The Internet Survives, and Thrives, For Now

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Despite the Federal Communications Commission's "net neutrality" announcement this week, the American Internet economy is likely to survive and thrive. That's because the new proposal offered by FCC chairman Julius Genachowski is lacking almost all the worst ideas considered over the last few years. No one has warned more persistently than I against the dangers of over-regulating the Internet in the name of "net neutrality."

In a better world, policy makers would heed my friend Andy Kessler's advice to shutter the FCC. But back on earth this new compromise should, for the near-term at least, cap Washington's mischief in the digital realm.

The policy would prohibit networks from blocking lawful data, websites, and applications - a principle the entire industry agreed to five years ago. It would also encourage "transparency," meaning service providers must clearly define their products and tell customers how they manage their networks. Broadband providers would also have to offer similar prices and terms to similarly situated customers.

Absent from the proposal, at least in the broad version we've seen, are the most intrusive measures that could have killed investment and innovation. There is no reclassification of broadband as an old monopoly Title II "telecom service," which could have led to price controls, open access mandates, and fragmented regulation in the 50 states.

There is no prohibition of important packet routing technologies that block intruders and speed Web video to end users. There is no ban on partnerships among broadband networks and content, app, and device providers. Moreover, the proposal smartly recognizes the distinctive nature of wireless networks, which are capacity-constrained and famously tricky to manage.

In a world of Netflix on iPads and Salesforce on BlackBerries - where every business and business model is in a state of flux - experimentation is paramount. Information technology - computers, communications equipment, software - now accounts for 47.3 percent of all U.S. non-structure fixed investment. This not only provides jobs today but creates the platform for future American productivity across every industry. Indeed, it's the platform to create entirely new industries, which is the key to economic growth.

Contrary to misleading studies decrying America's supposed world broadband rank of 15th, or even 26th, the U.S. is at the very top in broadband infrastructure and digital innovation. Using new measurements from Cisco, we show the U.S. generates and consumes more network traffic (per Internet user and per capita) than any nation but South Korea. (The U.S. is even with Canada.) With the worst policy proposals now off the table, U.S. broadband providers can move ahead with their network expansions, which now total around $60 billion per year.

The Genachowski proposal could have a beneficial secondary effect. It should stop - or at least expose as melodrama - the endless hyperventilation of the "consumer interest" groups, where every disagreement is billed as an existential threat to the "open Internet."

On the eve of Mr. Genachowski's announcement, Level 3 Communications, with great fanfare, accused Comcast of blocking Netflix traffic and turning the Internet into a "toll road." But upon further examination, it was a mere business dispute among Internet "peers" - networks that exchange traffic. No content was blocked, and Netflix movies continue to flow freely. So freely, in fact, that Netflix now accounts for an estimated 20% of prime time network traffic. This type of peering negotiation happens every day on the Internet, and with the Net's architecture changing so rapidly, these disputes will go on.

The Level 3-Comcast clash showed what many of us have said all along: "net neutrality" was a purposely ill-defined catch-all for any grievance in the digital realm. No more. With the FCC offering some definition, however imperfect, businesses will now mostly have to slug it out in a dynamic and tumultuous technology arena, instead of running to the press and politicians.

An onslaught of actual and possible top-down regulation of business has stifled the U.S. recovery. A totally "hands off the Net" policy would be far preferable, and lawyers will rightfully challenge the FCC's most basic authority to act in this way. If the modest new policy becomes a platform for further meddling, then all bets are off. The precedent of piercing the Internet's no-government protective shield is a big long-term danger.

But with Washington busy writing literally hundreds of new rules for health care, energy, and finance, the removal of the worst-case scenario for the all-important Internet sector is a huge relief. In the two days after the FCC announcement, telecom and cable stocks were up smartly. Internet content stocks held their ground or even advanced a little.

Bret Swanson, a visiting fellow at the American Enterprise Institute and a U.S. Chamber Foundation scholar, is president of Entropy Economics LLC. 

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