Policy Documents

The Real Cost of Network Neutrality

Marc Oestreich –

On June 17, FCC Chairman Julius Genachowski pushed through a 3-2 vote along party lines to begin his agency’s process of reclassifying broadband Internet access under a more restrictive regulatory regime known as Title II. Once the Internet is reclassified as a telecommunications service rather than an information service under Title I, the FCC will have seized the power necessary to micromanage the vibrant medium we take for granted.

Numerous studies have found FCC enforcement of net neutrality rules would harm the digital economy and consumers. The research on net neutrality points out regulation would stifle innovation and impose costs that would be passed on to consumers. Study after study finds net neutrality is an attempt to fix a “market failure” that doesn’t exist.

A recent study from New York University concluded net neutrality would cost Americans 500,000 jobs and $62 billion over the next five years. The international market research firm Frost & Sullivan found net neutrality regulations would likely pass on to the consumer up to $55 per month in additional costs. These and other studies show a hands-off approach to Internet regulation maximizes social and economic welfare.

The following articles discuss the economic consequences of an FCC-driven network neutrality policy.

High-Speed Internet Rules Might Prove Costly
http://www.businessweek.com/print/technology/content/jun2010/tc20100616_751009.htm
This report describes a New York University School of Law study of the expected cost of an FCC net neutrality policy. The report concludes enforced net neutrality would cost the U.S. economy $62 billion and eliminate 502,000 jobs over the next five years.

Net Neutrality: Impact on the Consumer and Economic Growth
http://internetinnovation.org/files/special-reports/Impact_of_Net_Neutrality_on_Consumers_and_Economic_Growth.pdf
This report on network neutrality finds the policy could pass on an upcharge of as much as $55 per month to the consumer, in addition to current charges. The author finds a “policy which seeks to manage competition by influencing the investment decisions of operators could have a significantly negative impact on consumers, job growth and the economy generally.”

Unintended Consequences of Net Neutrality Regulation
http://www.nextgenweb.org/wp-content/uploads/2008/01/litan-singer-unintended-consequences-of-nn.pdf
Robert E. Litan and Hal J. Singer find an FCC mandate on network neutrality “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.”

Network Neutrality or Internet Innovation
http://www.cato.org/pubs/regulation/regv33n1/regv33n1-6.pdf
Christopher S. Yoo identifies the inherent price and quality tradeoff in regulations on network neutrality. He concludes, “Social welfare would be maximized if the network provider could price discriminate on both sides of the two-sided market.” Yoo suggests the FCC does not understand the economic complexity of the market and uses an ahistoric and simplistic model to view complex and ever-changing problems.

The Economics of Net Neutrality
http://econ.gsia.cmu.edu/Ecommerce/Economics%20of%20Net%20Neutrality.pdf
Robert Hahn of the American Enterprise Institute finds, “’Hands off the Internet’ was good policy when the Internet was brand new, and it’s good policy now.” Noting several attempts at regulation that currently prohibit competition and stifle innovation, Hahn views additional regulation as directed toward a nonexistent problem. If competition should decline, current antitrust law would solve any problems, he observes.

The Impact of Regulatory Costs on Small Firms
http://www.sba.gov/ADVO/research/rs264tot.pdf
This study finds government-enforced regulation has a disproportionately large economic effect on small business.

The Dangers of Network Neutrality Regulation
http://www.cato.org/event.php?eventid=5694
This video from the Cato Institute tells how network neutrality will stifle innovation from current Internet service providers (ISPs) and add a barrier to market entry.

For further information on the subject, visit the InfoTech & Telecom News Web site at http://www.infotech-news.org or The Heartland Institute’s Web site at http://www.heartland.org.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. If you have any questions about this issue or the Heartland Web site, contact Marc Oestreich, legislative specialist in education, at 312/377-4000 or moestreich@heartland.org.