NetCompetition

In effectively reversing fifteen-year bipartisan U.S. communications policy from promoting competition and reducing regulation to promoting regulation and reducing competition, the FCC’s coming “Open Internet” regulations are anything but neutral; they pick sides and strongly skew outcomes.

• First, the FCC is proposing new preemptive business bans mid-game, the harshest most disruptive form of economic regulation possible.
• Second, the FCC is arbitrarily discriminating among increasingly similar and converging businesses resulting in the arbitrary punishment of some businesses for what they allegedly might do, while rewarding others with protection from competition for what they allegedly might not do.
• Third, the FCC is arbitrarily mandating one-way technology convergence without any supportable justification, i.e. banning distribution convergence into applications/content, while encouraging application/content convergence into distribution.

The chaotic result of this “open un-neutrality” will be regulation that is increasingly at war with inexorable technological convergence and economic efficiency — requiring ever-increasing FCC regulatory artifices to keep the Internet’s original technological layers, market segments, and business models from naturally converging, evolving and competing.

• The folly and economic danger of this open fight against competition and convergence cannot be overstated.

The practical effect of openly un-neutral FCC rules is to create a new un-level playing field that will only get more un-level the more the Government stands on one-side of the scales picking de facto winners and losers via regulation.

The practical effect of re-distributing Internet opportunity is to increasingly introduce substantial systemic risk into the Internet eco-system as the FCC endeavors to replace the Internet’s jet engines of competition with the propeller engines of FCC regulation – during flight.

• The folly and danger of such a nonsensical retrofitting of economic propulsion cannot be overstated.  

At core, the FCC’s open un-neutrality would effectively redistribute Internet opportunity:

• From some consumers to other consumers;
• From some industries, companies, workers, and business models to other industries, companies, workers and business models; and
• From most investors to special favored investors.

Re-Distributing Consumer Opportunity:

From the responsible to the irresponsible: In trying to create a new individual right not found in the constitution or law — that a online consumer has an absolute right to use the Internet however they want regardless of the impact on anyone else (i.e. an impact on quality of service, costs or safety) — the FCC rules would allow Internet users to have freedom with no responsibility at the expense of everyone else that respects our society’s implicit social contract where freedom is well understood to come with responsibility. 

From the average consumer to tech elites: By banning differentiation/innovation by broadband providers in order to make life easier for application providers, the FCC rules implicitly favor do-it-yourself-technology-integration that tech elites want, to the detriment of the average mass-market consumer of broadband services that prefers simple, easy-to-use, integrated products and bundled services. The FCC is entranced by the siren song of the tech elites and is ignoring the reality that the vast majority of Internet users do not want to be their own technology integrator. Forced complexity and end-user integration via net neutrality regulations will only block and impede broadband adoption among the less educated or more tech-phobic consumers. 

From the poor to the rich: By favoring non-paying consumers of advertising-based applications like Google that don’t contribute to the cost of the operating the Internet, over paying consumers of broadband connectivity services that pay the lions share of the cost of the Internet, the FCC’s open Internet rules would create an unsustainable model for the Internet where those that don’t pay their fair share of Internet costs arbitrage those forced to pay more than their fair share of the Internet’s costs. This regressive arbitrage shifts the cost burden from the tech elites that can most afford it to those who can least afford it.

Re-Distributing Business Opportunity:

From connectivity providers to application providers:The FCC rules nakedly redistribute business opportunity by creating a win-win, all-benefit/no-cost regulatory situation for application providers versus a lose-lose, all-cost/no-benefit regulatory situation for broadband providers. As convergence blurs the connectivity and applications layers, the rules allow application providers to enter the connectivity business leveraging their apps customer base, but create an artificial but effective barrier to competitive entry for connectivity providers getting into the applications business.

