Netflix Tax a Disaster for Web, Economy

Published April 6, 2011

The Consumer Federation of America contends major online content distributors such as Netflix should be taxed in order to funnel more money through the slush-fund boondoggle known as the Universal Service Fund (USF).

This plan—essentially taxing content providers to pay for Internet service provider (ISP) upgrades—is especially absurd coming from a group that is a vocal proponent of “net neutrality,” a policy based on the idea that such charges are “unfair” or “unjust.” Apparently our lean, efficient central government is the only entity capable of fairly determining which companies should pay and which should be subsidized.

The USF was launched by President Bill Clinton’s FCC as a subsidy to companies helping provide telephone service to U.S. residents, hospitals, and schools. The increasingly troubled USF has been under a microscope recently, as the Obama administration has announced plans to expand it to cover broadband Internet services.

A recent Technology Policy Institute study by Scott Wallsten found as much as 59 cents of every USF dollar are spent on administrative costs and bureaucracy.

The developer of the plan to expand the USF, ex-FCC member Blair Levin, recently offered an apologetic interview in which he admitted the inherent problems of the USF bureaucracy and laid out an even scarier plan for the future. His newest iteration of the plan: even less money for programs that create access, and even more to subsidize “technology literacy” and education. It’s always a bad sign when government is tasked to do things that aren’t measurable, such as technology literacy.

The USF and the FCC are clearly not the appropriate bodies to fund and implement broad access to the Internet. No government entity is.

Why, then, the push to have the government take over expansion of access to broadband Internet? Because the Obama administration is loading up so many obstructing regulations and barriers that private-sector innovation and investment will become increasingly scarce.

The FCC—pressed by Sen. Al Franken, Obama, and FCC Chair Julius Genachowski—is moving to impose net neutrality, a set of policies limiting the freedom of Internet service providers to charge for the heavy bandwidth use demanded by customers of services such as Netflix. Without the authority to charge varying fees based on use, ISPs are forced into a difficult decision: pass the costs along to all customers equally, regardless of whether they are heavy-bandwidth users (a move the Obama administration will undoubtedly block as “unjustified price hikes”), find a way to get Neflix and other such firms to pay the costs, or stop investing in infrastructure.

Instead of removing the stifling regulations, the Obama administration thinks the solution is to grab more taxpayer money to subsidize the very investments the administration suppressed in the first place.

With an overregulated ISP market and Web content growing at light-speed, infrastructure development is waning. The National Telecommunications Cooperative Association estimates Netflix alone uses almost 10 percent of the average Internet service provider’s (ISP) bandwidth, and recent announcements make a fully digital version of the company look like an inevitability in the next few years. The strain this sort of massive Web use puts on local ISPs is greater than any regulate-and-subsidize scheme can possibly support.

All of this means higher costs to consumers and taxpayers alike: Netflix must increase prices to make up for the new tax levied on the firm, and ISPs must charge more to make up for the 59 cent premium the government already charges. What will we get for these higher prices? Much more government regulation, slower innovation, and slower Internet service.

The real way to increase broadband access is to dissolve the USF, revoke the net neutrality rules, and let ISPs invest in their own expansion plans paid for by the companies that use their services, such as Netflix, or by the heavy bandwidth users. In other words, let ISPs charge both providers and consumers what their services are worth to them.

Marc Oestreich ([email protected]) is telecommunications legislative specialist for The Heartland Institute.