Net neutrality: Is the Internet about to change?

The FCC has applied 'neutrality' to its oversight of the Internet: Everyone’s data reaches the same audience in the same way. But the Internet’s gatekeepers, such as Verizon and Comcast, have been trying to reshape the federal regulatory landscape.

Focus

The executive summary of the Federal Communications Commission's National Broadband Plan would never be mistaken for a Dan Brown page turner, but right at the top of the first page it makes a statement that is central to the future of the Internet in the United States.

"Like electricity a century ago, broadband is a foundation for economic growth, job creation, global competitiveness and a better way of life," it says. "It is changing how we educate children, deliver health care, manage energy, ensure public safety, engage government, and access, organize and disseminate knowledge."

The comment could easily be dismissed as bureaucratic hyperbole, but it raises an important point that the Federal Communications Commission (FCC) is even now struggling to resolve: Has the Internet become so vital to national welfare that it should be run for the public good, or is it just a business that can be run primarily for profit?

The answer to that question could have a profound effect on how the Internet works for American users for decades, analysts say.

Imagine if one business ran faster on the Internet because it paid an extra fee. To the industry that owns the wires that bring the Internet to homes and offices, that's just basic business sense. To defenders of "net neutrality," it amounts to fencing off the best parts of one of humanity's most powerful social tools according to the highest bidder.

Now, the US stands at a hinge point, analysts say. Until recently, the FCC has applied "neutrality" to its oversight of the Internet: Everyone's data, from Jane in Poughkeepsie e-mailing a photo to Apple running all its applications on the cloud, reaches the same audience in the same way without discrimination. But the Internet's gatekeepers – such as Verizon, Comcast, and AT&T – have slowly been consolidating the minor players and using their growing leverage to reshape the federal regulatory landscape.

It's a battle that pits Internet providers against the FCC's bid to regulate them, with the most strident critics suggesting that Internet providers have become virtual monopolies. At stake, they say, is whether the American Internet evolves into something more like cable TV, with providers controlling access to content on the Web similar to the way cable companies control access to TV channels.

"This may very well be viewed from a historical perspective as the moment – 2013 and 2014 – when the Internet became a mass medium, with all the limitation of the mass media that we know from the age of television and radio," says Aram Sinnreich, professor at Rutgers University School of Communication and Information in New Brunswick, N.J. "The age when it stopped being a profoundly transformative, profoundly radical platform for cultural innovation and business innovation. And that's a lot to give up."

It is understandable that Internet providers would not be thrilled by the FCC's determination to enforce net neutrality. The rules, after all, were specifically designed to put a check on them. So they have fought back by ramping up lobbying and legal challenges.

As of late, momentum has been with the telecommunications and cable companies. In mid-January, a federal court tossed out the FCC's "Open Internet Order," the regulatory core of net neutrality principles. Verizon had challenged the FCC's legal jurisdiction to regulate broadband Internet.

In 2010, a federal judge similarly ruled that the FCC had overstepped its statutory bounds. Comcast brought that lawsuit.

Still, the judge in the Verizon case this year affirmed the basic authority of the agency to regulate Internet services. In response, FCC Chairman Tom Wheeler announced he would attempt to save net neutrality by reformulating the FCC's rules on a different section of law.

"The FCC must stand strongly behind its responsibility to oversee the public interest standard and ensure that the Internet remains open and fair," Mr. Wheeler said in a February statement. "The Internet is and must remain the greatest engine of free expression, innovation, economic growth, and opportunity the world has ever known."

Internet providers have also been making headway outside the courtroom.

In February, Comcast announced that video-delivery service Netflix had agreed to pay a modest fee to improve its streaming speed on Comcast's networks. Netflix saw the speed of its Internet streams decline by 27 percent on Comcast's networks right before the première of its award-winning original drama,"House of Cards." Given that Comcast is virtually unchallenged in many markets, Netflix felt compelled to make the deal – which sent shivers down the spines of other companies that produce or provide content.

"We're in a really interesting point to see whether the Comcast precedent is going to be exported, this give-us-the-cash-for-better-streaming model, to the rest of the industry," says Tim Wu, the Columbia University law professor who coined the term "net neutrality" in 2003. Content providers "are nervous, and you can imagine them as circled wagons, and Netflix just went down."

The potential next steps are not hard to imagine. The FCC's net neutrality doctrine prohibits giving special pipeline privileges to data that Internet providers might favor or have a financial interest in. If it were struck down or abandoned, would Comcast – which owns NBC – stream NBC content at faster rates? Would other content providers be forced to pay "tolls" to enter the fast lane, too?

Intentionally bad Internet?

Critics say consolidation among Internet providers has resulted in too few having too much power.

"Consolidation is the real threat today," says Ramnath Chellappa, professor of operations management at Emory University in Atlanta. "True social welfare in this scenario is really about the availability of choices to the consumer, not necessarily stopping what these folks are trying to do with their pricing."

