Shaking down the Net
THE HOUSE of Representatives recently voted to refrain from mandating something called “Net neutrality” in this year’s telecom legislation, but the proposal could resurface in the Senate or in a conference committee. Many people wonder what this “Net neutrality” means. My explanation: It means that this year, it’s the technology industry’s turn to pay for the election.
Net neutrality pits high-speed Internet service providers, such as phone and cable companies, against technology firms such as Google and Amazon that create Internet content and applications. The Internet providers argue that they should be allowed to prioritize traffic and charge content producers who direct a lot of eyeballs onto their networks. The content producers say all traffic must be treated equally and consumers should pay the full costs of the Internet in their subscription fees.
Prioritization of Web traffic, or differential pricing for different kinds of traffic, may either help or harm consumers. If it harms consumers, redress is available by way of federal antitrust law. So if consumer-harming discrimination by Internet providers is already illegal, why has the issue become high drama this year?
Fred McChesney, a Northwestern University law professor, offered an explanation in an article published in 1987, back when broadband was just a gleam in Al Gore’s eye. A politician, McChesney wrote, can “make his demands on private parties, not by promising benefits but by threatening to impose costs -- a form of political blackmail. If the expected cost of the act threatened exceeds the value of the consideration that private parties must give up to avoid legislative action, they will surrender the tribute demanded of them.”
That’s economics-speak for politicians shaking down interest groups by threatening to impose costly new regulations, a cyclical Washington tradition.
My George Mason University colleague Thomas Hazlett has documented that the Telecommunications Act of 1996 was a smashing success at generating increased campaign contributions from communications firms. “Soft money” donations from telecom firms that year more than tripled over 1994.
The electricity industry’s turn came next. Remember those traveling roadshow hearings from 1997 about states opening their electricity markets to competition? With long-standing monopolies at stake, political contributions from electric utilities doubled from the 1994 election cycle to the 1998 cycle, then nearly doubled again in 2000, according to the Center for Responsive Politics.
This year, in both Washington and Sacramento, legislators have put cable companies’ near-monopoly on video service up for auction by proposing new rules allowing telecoms to break into the market. “I haven’t seen this level of lobbying in the Capitol since the fallout from the electricity crisis,” Jamie Court, president of the Foundation for Taxpayer and Consumer Rights, told the Sacramento Bee.
The concessions extracted from businesses don’t always have to be campaign contributions. In a 1998 Journal of Law and Economics article, Hazlett documented how broadcasters engaged in self-censorship and offered politically popular program content because politicians could always threaten to take away the spectrum of the airwaves broadcasters use for free. Instead of paying the government for a piece of the spectrum, as wireless phone companies do, broadcasters submitted to “regulation by raised eyebrow.”
Some have even argued that the Microsoft antitrust suit was punishment for the company minding its own business and staying out of politics. Campaign contributions from Microsoft employees increased nearly sevenfold from the 1996 election cycle to the 1998 cycle, according to the Center for Responsive Politics.
From a fundraising perspective, the ideal regulatory issue is one with well-organized, moneyed interests on both sides. That way, policymakers can threaten to auction one party’s property to the highest bidder. The 1996 Telecommunications Act, with the long-distance phone companies on one side and the local providers on the other, is a good example. Net neutrality, with AT&T; and Time Warner on one side and Google on the other, certainly fits this pattern.
If what McChesney called the “rent extraction” game affected only corporations, then it would harm only the people who own corporations. Because pension funds, IRAs and 401(k)s hold lots of corporate stock, average citizens can see their retirement savings take a slight hit.
But the real harm is to us as consumers. When companies are reluctant to invest out of fear of being targeted by the government, they don’t create as many useful goods and technological advances.
The threat of regulation acts like a tax on technology investments in general, and consumers are worse off as a result. “Neutrality” may sound idealistic, but it certainly isn’t free.
