Is Net Neutrality good for permission-less innovation?

Net Neutrality is the idea that Internet Service Providers (ISPs) should treat all content (from Netflix and YouTube to this very blog) equally. Advocates of Net Neutrality typically back regulations that ban ISPs from charging companies like Netflix extra for access to fast lanes.

There’s a number of reasons that Net Neutrality advocates back additional regulations, but probably the most important is the idea that a ‘neutral’ net will lead to more innovation. For example, take this op-ed in Wired magazine. The author argues for Net Neutrality on the grounds it will support permission-less innovation, he writes “the neutral and level playing field provided by permission-less innovation has empowered all of us with the freedom to express ourselves and innovate online without having to seek the permission of a remote telecom executive.”

But this argument confuses permission-less innovation, the idea that creators shouldn’t have to ask for permission from gatekeepers (regulators, ISPs, etc.), before launching a new product, with the idea of paying gatekeepers from a publicly available menu of prices. It’s true you couldn’t launch a Netflix competitor without access to broadband subscribers but it’s equally true that you couldn’t reach consumers without electricity. Yet we typically don’t act as if Google has to seek the permission of British Gas or EDF.

It’s true that vertically integrated ISPs could hurt innovation by blocking access to competing services (e.g. Sky forcing Netflix to pay a big fee to access end users). But two things should work against this.

First, if an ISP blocked Netflix or Amazon or any other service they would lose customers to rival ISPs. According to OfCom 95% of UK premises have a choice of 3 or more ISPs. It’s not clear that ISPs have the market power in the first place to block a rival service. 

Second, competition law exists for a reason. If an ISP were to pursue such a nakedly anti-competitive move, they would soon be censured by the Competition and Markets Authority.

We shouldn’t ban a practice simply because it could be used for anti-competitive ends. After all, cutting prices can be used to drive out competition. We should only restrict practices if they are almost always likely to restrict competition, otherwise we would end up restricting business practices that have real benefits to consumers.

It is just as easy to see how a practice of charging Netflix, Amazon or Google for access to fast lanes could help consumers. ISPs could use the extra-revenue from web services to cut prices for broadband subscribers allowing them to expand market share. It might also encourage greater investment in under-served rural areas. Economist Hal Singer notes that capital expenditure from ISPs fell in the US the year after the Open Internet Order was passed.

Tim Wu, the legal scholar who first coined the term, argues that Net Neutrality is a subsidy to creators from consumers.

“A more accurate description of a ban on payments from content providers to Internet intermediaries is this: it is a subsidy to the creative and entrepreneurial at the expense of the passive and consumptive.”

Wu, accepts that Net Neutrality likely raises prices for broadband subscribers but argues that is a price worth paying for the innovation created by tech companies launching new and exciting services online.

But I think this view is mistaken for three reasons:

  1. Even if it were effectively a subsidy, it doesn’t seem obvious why the best way to finance that subsidy is a tax on internet use. It seems to go against the principle that the most efficient way to raise revenue is from a broad base.
  2. Broadband subscribers are creators too. It’s weird to highlight YouTube and Facebook as examples of the success of net neutrality when the reason for its success is broadband subscribers creating and submitting their own videos. Expanding internet access through lower prices (funded by revenue from companies like Netflix) would also expand the pool of creators for companies like YouTube.
  3. If lower prices mean more people accessing the internet that also increases the size of the market for web services encouraging more innovation at the margin.

Innovation is important, but enforcing Net Neutrality rules that will push up broadband prices isn’t the way to encourage it.