Net Neutrality: Toward a Stupid Internet

The Internet is an achievement of historic importance, arguably rivaling or exceeding the invention of the printing press in its capacity to spread human knowledge and entertainment to the farthest corners of the globe. With the introduction of his printing press in 1450,1 Gutenberg took the books from the hands of cloistered monks and put them into the hands of those who would challenge the orthodoxy of the Church—and into the hands of those who would build the free society that has produced the industrial and technological marvels we enjoy today.

In the same manner, the Internet takes encyclopedic knowledge from the libraries and puts it into the homes of people all over the earth. It delivers images of artworks from the Louvre and the Metropolitan Museum of Art to our homes. It makes the wares of locally owned boutiques available to a world of customers. It facilitates discussions between distant scholars and enthusiasts on every possible subject. And, as did the printing press, it can lead to great cultural and political change, by spreading truths that censored media around the world cannot speak. The Internet promotes the open exchange of ideas and information in an unprecedented way.

What makes this open exchange of ideas and information possible? According to some, the answer is something called “net neutrality.”

“Net Neutrality is the reason why the Internet has driven economic innovation, democratic participation, and free speech online,” claims one website. And, say its advocates, net neutrality—and thus the Internet itself—is in grave danger:

The big phone and cable companies are spending hundreds of millions of dollars lobbying Congress and the Federal Communications Commission to gut Net Neutrality, putting the future of the Internet at risk. . . . The consequences of a world without Net Neutrality would be devastating. Innovation would be stifled, competition limited, and access to information restricted. Consumer choice and the free market would be sacrificed to the interests of a few corporate executives.2

Such claims naturally catch the attention of people who value innovation, competition, and information. And anything that threatens to thwart the free market is certainly cause for alarm. But what exactly is net neutrality? Does it really protect these crucial values? If so, how? And if not, might it actually assault them? To answer these questions, we must first specify the exact nature of the Internet.

What Is the Internet?

Anyone who uses the Internet understands on some level what it is: a means by which computer users around the world can exchange data, usually via websites and email. But, for our purposes, we need a deeper and broader understanding of the Internet and how it came to be.

In the 1960s, MIT professors conceived of the Internet as a means to connect geographically distant computer networks via a robust communications system that could function even if portions of it were destroyed. Their innovative solution entailed dividing data being sent across the network into “packets,” each packet with routing instructions to direct it to its destination over any available path. Therefore, if one portion of the network was damaged, the “data packet” could follow its routing instructions to its destination over an undamaged portion. The first actual interconnection of networks, or “Internet,” was deployed in 1969, enabling four different research institutions to transmit information to each other.3

Other important developments followed. In the 1970s, Robert Kahn and Vinton Cerf developed TCP/IP (transmission control protocol/Internet protocol) in order to facilitate the transmission of data packets between computers using different operating systems.4 And in 1991, Tim Berners-Lee, a computer programmer at the European Center for Particle Research (CERN) in Geneva, unveiled the World Wide Web, a system of Web pages, written in hypertext markup language (HTML), that could be accessed by means of hypertext transfer protocol (http://) addresses. HTML provided a common language by which Web pages could be written and read; http provided the means to access those pages.5 By enabling computer users to easily communicate with each other—to send emails and to post and retrieve data in the form of Web pages—these men created the technology that powers the global Internet as we know it today.

Most of the code involved in these developments is “open source,” meaning that the individuals and companies that created it have released it into the public domain. By doing so, they have relinquished their right to control and exclusively profit from the use of their creations. In this respect the Internet is free; the coding languages and communications protocols that make the Internet possible belong to no one and are therefore available for free use by anyone who has the requisite physical means—the computers and the data transmission lines that connect the computers to each other.

But these physical means are not free. The specialized computers (servers) that a Web content provider, such as Google, uses to make its content available on the Web must be purchased and maintained by that content provider, and are therefore its rightful property. The computer that a Web surfer uses to access websites such as Google and to check his email must be purchased and maintained by him (or by his parents, a school, an employer, etc.) and is therefore his (or someone’s) private property.

