of that crash was that a government interference may have a negative impact on the economy, including high prices. As Joshua Steimle, a contributor at Forbes, stated:
“If we choose politicians, we will see the Internet become another mismanaged public monopoly, subject to political whims and increased scrutiny from our friends at the NSA. If we leave it up to the free market we will, in time, receive more of what we want at a lower price. It may not be a perfect process, but it will be better than the alternative.”
The new net neutrality rules can be the beginning of the slippery slope of regulation in the field of the Internet because the reclassification of broadband as a utility under Title II of the Communications Act could potentially give the FCC the right to impose price regulations, conditions on wholesale access and other controls.
Too much regulation of the Internet may have a negative impact on the small companies which will need to pay significant financial resources for ensuring regulatory compliance. The European Union (EU) can be seen as an example of extensive regulation in the field of the Internet. Because the EU countries often create more rules than required by the EU, a company that would like to do business in the EU needs to investigate the dozens of Internet laws of each of the EU countries. For example, a British e-commerce company cannot create a standard template of an EU guarantee valid for all EU countries because France requires the companies to include certain statutory provisions of the French civil code and the French consumer code in the guarantee.
If the U.S. falls within the slippery slope of the Internet regulation, one can expect hundreds of new laws aimed to “benefit the consumer”, which may lead to overregulation. In this context, Ajit Pai pointed out that:
“It’s a pretty tough thing to build the nuts and bolts of the Internet, and if the regulatory system is one that second guesses you every single step of the way, regulates your rates, tells you what service plans are allowed or now, regulates the commercial arrangements you have both within users and companies, you’re going to have the European situation essentially.”
This article indicated that the new net neutrality rules may have five negative consequences on consumers and companies. Firstly, the new rules may prevent ISPs from conducting innovation activities. Without being able to innovate, the ISPs would not be able to find ways to decrease the consumer prices. Secondly, the rules may prevent ISPs from meeting the increased bandwidth requirements. The reason is that ISPs would not be able to charge more for the high-bandwidth websites. This may lead to the end of many small ISPs. Thirdly, ISPs may lose a significant part of their revenues as a result of the prohibition to charge more for preferential treatment of content. This, in turn, may have an effect on the unemployment and the GDP of the country. Fourthly, ISPs may increase the prices of the Internet in order to compensate for the lack of revenues caused by the prohibition to charge more for preferential treatment of content. Fifthly, the ISPs would need to pay significant legal fees in order to orient in a complex regulatory environment. It is worth mentioning that the new rules are published in a document which is longer than 300 pages. The document contains uncodified rules which are scattered through it. Although these rules would not be codified in the code of federal regulations, the companies would need to comply with them. Moreover, the FCC states that many issues will be decided on a case-by-case basis. Such an approach will not provide the regulated companies with legal certainty. This is because the companies can only “guess” how the FCC will interpret certain rules.
Any regulations concerning net neutrality should be able to balance the interests of the parties concerned. The new net neutrality regulations raise fears of excessive government intervention and unintended consequences on the players of the Internet market. It is not a coincidence that American Commitment, a U.S. advocacy group, collected more than 540,000 signatures on a petition asking Congress to overturn the net neutrality rules. On its website, American Commitment stated:
“The landslide 2014 elections made crystal clear that the American people reject larger, more intrusive government. But President Obama reacted by moving even further left, ignoring the fact the Federal Communications Commission (FCC) is supposed to be an independent agency, and openly demanding the FCC take the most radical action imaginable: reducing the Internet to a “public utility,” imposing sweeping new taxes and destroying private investment, competition, and innovation while putting bureaucrats firmly in control.”
* The author would like to thank Rasa Juzenaite for her invaluable contribution to this article.
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