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Business Impact

Net Neutrality Rules May Slow Innovation, but Uncertainty Will Be Worse

FCC chairman Ajit Pai argues that rules governing Internet providers discourage investment, but killing them could create more problems for content providers.

Ajit Pai

During a dramatic speech last week in Washington, Federal Communications Commission chair Ajit Pai argued that the case for killing the Obama administration’s net neutrality regulations is simple: government is standing in the way of broadband network upgrades needed to support the next generation of innovation on the Internet. Pai said his agency would begin a formal process to effectively kill the regulations, calling them the reason that in 2016 the top 12 ISPs invested over 5 percent less on broadband infrastructure relative to 2014, the last year before the rules took effect.

Not everyone agrees with Pai’s assessment, which is based in part on a recent analysis by economist Hal Singer, a senior fellow at the George Washington University Institute of Public Policy. A competing analysis by the advocacy group Free Press concludes that investment has actually increased. Singer and Free Press don’t agree on the appropriate methodology for fairly comparing broadband investment before and after the regulations took effect.

It is hard to quantify an effect, if there has been one, after only two years under the rules. And at this point it may not matter which camp is right anyway. Pai appears determined to do away with the rules regardless of their impact. The question that matters now is what, if anything, will replace them if he succeeds (see “What Happens If Net Neutrality Goes Away?”).

It is no surprise that Pai wants to get rid of the Open Internet Order, which the FCC enacted in 2015 under former chairman Tom Wheeler. Pai, then an FCC commissioner, issued a scathing dissent upon the passage of the order, which banned ISPs from blocking or throttling legal content, and banned business arrangements in which content providers pay more to have their traffic prioritized. His major objection was not to the rules themselves, but to the legal maneuver the FCC used to claim the authority to impose them—changing broadband’s designation from information service to telecommunications service, thereby making ISPs common carriers, a class that faces relatively strict regulations and includes telephone service providers, airlines, and trucking services.

When President Trump nominated Pai to run the FCC, the fate of the common carrier-style regulatory approach for ISPs seemed all but sealed, and last week’s announcement that the agency will seek to turn broadband back into a lightly regulated information service wasn’t much more than a formality.

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Reclassifying broadband will effectively kill the rules against blocking, throttling, and paid prioritization, because the FCC will no longer have the legal standing it used to create them. Still, Pai and other opponents of the Obama-era rules, including Republican leaders in Congress, say they recognize the need to protect smaller content providers against discriminatory practices by incumbent ISPs.

For instance, many ISPs are rolling out streaming video products of their own. What is to stop them from giving their own content, or that of an exclusive partner, preferential treatment? When the maker of Snapchat filed for its IPO earlier this year, it warned investors that if the Open Internet rules go away, “mobile providers may be able to limit our users’ ability to access Snapchat or make Snapchat a less attractive alternative to our competitors’ applications.” A wireless provider could give Instagram a favorable deal that effectively cuts Snapchat out of its network, for example. Neither Pai nor any leaders in Congress have revealed any specific plans for what to do about this.

So what will happen if the FCC successfully eliminates Obama’s net neutrality rules? Unfortunately, that seems like anyone’s guess, and such an uncertain environment could leave us with even less investment by ISPs and content providers alike—more than 800 tech startups wrote Pai last week, urging him not to kill the rules. It’s plausible that we could end up with no regulations at all, at least for a time. The agency could try to enact new rules, which would likely be more business-friendly and allow certain things that weren’t allowed under Obama’s rules, like Internet fast lanes.

Ultimately, Congress has the power to step in and clarify the situation with legislation that establishes some sort of yet-to-be determined protections for content providers. If recent history is any guide, however, it's a long shot that this Congress will come up with a compromise on net neutrality anytime soon. 

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