Net neutrality regulation would make no economic sense, write Martin Cave and Pierre Larouche of the Centre on Regulation in Europe (CERRE).
This analysis was authored by Martin Cave and Pierre Larouche, academic directors at the Centre on Regulation in Europe (CERRE).
"The net neutrality debate is one that causes strong feeling on both sides of the argument. Put simply, proponents of net neutrality believe that all content should be given equal treatment and delivered at the same speed. Those against net neutrality believe that the flow of information over the Internet needs to be carefully managed in order to obtain maximum efficiency and speeds and avoid a bottleneck in a network that does not have the capacity to handle the amount of content being thrown at it.
The main argument for net neutrality (and by default against traffic management) is that without it Internet operators – the ISPs – could seek out a commercial advantage by prioritising certain 'paid for' content over other data creating a two-tier market for Internet data.
Our view is that the existing competition laws are more than strong enough to counter this risk. But more than that, our view is that the ISPs are still experiencing traffic imbalances and congestion on their networks due to a growth in capacity requirements from users. The management of the information flow over the network is a necessity in order for it to function efficiently at all. Any net neutrality legislation will therefore clog up the existing networks and act as a disincentive to the large-scale investment required by the operators for a new, faster, more globally competitive Internet infrastructure.
These arguments have come to a head recently as the European Parliament and [European] Commission host a summit entitled 'The open Internet and net neutrality in Europe', where stakeholders and policymakers will be given the opportunity to discuss the issues.
A first complication arising in the network neutrality debate is that it covers a number of distinct issues: in the short term, Internet service providers (ISPs) must take measures to deal with congestion on their networks, as a small fraction of users (usually smaller than 10%) account for a disproportionate amount of traffic (up to 80%). In the long term, falling margins, resulting from the commoditisation of the Internet, force ISPs to look for alternative sources of revenue to finance huge infrastructure investments.
One possible source of alternative revenues would be to offer different levels of services (in terms of priority and technical requirements) to different types of end-users and content providers, charging higher rates for premium service. This would, however, break with the traditional 'best-efforts' model of ISPs, where all data bundles are handled similarly regardless of their content or owner.
The first question which in our opinion needs to be addressed is whether differentiated quality of service (QoS) should be allowed at all. Economic analysis points both to potential benefits and risks of allowing differentiated QoS.
On the benefit side, the prohibition of any differentiation could lead to the disappearance of premium services as they would not be profitable. In this respect, the Internet is not any different from express mail services or high-speed trains. As already mentioned, an indirect advantage of differentiation would be to allow for the necessary margins to finance Internet infrastructure projects.
The potential risks put forward by proponents of net neutrality mostly relate to the possibility for ISPs to abuse their new-found market power. On the one hand, they could make consumers pay more for their Internet access, otherwise lowering the quality of the provided service. However, this seems highly unlikely, as it is increasingly easy for consumers to switch ISPs and as competition between ISPs (both mobile and fixed-line) increases.
On the other hand, ISPs could exert market power on content providers as they offer the only way to reach the final customer. Again, this source of market power might be overestimated as end-users access the Internet through many different routes (mobile, fixed broadband, WIFI hotspots). However, the problem of abuse of market power is by no means confined to the Internet and can be addressed by traditional competition policy tools and as such, does not justify radical intervention through sector-specific regulation.
The introduction of a transparency obligation in EU law, providing consumers with clearer information on the quality characteristics of their Internet access will improve the functioning of the broadband market and further reduce the risk of abuses of market power vis-à-vis the end-user.
To summarise, in our opinion, a priori prohibiting differentiation of QoS would make no economic sense and no additional regulations are needed as the risks presented by differentiation can, at least at the onset, be fully addressed by competition policy and the existing sectoral regulation. If any extreme problems were to arise, it would still be possible in the future to adopt specific regulation."