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The Durable Internet: Preserving Network Neutrality without Regulation, Cato Policy Analysis No. 626

The Durable Internet: Preserving Network Neutrality without Regulation, Cato Policy Analysis No. 626

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Published by Cato Institute
An important reason for the Internet's remarkable growth over the last quarter century is the "end-to-end" principle that networks should confine themselves to transmitting generic packets without worrying about their contents. Not only has this made deployment of internet infrastructure cheap and efficient, but it has created fertile ground for entrepreneurship. On a network that respects the end-to-end principle, prior approval from network owners is not needed to launch new applications, services, or content.



In recent years, self-styled "network neutrality" activists have pushed for legislation to prevent network owners from undermining the end-to end principle. Although the concern is understandable, such legislation would be premature. Physical ownership of internet infrastructure does not translate into a practical ability to control its use. Regulations are unnecessary because even in the absence of robust broadband competition, network owners are likely to find deviations from the end-to-end principle unprofitable.

New regulations inevitably come with unintended consequences. Indeed, today's network neutrality debate is strikingly similar to the debate that produced the first modern regulatory agency, the Interstate Commerce Commission. Unfortunately, rather than protecting consumers from the railroads, the ICC protected the railroads from competition by erecting new barriers to entry in the surface transportation marketplace. Other 20th-century regulatory agencies also limited competition in the industries they regulated. Like these older regulatory regimes, network neutrality regulations are likely not to achieve their intended aims. Given the need for more competition in the broadband marketplace, policymakers should be especially wary of enacting regulations that could become a barrier to entry for new broadband firms.
An important reason for the Internet's remarkable growth over the last quarter century is the "end-to-end" principle that networks should confine themselves to transmitting generic packets without worrying about their contents. Not only has this made deployment of internet infrastructure cheap and efficient, but it has created fertile ground for entrepreneurship. On a network that respects the end-to-end principle, prior approval from network owners is not needed to launch new applications, services, or content.



In recent years, self-styled "network neutrality" activists have pushed for legislation to prevent network owners from undermining the end-to end principle. Although the concern is understandable, such legislation would be premature. Physical ownership of internet infrastructure does not translate into a practical ability to control its use. Regulations are unnecessary because even in the absence of robust broadband competition, network owners are likely to find deviations from the end-to-end principle unprofitable.

New regulations inevitably come with unintended consequences. Indeed, today's network neutrality debate is strikingly similar to the debate that produced the first modern regulatory agency, the Interstate Commerce Commission. Unfortunately, rather than protecting consumers from the railroads, the ICC protected the railroads from competition by erecting new barriers to entry in the surface transportation marketplace. Other 20th-century regulatory agencies also limited competition in the industries they regulated. Like these older regulatory regimes, network neutrality regulations are likely not to achieve their intended aims. Given the need for more competition in the broadband marketplace, policymakers should be especially wary of enacting regulations that could become a barrier to entry for new broadband firms.

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Published by: Cato Institute on Mar 27, 2009
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 AnimportantreasonfortheInternet’sremark-able growth over the last quarter century is the“end-to-end”principlethatnetworksshouldcon-fine themselves to transmitting generic packetswithout worrying about their contents. Not only has this made deployment of Internet infrastruc-ture cheap and efficient, but it has created fertileground for entrepreneurship. On a network thatrespects the end-to-end principle, prior approvalfromnetworkownersisnotneededtolaunchneapplications,services,orcontent.Inrecentyears,self-styled“networkneutrality”activists have pushed for legislation to preventnetwork owners from undermining the end-to-end principle. Although the concern is under-standable, such legislation would be premature.PhysicalownershipofInternetinfrastructuredoesnot translate into a practical ability to control itsuse. Regulations are unnecessary because even inthe absence of robust broadband competition,network owners are likely to find deviations fromtheend-to-endprincipleunprofitable.New regulations inevitably come with unin-tended consequences. Indeed, today’s networkneutralitydebateisstrikinglysimilartothedebatethatproducedthefirstmodernregulatoryagency,the Interstate Commerce Commission. Unfortu-nately,ratherthanprotectingconsumersfromtherailroads, the ICC protected the railroads fromcompetition by erecting new barriers to entry inthe surface transportation marketplace. Other20th-century regulatory agencies also limitedcompetitionintheindustriestheyregulated.Liketheseolderregulatoryregimes,networkneutrality regulationsarelikelynottoachievetheirintendedaims.Giventheneedformorecompetitioninthebroadband marketplace, policymakers should beespeciallywaryof enacting regulations that couldbecome a barrier to entry for new broadbandfirms.
The Durable Internet 
 Preserving Network Neutrality without Regulation
by Timothy B. Lee
_____________________________________________________________________________________________________
Timothy B. Lee, an adjunct scholar at the Cato Institute, is pursuing a Ph.D. in computer science at PrincetonUniversity.
Executive Summary 
No. 626 November 12, 2008
 