Likewise, the cabling, computers, satellites, wireless transmitters, and other equipment used by an Internet service provider (ISP) to connect Web surfers to online content is purchased and maintained by that provider and is therefore its rightful property. By providing the requisite data transmission lines, ISPs make the Internet possible. By expanding and improving their infrastructure, ISPs improve the online experience of their customers: Internet users who once suffered incredibly slow dial-up data transmission rates of 300 bits/second now enjoy DSL and cable speeds of 2.3 million bits/second—thanks to ISPs investing in their infrastructure.6 (And Internet users soon will see even greater gains in data transmission speeds: Verizon is rolling out a new fiber optic cable network that can deliver data at speeds of 50 million bits/second,7 at an estimated eventual cost to Verizon of $140 billion.)8 Internet service providers build and maintain their networks because they can profit by charging Web content providers and Web surfers for access to their lines. Their infrastructure is rightfully theirs to use, dispose of, and profit from as they see fit.

To summarize, the Internet comprises two types of things: public domain ideas, such as the TCP/IP protocol and HTML coding language; and private property, such as personal computers, servers, and fiber optic cable.*

Bearing in mind the essential history and general nature of the Internet, let us examine the notion that claims to protect it.

The Nature of Net Neutrality

Net neutrality advocates such as Stanford law professor Lawrence Lessig liken the Internet to a “commons”—to “public property,” akin to state-owned highways and municipal parks.9 They call for the Internet to be treated as if it were “public property,” managed by the government in accordance with the “public welfare.” On these grounds, they advocate that the Internet remain a “neutral platform” where “the network owner can’t discriminate against some [data] packets while favoring others.”10 Plainly stated, net neutrality is the idea that the Internet is “public property”; thus, the government must ensure that online content is delivered in a “neutral,” non-preferential fashion.

But delivered by whom? To hold that the Internet is a “commons” or “public property” is to evade its actual nature; the Internet is a network of privately owned personal computers, servers, and cable. Ignoring this fact and pretending to themselves that the Internet is “public property,” proponents of net neutrality seek government control over private property—specifically that of Internet service providers.

In order to achieve net neutrality, its advocates hold that the Internet must remain, as they put it, a “stupid network,” meaning unregulated by an intelligence that might favor the transmission of some content over other content.11 But because data is transmitted through the private property of ISPs—the expensive cables, computers, and other infrastructure that make the Internet possible—what they actually advocate is denying ISPs the right to manage their own property. The “stupid” Internet that net neutrality advocates desire is one in which ISPs must, under threat of government force, remain largely passive with regard to how data flows through their lines and over their networks. An ISP’s role, according to net neutrality advocates, is to pay for and then provide a “stupid network” of “dumb pipe” (i.e., bandwidth capacity) to customers, who can use it however they please.12 Fearing the decisions that ISPs might make with respect to their own property, net neutrality advocates seek to impose their conception of how the Internet should work—via government force.

In essence, beneath their calls to preserve “economic innovation” and “free speech online,” net neutrality proponents advocate government control of the privately owned infrastructure that makes the Internet possible. To what types of controls will adherence to net neutrality lead, and how will these affect Internet service providers and their customers?

Net Neutrality in Action

Unfortunately, the Federal Communications Commission (FCC) has already begun to abide by the principles of net neutrality in its regulation of the Internet, and Congress is threatening to incorporate these principles into legislation.

In 2004, then FCC Chairman Michael Powell proposed that his agency adopt certain principles toward the achievement of a “neutral” Internet.13 Those principles, as officially adopted in 2005, state:

To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to access the lawful Internet content of their choice. . . . to run applications and use services of their choice. . . . to connect their choice of legal devices that do not harm the network. . . . to competition among network providers, application and service providers, and content providers.14

By declaring that consumers are “entitled” to an “open” and “interconnected” Internet, the FCC is declaring ISPs to be rights-less public servants who must pay for and build Internet infrastructure—and then turn it over to Web surfers and FCC bureaucrats for them to use and abuse as they see fit. These FCC principles are clearly in keeping with the net neutrality principle that the private property of ISPs be, in effect, collectivized and regulated so as to be kept “stupid.”

To grasp the implications of this, consider the first official regulatory action taken by the FCC toward enforcing the principles of net neutrality: its August 1, 2008, decision against Comcast, the nation’s largest Internet service provider.15

The FCC’s action against Comcast stems from an accusation by the group Free Press and Public Knowledge that it was “secretly degrading peer-to-peer applications.”16 “Peer-to-peer” is a method of file transfer developed by Bit Torrent to facilitate the rapid downloading of large video files, such as entire movies, from various websites.17 Such downloads consume a vast amount of an ISP’s bandwidth—its capacity to deliver content to its customers. For instance, another ISP, AT&T, reports that a mere 5 percent of its customers consume 50 percent of its capacity, most of which consists of video downloads achieved by technologies such as Bit Torrent’s peer-to-peer.18 Free Press and Public Knowledge accused Comcast of identifying bandwidth-consuming Bit Torrent data packets and slowing their progress through its network in order to free up capacity for the vast majority of its users.

