February 12, 2014

If You're Reliant On the Internet, You Loathe Net Neutrality

Brent Skorup

Senior Research Fellow
Summary

We need net neutrality to keep powerful, monopolist Internet Service Providers from holding its customers as a ransom and to prevent carriers from price gouging content companies. Anything less means speech suppression, collusive content deals, and higher prices. At least, that's how advocates spin net neutrality to get credulous citizens to care about this complex network-engineering issue.

Contact us
To speak with a scholar or learn more on this topic, visit our contact page.

We need net neutrality to keep powerful, monopolist Internet Service Providers from holding its customers as a ransom and to prevent carriers from price gouging content companies. Anything less means speech suppression, collusive content deals, and higher prices. At least, that's how advocates spin net neutrality to get credulous citizens to care about this complex network-engineering issue.

The first complaint of a net neutrality violation after the Federal Communications Commission crafted its rules, however, dispels that romantic view. As economist Thomas W. Hazlett and Federal Trade Commissioner Joshua Wright point out there was no market failure that necessitated FCC intervention in broadband markets. Moreover, the circumstances triggering the first complaint reveal that-beneath the public interest rhetoric-net neutrality is a rigid, ideological view that disdains economic evidence and conventional theories of consumer harm. The FCC's rules were a costly policy that stifled innovative business practices and injected the FCC into common commercial agreements.

The first net neutrality "offender" was not telecom giant Verizon, AT&T, or Comcast; it was diminutive MetroPCS-a wireless carrier with a market share under 3 percent. In January 2011, a few weeks after the FCC published its order, Free Press and other public interest groups filed a formal complaint that MetroPCS' violated the order. With uncompromising fervor, net neutrality proponents concocted scenarios in which MetroPCS threatened the future of the Internet and free speech.

Few are familiar with MetroPCS, a company that mostly targets lower-income Americans for cellphone service. Unlike more common carriers, it did not require deposits or credit checks, which made its offerings accessible to those otherwise excluded from phone contracts. In 2010, like today, it was a regional carrier serving around eight million subscribers-about one-fourth the size of the fourth largest carrier T-Mobile and one-tenth the size of Verizon. Yet, MetroPCS is an innovator. Despite its small size and meager spectrum and network assets, it was the first American carrier to launch 4G LTE service in late 2010. Using a small amount of spectrum and unconventional network construction, it provided budget-friendly phone plans to customers who could not afford the large carriers.

While bigger carriers eventually launched 4G LTE on 20 and 40 MHz bands of spectrum, MetroPCS went to great lengths to find equipment manufacturers who could enable them to deploy 4G LTE on bands as narrow as 1.4 MHz. Offering data services on such small bands, however, meant MetroPCS had to creatively manage its offerings to maintain affordable service.

In particular, because its older, so-called 2.5G network became congested, MetroPCS had to incent its customers to migrate to its efficient 4G LTE network. The company did not, however, want to lose customers who couldn't afford the premium price of 4G LTE. To accomplish that, MetroPCS created a new pricing tier to bring broadband speeds to subscribers who never before had affordable access. Around the time the net neutrality order came down, the company offered a 4G LTE plan for $40 per month, which included unlimited talk, text, web browsing, and YouTube streaming. This was $20 cheaper than its premium unlimited 4G LTE service and-to incent customers to use the new plan and alleviate congestion on its old network-was even $10 cheaper than its relatively inferior 2.5G service plan.

The company allowed only unlimited YouTube because it had existing technology that permitted compressed YouTube videos to work on MetroPCS' constrained networks. YouTube was very popular with MetroPCS subscribers so the company worked closely with phone manufacturers and YouTube to make videos less stressful on the network.

Through innovative pricing tiers and compression technology, MetroPCS could migrate customers from its congested, older network to its more efficient 4G LTE network-thereby giving customers more functionality for a lower price.

In the eyes of net neutrality proponents, however, this was not a novel business decision that made everyone better off. Since the carrier only offered unlimited YouTube-not Hulu, Netflix, and other video sites-on its budget plan, it was a direct affront to the FCC's new rules and a threat to Internet openness. In response, the groups complained to the FCC and engaged in a public relations blitz. Despite no money changing hands between YouTube and MetroPCS, despite the ridiculousness of the idea that MetroPCS had market power, and despite the obvious benefit to consumers on a budget, net neutrality advocates showed no mercy to this David surrounded by Goliaths. Their rigid view allows no exceptions.

A few months ago, MetroPCS merged with T-Mobile. The company shrewdly dropped its 2011 lawsuit against the FCC's net neutrality rules before seeking the commission's approval of their merger. If Verizon had not won its net neutrality lawsuit last month, however, the net neutrality proponents would probably still be hounding this small, innovative company until it submitted to their uncompromising demands.