Net neutrality creates systemic risk for US economy

October 23, 2009

The Federal Communications Commission decision to begin the process of imposing an Internet neutrality rule — network operators such as AT&T would be barred from charging variable prices for different kinds of traffic from content providers such as Google or Amazon — is curious as well as wrongheaded.

The financial crisis that has convulsed the global economy for the past two years should be a potent reminder to communications regulators that the best of government intentions can create horrible, though unintended, consequences. Easy monetary policy by the Federal Reserve, for instance, intended to counter a recession in 2001, helped create a dangerous housing bubble.

Like physicians and Fed governors, the first goal of regulators should be to do no harm. And that is especially true when they are trying to impose a solution in search of a problem. Broadband prices, for one thing, are on the decline. The average cost of consumer broadband has dropped from to less than $20 a month from $50 a month in 2001. And more people have access. As late of 2004, 70 percent of households still used dial-up modems for web access. Today, just 10 percent do with broadband speeds doubling over that period. Tough to find a market failure here.

Of course, the Internet has hardly reached its potential. But future network upgrades by telecom firms to handle high bandwidth applications will be costly. One way to pay for them would be to charge higher rates to Google, Amazon and other corporate users who generate huge volumes of traffic.

Not surprisingly, content providers are in favor of net neutrality and the de facto government-created subsidy it would create at the expense of telecommunications companies. Net neutrality is merely another form of rent-seeking that seeks to manipulate regulators for private gain. The goal: Use the FCC to turn telecoms into highly-regulated utilities that would absorb the cost of future network buildouts — before passing it along to consumers, of course.

The Washington-based Open Internet Coalition, which represents Google, Amazon and eBay, sees things differently, saying the FCC decision advances a regulatory framework that “promotes innovation and consumer choice on the Internet.”

But not only do more and more consumers have access to ever-faster broadband, they have more choices. In addition to the telecoms, America has four nationwide 3G wireless providers and fifth,Clearwire, readying a nationwide launch of a 4G WiMax service.

But the FCC — with the full encouragement of the Obama administration — nonetheless intends to push forward with seeming little concern about the unintended consequences of intervening into a well-functioning sector vital to the American economy. At the very least, the FCC will likely face years of court battles over the rule that could serve to paralyze the sector. Now there’s your systemic risk.


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The internet providers already charge for services based on bandwidth, especially in the business sector, but even in the private sector where consumers are presented with a dizzying array of gold and platinum service plans.

“Net Neutrality” prevents the ISPs from selling, say a 1 Mbit service, then intentionally choking it down to say 10 Kbit bandwidth because of the consumer’s network surfing practices.

These bandwidth “choking” policies are often seen by Verizon, and perhaps other cellular modem providers.

“Net Neutrality” is little more than encouraging vendors to provide the services that they have sold to consumers, often with expensive equipment and long-term contract requirements.

The concern, of course, is whether the ISPs can actually provide the bandwidth that they’ve promised, something that will require continuous upgrades and technology investments.

Posted by Clifford | Report as abusive

You have to be kidding me. The broadband provider has the ability to charge for varying sizes of bandwidth access to the customer and the content provider. All this bill would do is insure that there is not discrimination by the broadband providers to companies it could not extort fees for bandwidth that they already pay for. What this bill does is provide greater competition by increasing the market for services available over that same medium by eliminating anti competitive oligopolies on the last mile to your home. This bill is pro competition and what the conservatives expose to be about. McCaine and these lobbyists for Comcast and AT&T are beyond ignorant. This is the issue with American economy. Everything that can be done to promote innovation and the free market they kill unless its one of their donors.

Posted by alex | Report as abusive

Clifford “‘Net Neutrality’ is little more than encouraging vendors” Really? It is much much more than that. I suggest you take a look at this article to further understand the difficulties of so called “Net Neutrality” when it is applied to wireless broadband. Search “Net neutrality for wireless: The few versus the many.” which can be found at: tory/net-neutrality-wireless-few-versus- many/2009-10-12?utm_medium=nl&utm_source =internal#ixzz0Un0KXpJ8

Alex. To suggest that McCain is ignorant is laughable. He has been fighting government regulation of the internet since the beginning. He has introduced a bill that will forbid the FCC from further regulating the Internet. What is before the FCC is a rule making proceeding that is anti-consumer and pro-large internet companies.

