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How the FCC Will Block Silicon Valley’s Streams

7/27/2015 8:00 AM Eastern

In a recent investor call, Google chief business officer Omid Kordestani said YouTube viewing “accelerated and is now up over 60% year-over-year,” with an average session time of 40 minutes and corresponding growth in its video advertising business. On this and other good news, Google’s market value rocketed $65 billion — in one day.

 

Despite the overflowing good news from the digital economy, the Federal Communications Commission pretends the Internet needs fixing. In June, it turned back the clock by applying, for the first time, 80-year-old telephone rules to the Internet. Already the “Title II” rules are generating confusion, blocking innovation and shifting value from disfavored firms to political allies.

 

FCC chairman Tom Wheeler denied the new rules would govern rates or interconnection agreements, but now it appears they may do both, possibly mandating a price of zero. Last week, for example, Netflix agreed not to oppose Charter’s acquisition of Time Warner Cable in exchange for free interconnection — a classic case of regulatory arbitrage.

 

Won’t “free” interconnection be great for Silicon Valley content firms? Not in the long run. Most content and cloud providers employ highly engineered (and paid for) connections with broadband and mobile fi rms. Millions of smaller content providers have similar arrangements with content delivery networks.

 

This complex web of connections makes the Internet work. If everyone demanded and got Web hosting and connectivity for free, however, the Internet would grind to a halt. Making a product artificially “free” doesn’t make it abundant; it makes it scarce. Title II fans also want to prohibit usage tiers and data caps, supposedly unleashing “unlimited” data usage. But in a world of “free” interconnection and “unlimited” data, bandwidth will shrink, not grow.

 

This is merely the tip of the FCC’s new regulatory iceberg. The agency just fined AT&T $100 million for violating its new make-it-up-as-you-go transparency “rule.” Commissioner Ajit Pai called it Kafkaesque and said all firms in the digital ecosystem should “be very afraid” of the FCC’s new, unlimited powers.

 

The agency also conjured a sweeping and purposefully ambiguous “Internet conduct standard” meant to capture all future behavior the agency finds undesirable, or politically inconvenient. Then there is the FCC’s redefinition of all IP addresses to be part of the public switched-telephone network. These new assertions of power, found nowhere in law or agency precedent, let the FCC govern everything that touches the Internet — but in a way in which no individual or firm can predict ahead of time.

 

Net neutrality in its most abstract sense — promoting an open Internet — may once have been a good idea. But the new Title II regime has little to do with this lofty principle. The rules will deter investment in fixed and mobile broadband networks, limiting available bandwidth for new content, services and apps. In the wrong hands, the FCC could target Silicon Valley firms — who operate networks, own millions of IP addresses and engage in many forms of “Internet conduct” — directly.

 

Bret Swanson, a visiting fellow at the American Enterprise Institute’s Center for Internet, Communications, and Technology Policy, is president of Entropy Economics.

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