Comcast’s policy toward the peer-to-peer data packets made economic sense: A small minority of its customers was consuming much of its bandwidth by downloading large movie files with Bit Torrent’s technology, thereby reducing data transfer rates for the majority of customers who used Comcast’s service primarily for Web surfing and email. By identifying peer-to-peer data packets and slowing, or “de-prioritizing,” their passage through its network, Comcast made available more capacity for the majority of its customers and avoided raising its rates in order to foot the cost of the infrastructure improvements that would be required to accommodate peer-to-peer file transfers as they grew in popularity. Given that these peer-to-peer file transfers were being made on its property, Comcast had the right to do so.

But neither property rights nor sound economics is the concern of the FCC or the net neutrality advocates who applauded its decision. According to the FCC, Comcast’s actions violated the principles of net neutrality because they unfairly “discriminated” against the Bit Torrent data packets. As such, the FCC rejected Comcast’s right to make decisions regarding the use of its own property: It ruled that its data management practices were illegal and ordered it—and by implication, all other Internet service providers—to stop de-prioritizing Bit Torrent data packets by January 1, 2009.19

By denying Internet service providers such as Comcast the right to manage their own property, the FCC is, as net neutrality advocates would have it, taking the “intelligence” out of the Internet. An ISP such as Comcast has a strong incentive—profit maximization—to create the best possible Internet experience for as many of its customers as it can. Responding to pressures on its capacity, Comcast managed the flow of data on its network to ensure that the downloading activities of some of its customers did not slow down access to websites and email for the majority of its customers. As net neutrality advocates would have it, and as the FCC ordered it, Comcast can no longer single out bandwidth-intensive Bit Torrent downloads, which means that, in order to avoid additional infrastructure costs that would raise its rates across the board, Comcast must—as it has announced it will do—indiscriminately de-prioritize all bandwidth-intensive data.20

By forcing an Internet service provider to treat all data “neutrally,” the FCC and net neutrality advocates prevent that ISP from instituting policies, offering services, and using technologies in accordance with its judgment of the relevant facts. Consequently, the ISP cannot offer the policies, services, and technologies that it thinks would be beneficial to its customers and therefore profitable to the ISP. For instance, in order not to “unfairly discriminate” against movie downloads, Comcast may also slow down other types of data transfers for which speed is essential. Certain “real-time” applications such as streaming video (e.g., YouTube), telephony services (e.g., Skype), and multi-player gaming require that data packets stream smoothly without interruption. In order for these applications to stream smoothly, and therefore function as intended, an ISP might give their data packets priority over those of movie downloads or email, for which smooth streaming is not essential. Whereas an unregulated ISP might see to it that customers who need smooth streaming get it, an ISP shackled by bureaucrats wielding net neutrality cannot.

And by denying an Internet service provider its right to manage its property, net neutrality throttles its incentive to invest in new bandwidth. If an ISP is forced to turn over a large portion of its bandwidth to a small portion of its customer base, its overall capacity is not being used profitably, and it therefore has much less incentive to increase its capacity by investing in the expansion of its infrastructure. It could partially defray the enormous cost of increasing its capacity by raising rates across the board, but this would come at the risk of losing customers. Better yet, it could charge customers who have high bandwidth requirements, such as movie downloaders, premium rates. But although some net neutrality proponents would allow an ISP to charge some customers premium rates—that is, “nondiscriminatory” FCC-approved rates—other proponents would ban the practice completely. In either case, the ISP would be unable to charge market-clearing prices for the heavy consumption of bandwidth capacity, and the cost of that capacity would be borne by both it and its customers, who would suffer increased costs and degraded service.

Denying Internet service providers such as Comcast their right to profitably manage data packets traveling over their networks on the grounds that their networks are “public property” is morally outrageous and, for those who value the Internet and its possibilities, stupid—in the traditional sense. By making an ISP’s property less profitable, net neutrality will have the obvious effect of reducing its incentive to increase its bandwidth capacities by investing in more property. And net neutrality will destroy innovations that could profit ISPs and customers alike. For example, an unregulated ISP could easily provide a hospital on its network with an extremely high-bandwidth and smooth-streaming connection enabling a surgical specialist from a remote corner of the globe to oversee a rare and dangerous surgery via high-definition video conferencing.21 But net neutrality principles neither allow the ISP to prioritize the data packets required for that purpose nor allow the ISP and hospital to agree on a premium rate for such a mutually beneficial service. By violating property rights, net neutrality kills the incentive and means for Internet service providers to improve the quality of their service and to innovate.

