DOJ: 'Net Neutrality' Precludes Broadband Investment, Threatens Free Markets

In a filing before the US Federal Communications Commission this morning, the Dept. of Justice's Antitrust Division argued that proponents of "net neutrality" would stifle the natural course of free market innovation in Internet technologies, in the name of leveling the playing field for competitors. Creating different tiers of Internet service, Assistant Attorney General Thomas O. Barnett's team argued, is really no different than the Postal Service charging different rates for shipping varying classes of mail.

"Much of the conduct that some proponents of 'net neutrality' regulation are concerned about can be precompetitive," the ATR team wrote. "Differentiating service levels and pricing, for example, is a common and often efficient way of allocating scarce resources and meeting consumer preferences. The United States Postal Service, for example, allows consumers to send packages with a variety of different delivery guarantees and speeds, from bulk mail to overnight delivery. These differentiated products respond to market demand and expand consumer choice. No one challenges the benefits to society of these differentiated products; nor does anyone seriously propose that the United States Postal Service be banned from charging different fees for next-day delivery than for bulk mailers. Whether or not the same type of differentiated products and services will develop on the Internet should be determined by market forces, not regulatory intervention."

The argument is similar to one raised by a pair of university professors last January, in an op-ed piece for the Washington Post.

"When traffic surges beyond the ability of the network to carry it, something is going to be delayed," wrote Carnegie Mellon computer science professor David Farber and Berkeley economics professor Michael Katz. "When choosing what gets delayed, it makes sense to allow a network to favor traffic from, say, a patient's heart monitor over traffic delivering a music download. It also makes sense to allow network operators to restrict traffic that is downright harmful, such as viruses, worms and spam."

But the Postal Service is neither an information service nor a telecommunications service by their legal definitions, as the FCC has already become painfully aware. If the Internet is indeed a telecommunications service - and there's legal precedent establishing that it is - then its regulation falls under the guidelines of the Telecommunications Act. That law mandates that certain providers that have precedent over others by virtue of owning the communications mechanism, give way to others even if they're competitors.

If the Internet is an information service - and again, there's legal precedent there establishing that it is - then the FCC may not be the party to regulate it after all, but rather the Federal Trade Commission. While it would appear on the surface that information, by design, wants to "be free," an Internet fully under the regulation of the FTC might be free of those regulations that currently mandate fairness among service providers.

Last March, the FCC decided it would open that can of worms, dump it out on the table, and examine all the arguments therein, as nasty as they might be. What is the Internet, anyway, and should the FCC even be regulating it in the first place? The Justice Dept. would answer that last part of the question, no.

But the FCC has already ruled that wireless broadband does indeed fall under the protection of the Telecommunications act, which means it's under FCC jurisdiction. That could mean the DOJ's whole Postal Service argument might have come a bit too late.

Not so fast, though, says the ATR team. "Regulation should be avoided except in those rare instances of market failure (e.g., where competition cannot work because of a 'natural monopoly') or where regulation is necessary to protect a clearly defined and compelling public policy goal that cannot be achieved through competition," the team writes.

"There is neither a sound theoretical nor empirical basis for restricting broadband competition at this time. From a theoretical perspective, differentiated products and pricing can provide consumers (and content providers) a broader array of choices that meets service preferences more effectively and efficiently. Further, such practices can enable greater investment that will speed innovation and development."

Someone has to pay for all that innovation and development. If the FCC continues to be pro-regulation toward the Internet, the ATR division argues, not only will the services be spread out all over the net, but the costs as well. Inevitably, those costs would be passed on to consumers. And when consumers complain, it's the lawmakers who get to hear them...and that noise gets passed right back to the FCC.

"There is reason to believe that the type of regulatory restraints proposed by some commenters under the mantle of 'neutrality' could actually deter and delay investment and innovation," the team goes on, "and result in less choice and higher prices to consumers of Internet services. Proponents of 'net neutrality' regulation do not agree on a definition of what conduct should be prohibited, nor what networks would be regulated (wireline and/or wireless), or even the extent to which pieces of the Internet need to be regulated (just the last-mile or the Internet backbone). The mere fact that a definition of 'net neutrality' remains elusive should give the Commission great pause before imposing regulation."

The DOJ's ex parte filing this morning did not address the issue of whether premium tier service providers under a multi-tier, free enterprise, minimum regulation environment would be more or less willing to pass on their innovation and development costs directly to the consumers, rather than to their would-be competitors.

Last January, at a speech at CES, FCC Chairman Kevin Martin did open the door to the possibility of allowing some kind of tiered access for premium providers. InfoWorld quoted Martin as saying, "I think it's important to realize the operators themselves have an interest in potentially selling tiers of speed and service. If a consumer chooses to buy a lower tier and then tries to access content...and they can't access [it] because they haven't bought enough capacity, well, they're not being blocked from getting access to that."

Martin also said at that time that the absolute definition of "net neutrality" was not a certainty. The DOJ's allusion to Martin's comments are an indication that it isn't exactly barking up a tree, and that it may indeed find a receptive audience.