The proposal does not allow networks to manage its traffic. (Sure it says reasonable management practices will be allowed, but application providers will not be happy with any management and will initiate lawsuits and inquiries into every practice adopted by the providers. At huge expense that will have to be passed on to the consumer.) As demand for high bandwidth application increases. Search “Exaflood” the networks will no longer be able to keep up with demand and will be forced to charge consumers for the amount of data they consume.

Pethokoukis is right. This is a solution in search of a problem. Instead the FCC should be focusing on its congressional mandate to establish an national broadband policy instead of assaulting an industry that has invested hundreds of billions of dollars into our economy.

Posted by Tony | Report as abusive

That’s it…
Net Neutrality boils down to bandwidth distribution.


And, yes, the Wireless Providers are in the center of it.

Companies that sell… “Broadband-Like” access… speeds of 700+ KBS…. “UNLIMITED” uploads and downloads….

Then intentionally choke the access down to a trickle. I’ve often seen speeds drop to well below “Modem” speeds.

With Verizon, it is obvious that just logging into popular dating/networking sites such as, and the complete network connection is choked to nearly nothing, no matter whether the user is accessing the site with text or video. And, it isn’t limited to that one site, but logging onto the site, and the entire network connection is choked.

I’d buy the “limited radio frequency bandwidth” argument… except that it is obvious that the bigger the city, the faster the connection speed and more connection bandwidth available. The smaller the community, the worse the connection. I.E. companies are intentionally choking network connections due to an unwillingness to support the infrastructure that they are charging for.

The obvious solution, of course, would be for a company to start packaging wired and wireless accounts… and perhaps start piggybacking (commercial) 802.11 WIFI access to their wired network. And, of course, keep improving the wired network bandwidth capabilities.

Posted by Clifford | Report as abusive

People, the DSL rate you buy is what you get IF it’s available from the infrastructure. For comparison, for a residential land phone line, the switching fabric can serve 10% of subscribers at once. (Internet modems were screwing that up, so they got permission to charge more for “computer” lines.) For business subscribers, the switching fabric can handle 50% of subscribers at once. Just because you have a phone line doesn’t mean you’re paying what it costs to be on it 24 hours a day. Use is random and it averages out. I use my DSL far less than 1%, and I have no desire to pay so you can use yours more than 90%.

Posted by Pete Cann | Report as abusive

The problem I have with the position of the ISPs is two-fold. First, they want to act as snake oil salemen, in that they are selling something to the content providers that they have no claim to. They are Internet Service Providers, they don’t own the internet, nor do they own ALL the infrastructure that it travels along. If I, living in Michigan, log onto out of California, it’s not the packets are only staying on my at&t built infrastructure.

Also, this opens them up to HUGE anti-competitive issues. What is to stop MS or Google from buying Comcast or AT&T and basically shutting off access to its competition in a huge number of American households?

I am generally a free market guy, but this is too much. This would be like Michigan wanting to charge a freight company per mile for a trip from Phoenix to Detroit.

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Let’s set a few things straight.

Private industry did not “invent” or develop the Internet.

The development of what became “the Internet” was financed by American taxpayers: the public. It was originally a military project.

Seeing as how “we, the people” paid for the development of the Internet, it is a slap in the face for private companies to decide that they can regulate it however they see fit, let alone charge outrageous fees to us, who paid to develop it in the first place!

Not so long ago, it would have been a simple antitrust matter:

The ISP’s can decide to provide the access , only, or they can be content providers (censors).

Not both.

Posted by Joe R | Report as abusive

The Federal government financed research, and early on gave out funds for some of the buildout, but that contribution is not even a drop in the metaphorical bucket when it comes to the making of the Internet, and has been paid back a thousand-fold in – that’s right – taxes.

There were competing protocols and ideas back then – look up IPX, DECnet, and Vines – and it just so happens that the federally funded set of protocols “won,” but that doesn’t mean that “we the people” can claim to own the result.

As a network engineer, I have more bandwidth in my hands every single day than existed on the entire *planet* when the feds stopped putting money into it. Who do you suppose invested millions or even billions of dollars to build it out? Hint: it wasn’t us the people.

The government doesn’t own the Internet. Private companies own the bandwidth, and as far as I’m concerned, they can resell it in whatever way they want, as long as they abide by their contracts.

Outrageous fees? Maybe you need to shop around a bit more. I’m paying 25% of what I paid 10 years ago, for about 50 times the peak bandwidth – and a mere 5 or 6 times the b/w if things are congested. That’s a hell of a bargain. If you don’t like “outrageous” fees, you don’t have to pay them. Just do without.

“Net Neutrality” sounds to me like nothing more or less than socialized technology.

