Tuesday, May 11, 2010

More Big Government Via the FCC

The FCC now wants to make the Internet a public utility. Interesting. The same thing that the president so effectively used to get himself elected and now is coming back to haung him. Now that he is President Obama and not candidate Obama, those working under him want to now change it so that it can be regulated by the US Government. Never mind that a US Court of Appeals struck down Net Neutrality. For those of you who do not know about Net Neutrality, it can best be shortly defined as

Regulations that would allow federal officials to determine how internet service providers could manage the networks they built and own, ostensibly in the “public interest.”

For more detailed information, you can go HERE.

Since the FCC did not get its way, it has now decided that it wants to make the Internet a public utility. They want to do this using the Title 2 of the 1934 Communications Act. This title was originally created to handle monopoly based telecommunications companies and force them to open up their networks to competition as well as regulate pricing. For more information, you can go HERE. In the past, the FCC was able to control the Internet providers using Title 1 of the 1934 Communications Act. You can review Title 1 HERE.

So what is the difference you may be asking. It is huge. Title 1 gives the FCC the right to intervene when necessary. Title 2 mandates the FCC regulate internet service providers. With this type of power, the FCC could force net neutrality regulations, they could tax internet services under the Universal Service Fund and even regulating Internet pricing.

Historically speaking, public utility regulation restricts entry into an environment and regulates prices to prevent firms from charging excessive prices. It’s typically used in situations where competition is believed to be impossible. Think of the classic Ma Bell (click HERE if you are not old enough to know what this reference means). Sometimes it is also used in situations where pre-existing policy decisions have created monopolies that aren’t going to go away very soon. Note, soon is a relative term.

Broadband access is in no way monopoly. We no longer live in the time where you have to purchase your Internet access through one of a few companies like AOL or Prodigy. While locally in St. Louis, many people purchase their Internet through either AT&T or Charter, you are not required to purchase it through them, you can also purchase it through a wireless company like Sprint or one of many resellers that offer equal to or discounted prices.

While ISP’s are aplenty, the network backbone is essentially an oligopoly. As defined by Dictionary.com an oligopoly is:

When a particular market is controlled by a small group of firms.

The network backbones are maintained by large telecommunication firms like AT&T, Quest, Verizon, Comcast, etc. These carriers are the ones who have laid and maintain the lines. For the small business or residential customer, they basically sell portal access to their backbones. Midsized and larger companies are a different story. Due to the nature of their business, some businesses must align directly with the telecommunications/backbone companies rather than going through a reseller due to the volume of data they will be using. For these companies the prices are dependent upon the total network traffic. These companies would then work directly with one of the backbone companies like a AT&T or Quest.

Basically put, if I am a large company and I need a lot of data, I will purchase access to the Internet that will give me plenty of bandwidth to meet my needs. That purchase may have some limitations on total data where I have to pay a penalty if I exceed the total size during a monthly, quarterly or even yearly period.

Contrary to the perception by some, oligopoly is not synonymous with “evil.” Although both monopoly and oligopoly end in “-opoly,” that doesn’t mean they are the same. Broadband providers do not charge monopoly prices. In fact, the competition to the consumer has probably had the opposite effect and driven costs down even further. Just look locally, AT&T offers a bundle discounts to residential customers and Charter does the same. Charter offers higher speeds for lower prices and AT&T matches. For business, these larger companies are all competing for these high priced contracts. While their prices may be similar they compete by offering additional services, equipment, etc.

This is not a bad thing. Residential customers, who for the most part are using a low volume of broadband, compared to companies, get the benefit of lower prices via competition. These large companies are dealing with the companies that own and maintain that line. If there are problems, there are guarantees that the providers will have the line up and running in a certain length of time, otherwise they have to pay the customer back. The larger backbone companies, while their prices may be similar, are competing on their services. There is nothing wrong with this style and companies have been doing it this way for years.

Once again, historically speaking, there is hard evidence that surface from economic literature on public utility regulation. Just about every time the federal government has tried to impose public utility regulation on an oligopoly, it has ended up enforcing a cartel. This is what happened in the past with railroads, trucking, airlines, and brokerage firms. There are a few times federal price regulation did not enforce cartels for oligopolies or competitive industries. In those cases, it usually created shortages — most notably gasoline and natural gas in the 1970s.

History shows that there is nothing that is working fine that the government cannot screw up when it gets involved. In this case, the Internet providers and backbone is working fine. Sure, we all want higher speeds and it would be great if more people in outlying areas could get easier access to the Internet but that is not something the government can fix. Should the government get involved, it will force these companies to lay cable and give high speed access to those in outlying areas and do so at either a loss or at the cost of those in larger cities. The same is true for corporations. Should net neutrality be enacted, the government will force these backbones to charge a flat fee, equally to companies no matter if they consume a large amount of bandwidth or not.

If this type of government control is to go forward, let it do so through Congress. Using the FCC to sidestep legislative and judicial authority reeks of Chicago style thuggery. Of course, should we expect anything less from the Barack Obama – Rahm Emanual style of politics which is currently in play in Washington?

Now, let’s bring this all together. Recently during the commencement speech at Hampton University in Virginia, President Obama had these two gems.

With so many voices clamoring for attention on blogs, on cable, on talk radio, it can be difficult, at times, to sift through it all…to figure out who’s telling the truth and who’s not. ..Even some of the craziest claims can quickly gain traction. I’ve had some experience with that myself.

You’re coming of age in a 24/7 media environment that bombards us with all kinds of content and exposes us to all kinds of arguments, some of which don’t rank all that high on the truth meter. With iPods and iPads; Xboxes and PlayStations; information becomes a distraction, a diversion, a form of entertainment, rather than a tool of empowerment. All of this…is putting new pressures on our democracy.
When the President of the United States is saying things like this and his FCC Chairman is trying to control the Internet, it is no wonder that people start becoming a little paranoid.

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