Study: what are the economic stakes and impacts of the decision to repeal net neutrality?
On December 14th, 2017, in the United States, the Federal Communication Commission (FCC) voted the end of the internet’s biggest rule, known as net neutrality. Net neutrality was one of the first cases opened by new FCC boss Ajit Pai, appointed by Donald Trump in January, 2017. Created in 2015 under former President Obama, this is the principle that all data have to be treated equally by Internet Service Providers (ISPs) as well as government, without any discrimination and regardless of user, website, content, or communication mode. In some countries as France or Estonia, internet access is a human right. The goal is to keep the flow of information as free and open as possible to perpetuate an inclusive digital economy, similar to how mail or electricity are distributed. This means that ISPs should not discriminate against companies that are in direct competition with them or create revenue by limiting companies that do not pay fee. However, a revolution 2.0 is brewing in the United States as a result of the repeal of net neutrality by the vote of FCC members.
Therefore, it seems interesting to study what are the economic stakes and impacts of this decision to repeal net neutrality.
This question can be studied along three lines. First, the end of net neutrality will provoke higher costs for players involved in this debate. Then, the free economic competition will be challenged by the power of ISPs and the creation of dominant positions. Finally, there is a risk of a curbed innovation leading to a loss of productivity.
First of all, the repeal of net neutrality would lead to an overall increase in costs for the players involved. Here, these include three different types of stakeholders which are content providers (Netflix, Le Monde, Google, Facebook…), internet service providers (ISPs) and finally the consumers.
Those responsible for these cost increases would be the ISPs like Verizon or Comcast. Indeed, without net neutrality, they can create a tiered internet by charging websites a fee in exchange for preferential treatment and a faster and more reliable connection. This is why ISPs will also be the only players involved in net neutrality to make greater profits if it were to be definitively rejected.
Moreover, large companies are not immune from negative effect as they generate a lot of traffic on the Internet with their content. Thus, this could increase the costs even more if they want to prevent their content from being blocked or slowed down by ISPs and if they want fast-lane access. However, in spite of not agreeing with these payment principles, biggest users of data like Netflix, Youtube or Google would most likely pay ISPs because they can afford it.
For smaller companies and startups, on the other hand, this is a problem of an even much bigger and more threatening dimension. They could have a harder time striking deals with providers and paying to have their content delivered faster. Moreover, there are also concerns with how non-profit organizations would cope without net neutrality rules.
The other players who will be affected by rising costs are consumers. Indeed, should content providers like Netflix or Spotify have to pay ISPs to guarantee the speed of their websites, those costs will be passed onto their consumers. So the repeal of net neutrality can have real financial implications for them and even change how they are billed for services. For instance, a monthly subscription to Netflix could be increased to meet the new costs and to satisfy the stockholders who fear a loss of profit. At the end, the repeal of net neutrality would have consequences for users’ freedom and purchasing power.
So the end of net neutrality decided recently in the United States, could have significant financial consequences both on digital companies whether multinational or startups, and on how consumers use and pay for their services on the Internet.
Then, without net neutrality, free economic competition will be challenged by the power of ISPs and the creation of dominant positions.
Indeed, internet is essential for every companies in advertising their product, creating a market, connecting with consumers and also distribution. However internet speed shapes consumer preferences and a slower website often means fewer viewers which leads to a real economic impact over companies. With the new policy that will follow the repeal of net neutrality, businesses will not have a fast-lane access without paying extra and this is what will keep small companies and startups out of the market. Thereby, if only large companies and Silicon Valley giants can afford these tolls, there will be no free competition anymore as small businesses will be limited in their actions and development by their reduced economic means. So this will increase the risk of strengthening dominant positions on the Internet and among digital players.
Moreover, in addition to reducing competition, ISPs will also be able to control it and create certain dominant positions. It would then be question of anticompetitive situations since the ISPs could choose which content to promote and which company to highlight by offering a fast internet access. For instance, Verizon is an American ISP and owns companies like Yahoo. So Verizon could choose to let Yahoo traffic through first while putting content from Airbnb in the slow lane. In this case, Verizon would give an advantage to one service over another, under the pretext that they belong to the same group.
Also, ISPs have developed another practice called “Zero-rating”. It consists in discriminating financially between different contents by excluding some of the monthly internet data limit. For example there could be a mobile offer with Facebook unlimited. This practice can modify the competition between contents since these are no longer treated in an equivalent way. This is even problematic as there is an increasing integration between content providers and ISPs. Indeed large companies like Verizon, Comcast or AT&T are increasingly trying to own content companies and to make them more convenient to access using “zero-rating”.
This is how ISPs could control and suppress competition by having the ability to choose which content to highlight and which to oust. The tiered internet that will emerge from all of this will also be a threat to the economy as innovation could be slowed down.
Lastly, the repeal of net neutrality could cause a curbed innovation leading to a loss of productivity. There is therefore a real risk to consider in this debate since innovation affects most economic mechanisms. Indeed, it is essential in corporate strategies, market structures, growth, labor market, globalization and international trade.
More than 200 US digital companies, including Twitter and Airbnb, have written an open letter denouncing the loss of the equality needed for a free market and for innovation. According to them, the repeal of net neutrality will lead to the disappearance of a free Internet that tends to “encourage entrepreneurship, promote innovation and support a healthy economy”. In general Silicon Valley’s top executives are known for their very liberal position on net neutrality. For instance, Google’s CEO indicates that “the Internet is a playground open to all, on which new entrants and established players can reach users in the same way (…). If ISPs can block certain services and impose contracts that favor the content of some companies, it would threaten the innovation that makes the Internet so great”. However, at the time of creating a “two-speed internet”, Facebook, Amazon, Twitter and others are in a strong position. Their technological and financial resources will allow them to easily appear in all offers by paying ISPs to be pushed as a priority, where smaller players may fall into the trap by being stuck in basic offers.
Indeed, the entry fee that startups will have to pay to access the market will be a major handicap that will not allow them to gain international recognition like the giants of the digital industry. This is why allowing ISPs to act as gatekeepers and to charge for quality of services would create an exploitive business model and would also endanger innovation in online services. Instead of putting money into innovation, small businesses that already do not have unlimited means will be forced to pay for their content to be broadcast as quickly as possible. So small businesses like startups will never have the opportunity to become the new Netflix or the future Facebook for example. At the end, monopolization of the internet by bigger companies would supress the generation of new and innovative web content and the diversity of online services.
Moreover, innovation, investment and adaptation that facilitate competition are the main drivers of productivity growth. Without net neutrality, all those drivers would be more fragile and destabilized. So the lack of innovation due to the repeal of this rule would also mean a lack of investment and finally a loss of productivity in the digital sector. This is a real economic issue as productivity is essential for wealth creation and the prosperity of a business.
To conclude, the debate and decisions over net neutrality could fundamentally change the future internet landscape. Real economic impacts of net neutrality’s repeal are yet to be seen and economists are advising not to speculate too much for now. However, there are true economic stakes to consider like rising costs for key players in net neutrality as well as the threat over the free competition on the international market. The risk of a downward innovation is also important as it could lead to a loss of productivity and wealth. Having regard to the very large number of opponents of net neutrality’s repeal, it is very likely that this issue could end up being decided in court, or maybe even by legislation in Congress.