Every normal man must be tempted, at times, to spit on his hands, hoist the black flag, and begin slitting throats. –H.L. Mencken

The Net Neutrality Ruling – Part 3: The Economic View Of Net Neutrality


Silberman on Legal Interpretation

In this final part, we’ll look at some of the other parts of Silberman’s opinion which warrant attention.  Here are parts one and two.  I particularly enjoyed this paragraph, emphasis mine:

I quite agree with the majority that the relevant statutory language is § 706 of the Communications Act. 47 U.S.C. §1302. Although the FCC purports to rely on a scatter shot of other provisions of the statute, as well as § 706, none of those other provisions truly bear on the issue. “Emanations from the penumbra” may once have served to justify constitutional interpretation, but it hasn’t caught on as legitimate statutory interpretation.

Justice Oliver Wendell Holmes once described this so-called legal “penumbra” as the “gray area where logic and principle falter”.  I would submit that there is no such area, only that men falter.

The Myth of Market Monopoly

In one part, however, Silberman falls prey to a common economic fallacy: the monopoly.

For example, if a particular broadband provider were a monopolist, then by regulating its prices, the Commission might encourage it to expand supply to increase profits, rather than artificially restrict supply so as to charge supracompetitive rates. Such a regulation would not increase competition, but it would at least potentially remove a barrier to investment.

In chapter ten of Man, Economy, & State, Murray Rothbard demolishes the whole concept of a market monopoly.  Such a monopoly as Silberman posits can only exist because of regulatory agencies like the FCC which prevent competitors from entering the market, not in spite of them.

But Silberman gets back on track:

According to the majority, the Commission is also restrained because it may only regulate pursuant to § 706 if it does so to achieve a particular purpose: to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans.” 25 F.C.C.R. at 17970 ¶ 121 (citing 47 U.S.C. § 1302(a)).

This, he replies, is “an almost meaningless limitation, as demonstrated by the Open Internet Order itself.”  While I agree with him on this, the same can be said of the Interstate Commerce clause, of which he is apparently a proponent, and virtually every other statute and regulation designed to “encourage” certain outcomes.

Silberman rebukes the idea of pre-crime in the FCC’s claims that broadband providers “may” or “might” engage in a variety of activities which they deem harmful to the Internet by saying:

That a party “may” do something is hardly a finding – at least in American law – that a party has done or will do something.

I’ll only split hairs here a bit to say that “will do something” is also a bit of pre-crime.

The FCC also argued that without their “guidance” the Internet would cease to exist:

In short, the Commission speculates that the Open Internet Order prevents a classic “tragedy of the commons”– a situation in which each economic actor, behaving in his own self-interest, contributes to the destruction of a public good.

This would assume that the Internet is a public good, which it is not, but Silberman repudiates this and shows a hint of free market thinking with his response:

Indeed, if a tragedy of the commons were likely in the broadband market, then one would expect Verizon and other broadband providers to support the Open Internet Order, because such a situation would be economically harmful to them in the long run. By the same token, when firms oppose, on antitrust grounds, the merger of competing firms, it is generally a reliable indicator that the merger is pro-competitive. See Frank H. Easterbrook, The Limits of Antitrust, 63 TEX. L. REV. 1, 18 (1984) (“When a business rival brings suit, it is often safe to infer that the arrangement is beneficial to consumers.”). Firms can generally be relied upon to know their own best interest.

Net Neutrality As Rent Seeking

His closing statement is perhaps the best:

This regulation essentially provides an economic preference to a politically powerful constituency, a constituency that, as is true of typical rent seekers, wishes protection against market forces. The Commission does not have authority to grant such a favor.

The question then is, who are these rent seekers?  Put simply, they are Internet companies who are not also carriers.  Content providers like Google, Yahoo, Amazon, Netflix, Vonage, etc all have an interest in keeping carriers like Verizon and Comcast from being able to charge them more to keep their content flowing.

Which perhaps brings us back to the beginning.  Aside from the freedom and private property aspects of this case, was there ever a need for the Order to prevent carrie’s from blocking or discriminating against certain content providers or was it simply a made-up problem, designed, as Silberman suggests, to aid the rent-seekers?

I would argue, with Silberman, that it is the latter.

Of course it is not in Verizon’s or Comcast’s best interest to irritate either its residential subscribers (who want to view certain content) or content providers (who want their content to be viewed), a carrier’s goal being to make money on both.  So the idea that a carrier would entirely block access is a bit ludicrous.

Ask yourself this: If you couldn’t get to Netflix on your Verizon FIOS connection, wouldn’t you switch to Comcast?  And if Netflix couldn’t reach a large portion of the Internet via Verizon, why would they continue paying Verizon for Internet service?

As for “discrimination”, this is merely another word for varying service levels.  All traffic is already discriminated against across computer networks.  Voice and video traffic take precedence due to their time-sensitive nature and other traffic is sacrificed to ensure delivery.

In the absence of the Order they will likely charge a premium for faster access to YouTube and Netflix.  But the fact that content providers have voluntarily chosen to pay extra for faster access to carrier networks in the presence of the Order speaks volumes.

Take for example Netflix’s Open Connect platforms which works with carriers to pre-position content on their networks, as close to viewers as possible.  And other providers were already in the process of building these content distribution networks (CDNs) long before the Order was invalidated.

I’ve hit several points about this case, but I think the most basic is this: there never was a need for regulation to force carriers to act in a way that is beneficial to all parties.  The free market will take care of that…if you let it.

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This entry was posted on March 18, 2014 by in Business, Government overreach, Legal, Libertarianism, Protectionism, The Internet Strikes Back and tagged .

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