From connectivity services to cloud computing: The practical effect of net neutrality for cloud computing, is first to commoditize conduit/bandwidth in order to subsidize the cloud computing services of Google/Amazon, and second, to effectively block broadband providers from competitive entry into cloud computing. The proposed rules would powerfully favor cloud computing services at the expense of bandwidth providers, because cloud providers like Google and Amazon can leverage their huge global customer bases that don’t face much competition to offer cloud computing, however broadband providers cannot leverage their much smaller national broadband customer bases that face more competition.   

From property owners to non-property owners: A not-so-hidden purpose of the proposed Open Internet regulations is to advance the notion that the Internet is not an aggregation of cooperating private networks, but one public utility network. Net neutrality backers call it an “information commons” where Internet users do not have to ask permission or pay to use the property they encounter on the Internet. Despite FCC assurances that the proposed Open Internet would only apply to accessing “legal” content, the fact is that the proposed FCC rules would legitimize, favor, and protect p2p technologies that are in fact the overwhelming source of IP piracy and malware infections/intrusions.

From competitive industries to non-competitive industries: The FCC rules perversely advantage the netopolies, Google with about a billion users, and eBay’s Skype with about a half billion users, that face little competition, while disadvantaging broadband providers that face substantial competition. The FCC’s asymmetric application of transparency regulations would further skew market outcomes, allowing dominant and non-transparent companies like Google, the substantial competitive advantage of not being transparent when its broadband competitors are forced by regulation to be transparent. It is like hanging regulatory cowbells around the necks of broadband providers so they can never competitively surprise Google.

From blue collar workers to dotcom option holders: The FCC rules will also perversely reduce job opportunity for the union and minority employees which comprise significant percentages of broadband and equipment provider employment by banning their employers’ Internet growth opportunity, while increasing the job opportunities for Google’s predominantly ivy-league and six-figure, option-compensated employees.  

Re-Distributing Investor Opportunity:

From non-Silicon Valley VCs to Silicon Valley VCs: By creating regulations that favor Web 2.0 new media applications via guaranteed free/subsidized distribution, that are almost exclusively funded by a handful of Silicon Valley elite venture capital firms like Kleiner Perkins and Sequoia, the FCC rules would provide these special investors guaranteed and subsidized distribution for their “Web 2.0” application investments so they could quickly scale with first-mover advantage and face little competition.  

From lower-risk pensioners to higher-risk investors:Most retirees and pensioners need reliable income from their investment portfolio and many broadband companies deliver steady dividends, among the safest and most reliable sources of income for retirees. The FCC’s proposed regulations would in effect greatly reduce the amount of profit these dividend-paying stocks could generate, threatening their dividends and some of the steady income that many pensioners rely upon. By asymmetrically applying regulations to broadband providers and not growth companies, the FCC over time would be redistributing investment return potential from dividend-paying broadband companies to non-dividend growth companies, like Google, eBay, and Amazon.

From bondholders to distressed debt managers:A greatly under-appreciated impact of the FCC proposed regulations denying broadband companies Internet growth opportunity is that it could be a surprising and highly-destabilizing systemic shock to the balance sheets of some of the largest most stable companies in the economy today. Capital-intensive broadband companies naturally can carry more debt than most companies because of the historical consistency and stability of their free cash flow. If the FCC’s proposed draconian regulations were to suddenly and drastically change the consistency and stability of their cash flow, and their ability to service their long-term debt, the FCC’s proposed regulations could cause a broadband-sector version of the financial crisis of last fall. Sudden drastic and forced business model changes from government regulation could quickly turn good serviceable debt into destabilizing distressed debt.

Conclusion:

Without justification, the FCC is abandoning, the successful, bipartisan, fifteen-year-old, Internet free market policy of the United States, where market forces and competition have provided opportunity to all. Without evidence, the FCC’s proposed regulations would de facto declare broadband providers to be the lone threat to Internet opportunity, and thus would block their future Internet opportunity and only their opportunity. With only three votes of unelected FCC commissioners, the FCC’s proposed regulations would practically make the private networks that make up the Internet, public, and practically re-purpose the Federal Communications Commission into the “Federal Internet Opportunity Commission.”