Net Neutrality and Unintended Consequences

Google and Verizon's proposed framework for net neutrality regulation has provoked cries of protest from advocates of aggressive regulation at places like Free Press and Public Knowledge. Some of the loudest objections have concerned the distinction between the "public Internet," which (at least for wireline broadband) would be subject to neutrality requirements, and vaguely defined "differentiated" or "managed" services—presumably things like IPTV or digital telephone service—which would not. This, according to the pro-regulation camp, would amount to a massive loophole that defeats the purpose of imposing neutrality rules. As Public Knowledge writes in their press release:

Thus, it is conceivable under the agreement that a network provider could devote 90% of its broadband capacity to these priority services and 10% to the best efforts Internet. If managed services are allowed to cannibalize the best efforts Internet, whatever protections are agreed to for the latter become, for all intents and purposes, meaningless.

This may be right. But if so, it sounds like a reason to be chary of the whole regulatory project. Neutrality or no neutrality, after all, there are a variety of ways to get digital content from producers to subscribers. Traditionally, the cable running to your home comprised separate dedicated channels for cable TV and broadband Internet traffic—though the trend now is toward a more efficient model where the TV content is also delivered as packet-switched data. If you'd rather watch Jersey Shore from the Jersey Shore, you can stream your video to a mobile device like a tablet or smartphone via Internet, but that's hardly the only way to get your Snooki fix: There's also, for instance, Digitial Video Broadcasting Satellite to Handheld (DVB-SH) or Qualcomm's MediaFLO operating on their own dedicated frequencies.  Imposing neutrality rules on wireless broadband (as the Google/Verizon proposal would not -- again, to the dismay of regulation fans) shouldn't affect these services.

My concern, then, is that if neutrality rules foreclose the possibility of cross-subsidy from the providers of subscription-based video streaming or VoIP services, these alternatives become more attractive. Maybe Netflix or Hulu Plus want to be able to offer a deal where your subscription price includes priority delivery of their packets to your smartphone or tablet, making non-WiFi video streaming feasible even if you haven't sprung for that kind of top-shelf bandwidth for all your wireless data. If neutrality regulation forbids that kind of deal, even with respect to these kinds of "managed services," one possible effect is to skew investment away from building out next-gen IP networks and toward these kinds of niche services, which strikes me as inefficient. Indeed, it's precisely the effect Public Knowledge seems to fear, and there's no obvious reason to suppose that it's going to be a big problem within IP-based broadband services, but not affect the choice between alternative modes of digital content delivery.

I should close with the caveat that I haven't looked very closely at the economics here, so while I think the effect I've just sketched is theoretically plausible enough, I couldn't say with any confidence how significant it's going to be in practice. That said, given that the case for neutrality regulation seems to rest on a smattering of genuine cases of bad behavior by providers and a whole lot of dire speculation about consumer-unfriendly practices that might emerge, I'll permit myself a little extra latitude to deal in hypotheticals.