Net Neutrality Legislation Called Recipe for Mediocrity in U.S. Broadband Networks

January 23, 2007

Net Neutrality measures that would bar network providers from offering a range of choices in Quality of Service will slow the deployment of advanced broadband networks, raise prices, reduce consumer choices and deter innovation, according to a new study by economists Robert Litan and Hal J. Singer. The study was accepted for publication by the Journal on Telecommunications and High Tech Law.

Litan and Singer warn that restricting the ability to customize service would drive network providers toward offering only a single level of "blended" service that does not fully meet the needs of real time application providers or their customers.

"As a result, the U.S. broadband industry would begin slouching towards mediocrity," they conclude.

Net Neutrality Could Curb Consumer Use of Broadband
Pending Net Neutrality proposals "would be detrimental to the objectives that all Americans seemingly should want – namely, the accelerated construction of next-generation networks, and benefits of lower prices, broader consumer choices, and innovations these networks would bring," the study says.

The study adds that forcing network providers to meet the growing demand for Internet capacity without building intelligence into their networks would lead to higher prices that could cause as many as one-third of subscribers to disconnect their broadband service.

"By increasing broadband access prices, net neutrality would undermine the particular objective of maximizing broadband penetration rates," the study warns.

Limiting QoS Options Would Be a Step Back from Current Practice
The study focuses specifically on "non-discrimination" requirements in pending Congressional legislation that would generally bar network providers from offering a range of Quality of Service (QoS) options.

The study notes that such restrictions would represent a step backwards because enhanced QoS offerings, such as caching and prioritization for providers of multiplayer online games, are already commonplace.

"Tiered QoS offerings are already here at different layers of an access provider's network, and for legitimate technical and economic reasons. Content providers are voluntarily entering into contracts with access providers because content providers (and their customers) value these service enhancements more than the prices for these enhancements," they say. Rather than requiring an access provider to deal with content providers for priority delivery on the same terms, as would be the case for standard non-discrimination conditions, the proposed legislation would generally eliminate contracting for prioritization with content providers at any level of the access provider's network.

Network Investment May Hinge on Providers' Return
Litan and Singer also note that required expansions of broadband networks to meet the growing demands of bandwidth hungry applications such as video streaming could exceed $140 billion. They say that those who supply the funds are entitled to earn a return commensurate with their investment risk.

"In virtually all private sector markets, firms that undertake investments have sufficient freedom to fashion the way in which they offer the products and services those investments make possible and to price them in ways that meet consumer demands and optimize their returns," the study says. "In the broadband Internet access market, however, advocates of proposed network neutrality regulation would restrict those who are planning to build out next-generation broadband networks from having these freedoms."

Robert Litan is a Senior Fellow in the Economic Studies Program at the Brookings Institution and has written widely on regulatory issues and the telecommunications industry. Litan has served as Deputy Assistant Attorney General in the Antitrust Division at the Justice Department and as Associate Director of the Office of Management and Budget. Litan is also the co-director of the AEI-Brookings Joint Center for Regulatory Studies. Hal Singer is President of Criterion Economics. His areas of economic expertise are antitrust and industrial organization. He has produced a number of works on broadband, telecommunications, and video services and is the co-author of the Broadband in Europe: How Brussels Can Wire the Information Society (Kluwer/Springer Press 2005). Before joining Criterion, he worked as an economist for the Securities and Exchange Commission.

The study, which is available here, was funded by AT&T and issued by Criterion Economics where Litan is a Special Consultant and Singer is President. The opinions expressed here are the authors.