Net Neutrality Is A Regressive Internet Service Tax

Treating the internet as a public utility will entrench the billing practices of today, with ISPs billing lower-end users for the cost of infrastructure that only higher-end users benefit from. By denying ISPs and their backbone peers the right to discriminate against bandwidth-hog content providers like Netflix, the President’s Net Neutrality Plan encourages them to discriminate against America’s hardest-working families instead. Low-level internet users, for whom internet access is a basic lifeline they use to find or keep jobs or compete in school, will pay more for access so wealthier families can stream Netflix in full quality without paying bandwidth surcharges. If this is innovation, Americans are better off having no part of it.

The President made a bold proclamation that “there is no higher calling than protecting an open, accessible, and free Internet”. The technical theory of neutrality is simple: two bits of data headed into your home or business from your ISP must be delivered with the same reliability, and at the same speed, no matter where they are coming from, be it Netflix, Google, Facebook, or your friend’s small personal website. The companies earlier in the list can’t pay for better treatment, even if they can afford to.

The claim made by Net Neutrality proponents is that a non-neutral internet is one inevitably dominated by large corporations, that suppresses small startups unwilling or unable to pay exorbitant “tolls” for access to Americans’ homes. Proponents claim that a neutral internet, enforced by FCC fiat, is the only way to protect the innovative potential of the Internet. This argument misses the mark: the neutral networks of today’s internet are, in fact, dominated by a cartel of some of the world’s wealthiest corporations, to the detriment of the most economically vulnerable Americans.

America’s “neutral” internet services have yielded very uneven economic gains. Many of America’s poorest families have missed the internet revolution entirely. 1 in 5 households have no internet access at all, and that 20% of households includes almost half of America’s poorest familes: those with $15,000 or less in gross income.

Among America’s connected households, the bulk of internet utilization, more than 50%, goes to real-time video streaming. Netflix alone accounts for more than a third of wire-line broadband providers’ peak-period demand, according to Sandvine’s 1H 2014 “Global Internet Phenomena” report. Sandvine estimates that only 1% of the wire-line internet users in the U.S. account for 12% of providers’ downstream traffic, while the lightest 50% account for only 7% of total monthly traffic.

On a strictly neutral network, this skewed usage leaves ISPs with an awful choice. They can risk alienating high-paying heavy users by raising their prices according to what they actually use; or spread the costs of these heavy users’ use throughout the subscriber base, artificially raising prices for the poorest and most vulnerable subscribers. We only need to look at their plan pricing to see what course they chose, and they haven’t gone the equitable route.

AT&T’s pricing for U-Verse, for example, offers a household in San Francisco access to the internet at a mere 768 kilobits per second, for $33 per month. Subscribers can double their speed to 1.5 megabits for $41, and step up from there in several tiers, topping out at the U-Verse “Max” package for $56 per month. Max offers 12 megabits per second — 15 times the bandwidth of the base package — for not even twice the price. The story is even more lopsided at Comcast, where the “Performance Starter” package at 6 megabits for second costs $49.95, while the “Extreme 150” package at 150 megabits per second costs $114.95 per month. That’s twenty five times the speed, for a little more than twice the price. Wireless providers’ pricing, which is based on actual use rather than connection speed, is also a raw deal for low-volume users. Verizon’s data plans in the same market start at 500 MB per month, for $20, but 10GB costs only $80 per month — twenty times as much data service at four times the price. Verizon’s plans top out at 100 gigabytes for $750. That’s two hundred times the size of the base plan, only thirty seven times the price.

The less you use, the more you pay for what you get. In a truly neutral regime, providers are commodities: dumb pipes that customers can switch between in an instant, and forced to compete for the high-paying, high-volume subscriber, even to the detriment of lower-volume customers. Lower-tier internet subscriber households are disproportionately poorer families, and the current “neutral” internet system builds the network primarily on these families’ backs.

The pricing policies President Obama criticizes actually would stand a strong chance of addressing this imbalance. By allowing internet providers to surcharge Netflix for heavy use, or for all use, providers could pass through the capital costs of the surge in demand for their services without raising top-line prices on high-volume households. High-volume households that benefit from artificially cheap internet would see their Netflix bill rise with usage, or might have to watch a few ads to allow for payment to their ISP. This back-end pricing is more complex, but it is ultimately fairer than the ostensibly neutral pricing the President and other neutrality proponents suggest should be enshrined in regulation.

It’s no coincidence that the biggest drivers of net neutrality are large businesses like Netflix. These businesses have seen their bottom lines benefit from artificially cheap internet service prices for high-end users, at the expense of America’s working poor. Nor is it any coincidence that the fastest internet services available in America today are those largely built without the government’s support (cable, fiberoptic, etc.). The vibrant marketplaces high-speed internet connectivity has spawned should be allowed to operate as they always have: without the government’s burdensome and destructive interference. The government has been smart to disavow regressive internet access taxes, but mandatory neutrality enshrines a pricing structure so regressive that even a tax collector might blush.

Ultimately, the choice to regulate or not to regulate under Title II is a choice of what kind of utility we want the internet to be. We can be short-sighted, and have the President’s vision of a regulated, ostensibly neutral backbone. That will usher in a future where the relatively well-off stream cat videos and HD Netflix movies with abandon and without regard to cost. The internet will be a utility in name but out of reach of many Americans. Instead, we can leave the internet an unregulated, truly open market. That is the best path to the tremendous potential it has as an economic equalizer, where those who use it most pay their share, and help support those who need it most.


About Matt Murphy

I'm a software engineer with a certain company you've probably heard of. In my free time, I'm an advocate for individual liberty and free markets.
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