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Asking More Commentary: Perspectives from Mendoza College of Business

Commentary Post - Barry P. Keating

Net Neutrality: 'Necessary' or Ill Advised?

March 1, 2011

Net neutrality is the concept that no restrictions or conditions should be placed on an item entering and being transmitted through the Internet. The concept of net neutrality boils down to the statement that “every packet should be treated identically to every other packet.” Packets, of course, are the way data moves to and from computers and other devices connected to the Internet; the network we call the Internet is hardware and software that allows these packets to move between computers through both wired and increasingly, wireless connections.

Surprisingly, the United States Conference of Catholic Bishops has called on lawmakers to recognize that net neutrality “… is necessary for people to flourish in a democratic society.” The debate the bishops are entering is about whether access providers have the right to treat some data preferentially with respect to other data. If access providers are allowed to treat data differentially they may then charge content providers for priority or other enhancements made possible through the technology that allows packets to be distinguished from one another.

The bishops believe that “… access to the Internet for all, including religious and nonprofit agencies …” will be severely limited in the absence of a government mandate requiring net neutrality. They are not alone in their call for the requirement of net neutrality; proponents of net neutrality have argued that a “dumb network ” treats all users equally and disadvantages none. In the net neutral world, every packet would enter the Internet and be treated on an equal basis with every other packet.

The concept as stated by the bishops and other net neutrality proponents does sound reasonable at first glance. The popularity of the concept of “equality” is quite appealing. In fact, some attribute the success of the Internet to the fact that, until now, packets have been net neutral.

Nothing could be further from the truth. Even Google, whose chief technologist is a supporter of net neutrality, prioritizes searches, treats different users differentially, and supports outgoing packet priority to prevent congestion. What net neutrality requirements actually constitute is a price fixing arrangement in which any form of flexible pricing is illegal. Were the equivalent form of price fixing to be proposed for enactment in almost any other sector of the economy, there would be swift realization that the general public would be made much worse off as a result.

Consider an individual wishing to fly from Chicago to Dallas. Treated as a “net neutral packet,” the person would have to be flown by any airline at some standard rate no matter what other conditions exist. Suppose the individual views getting to Dallas as soon as possible as an emergency situation. The individual would like the next flight out and is willing to pay a premium for such differential service. Net neutral rules would prohibit the airline from allowing differential treatment of the customer. The customer would wait for the next available flight, perhaps days in the future, but would be charged just the standard rate.

A second customer also wishes to fly to Dallas but would like to pay a low rate; this customer, however, is willing to wait and fly at any time of day, on any day of the week. The airline would like to offer this person a low fare and place them on a flight that is normally not full. However, with net neutrality rules, the airline must charge the standard rate and treat the customer in exactly the same manner as the first customer.

Who is better off under this arrangement? The customer-in-a-hurry would like to pay extra and be in Dallas today, but who is not allowed? The customer-willing-to-wait would like a lower fare and is willing to adjust their schedule to accommodate the airline? But that’s not allowed, either. Both customers are disadvantaged. But, according to net neutrality proponents, both have been treated with the dignity of equality.

Equality may be an overrated and misunderstood concept. We accept inequality every day to our advantage. I go to the theater for a matinee and pay a lower price than if I went at night. I choose to purchase a cheaper automobile than my neighbor, but the automobile still provides me with transportation. I eat at a fine French restaurant rather than the all-you-can-eat buffet, but I am charged a higher price. Markets discriminate all the time; we allow it because we each have different tastes and preferences and believe we should be free to make choices on our own without the interference of regulators. We allow the airlines, theaters, and restaurants to exercise reasonable property rights and charge differentially for different services in order to make ourselves better off, not worse off.

The Internet has been built on the basis of property rights (which include the right to price differentially). Prices, even “equal prices,” that have been imposed by regulation rather than by the invisible hand of the market make people less able to make choices and thus less satisfied than they otherwise would be.

Additionally, without the right to make pricing and priority choices, Internet providers, both wired and wireless, will be unwilling to build out new networks or enable new features because they simply will not be able to recover their costs. Perhaps it’s time for proponents of net neutrality to reconsider whether their diagnosis of the “problem” is incorrect and whether their “solution” is actually in the best interests of mankind.