Posted by Russ | Report as abusive

>”Net Neutrality” sounds to me like nothing more or less than socialized technology.
I agree with you Russ. The devil is going to be in the details on this one. So far I’ve read, among other things, I’ve read about regulating content and transparency of networks. My question would be what kind of content would it regulate. Also might it be something in a box like this where opinions are posted. After all once I hit the submit button it becomes part of the content of the site. Why would the government want transparency into the networks and how might that be accomplished? I don’t have the answer to that one but maybe someone else does.

Posted by Alouis | Report as abusive

Though I may speak from a bias stand point as I run an opinion site, I think it is utterly ridiculous that a telephone company can slow down access to my site.

Just think about it, how would Reuters feel if AOL Time Warner, owners of CNN, slows down Reuter’s website in favor of CNN’s site?

Hell no! Corporations should not be able to choke on our access. That is what Net Neutrality is about. We pay for 100 Mbs, we should get 100 Mbs for all sites! Not just the sites that the corporation want us to see or not to see.

And to the dim ones that think that this is socialism, you would be calling Google, Yahoo, Amazon and other companies and sites socialist!

Posted by Slashingtonguedotcom | Report as abusive

Dear Mr. James,
I am sorry you do not know what the consumer needs. You might be trying to say something against net neutrality just to get some attention, but comparing real estate bubble to technology, is like comparing your knowledge of this topic to a sane persons. I understand the shock and going against the wave, be unique all that crap, but how in the world could reuters hire you? Did you pull some kind of a fastone so that they think they are giving a free market an oppurtunity by employing dimwits like you?

Posted by rebel13 | Report as abusive

“Though I may speak from a bias stand point as I run an opinion site, I think it is utterly ridiculous that a telephone company can slow down access to my site.”

And now we get to the truth of the matter, and your limited understanding of the regulations of interstate cariers.

“Just think about it, how would Reuters feel if AOL Time Warner, owners of CNN, slows down Reuter’s website in favor of CNN’s site? ”

The short answer is that such a thing is not possible. CNN, Reuters, and AOL/Time Warner all own and operate their own servers independently of one another. when your http request goes out, it resolves to a DNS server, and then hits the IP of the content server directly. AOL could not bottleneck either unless you were being served by AOL; If that bothers you, you’re free to switch to another network.

RBOCs (ILECs) are required by the Telecom act of ’96 to sell carriers at market rates to CLECs (local ISP and telecoms). THEY ARE FORBIDDEN FROM DENYING CONNECTIONS.

All of this may be moot by what companies choose for themselves; while MS may be able to afford OC-192 access to its servers, Blizzard my be limited to OC-12. Joe Schmuacktely, inc. may be running at T1 speed.

Posted by flashoverride | Report as abusive

It’s not a question of the providers choking off access. When AOL went to a flat rate deal back in ’96, all of a sudden you couldn’t get connected because everyone-and-their-grandma was trying to use a suddenly scarce commodity, i.e., the AOL dial-in access servers.

Bandwidth is a finite resource – though an always increasing one – and TCP/IP has always operated on a “best effort” delivery scheme. When the bandwidth is plentiful, no one complains.

But because there is a limit to b/w, and because some technologies – voice and video – require realtime delivery, the technologists who develop such things came up with an idea we now know as Quality of Service. It’s still a best effort scheme, but now certain traffic can be given first shot at using the available b/w.

(Welcome to Technology – it’s complicated stuff.)

Meanwhile, the customers who require that priority for their packets pay a premium for it.

And by “a premium,” I mean “through the nose.” To make a long story short (whoops, too late) if that’s what they want to pay, and if the carriers and ISPs want to offer the service, hey, it’s their b/w to sell – God Bless America, it’s a good thing.

Posted by Russ | Report as abusive

[…] I have good reason to hate net neutrality:  It’s crony-capitalist dickbaggery.  Just like everything else Teleprompter Jesus wants. The Federal Communications Commission […]

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There are two issues that do not appear to have occurred to the ISP/Network operators: Interfering with interstate commerce, and fraud.

By throttling data, say from a competing service, they may be intentionally interfering with interstate commerce – a serious felony. Additionally, the customer has paid for Internet access – when the ISP intentionally denies the customer that very service (or interferes with that service to the point that is is effectively unusable), they may be committing fraud.

In fact, due to the scope of both problems, ISPs might find themselves declared organized criminal conspiracies – and prosecuted collectively. I can’t say they don’t deserve it.

