In a major development in the ongoing debate over net neutrality, President Obama announced his support for a strict regulatory regime to govern the Internet. The President framed the discussion around a good-faith need to protect innovators and entrepreneurs. Unfortunately, he has fallen for a cynical ploy that some Silicon Valley companies and advocacy groups are using to push an extreme regulatory agenda for the Internet.
Unfortunately, the innovative companies we take for granted to enrich our lives are not always the altruistic companies we think they are especially when it comes to exerting influence in Washington.
Take for example Netflix, who has transformed from a DVD mail order business to a dominant leader in streaming video. They have mastered the ability to provide almost any digital programming directly to smartphones, tablets, and TVs. What Netflix is not yet known for is the age-old practice many companies have come to rely on, known as “regulate my competitor,” or what economists call “rent-seeking”.
By hijacking the debate over network neutrality and conflating it with a regulatory arbitrage scheme to pad its bottom line, Netflix is putting its interest above all Internet users. The network neutrality debate has always been about treating all content on the Internet the same – no blocking or impeding traffic. Now, Netflix is trying to convince the Federal Communications Commission (FCC), to adopt a new proposal that would change the current bipartisan “light-touch” regulatory structure of today. Netflix and now President Obama want to “reclassify” broadband networks under 1930s rotary telephone laws that would make ISPs public utilities under the guise of no blocking or prioritization. However, making ISPs into utilities still won’t prevent prioritization, further revealing the “regulate my competitor” strategy Netflix has embarked on with other advocacy groups.
The Communications Workers of America recently noted that investment by the 11 largest publicly traded broadband companies rose from $56.5 billion in 2010 to $70.1 billion in 2013 while investment by content companies only rose from $9 billion to $13.2 billion in the same timeframe. Clearly, the investments made by ISPs to expand Internet service dwarfs that of the content companies. ISP investments translate directly into good, U.S.-based union jobs, a situation not matched by the largely non-unionized global content companies.
It’s also important to remember that Silicon Valley’s giants rely on the investment that creates the robustness of these networks for their success. Public utility regulations will only dry up investment in networks – ultimately hurting the innovators the President and advocates claim to protect.
Analysts have noted that Netflix generates about 1/3 of all Internet traffic at peak times in the US. Traffic is so high it puts significant strain on the ISPs’ networks. To alleviate this strain, ISPs, for years, have made arrangements to connect directly with content companies in order to keep the Internet free from this congestion. These arrangements are a win for content companies, ISPs and consumers.
But these types of traffic routing arrangements, called “paid interconnection,” are not good enough for Netflix’s profit motives. Instead, by using the neutrality debate to try to force ISPs to deliver Netflix traffic for free over ISPs’ networks, subsidizing the delivery of Netflix’s massive content bandwidth. This would ultimately force all Internet users to subsidize Netflix’s bandwidth needs.
Instead of urging the FCC to regulate its competitors as public utilities, Netflix should be doing what many other content companies like Amazon and Google have done – make interconnection arrangements with ISPs or invest in their own networks to bring content closer to the end customer. This strategy will create high paying jobs in California and avoid age-old tactics like “regulate my competitor”.