Unfortunately, the requirement that all data packets be transported in a “nondiscriminatory” manner is only one of the government controls influenced by net neutrality that threatens Internet service providers and their customers.

Proposed legislation would prohibit Internet service providers from charging different prices for different online content.22 For instance, an ISP might charge $5 extra per month for access to Google on the grounds that visits by its customers to Google’s website account for a large percentage of its bandwidth usage and thus its infrastructure cost. No ISP currently levies such fees but, for fear that an ISP might one day find it profitable to do so, net neutrality advocates seek to preemptively ban the practice on the grounds that it constitutes “unfair discrimination” against certain types of content. On the heels of the requirement that data packets be treated equally, such legislation would further reduce an ISP’s ability to manage its own property in a manner profitable to it and its customers.

In all likelihood Internet service providers would not find it profitable to “discriminate” against certain types of content by charging extra for it. Customers who expect their Internet access to be “open” and “neutral” would likely balk at such an idea and leave a provider that levied such fees for a competitor. (And if the government keeps its hands off the Internet, there will be competition.) But ISPs may well find it profitable to charge extra for particular content, a standard practice in other mediums, such as the cable and satellite television services that charge for premium channels and pay-per-view events. If certain online content were inherently bandwidth intensive, ISPs might charge for it in order to recoup the cost of the infrastructure necessary to deliver it to its customers. And, along the lines of broadcast television, ISPs might even provide free limited access to online content to customers who did not mind the limitation and were willing to tolerate some degree of advertising. But whereas the desirability of such arrangements is rightfully a matter for ISPs and their paying customers to decide in the free market, net neutrality advocates and FCC bureaucrats seek to preemptively settle the matter with government force.

Most of an Internet service provider’s customers are Web surfers accessing online content via personal computers. But ISPs also serve Web content providers such as eBay and Amazon, providing the transmission lines through which those companies’ millions of customers access the content housed in their servers. Not surprisingly, in order to prevent ISPs from charging different Web content providers different rates for bringing their sites to the Web, net neutrality advocates also seek to regulate this relationship. Under proposed federal net neutrality legislation, all content providers, regardless of their size, must be permitted to connect to the Web at the same “nondiscriminatory” rates.23 Fearing that market conditions might one day result in them paying more for access to the Web than their competitors, such major content providers as Google, YouTube, and Yahoo! support net neutrality and the “level playing field” it would provide.24 All of this would come at the expense of ISPs, which would have to defer to the FCC regarding the maximum rates they could charge and who would be unable to negotiate lower rates with certain Web content providers when it would be profitable to do so. A “level playing field” would come also at the expense of competition among Web content providers. A small future Google competitor might be unable to afford the “non-discriminatory” rates set by the FCC. In a free market, such a competitor could negotiate a special rate with a local ISP so that both would profit: The Web content provider would have the financial breathing room provided by the savings while the ISP might have the certainty of an extended-year contract with the content provider. Under net neutrality, an ISP’s right to negotiate with its customers to mutual benefit is not recognized because an ISP’s right to its property is not recognized.

Further diminishing an Internet service provider’s profits, and therefore its incentive to expand and innovate, is a provision to force ISPs to carry content that competes with other products and services it offers. The FCC has already fined one ISP for prohibiting a competing voice-over-Internet telephone service to use its Internet lines, ruling not only that the Internet provider had to carry the competing service, but also that it could not charge an extra fee for doing so.25 This flagrant violation of an ISP’s right to use and dispose of its own property is analogous to forcing Ford to provide space in its showrooms for Toyota, without charging its competitor anything over and above its own floor space costs. In such a scenario, in addition to losing showroom space that could be used for showcasing one of its own vehicles, Ford would be forced to aid its competitor—at no cost to Toyota. Needless to say, Ford’s incentive to build large new showrooms would be impaired by the knowledge that it would have to hand over floor space in those showrooms to its competitors. Likewise, forcing an ISP to transmit the data of its competitors reduces its incentive to invest in bandwidth.

