Net Neutrality...Market Approach???

This week I co-authored an article about “net neutrality” or “Open Internet” as others call it, with GOP Internet consultant David All. The op-ed piece was published in POLITICO and you can read it here:

http://www.politico.com/news/stories/0708/11734.html

Another Republican activist, Michael Turk, a cable company consultant/employee took issue with some of the assertions and claimed the article attacked cable and telecom companies…which I don’t believe it did nor was it my intent. You can see his response here:

http://www.thenextright.com/michaelturk/the-gop-online-politics-and-internet-regulation

I don’t want to engage in a long debate over this, as I’ve been involved in this issue and telecom competition here in Michigan over the last 20 years.

Professor Gary Wolfram of Hillsdale College (the home of the Von Mises Institute) wrote a series of papers and article during the telecom debate here in Michigan which discussed the role of government when you “privatize” someone with government granted “monopoly” status.

This debate usually comes down to the question of the “last mile.” While we have come a long way toward opening up access is some ways, the overwhelming majority of people still get their access through their local incumbent telco provider or a franchise cable company.

I have attached a number of Professor Wolfram’s articles that go into great detail about some of the market challenges we face over competition and the last mile, which directly relates to “net neutrality.” Professor Wolfram summarizes it well here:

“There is general agreement from all sides of the issue that the telecommunications industry would be best served by a competitive market. The issue of creating a competitive local phone service system is much like the question of how to move Russia from a centrally planned economic system to a competitive one. As with the latter, the debate is in the transition strategy not in the ultimate desired outcome. Some free market proponents argue that immediate deregulation is the best method of getting to the optimal state and that the current system of requiring local telecommunications firms to allow access to their networks is either a violation of property rights or is the equivalent of government setting prices. While this appears to be a strong argument, it is in fact seriously flawed for at least two reasons. First, the four companies that own the bulk of the local network in the United States effectively became monopoly providers through the political process, not by being the most efficient provider in a competitive market. Second, the current process of requiring incumbent local phone companies to allow access to the network is not a form of price-fixing, but rather an attempt to allow use of the network at a price that reflects the cost of providing the network to competitors. It is more likely that the current Michigan Public Service Commission requirements that provide access to the network will result in a competitive market than would elimination of all regulation in a situation of monopoly control of the infrastructure."

“The result of removing government from the process of moving to competition would be to remonopolize the phone industry over the next decade. Using their advantage of control of the infrastructure the incumbents such as SBC would be able to eliminate competition for not just local but also for long distance and Internet. We have already seen the steady consolidation of local phone providers and the financial difficulties of the long distance companies, and Internet providers It will become increasing difficult for competitors to obtain capital to upgrade their systems or to attempt to build a parallel network. “

You can read his complete text in the attached documents.

The idea on phone service was that the phone companies built out the infrastructure under the institution of government granted monopoly. This gave them a "choke point" in getting access to your house. If they did not sell a competing service, that would be OK, that is structural separation, where they only sold access. In this case they would not have an incentive to discriminate against local or long distance or Internet providers.

Because they sold local service, they did have an incentive to not let others who also sell local services access to your house. It is also very clear that there is a big advantage in being able to bundle services. Thus, once local phone companies could sell long distance they began to further consolidate. They then began to take over the wireless and IP markets. The question is how to relate this to cable and Internet access. The argument would have to be that cable companies gained access to your house through a similar process as local phone--government granted monopoly access. Once they are able to sell Internet service, you get the same argument. If cable companies were given monopoly access to your house by government, and they sell Internet services, then they will not have incentive to grant access to competitors. This implies that if a company was granted monopoly access to your house, it should be required to allow competitors this access at the marginal cost of doing so, with perhaps a fee to offset the fixed cost of installing the infrastructure.

So one way to ensure and stregthen competition and open access is to guarantee “net neutrality.”
Another good article worth reading would be The Meaning of Competition by Hayek. This is NOT a simple free market vs government intervention argument. This is not, nor should it be, a partisan issue.

I hope this helps clarify my position, for those who care ☺

Download wolfram_analysis.pdf

Download wolfram_editorial.doc

Download wolfram_katz.doc

Download wolfram_mi_comp.doc

Download wolfram_report.doc