Stop Whining That the Web Is Broken

(Originally published here.)

The “open Internet” has supposedly been endangered by a federal appeals court’sdecision Tuesday to override the Federal Communications Commission’s so-called “net neutrality” rules. I’m skeptical. Advocates of more intrusive regulation are making some really weird assumptions about the nature of the telecommunications industry.

According to Bloomberg News, “the regulations would have required Internet service providers to treat all online traffic equally, rather than giving preference to companies willing to pay extra fees for faster service.” It’s hard to think of other businesses that are legally prohibited from offering different products at different prices, as long as they are reasonably transparent and don’t discriminate on the basis of things such as race.

Take airlines, which now sell the option to board early. One possible benefit of this is that you may have less trouble finding overhead space for a carry-on, while those who didn’t pay extra may have to check their carry-ons. Maybe that’s unfair, but nobody writes impassioned books about it, or demands that the Federal Aviation Administration ban the practice.

Or consider government-owned toll roads, many of which charge different rates depending on the number of axles in a vehicle. That’s entirely reasonable, because big trucks weigh more than motorcycles, which means they create more wear and tear on roads. The burden of proof is on the “net neutrality” crowd to explain why telecoms are different. Simply repeating “open Internet” — a meaningless catchphrase — isn’t convincing.

The government might have good reason to regulate the fees charged by broadband providers if it could show that the industry earns excessive profits and is dominated by an anticompetitive oligopoly. Yet this narrative isn’t supported by the facts. According to data compiled by Bloomberg, the profit margins of companies in the Standard & Poor’s index of telecommunication services are lower than the average margins of all companies in the S&P 500. Similarly, shares of companies in the telecoms index have underperformed the broader market during the past five years.

The S&P 500 (green) has outperformed shares of telecommunications companies. Source: Bloomberg.

The S&P 500 (green) has outperformed shares of telecommunications companies. Source: Bloomberg.

The reality is that these companies must spend vast sums on capital expenditures to keep pace with soaring demand for high-speed Internet service. For all the talk about stifling competition and hurting startups, the existing system means that text-based websites end up paying the same rates to Internet access providers as video-streaming services that consume far more bandwidth. Why is one-size pricing — an effective subsidy — fair? How is that in the interest of consumers? Why shouldn’t companies pay for the data needs they create?

If the government can prove that broadband providers should be classified as common carriers in the same manner as telephone companies, then it should regulate these companies as utilities. If not, it should let Verizon Communications Inc., Comcast Corp. and Time Warner Cable Inc. set Web access prices as they see fit. They could use the extra revenue to invest in new capacity and make U.S. consumers better off.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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