By: ProcurementIQ analyst, Connor DiGregorio
Internet business is about to get another shakeup. On May 18, the Federal Communications Commission proposed rolling back net neutrality rules that regulate how internet service providers manage internet traffic. The recent proposal from Trump-appointed FCC chairman Ajit Pai will place communications companies – including Comcast, AT&T and Verizon – under a different Communications Act classification, and potentially revert the industry to pre-2015 net neutrality regulations. Currently, internet service providers are classified as Common Carriers under Title II of the Communications Act, and are explicitly barred from treating internet traffic differently because the service is considered a utility, much like cable TV or landline phone service. Pro-net neutrality advocates argue that this classification ensures equal internet access for all businesses and consumers, while those against it – including Chairman Pai – argue that it prevents industry innovation, investment and competition.
Equal Access, Speed and Pricing For All: The Case Against Rolling Back Regulations
One of the primary concerns of those opposing deregulation is that ISPs might create paid-prioritization, or “fast lanes”, which would enable businesses that pay more to receive higher-speed connections. As a result, other web users would be slowed down due to the zero-sum nature of internet traffic. Moreover, deregulation could force businesses to pay more for their current internet speeds, as they may be forced into “fast lanes” if they wish to maintain similar connection levels. Another worry is that because many ISPs also own internet content, there is a clear incentive to give themselves preferential treatment. For example, Comcast owns NBC and AT&T owns DIRECTV, both of which produce original online video content. Without regulation, there is nothing stopping ISPs from giving themselves faster speeds while throttling their competitors’. Thus, businesses that compete with those subsidiaries, such as Netflix and YouTube, are on high alert.
Rollback Supporters: Neutrality Stunts Innovation and Investment
Proponents of deregulation, including ISP conglomerates such Comcast, AT&T and Verizon, suggest that there are flaws in the current arrangement – such as subdued investment in high-speed internet infrastructure and less competition. According to economist Hal Singer, total capital expenditure by ISPs declined from 2015 to 2016, though opponents of deregulation argue that there has been an overall increase in expenditure when compared to 2013 levels, as stated in a survey by FreePress. This highlights the fundamental disagreement between each side over whether regulation has actually stunted investment across the industry.
Supporters also argue that competition from smaller ISPs can flourish if the industry returns to light-touch regulation, and highlight the fact that smaller companies suffer more than big conglomerates when regulations do hit. Because of the typically slimmer profit margins of small ISPs, there is little revenue left for investment after absorbing costly regulation. Deregulation advocates propose that smaller companies could gain a bigger slice of the ISP market pie by building out their networks, and could eventually pressure industry giants to lower their prices, aiding businesses that contract Internet Services, Web Hosting Services, or IT Hosting Services.
However, opponents of deregulation argue that the opposite would happen, and that service prices would go up. They argue that by loosening regulation, the top ISPs could charge more for internet services and arbitrarily throttle internet speeds for businesses that do not wish to pay for prioritization on their broadband networks. Rising prices would negatively affect businesses with core operations that rely heavily on broadband speed and that contribute a significant amount of traffic to the ISPs’ networks, such as government agencies, retailers with heavy e-commerce presence, and internet publishing and broadcasting companies.
So, Will Prices Actually Go Up?
According to ProcurementIQ’s analysis, the impact of reclassification on prices will depend on the buyer’s current provider. If a business employs one of the industry giants, such as Comcast, AT&T or Verizon, service prices would likely rise in either regulatory scenario. Under reclassification, and even with the potential increased investment from small and regional ISPs, rates would rise due to big ISPs gravitating towards a paid-prioritization business model. While big players say that they will self-police themselves from treating content unfairly, their historical behavior and the incentives that this kind of market structure would provide indicates otherwise. Alternatively, if current regulation remains in place and investment from small ISPs declines as proponents of lighter regulation predict, then big ISPs who can bear the regulatory burden will expand their network and, subsequently, their market share. This scenario will lead to further consolidation, and likely elevate prices for these services. As it stands, ProcurementIQ expects that the price of Web Hosting Services will rise 3.5% during the next three years.
The only likely scenario in which reclassification will benefit buyers is if they employ small ISP providers and if deregulation does in fact spur infrastructure growth as proponents say it will. In turn, growth of small players in the industry would drive price competition across related markets. However, high market share concentration existed in this market before net neutrality regulation, and the industry has been consolidating further during the past three years. So even if small players did prompt more competition, big ISPs could relieve themselves of this downward price pressure by buying them up – a move that could only be stopped by the Department of Justice under antitrust laws.
Politics and Implementation
Reclassification is still only a proposal at this point. Currently, the FCC is in a 90-day public comment period, which has prompted further debates about the new legal proposition from both sides of the argument. While the FCC is under a majority Republican rule and has the power to enact the new framework on its own, the proposal faces hefty vocal opposition from Democrats, consumers and internet heavyweights, such as Google and Amazon.
The coming months will be an intense back and forth between each party, but there is mutual agreement that accompanying legislation from Congress is necessary to ensure a holistic, sound legal footing for the future of the internet. Congress has yet to release or even indicate that they are working on new legislation related to the proposed reclassification – however, the content of such a bill is sure to heavily influence the outcome of the Title II debate, perhaps allaying some concerns on each side. Either way, internet infrastructure and how consumers and businesses use its benefits are still rapidly evolving, and this will not be the last fight to shape the future of the internet.