Posted by AC | Report as abusive

Fascinating, AC. I think the right solution is a fee and limit structure that the ISPs publish, which is based on costs incurred (just a crude example: for each hour of the month, you pay a fee depending nonlinearly upon bytes communicated, including zero), and total indifference of the ISP to content, sender or recipient of packets. I think this gives us what we must have to avoid breaking the back of the system with ever-greedier uses, while avoiding the very sensible grounds you’ve set forth for prosecution.

Posted by Pete Cann | Report as abusive

There are six more pages of comments on this article at  /23/net-neutrality-leads-to-systemic-ri sk/

Why there are two separate pages for the same article for commenting is beyond me. But whatever.

Posted by Benny Acosta | Report as abusive

Thanks for your perspective. You are absolutely correct. Telecommunications companies must be constantly investing in infrastructure in order for the public stay ahead of a growing Internet. It only makes sense that large enterprises that benefit from moving vast amounts of content across the Internet should pay their fair share. As a result of the FCC playing politics with our Internet, we will begin to see Internet service providers charging customers on a per Gigabyte basis. End users will pay for what Google and Ebay have the resources and the political clout to avoid. We’ll see GigaByte meters at modems, and father’s telling their children that they can’t do a Google search or what a Hulu show because the meter is about to go over the limit.

Government regulation of the Internet sets a bad precedent. What happens when the Internet clogs from over use, and comes to a screeching halt from lack of infrastructure investment? Will Obama take that over too? Sounds like another good crisis to exploit. Maybe the UN could take it over to make it more efficient. That would be great.

Posted by Tom Swan | Report as abusive

What ever the justification the corporations spit out the one thing that won’t change is that the Internet is a vital transport system for information that is used and needed equally by everyone.

The technology has become a necessity. As such neutrality makes it possible for EVERYONE to use the Internet and have an equal presence on the net with everyone else.

There is nothing good that will come from taking away the ability of the average citizen to have an internet presence, or to surf the web.

The idea of free and equal access is far too important to give way to some childish desire for profit.

And it was the UNIVERSITIES like MIT that created the Internet, not corporations. Corps advance the technology for their own profit and that’s fine. But there is no way they should be allowed to hijack the whole system just to turn a buck. They can make a profit with net neutrality in place. The only reason to get rid of net neutrality is so that AT&T and their kind can squeeze more money out of the average citizen just for doing the things they need to do to improve their business anyway.

The business sector used to talk so boldly about what a powerful force it is. But in the past few years these same “survival of the fittest” idiots have come to the government with their tails between their legs to beg for money from the people. They lobby and make secret deals to grease the palms of politicians that are willing to sell out the mandate of the people that elected them into office.

All this so that they can have a little extra silver cross their palms.

Net neutrality protects the citizen. Any one who does not understand this would do well to read up on the subject. If you give up the only protection you have, then you deserve every bit of suffering you get for believing thieves and liars.

Posted by Benny Acosta | Report as abusive

People in favor of net neutrality, please specify how you propose to recover costs, i.e. per user or per use.

Posted by Pete Cann | Report as abusive

Look at the open source movement and apply the same principles to technology.

The old saying is that “necessity is the mother of invention”.
These days people would like us to think that profit is the mother of invention. That is not correct.

Work is done to solve a problem or to fill a need. Profit as a motivator distorts the situation. Problems become opportunities to profit, but never become anything more than that. There is no need to recover the costs of building out new infrastructure directly by the builders because the amount of total business generated over those lines will allow all business to flourish across the board. This will more than make up for the individual costs of building out.

Businesses think only of their own survival and prosperity. They care nothing about the citizen. You are a wallet to them. That’s it. And if that wallet is empty then to hell with you.

So let the telcos bitch all they want. They only bitch because they want to be paid. And they are only too happy to ask for bail outs and other support from the very people they intend to gauge. We citizens have propped up a failing economy done in by liars and thieves of all sorts. We have had no bailouts. But we are expected to carry the burden for those that eat better and live better than we can afford to do.

And now we get more arguments from these profiteers that suggest that we should give up EVEN MORE by relinquishing the only consumer protection that keeps our Internet access open equally to all destinations.

Our money is worthless. And it’s business that has most of it anyway. So they can pay out to build for us. It’s not like we haven’t paid, gone without health care, gotten evicted from our homes, and been denied educations so that corporate America can profit.

It’s our time now. More and more people are waking up to the constant line bull shit being spewed on us and we aren’t accepting it any more. The many posts on this subject alone should be an indicator of this.

