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The Fraser Institute: Imposing Regulations on Internet Service Providers Will Likely Lead to Degraded Service, Says New Study

Posted on: Thursday, 5 June 2008, 06:00 CDT

Calls by proponents of "net neutrality" for greater regulation of Internet Service Providers (ISPs) are unwarranted with additional regulation likely to degrade internet service, concludes a new study released today by independent research organization the Fraser Institute.

"Rather than additional, heavy-handed regulation, complaints about the behavior and practices of ISPs should be addressed on a case-by-case basis using the criteria underlying the Competition Act," said Steven Globerman, author of A Policy Analysis of Net Neutrality and Kaiser Professor of International Business in the College of Business and Economics at Western Washington University.

"A case-by-case evaluation of any objectionable initiative is more desirable than blanket rules or regulations covering the initiative."

The concept of net neutrality has recently emerged as a focal point of debate in the evolution of Canadian broadcast and telecommunications policy. Net neutrality is based on three main themes:

1) Internet access providers should not deny or degrade access to specific content and applications accessible on the Internet or to specific hardware used to access the Internet;

2) Network operators should not charge content providers, or providers of applications, fees that are conditional on the "quality of service," a practice known as access tiering, and;

3) Network operators should not vertically integrate into the production of content and applications, including advertiser-supported services.

Fueling the discussion is the fear that that some Internet Service Providers are impeding access to specific web sites or curtailing specific types of usage. Many proponents of net neutrality believe that the Internet should be universally available for all possible uses and that access to content and applications should not be interfered with, particularly by service providers. Related to this belief is a view that censoring or controlling the flow of information carried on the Internet will discourage innovation and productivity growth in the economy and, perhaps of greater importance to some, threaten freedom of speech and expression, thereby undermining the democratic process.

The issue has crystallized recently as some Internet Service Providers have proposed prioritizing content and applications, whereby content and applications suppliers would pay different prices reflecting differing qualities of service. Proponents of net neutrality maintain that ISPs should treat all forms of Internet traffic identically. Differentiated pricing to subscribers by ISPs has also been criticized by some on grounds that it will lead to lower income groups receiving "inferior" Internet service.

Globerman argues that access tiering and differentiated pricing should be seen as appropriate responses by ISPs to the market imperative for efficiency.

"Obviously, Internet capacity is not unlimited. Any differentiation in pricing by Canadian ISPs is simply a response to capacity scarcity and a way of sending signals to the marketplace," he said.

"Non-price rationing, such as increased regulation, is an inefficient method of allocating scarce resources and is not guided by the value consumers place on those resources."

Globerman's examination of the issue finds that additional regulation of ISPs will likely discourage innovation and investment, eventually resulting in a decline in quality and availability of service.

He cites research showing that a network without tiered access and different service levels would ultimately be less beneficial to consumers because ISPs would be forced to standardize service offerings; consumers who value enhanced quality of service would be forced to settle for less; consumers who are happy with a relatively low quality of service may find that they have to pay more for unwanted higher qualities of service, and network costs will be higher, making network service more expensive, on average, for all consumers.

"Requiring Internet Service Providers to offer a standardized quality of service reduces incentives to innovate."

The fundamental issue underlying the net neutrality debate is whether regulating the behavior of ISPs will lead to increased efficiency, particularly through innovation. Globerman's analysis shows that any such regulation is more likely to degrade the efficiency of the Internet.

"Calls for additional regulation of ISPs are antithetical to the ongoing deregulation of the telecommunications industry, as well as to calls for moving towards deregulation of the broadcasting sector," Globerman said.

"If we carefully assess the net neutrality argument for regulation, particularly given the obvious benefits to consumers that can be ascribed to deregulation of the telecommunications sector over the past two decades, it becomes obvious that reliance on market competition is the best option for ensuring that the economic benefits of the Internet are available to the maximum number of people."

A Policy Analysis of Net Neutrality can be downloaded as a free pdf from the Fraser Institute web site at www.fraserinstitute.org.

The Fraser Institute is an independent research and educational organization with offices in Calgary, Montreal, Toronto, and Vancouver. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit www.fraserinstitute.org.

 Contacts: Western Washington University - Media Contact Steven Globerman (360) 650-7708 Email: Steve.Globerman@wwu.edu  The Fraser Institute Dean Pelkey Director of Communications (604) 714-4582 Email: dean.pelkey@fraserinstitute.org Website: www.fraserinstitute.org

SOURCE: The Fraser Institute

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