Dr Duncan Riach

@duncanr

Why the Internet Must Be Regulated

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A Free-Market Perspective

Many people argue that the government should not regulate anything, and that the free market, and the competition that it induces, should naturally take care of producing the lowest priced, highest quality, and therefore the best value products for purchase by the citizens of a capitalist nation. This is called free-market capitalism.

Now it’s important to remember that at the core of free-market capitalism is the idea of competition. You don’t get to espouse free-market capitalism unless you also value competition. And this is where the problem arises.

As with other utilities, such as gas, electricity, running water supply, sewage, and trash collection, the internet connection to our homes is delivered through a channel, or channels, that have been placed at great cost over a long period of time. The phone lines (used for DSL), the co-axial cables (used for cable internet), and in some cases the fiber-optic cables, are both extremely expensive and owned by a small number of incumbents.

Even though the title of this article refers to regulating the Internet, it is actually internet connections, provided by internet service providers (ISPs), that must be regulated. The connections between our homes, through the ISPs, to the backbone of the internet, are part of the public utility infrastructure, a special kind of monopoly that must be regulated.

The backbone of the Internet itself, implemented according to the Internet Standards, is self-regulated by design, not favoring traffic to or from any particular end-point, and always seeking to discover, and utilize, the most efficient paths between any two points. The Internet itself is a frictionless information free-market.

It’s worth remembering that the broader free-market in the USA, and other developed countries, is enabled by a rule of law and some level of government infrastructure, which both enables and protects competition. For example, it’s illegal, and the laws are enforceable, for one market player to literally destroy, through violent action, another market player. It’s also illegal for one player to physically prevent customers from reaching a competitor, such as by building a wall around the competitor. There are many ways that competition can be stifled unfairly in the physical world, which are protected against by the civil and criminal legal systems.

It’s hard to argue that a relatively fast internet connection is not as critical to modern life as gas, electricity, and the other utilities. It’s also clearly true that a very small number of very large companies have control of this new utility.

Now these companies have an almost insurmountable incumbent’s advantage, like AT&T did with the wired phone network back in the twentieth century. They get to charge you for a utility, and it’s almost impossible for you switch to another provider, usually because there isn’t a comparable alternative provider. It’s not even financially or pragmatically feasible to create a comparable service.

This is probably the primary reason that most of us have experienced terrible customer service from Comcast; they’re legendary for it. It’s also probably why the cost for cable internet — which is usually much faster than ADSL through your phone line — seems to be unreasonably expensive. Note that ISP customers are receiving this low value even with the Obama-era government regulations, and that’s because the net-neutrality regulations were never intended to prevent this basic monopoly. In short, the ISPs have a monopoly. Monopoly is a very important concept for us all to understand.

In a free market, a monopoly is a situation where one incumbent player has captured so much of the market, and has raised the barriers to entry so high, that they essentially own the market. In a monopoly, one player in the market has taken control of the whole market. In this case, it’s no longer a free market. Also, the incumbent player is usually able, and motivated, to use its monopolistic power in the first market to gain benefits in other markets.

This happened with Microsoft and Windows back in the nineties. Microsoft had created a monopoly on PC operating systems and was abusing that market privilege by manipulating another market unfairly: driving out competitors in the web-browser space by bundling it web-browser with its operating system.

Utilities are a special form of permitted monopoly, which, when kept in check, can be beneficial for both the consumer and the provider. We don’t need to have dozens of gas pipes coming to our homes, and the gas provider doesn’t need to worry about us switching to another service. It’s unfortunate that we don’t get to choose the provider, but I guess it’s better than having the government provide the utility, right? The answer to that question is not obvious.

By having a private utility, some people in the pseudo-free-market — the owners of the utility — get to milk a monopoly. I think that’s no better than the government doing it, and it has the added risk of the utility owners lobbying or manipulating the government to attempt to gain even greater monopolistic advantages, which would be another form of monopoly abuse, which has apparently already been happening.

So what are these potential additional monopolistic advantages that an ISP could lobby the government to obtain? Well, perhaps the most fundamental advantage, and the most problematic, would be the ability to control the priority of traffic to and form different end-points, an option that they now have following the repeal of the net-neutrality rules. When an ISP can do this, they can basically undermine the free-market that the Internet represents — the biggest free-market in the history of the world — while being financially rewarded for it.

By charging web sites and web services for priority service, ISPs would be leveraging their powerful monopolistic position to control and prevent competition in other markets. This would create insurmountable barriers to entry into the market for all kinds of innovators, and would massively hurt our economy. Back when the ISP monopolies were forming, through mergers and acquisitions, the net-neutrality rules were specifically designed to prevent such abuses of those monopolies. Those net-neutrality rules have now been repealed.

In a perfect free-market, all players have total freedom, and there is a balance of power between producers and consumers. In reality, with utilities, homes are stationary, and pipes are buried in the ground. It’s doesn’t behoove us to pretend otherwise. Instead, the reality of utilities must be addressed and the power of the producers must be kept in check, as it was for the landline telephone service. In the end, the purpose of free-market capitalism must be to provide the most benefit for the most people. Unregulated monopolies, the shadow of free-market capitalism, are detrimental to all.

The internet, as a service provided to our homes, is clearly a critical public utility. Furthermore, it’s clear that a small number of large, incumbent players currently have monopolistic control of that utility. Unless someone steps in to temper the capitalistic drive of these unchecked incumbent players in a no-longer-free-market, the expected outcome will be increased prices, reduced quality, and worse value for consumers and citizens. Furthermore, much more importantly, without the net-neutrality rules, the open and free-market of the Internet is likely to be destroyed in the name of short-term profit for the ISPs. There’s a good reason that the only apparent support for removing regulation has come from the internet service providers (ISPs) themselves.

In summary, the only people in our society who stand to benefit from not regulating ISPs, and allowing them to abuse their privileged monopolistic position, is the owners of the ISPs. All of us cannot, and should not, be owners of these utility companies, unless of course they are to be owned on our behalf by the government. Therefore, leaving the ISPs unregulated, or removing the regulation from them, is fundamentally anti-capitalist. Removing regulation would clearly be akin to a form of crony capitalism or dictator-led communism, a situation in which, to quote George Orwell in Animal Farm, “All animals are equal, but some animals are more equal than others.”

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