Introduction
The 1970s saw two revolutions that wouldtransform the American economyfor decadestocome.OnewastheearlydevelopmentoftheInternet.Theotherwasawaveofderegulationthat freed the nation’s transportation andcommunications infrastructure from micro-managementbyfederalbureaucracies.Each of those revolutions was tied to anintellectual tradition that has profoundly shaped the modern world. In the 1980s, theInternet was one network among many, andmost of its competitors were built on propri-etary standards. Partisans for the Internettended to be partisans for open technologiesmoregenerally.AstheInternethasemergedasthe undisputed winner of the networkingwars,italsobecametheposterchildfor“open-ness,” the now-dominant ideology of Silicon Valley.Similarly, the deregulations of the 1970swerebroughtaboutbyaseachangeinscholar-ly attitudes toward government regulation.Publicpolicyscholarsintheearly20thcentury had imagined that neutral bureaucrats couldmanage the economy and society. That naïveoptimism gave way to a more sophisticatedand skeptical view of the regulatory process inthe decades after World War II. Economistsbegantosuggestthatregulatoryprocesseswere vulnerableto“governmentfailures”akintothemarket failures often cited to justify govern-mentregulations.Scholarsarticulatedtheoriesof “regulatory capturein which regulatedindustries manipulated the regulatory processfortheirownbenefit.Andtheybegantorecog-nize the frequency with which regulatorschemes produce harmful, unintended conse-quences.In“TheBroadbandDebate:aUser’sGuide,Columbia law professor Tim Wu dubbed thesetwo schools of thought the “openists” and the“deregulationists,” respectively.
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The networkneutralitydebatehasputtheheirsofthesetradi-tionsonacollisioncourse.Eachcampviewstheother as a threat to the gains of the last quartercentury.OpenistsworrythattheremnantsoftheBell system will regain control over the nation’scommunications infrastructure and transformthe Internet into a proprietary network. Dereg-ulationists, on the other hand, worry thatWashington bureaucrats will gain control overtheInternet,returningthecountrytothebadolddayswhengovernmentbureaucrats,notmarketforces,determinedtheshapeofcommunicationsmarkets.Thesetwomovementshavecometoregardthemselves as implacable foes, but they havemoreincommonthantheyliketoadmit:they share the fundamental insight that too muchcentralization and bureaucracy is detrimentalto innovation. But each is convinced that theother’sagendawillbringabouttheseunfortu-natecircumstances.Eachcamphassometimesoverstated its case and failed to take the otherside’sconcernsseriously.Andeachcamphasgreatdealtolearnfromtheother.The openist camp includes Internet pio-neerslikeWorldWideWebinventorTimothBerners-Lee,
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who is intimately familiar withthe prerequisites for online innovation. Itwouldbeamistaketodismisstoolightlythiscamp’s concerns about the problems thatcould be created by network discrimination.The deregulationists include prominenteconomistssuchasAlfredKahn,whooversathederegulationoftheairlineindustryunderPresident Jimmy Carter. Kahn possesses deepunderstandingoftheunintendedconse-quences of government regulation. Ignoringhis concerns about the unintended conse-quences of government regulation would beequallymisguided.
3
“Network neutrality” has been given many meanings,butthecoredisputeisoverwhethernetwork owners will alter the Internet’s end-to-end architecture. Openists fear this out-come while some deregulationists welcome it.Other deregulationists flatly deny that theend-to-end principle has ever been the normon the Internet. But in fact, the end-to-endprinciplehasbeenthecentralorganizingprin-cipleoftheInternetforaquartercentury.Andboth sides overestimate the power of the net-work owners. The natural inertia of theInternet’s architecture, together with the vigi-
2
Toomuchcentralizationandbureaucracy isdetrimentaltoinnovation.
 