An ISP has the moral right to prohibit its competitors from using its infrastructure, and its customers have the moral right to seek service elsewhere if they disagree with that policy. Under net neutrality, these rights are not recognized, because its masterminds, advocates, and implementers evade the fact that the physical elements of the Internet are private property.

The Government Morally Must Stay Out of the Internet

With the exception of open source code and public domain content, every part of the Internet is private property: property owned by someone. The content of websites is owned by its authors. The servers that house those websites are owned by hosting companies. The personal computers that access those websites are owned by Web surfers. And the data transmission lines that make all of this possible are owned by Internet service providers. Each of these parties has the right to use and dispose of his property, including the right to deal with the other parties by mutual agreement to mutual benefit. Net neutrality denies that the Internet is private property and therefore denies that its owners have these rights.

As shown, net neutrality forcibly prevents Internet service providers from using their property in a profitable manner. If an ISP were left alone to manage the transmission of data packets across its property, it could profitably improve the speed of its network, it could profit from charging more for more bandwidth consumption, and it could profit from providing special services to certain customers, such as smoothly streaming high-definition video feeds. But because none of these things is possible under net neutrality’s rules, the property of Internet service providers is worth considerably less to them in terms of its profit potential. Accordingly, their incentive to expand and improve the infrastructure on which the Internet relies is greatly diminished.

Net neutrality also hinders competition among Internet service providers. By making the transmission of Internet data less profitable, net neutrality reduces the incentive for new ISPs to enter the market. And because new ISPs would be shackled by the same regulations as their established competitors, they would be less likely to find a way to compete, achieve profitability, and grow their business. Were it not for net neutrality, a start-up ISP might compete against Comcast by configuring its fledgling network to favor Bit Torrent’s peer-to-peer data packets, thereby earning it the business of serious movie downloaders without having to match or exceed Comcast in expensive infrastructure. But because ISPs cannot “discriminate” among data packets, the start-up would have one less means of gaining entry into the marketplace. And the extent to which there is currently little competition among Internet service providers is the extent to which government has established legal telecommunications and cable monopolies and regulated the wireless spectrum. If there is little choice in Internet services in a given market, it is likely a function of government regulation—not a lack thereof. The key to competition in the Internet is less regulation, not the added regulation entailed by net neutrality.26

And because of the foregoing, net neutrality reduces the overall quality, speed, and capability of the Internet. If its advocates and their federal enforcers have their way, an ISP’s customers will suffer slower speeds so that other customers can use disproportionate capacity for which they are not paying their share. If net neutrality’s principles are enforced, customers who desire, and would pay for, special priority service will be unable to obtain it. And in neither instance will customers have viable alternatives, for net neutrality creates a “level playing field” on which all Internet service providers are equally hamstrung.

Much could be said about the stupidity of net neutrality. But, setting aside the fact that it will thwart competition and retard the Internet, we must recognize first and foremost that net neutrality violates the rights of private property owners—specifically Internet service providers. The fact that Internet access is a profound value does not justify government force against the ISPs that make it possible, any more than the fact that books are a profound value justifies government involvement in Barnes and Noble’s pricing, displaying, and stocking of books. The property of Internet service providers is theirs; as such, they have the moral right to use and dispose of it as they please, regardless of what their customers, FCC bureaucrats, and net neutrality advocates have to say about it.

Unfortunately, net neutrality is a small part of a wider effort to erode property rights in America. As with eminent domain, zoning laws, and the like, net neutrality holds that it is moral to violate the rights of property owners for the “greater good.” Net neutrality holds that the benefit of a “neutral” Internet to all of its users justifies the use of force against those who own and maintain its backbone. It does not.

America morally must recognize the rights of Internet service providers to manage their property as they see fit. We must undo the relatively few controls already placed on the Internet, repudiate net neutrality, and keep the government’s stupid hands off this brilliant private property.

About Raymond C. Niles

Raymond C. Niles is a senior fellow at the American Institute for Economic Research and assistant professor of economics & management at DePauw University. He holds a Ph.D. in Economics from George Mason University and an MBA in Finance & Economics from the Leonard N. Stern School of Business at New York University. Prior to embarking on his academic career, Niles worked for more than fifteen years on Wall Street as senior equity research analyst at Goldman Sachs, Schroders, and Citigroup, and as managing partner of a hedge fund investing in energy securities. In addition to numerous articles in scholarly and popular publications, Niles has contributed book chapters to The Morality of Finance, and the recently published book, Coronavirus and Economic Crisis, edited by Peter G. Earle, and published by the American Institute for Economic Research.

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