Competition Is the Only Way to Preserve An Open Internet

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The Federal Communications Commission is actively considering turning the internet access industry into a public utility by classifying it as a "Title II" service under the Communications Act of 1934. Proponents of the idea, including President Obama, argue that doing so is necessary to protect "the open Internet" and all the benefits it has produced.

Everyone is for preserving an open Internet, but replacing a competitive industry with a regulated utility is not the way to do it. Broadband competition has produced a remarkably innovative, dynamic market in which output and performance double, and prices are cut in half, every few years. You can't say that about public utilities.

The public utility model is a response to the problem of natural monopoly: In some industries -- water, electricity and natural gas distribution among them -- economies of scale are so strong that the most efficient solution is to have a single firm serve all customers. Competition in such industries is not only inefficient but, in the long run, unsustainable: In a competitive market, the largest firm will ultimately drive out the rest.

Different countries have dealt with the natural monopoly problem in different ways. In much of the world, governments owned everything from water systems to railroads, airlines and telephone networks. In the U.S., government ownership was the exception rather than the rule: government ran the Post Office, a few municipal utilities, and the Tennessee Valley Authority, but for the most part left industries in private hands, overseen by public utility commissions.

The downsides of both approaches are well documented. First, and foremost, when government takes charge of allocating economic resources, politics inevitably comes into play. Regulated firms want higher prices, customers lower ones -- and suppliers, including organized labor, have skin in the game as well. All of the affected interests have strong incentives to "capture" the regulator through various forms of lobbying (or worse). The remedy -- forcing bureaucrats to navigate a forest of procedural requirements before making any important decision -- can be worse than the disease, especially in industries where speed and flexibility are important.

The upshot is that public utilities -- whether government owned or not -- systematically underperform industries that are subject to competition. One major issue is the lack of political support for needed investment in the upkeep and modernization of existing facilities. Search the phrase "America's aging infrastructure" and you will find article after article about our outmoded electricity grid, water systems still using lead pipes, and citizens killed in natural gas explosions resulting from inadequate investment. For example, USA Today reports that, on average, gas leaks cause property damage, injury, or death at least once every other day. In the last 10 years, gas explosions have killed 135 people, injured over 600, and caused more than $2 billion in property damage. Sixty-two percent of the gas mains in Washington, DC are more than 50 years old.

There is plenty of economic evidence that public utilities underperform competitive markets. For example, a recent study by economists at the Bureau of Economic Analysis (BEA) found that the output of the utility sector actually shrank by about two percent annually between 1998 and 2010. Another, by Harvard's Dale Jorgenson and others, shows the utility sector actually contributed negatively to U.S. productivity growth over the post-World War II period.

The broadband sector, by contrast, is growing and innovating, literally, as fast as the Internet itself. U.S. broadband connections are getting faster by more than a third annually, and the amount of traffic carried is doubling every three years. Americans use more data than in any other country except South Korea (and, by some measures, Japan). The BEA study ranks Broadcasting and Telecommunications among the top ten sectors in terms of contributions to GDP growth, immediately behind Information and Data Processing Services and ahead of Computer Systems Design and Related Services. Jorgenson ranks the sector sixth (out of more than 60) for contributions to productivity growth.

These results don't prove that public utility regulation, in and of itself, causes slow growth, but they do demonstrate how fundamentally different broadband is from the industries we treat as public utilities. We still generate electrons using the technology invented by Michael Faraday in the 1820s, and distribute it over the same old copper wires (too often literally the same wires). The same is basically true for water and gas. But broadband is constantly evolving: the first major fiber optic deployment - Verizon's FiOS -- is less than a decade old and the technology is already in its second major generation. Today's 4G LTE wireless networks left the drawing board less than five years ago -- at about the time the FCC was issuing its last round of net neutrality regulations.

Competition isn't an option in every industry, but it is working and producing great results in the market for broadband. Promoting competition, not replacing it with a public utility model, is the best way to preserve the economic and social benefits of a free and open Internet.

Jeffrey A. Eisenach is a Visiting Scholar at the American Enterprise Institute and Executive Editor of TechPolicyDaily.com.  

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