Steven Pearlstein column on Net Neutrality gets close to real issues in debate.

Steven Pearlstein, a professor at George Mason University, has published a column in the Washington Post Sunday that penetrates the phoney issues in the current debate.  All the noise at present is about neutrality, with claims that Internet Service Providers (ISPs)are discriminating and that they will destroy the Internet as we know it.  Pearlstein's column, entitled " Shades of complexity dominate the debate over "net neutrality", turns the debate to economics. which is where it belongs.

Pearlstein says:

"This is a debate that has come to be dominated by hypocrisy, half-truths and impenetrable complexities.  At one level, net neutrality is a solution to a problem that, for the moment, doesn’t exist.  ... At another level, what the net neutrality debate is really about is deciding who will pay the considerable costs of building out the infrastructure to handle all those bandwidth-hogging videos and games that we’ll be downloading from the Internet. The content providers and start-up app creators, naturally, think they shouldn’t have to pay because that would discourage their economy-disrupting innovation. The ISPs, naturally, think they will only have the money and incentive to expand their network if they can levy an extra charge on the Netflixes and the Googles who have sucked most of the value out of the Internet."

Pearlstein is correct that the fundamental issue is economic.  However, it is not merely related to the cost of building out additional infrastructure.  Rather, it relates to the manner in which the cost of the entire Internet will be recovered.  Like many other networks, the Internet is a joint product in economic terms – it has substantial fixed costs which must be recovered either from suppliers of information, or from consumers.  At present such costs are recovered from consumers.  However, there are proposals to recover some of those costs from suppliers in the form  of higher charges for greater speeds.  These are certainly reasonable proposals, but, obviously, shifting part of the burden to suppliers who had a free ride has generated opposition.  To win the argument, suppliers have camouflaged their economic interest with claims about equity, unfairness to small vendors, etc.  But remember, underneath all the propaganda is the fundamental economic issue of who should pay for the Internet.


25 years ago, I was involved in antitrust litigation with respect to how the cost of airline computerized reservation systems would be recovered.  The CRSs were the essential link between travel agents and the airlines upon which they made reservations.  The vendors, who were all airlines themselves at that time, initially recovered the costs from travel agents, but competition among the airline vendors reduced charges to them.  Therefore, with the help of government regulation requiring nondiscrimination in booking fees, they imposed substantial fees on other airlines.  Outraged, other carriers sued for over $4 billion, claiming that each CRS was a monopoly  After a three-month trial, a jury rejected this claim.

The current debate has many similarities that long-ago controversy.  I will write more about net neutrality and joint products in the future.  I may also devote another post to Pearlstein's bizarre solution to the problem – he  proposes to grant local monopolies to ISPs based upon competitive bidding.  The winning ISPs would then be able to charge monopoly prices.