Unintended Consequences of Net Neutrality Regulation

U.S. policymakers are in the midst of an active debate over how best to accelerate the build-out of next-generation broadband networks. The U.S. economy has a significant economic stake in the outcome. It is increasingly apparent in the global economy linked together by the Internet that the future competitiveness of individual firms, and indeed entire economies, depends heavily on being able to communicate on state-of-the-art networks. Next-generation broadband networks will be significantly more expensive than earlier versions. In the United States alone, the required investment to deploy such networks ubiquitously could exceed $140 billion. This investment will not be made unless those who supply the funds for it are compensated with a rate of return commensurate with the risk. In virtually all private sector markets, firms that undertake investments have sufficient freedom to fashion the way in which they offer the products and services those investments make possible and to price them in ways that meet customer demands and optimize their returns. In the broadband Internet access market, however, advocates of proposed network neutrality ("net neutrality") regulation would restrict those who are planning to build out next-generation broadband networks from having these freedoms. This paper examines one particular aspect of the "net neutrality" proposals: "non-discrimination" requirements relating to the provision of network quality of service (QoS) to content providers. The paper concludes that such requirements, however innocuous they may seem, actually would be detrimental to the objectives that all Americans seemingly should want — namely, the accelerated construction of next-generation networks, and benefits of lower prices, broader consumer choices, and innovations these networks would bring. The paper also concludes that under the best of circumstances, even if networks are significantly upgraded in the presence of net neutrality rules , the proposed non-discrimination provisions would provide incentives for those who would build and operate networks to offer "blended" QoS levels that are "too high" for some applications and "too low" for others. Mediocrity in broadband service is hardly an objective that policymakers in the United States should be trying to achieve.