As the industry fights net neutrality, it is keeping its prices high and speeds low, he and others say.

Broadband service in the US is often triple the cost of similar service in Europe, and five times that in places like South Korea, according to a study by the New America Foundation last fall.

"Lack of competition rewards maintaining scarcity," says Professor Wu. "It's a classic monopolist strategy. Monopolists always achieve a high price by reducing supply, and it's clearly in Comcast's interests to keep a nice, narrow Internet – one that's just good enough, but not really."

Internet as 'public calling'

To defenders of net neutrality like Wu, Internet providers belong to a special class of businesses that are crucial to a functioning society.

Two hundred years ago, these issues surrounded drinking water, bridges, and even roadside inns, he says. Later on, they arose for electricity, the telegram, and the telephone. Now, with 7 of 10 American adults having a basic high-speed Internet connection, according to Pew Research Center's Internet & American Life Project, they are arising for the Internet.

"There's a certain immortality to the net neutrality debate, because even though its name may change, the underlying issue will never go away, which is, How do the providers of life's essentials need to behave themselves?" says Wu. "Their behavior can have enormous spillover effects on everybody else."

In the Anglo-American common law tradition, such businesses were labeled "public callings," and they had certain duties: They had to serve without discrimination and charge reasonable rates. That model continued to inform 20th-century regulatory policy over industries like the telephone industry.

The alternative is to have the government control these industries – the option most of the rest of the world has chosen. But the American and British way has long been to have private companies with public duties. "So the underlying conflict now is whether broadband is a utility with public duties, or, in our mind, whether it is just a private business," says Wu.

Why Larry Freedman opposes neutrality

For the businesses that maintain the nation's hard-wired infrastructure – from the "long haul" cables stretching across the country to the "last mile" loops wired directly into American homes – the debate takes on a different hue.

Larry Freedman knows firsthand the daunting challenges of building and maintaining the Internet's vital broadband pipes. As former chief executive officer and president of Puerto Rico's WorldNet Communications, he helped build a state-of-the-art broadband network from scratch. But his 10-year-old telecom needed as many revenue sources as it could find, since it was battling two international giants, AT&T and the island's leader, the Puerto Rico Telephone Company (a company owned by Carlos Slim, the second richest man in the world, according to Forbes magazine).

For Mr. Freedman, net neutrality ignores the "blood, sweat, and tears associated with getting a modern telecom network built."

"As a network operator, when you take that risk and you invest that capital, and then a regulator comes and says, 'By the way, you have to open up your network to anyone..., including somebody who will offer the same services you thought you were going to be offering, and for free, and they don't have to pay you anything.' That's a bitter pill to swallow," says Freedman, now a partner at the Edwards Wildman Palmer law firm in Washington, where he helps companies dealing with the FCC.

This is the basic argument of the keepers of the Internet's pipes: They should be able to find out what users are willing to pay extra to get, and what they can't live without.

"In many ways, that's actually a very powerful argument," says Justin Johnson, a professor at the Samuel Curtis Johnson Graduate School of Management at Cornell University in Ithaca, N.Y. "And that's in some sense the basis of the capitalist system, which is, we charge people for resources that they use, and hopefully that encourages efficient investment."

Moreover, Internet providers complain that the current toll-free system allows content providers (like Netflix) to create profits for themselves while creating bottlenecks that Comcast and Verizon have to fix with extra switches and upgrades.

So what do the Comcasts and Verizons of the world want to do, exactly?

They want to discriminate and sort the flow of data and start charging tolls on certain types of content providers – especially those who can make money only if there is a robust high-speed network that only they can provide.

"If their mission-critical data is now [possible only] via broadband and the magic of cloud computing, there may be an argument why there should be an ability, under appropriate circumstances, to prioritize that traffic and to allow those providers, who've made the investment in that sort of technology, to purchase an additional level of security, or a priority to their traffic," Freedman says.

Everyone agrees: an unfair system

Supporters of net neutrality acknowledge that the system is, on some levels, unfair to Internet providers because it favors content providers and developers. But that's the point, they say. An open Internet is the ultimate level playing field. Once you have an Internet connection, everyone shares information toll free.

If net neutrality disappeared, the result would be a new kind of Internet. Today's free-flowing pipes could become a multitiered system of tolls and "value-added pricing," created by the companies controlling them.

"In a lot of other countries, the public policy seems to be able to get the job done and to ensure that there's enough broadband out there and that there are not congestion issues," says Professor Johnson, the Cornell economist. "So it seems a little risky, from my perspective, to throw away a system that's more or less been working, and that has given the consumer all sorts of wonderful Internet experiences. It seems odd to just throw that away and say, 'Well, the only way to go forward here is to let the cable companies, who are essentially monopolists, have a lot of extra power.' "