What the End of Net Neutrality Actually Means

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Wharton's Kevin Werbach and Pinar Yildirim discuss the end of net neutrality.

On June 11, the Federal Communications Commission officially ended network neutrality rules that were put in place three years ago by the Obama administration. Opponents decried the move. “Now your cable company can scam you for more money, censor websites, and slow down online content,” according to the Battle for the Net campaign by nonprofit advocacy groups Fight for the Future, Free Press and Demand Progress. “People are angry. And rightly so.” Meanwhile, FCC Chairman Ajit Pai and his family reportedly continue to receive death threats due to the decision.

But the situation is more complicated than what the inflammatory rhetoric would suggest. “There is this misunderstanding that net neutrality is kind of this catch-all provision that prevents broadband companies from doing bad things. It’s not,” said Kevin Werbach, Wharton professor of legal studies and business ethics who worked at the FCC under the Clinton administration, on the Knowledge@Wharton show that airs on SiriusXM channel 111. “What it has to do with is [banning] certain kinds of discriminatory practices about the treatment of data.”

Net neutrality is a set of rules ensuring that wired and mobile broadband providers — primarily cable and phone companies — treat all data transmissions that go through their pipes or airwaves equally, irrespective of content as long as it’s lawful, and subject to reasonable network management practices. When broadband providers manage data flows, they need to have a legitimate reason such as alleviating internet traffic congestion. What they can’t do, for example, is purposely hamper a rival company. Comcast cannot lawfully block the video streams of Netflix just because it is a rival of Hulu, which it partly owns.

The FCC’s 2015 Open Internet Order that established net neutrality rules bans the blocking and throttling of lawful content, applications, services and devices. It also prohibits “paid prioritization,” which creates favored “fast lanes” on the web. For example, Amazon cannot pay or otherwise compensate Verizon to speed up internet traffic going to its website to get an edge over other online shopping sites. Even if some prioritization benefits consumers, Obama’s FCC argued that “the threat of harm is overwhelming” if it allowed the practice.

“There is this misunderstanding that net neutrality is kind of this catch-all provision that prevents broadband companies from doing bad things. It’s not.”–Kevin Werbach

The bigger industry concern in the 2015 order was that it also classified wired and mobile broadband providers under Title II of the Communications Act of 1934. That means it considers them “common carriers” just like traditional landline phone companies. That means they could be much more highly regulated, including controlling the prices they charge consumers. However, the net neutrality order said it would adopt “light-touch” Title II rules. The FCC said it would not regulate prices and allow other exceptions so as not to discourage broadband providers from investing in their networks.

‘Right a Wrong’

The FCC’s Pai argues that the internet has thrived since its creation without them and would be just fine going forward absent these rules. He also said that reclassifying broadband service under Title II caused investment in networks to drop by 5.6%, the first decrease outside of a recession.

Pai said that 80% of small, fixed wireless providers in rural areas have delayed or decreased their network expansion and services because budgets went towards paying for compliance. The Wireless Internet Service Providers Association commended the FCC’s repeal of net neutrality, saying it did “right a wrong” by removing “heavy-handed, one-size-fits-all regulations.” The trade group said the Obama FCC cannot have it both ways: putting “disproportionate burdens” on small broadband providers and at the same time expecting them to invest in underserved areas.

But Pinar Yildirim, Wharton professor of marketing, is not buying Pai’s argument that “mom and pop” internet service providers are burdened by the cost to comply with net neutrality rules. ISPs serving fewer than 100,000 already had relief from some of these regulatory burdens by the time net neutrality rules passed, she noted. “It’s not clear whether these costs are really a burden on these ISPs,” Yildirim said. While it would undoubtedly benefit them if all net neutrality rules went away, Yildirim argued that if larger ISPs face fewer restrictions, they might disadvantage smaller ISPs, consumers and websites.

Comcast, AT&T and Verizon all say that they are committed to an open internet. Comcast said it does not “block, slow down or discriminate against lawful content” and supports “sustainable and legally enforceable net neutrality protections for our customers.” Verizon said it supports net neutrality, while an open letter from AT&T CEO Randall Stephenson not only pledged support for no blocking or throttling but also called on Congress to draft new rules governing the internet, and stop the whirlwind of shifting policies due to court decisions or new presidents. Werbach noted that ISPs have said publicly that net neutrality rules have not hurt their business.