Posted by Benny Acosta | Report as abusive


“Look at the open source movement and apply the same principles to technology.”

OK, a bunch of volunteers build a fiber cable factory, manufacture thousands of miles of cable and deploy it, after operating lemonade stands nationwide to aquire any new rights-of-way, and manufacture all the central equipment. (I heard of a mfr setting fire to $3 million worth of optics just to get approval to have their equipment sited at TelCos by their customers.)

“There is no need to recover the costs of building out new infrastructure directly by the builders because the amount of total business generated over those lines will allow all business to flourish across the board.”

Maybe. But that statement hints at per use pricing, which you oppose. I was under the impression that we were arguing about an increase in per-user consumption. A lot of people already have broadband. Being able to watch HDTV on their browsers is only going to bring in so many more, and even without watching HDTV on their browsers, they will generate the traffic traditionally generated by a user, requiring infrastructure. Present pricing is based on these historical costs. You wouldn’t by any chance have done any hard math on this, would you?

Seems like those were the 2 substantive points in your post.

In fact, buildout is probably going to be paid for by floating bonds, and money over time always has cost anyway. (Don’t believe me? How much money will you give me for free for 10 years? I’ll put it in a CD.) Who’s going to pay the cost of the money over time? The bonds probably won’t even have matured by the time the technology is obsolete and has to be replaced.

I reiterate, almost all I browse is HTML, and I’m not willing to have my monthly fee go for people watching HDTV. Not yet. Eventually, technology will evolve to the point that watching HDTV on one’s browser is so ridiculously cheap that it’s silly not to support it for everyone. We haven’t reached that point.

The ISPs have, in fact, alienated millions of users by throttling because hoggy uses were almost bringing their systems to their knees. Throttling is a total loss for them, except for preventing great expenses that they would be forced to ask users like me to remunerate.

Posted by Pete Cann | Report as abusive

Perhaps the point of greatest importance to consider is the direction of the argument against net neutrality.

The point has been made that they ( the corporations), need to recover the costs incurred from building out and upgrading the Internet back bone.

They say that we need to bare the costs of this because we all use it and it’s basically unfair to force them to pay for upgrades when we are the one’s benefiting from those upgrades.

So they, (the corporations), want you, (the citizens), to bare the costs of upgrading, growing and maintaining that system; so that they, (the corporations), can continue to charge you (the citizens) for using the very system you paid, and continue to pay for, at a profit, to them.

All of this comes out of your, (the citizens), collective pocket. Mind you, it was traditionally the practice of business owners to take a portion of their profit, and reinvest it into the company as a way of making sure it stayed healthy and competitive.

Not any more. Now they want YOU to pay to maintain them AND pay them extra for the privilege. This they call “economics”, and a “free market”. Free for who? And to do what?

Posted by Benny Acosta | Report as abusive

Those against net neutrality like to bog you down in the technicalities of an argument so that they can then employ their “solution” and abstract that solution to the entire problem. Such is the case against net neutrality.

Costs don’t actually matter because the nation and in fact the world become more and more dependent on the Internet every day.
There is NOTHING about net neutrality that keeps Telecoms from profiting at substantial gains.

So what could possibly be the reason for wanting the power to restrict the ability of the citizen to use that all important resource? Why is it a bad idea to ensure that everyone has the ability to access the net just as freely as we have access to air and water?

Thinking about it in those terms how can anyone be against net neutrality?

Posted by Benny Acosta | Report as abusive

[…] Click here to read the full article. […]

Posted by NextGenWeb | Report as abusive

One of the more remarkable aspects of the net neutrality debate is the extent to which a complicated technical issue has become a partisan political battleground.

Posted by Robert Poe | Report as abusive

[…] Pethokoukis, Money and Politics columnist and blogger for Reuters, notes that the FCC’s decision to proceed with a process of imposing so-called Net Neutrality rules on […]

Posted by Freedom Line Blog » Net Neutrality, the Next “Systemic Risk” for the U.S. Economy | Report as abusive

you keep saying we should make the companies bear (not bare) the cost of upgrading, and not the public. How does that not just come right back at the consumers? The ISP’s will of course raise their rates. I’m not sure where I stand on this issue yet, there are compelling arguments on both sides. I am principally against government regulation, but there are areas where it is necessary. This could be one, I don’t like the corporations to hold all the power, so just saying “no regulation is better for the public” is not a convincing argument either. But restraining those corporations who employ millions and advance technology is not a road to go down without a very good map.

Posted by Dave | Report as abusive