Regulation by narrative, Part I: How to turn the Internet into a monopoly

In a recent talk summarizing a new paper, Tim Brennan — who was chief economist of the Federal Communications Commission (FCC) at the height of the net neutrality wars — called the agency’s 2015 Open Internet Order an “economics free zone.” That was a nice way of saying the new regulations were driven by a narrative, not by real analysis. Stories are powerful. Narratives are easy. Evidence and analysis are boring and difficult. Lots of people and groups have their own stories, and they often conflict. So when a government agency wants to overhaul the way it regulates firms and industries, it’s supposed to do the hard work of analyzing data and economics and, yes, even the law. The net neutrality story appeared to end happily for those hailing the new policy, now subject to a legal challenge in the DC Circuit Court of Appeals. But if you thought this story was nearing its conclusion, think again. The next narratives have already begun, and they are as free of economics as the previous decade’s worth of net neutrality arguments were. One of the chief storytellers of the net neutrality saga, Susan Crawford, says that the great Title II victory was meaningless. Despite getting everything she and other activists wanted and more in a policy triumph that was supposed to solve any problem imaginable on the Internet, Crawford now says that when it comes to broadband, “Winter is coming.” It's the regulatory ratchet effect. Pocket the victory and then demand more. The broadband winter is the supposed monopolization of communications by “Big Cable.” Typical of the new narrative style, which skips over all relevant data, is Crawford’s assertion that:

“We are amplifying and entrenching existing inequality by not taking on this country’s Internet access problem.”

The Internet, like all else on this earth, isn’t perfect. And yet it may be the greatest economic success story of the last half century. After $1.4 trillion in investment, nearly one hundred million American households have broadband Internet access, up from zero households just 20 years ago. Mobile broadband is nearly ubiquitous, even for adolescents and children. Americans generate and consume more data than any large nation in the world. There’s more work to do to deliver the Internet to a few remaining rural and urban pockets, but overall the US leads the world in broadband. Crawford’s narrative, however, asserts a grave premise and then jumps to a wildly aggressive and disproportionate solution: a government Internet takeover. She justifies this by claiming that:

“adoption of high-speed Internet access has plateaued, while the percentage of smartphone-only users in the United States is growing.”

The key reasons why broadband adoption has plateaued are that (1) the market is nearly saturated and (2) mobile is a better (if imperfect) substitute than ever. As penetration of any product approaches 100 percent of the population, adoption always plateaus. Other factors, such as a slow-growing economy and stagnating incomes for low-income workers, could also affect broadband subscription numbers at the margins. But those are problems that not even the FCC can solve.

“We should stop throwing money at old, copper-based technologies….”

Who could disagree? But the only reason we’re wasting that money is because the FCC regulations Crawford supports force firms to keep investing in that copper even when they would rather redeploy that capital in fiber optics. Several years ago, network firms asked the FCC to launch a proceeding known as the “IP Transition,” which would have paved the way to decommissioning the old copper networks and consolidating around fiber and wireless. But the FCC dragged its feet and has even gone backwards in some cases; the IP Transition is subsequently languishing. Fiber, Crawford writes, is the only way to serve customers with high-speed service! But we were just told that the non-fiber networks of Big Cable are so fast that they dominate high-speed service. (Of course, most cable and DSL networks are in fact hybrid fiber networks.) The narrative tends to get tangled in itself. Crawford wants to block private firms from investing as much as they would like in fiber and then says only the government can deploy it.

“It’s got to be a single vision. Otherwise it won’t be the smartest one.” 

The only ones smart enough to build a nationwide network are the people who brought us the Obamacare website? The insistence on a single vision is central planning 101 and the antithesis of our successful Internet economy. The Internet economy contains multiple networks, lots of service providers, varied devices, competing operating systems, and a multitude of content and apps — all vying to compete based on differentiated innovation. There’s a historical example of the “smartest” “single vision.” It was the telephone system, in which the network, its components, and its services were all built and operated by one company. Compared to the Internet, the telephone network had little competition, almost no innovation, and very high prices. The multitudes of the Internet delivered us from the “single vision” of the telephone. To the extent that Crawford’s “winter is coming” nightmare came true, the most likely reason for it would be her own policy. Under the reigning light-touch policy of the last 25 years, the Internet boomed, and the once-concentrated communications sector became more competitive than ever. The surest way to promote a monopoly is to heavily regulate a sector. Large firms can better afford the costs of regulation. Smaller providers can’t absorb the costs as well, and prospective entrants are scared off. Who wants to enter a market in which the possibility of profit is foreclosed by regulation? Net neutrality, remember, was supposed to be the policy that prevented broadband firms from leveraging their “gatekeeper” status to hurt consumers and online content firms. Now, just as we expected, they say their dream policy that the FCC adopted one year ago — the “strongest possible rules” based on Title II — is not enough to contain Big Cable. Thus, we are now witnessing the new campaigns to outlaw zero-rating data plans and usage-based billing, impose a new layer of privacy regulation on the Internet, and fund a public option for broadband. Net neutrality wasn’t the end game — it was a foot in the door to comprehensively regulate and degrade private networks. Crawford’s “single vision” would bring about the very consolidation she warns against. But of course Crawford’s real worry isn’t about monopoly. She wants the “smartest one” to run a single network, and that “one” is the government. In fact,

“we need an institution—a dedicated body that can make the necessary long-term lending decisions to build a future-proof fiber-optic network infrastructure.”

But there’s more!

“We also need a second institution with deep expertise in building, financing, and maintaining cutting-edge internet access infrastructure, like the Overseas Private Investment Corporation (OPIC), a government agency that has been investing in infrastructure abroad for decades as part of our foreign policy efforts aimed at helping our allies.”

The narrative wants to place an OPIC-like network expert within each of the 12 Federal Reserve Banks to oversee the financing and construction of single-vision-compliant government networks to stave off the coming broadband winter. No, seriously — you didn’t misread that. Erect a series of policy obstacles that will retard the astounding $70 billion per year of broadband investment, warn of a mythical broadband winter, and launch a preemptive bid to save a booming industry with bureaucrats at the St. Louis and Richmond Feds. This is a recipe for a government Internet monopoly.

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