“Even though that repeal has now gone into effect … that doesn’t mean this is the end. This is just another step on this ongoing journey.”–Kevin Werbach

So What Will Change?

If net neutrality wasn’t a factor in the development of the internet, what would its absence mean? One outcome is the arrival of fast lanes on the internet. ISPs could give customers a choice of different types of access. In marketing, “this is a form of segmentation,” said Yildirim. That means a company would provide different products and services to cater to the needs of different users. But fast lanes would benefit websites that can afford to pay at the expense of smaller e-commerce or content sites without deep pockets. “That’s, I think, the concern here.”

Werbach pointed out, however, that “it’s important to understand that even though that repeal has now gone into effect … that doesn’t mean this is the end. This is just another step on this ongoing journey.” The debate over internet regulation has been going on for decades. “The FCC has gone through multiple cycles under many different administrations attempting to put in place these rules,” said Werbach, who wrote a seminal white paper on the digital revolution while at the FCC. “We haven’t heard the last of this,” he added, citing pending litigation and congressional action to restore net neutrality.

Several states such as Washington and Oregon also are moving to put net neutrality rules in place, Yildirim added. “The concerns are exactly around three things,” she said. “Blocking or censorship of content; throttling, slowing down of data transmission; and prioritization — fast lanes that are created which could favor some of the larger websites.” Washington passed its own net neutrality law in March while Oregon did it in April. Vermont signed a similar law in February. Meanwhile, lawmakers in 29 states have introduced more than 65 net neutrality bills while 22 states and D.C. are suing the FCC over the repeal.

It is important to note that the internet landscape today is not the same as it was in 2000 when ISPs were dominant amid a sea of smaller internet startups. “We now have an industry that has some very large, very influential players that, by the way, also have massive amounts of infrastructure,” Werbach said. “Google and Amazon run huge fiber networks across the country, even though they are not providing telephone service per se or broadband access service, except for a few exceptions.”

Given this new landscape, a criticism of net neutrality is that it regulates just one set of players — broadband access providers — while benefiting companies that use their networks, like Facebook, which are giants themselves. “We need to move to a point where we’re looking at the way the market works today,” Werbach said. He believes the solution could very well be found in the political realm, in the form of a legislative compromise.

“The concerns are exactly around three things: Blocking or censorship of content; throttling, slowing down of data transmission, and prioritization — fast lanes that are created which could favor some of the larger websites.”–Pinar Yildirim

Where critics and supporters of net neutrality agree is that broadband access and the internet are the “foundation for the entire digital economy. Everyone agrees that those markets need to be open to innovation,” Werbach said. Therefore, he added, the debate is whether “essentially just allowing market competition, such as it is, will facilitate a free and open market where there is opportunity for creativity and new startups to be formed … or whether the FCC needs to be there as a kind of cop on the beat to deal with anticompetitive procedures and practices by the broadband access providers.” He said history has shown, though, that broadband companies have taken advantage of their “gatekeeper” role in ways that harm competition and consumers.

But practically speaking, it is not in the interest of broadband providers to block or slow down traffic to certain websites, Werbach said. People use ISPs to go anywhere they want online, and any disruption in this process will backfire. “Companies make decisions that are in their business interest. There’s nothing wrong with that,” he added. “The point of net neutrality is not to say that broadband providers are somehow wrong or unethical or bad just because they’re trying to capture market share.”

However, in an environment where most people have few choices for wired broadband and overlapping choices for mobile internet, “it doesn’t make sense to say, ‘let the market work because that will be in everyone’s best interest,’” Werbach said. “There are important and significant discussions to have about exactly what is the boundary between legitimate business models and practices on the one hand and unreasonable discrimination on the other hand. But the way to do that is to have a set of rules and define where they are,” not the FCC’s current hands-off attitude. Besides, he added, “having some regulation is not always something that’s going to be against their interest.”

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