lanceandtechnicalskilloftheonlinecommu-nity, is likely to provide an adequate counter-weight to network owners’ efforts to trans-form the Internet into a proprietary network,regardless of the actions of government regu-lators.Networkownerswhotrytoprofitfromdiscriminatory practices will encounter stiff resistance from an army of tech-savvy userswhorapidlydevelopanddisseminatecounter-measures and workarounds. Network ownerswill find that they lack the leverage to effec-tivelycontrolthebehaviorofonlinefirmsandusers and that efforts to limit the activities of their own customers are financial and public-relationsdisasters.Networkownerswhotrytoconstruct a “walled gardenof proprietary applications and content are likely to be simi-larly disappointed, as proprietary services failto keep pace with the open Internet. ISPs arelikely to respect network neutrality notbecause they want to but because economicandtechnologicalconstraintsleavethemlittlechoice.Concerns that network owners will under-mine free speech online are particularly mis-guided.Networkownershaveneitherthetech-nology nor the manpower to effectively filteronline content based on the viewpoints beingexpressed, nor do profit-making businesseshaveanyrealincentivetodoso.Shouldanet-work owner be foolish enough to attemptlarge-scale censorship of its customers, itwouldnotonlyfailtosuppressthedisfavoredspeech, but the network would actually in-creasethevisibilityofthecontentastheeffortat censorship attracted additional coverage of thematerialbeingcensored.Theopenistshaveatendencytounderesti-mate the unintended consequences that canoccur when governments regulate. History suggests that regulatory efforts to protect thecustomers of major infrastructure ownersoften end badly. The first such effort was thecreationoftheInterstateCommerceCommis-sion in 1887. The language of the InterstateCommerce Act was strikingly similar to thenetworkneutralitylanguagebeingconsideredtoday. The ICC’s backers touted it as a way of protecting the public from abuses by the rail-roads, but in practice it reduced competitionin the railroad industry, effecting transfers of wealthfromthegeneralpublictotherailroadsand other politically connected groups. Overthe course of the 20th century, the ICC trans-formedvirtuallytheentiresurfacetransporta-tion industry into a government-run cartel.This and other examples suggest that policy-makers should be extremely cautious aboutenactingnewregulationswhennonregulatory approachesmightachievethesamegoals.If there’s one thing that almost all sides of thenetworkneutralitydebateagreeon,it’sthatthere is inadequate competition in the broad-band marketplace. Given that consensus,openistsshouldthinktwiceaboutdemandingnewregulatoryregimesthatcouldcreatebarri-ers to entry for new market entrants. Comply-ing with regulatory regimes requires the ser- vices of lawyers, lobbyists, accountants, andother highly paid professionals. Every dollarspentontheseactivitiesisadollarthatcannotbe spent on R&D or new infrastructure.Regulations designed with today’s technolo-giesinmindcouldinpracticebarnewentrantswithinnovativebusinessmodelsandtechnolo-gies.Congressshouldthereforebereluctanttoimposeregulationsonasectoroftheeconomy thathas,untilnow,beenlargelyfreetodobusi-nesswithoutgovernmentregulation.
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Theexistenceofsignificantconstraintsonthe power of individual network owners andthe risks of unintended consequences sug-gest that enacting prospective network neu-trality regulation would be premature andprobably counterproductive. There is littledanger that network owners will fundamen-tally transform the Internet’s architecture,and so it would be unwise for policymakersto enact new regulations to deal with vagueor speculative threats.
The Internet andEnd-to-End
TheInternetowesitsextraordinarysuccessto a set of technical principles that have beenimplicit in its design since it began life as an
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ISPsarelikelytorespectnetworkneutralitynotbecausetheywanttobutbecauseeconomicandtechnologicalconstraintsleavethemlittlechoice.

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