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Reversing Net Neutrality

By Denis Pombriant
Apr 3, 2017 2:49 PM PT
net-neutrality

When one side or the other in a political debate refused to accept a decision, it used to be simply annoying, but lately it has become dangerous to business and to the economy.

The current administration's "next move to deregulate broadband internet service companies would be to jettison the Obama administration's net neutrality rules, which were intended to safeguard free expression online," Steve Lohrmarch wrote in a New York Times article published last week.

That's something every reader has an interest in.

Consumer Protection

The Federal Communications Commission implemented the rules in 2015 to preserve the open Internet and to prevent a two-tier system in which companies that could afford it could pay extra for fast lanes to deliver their content, while others would be stuck using a slower service. At issue is how you classify broadband Internet providers like Verizon, AT&T, Comcast and Charter, among others.

Historically, companies like these have been classified as "common carriers," a designation that recognizes their status as quasi-monopolies and in this case, because there are more than one, oligopolies. These businesses have to invest heavily in infrastructure to make their businesses work, and few have the resources to invest, so monopolies or quasi-monopolies are easy to breed.

In a democracy, a business with quasi-monopoly power is subject to regulation so that it can't take advantage of its unitary status by gouging customers. The "common carrier" designation is a clear indication that in exchange for society granting this status, the business agrees not to discriminate against any customer or customer class.

For an in-depth look at common carriers and the Internet, take a look at Susan Crawford's insightful book, "Captive Audience."

The "common carrier" designation goes way back in history. Once a common carrier was simply a transportation company with a monopoly position at a river crossing, for instance.

In the 19th century, many services that we depend on -- like water, sewer, gas and electricity -- came into being without local competition. Because they were infrastructure-intensive, common carrier status descended on them, and modern life evolved from them.

Similarly, broadband Internet suppliers like Verizon, AT&T, Comcast, and Charter were classified as common carriers in 2015, and Net neutrality became the rule.

These companies also supply content, especially in the form of entertainment, and content is much more lucrative than simply providing the pipes. Other companies that only supply entertainment or content have to negotiate rates with the Internet suppliers, and therein lies the problem.

The broadband providers would love to charge different rates to these other content providers, which is anti-competitive and against the common carrier rules.

The administration describes the "common carrier" classification as "overreach," but it is clearly in the mainstream of centuries of American law. Perhaps a better example of overreach would be for the government to break up these companies into their component parts, as was done to AT&T in the 1984 consent decree that finally gave customers the right and ability to buy and install their own telephone equipment.

Customer Extortion

To get some inkling of what a two-tier Internet policy might look like, just consider what wireless service is like in hotels today. Many offer a two-tier service, with the lower-cost package barely adequate for email, and a more expensive one for more general use. Unfortunately, you can't always determine that you'll need only the lower cost service, which causes many people to overspend.

Disabling the Net neutrality rules would make every visit to the Internet like a visit to such a hotel. While this might be personally annoying, it would cripple businesses in several ways.

First, it would add an impediment to emerging companies trying to get to market, another practice with questionable legal underpinnings. Next, it would have an adverse impact on productivity, as waiting for slow Internet service literally would mean getting less done.

Finally, a two-tier structure also would build into the system a way to extort customers. By keeping the low-cost service just good enough, vendors effectively could throttle demand and force users to pay the premium service.

With that scenario, there would be a low-cost service in name only, and vendors would take a nice little price increase for doing nothing. In economic terms, we'd call this "rent seeking" behavior, after David Ricardo. In Ricardo's time, landowners could charge whatever rent they could get for their property. In the 21st century version, you just need to know a legislator or two. Call it "legislative entrepreneurship."

We're at a time in history when the Internet has become essential to modern life. In other eras, this has triggered application of the "common carrier" designation to vendors. When they reach this stage, they can address a mass market only with the proviso that they serve the whole market and not simply cherry pick the parts that pay well.

We need a decision on this that holds permanently, and not something that changes with each new administration.


Denis Pombriant is a well-known CRM industry researcher, strategist, writer and speaker. His new book, You Can't Buy Customer Loyalty, But You Can Earn It, is now available on Amazon. His 2015 book, Solve for the Customer, is also available there. He can be reached at denis.pombriant@beagleresearch.com.


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What's most likely to cost a company your customer loyalty?
a major product fail
major unethical corporate behavior
public advocacy of social or political views I oppose
a really bad customer service experience
stagnation -- I'm attracted to innovation
none of the above -- I'll stick through thick and thin