The Next Steps for U.S. Internet Regulation

A new Brookings E-book examines the issues and possible solutions to today's Internet regulation challenges.

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"It is assumed that BP, Royal Dutch Shell and the price-reporting agency Platts, will be at the top of the target list," U.K.-based cyber-security company CyByl said.

Robert Hahn is director of economics and a professor at the Smith School, University of Oxford, and a senior fellow at the Georgetown Center for Business and Public Policy. Peter Passell is a senior fellow at the Milken Institute and the editor of its economic policy magazine, The Milken Institute Review. They are cofounders of Regulation2point0.org, a web portal on regulatory policy.

Brookings, the D.C.-based think tank, just published The Need for Speed: A New Framework for Telecommunications Policy for the 21st Century, the last word to date on Internet regulation written by telecom experts Robert Litan and Hal Singer. If you're interested in the subject, this is a must-read. For those of you who lack time or attention span to delve deeply, fret not: Litan and Singer wrap up the issues in less than 100 pages.

The basic argument is straightforward: U.S. policy needs a makeover that will make consumers better off, even as it creates greater incentives to invest in the Internet and spurs productivity growth. The authors argue that broadband deserves special regulatory treatment because the societal benefits of extending the high speed network far exceed the private benefits. John Q. Smith is made better off by joining the Internet community. But so are others who can now connect to John—and he has little reason to factor their gain into his calculation of whether broadband is worth the price. This classic "economic externalities" argument provides a rationale for government to offer a helping hand.

[See a collection of political cartoons on the economy.]

But how much help? Internet policy, Litan and Singer say, should be aimed at maximizing consumer welfare (not producer welfare). Most economists would agree, so long as the principle is interpreted broadly. Consumer and producer welfare are inextricably bound—that is, the welfare of consumers tomorrow turns on keeping producers happy today.  

To that end, the authors say, regulators should offer some discretion to Internet access providers to make deals to treat some websites better than others. An example: a priority-delivery agreement, by which a website's data goes to the head of the line when the system is congested.  

Note that is in direct contradiction to the voguish notion of "net neutrality" (treating every packet of information riding the network the same). But the authors argue that allowing side deals makes it possible to provide superior service to consumers when it really counts—say, in permitting online gamers to interact in real time—and encourages investment in the networks. The authors would allow the Federal Communications Commission to review such arrangements after the fact if website rivals complain that the provisions impaired their ability to compete, and to nullify the deals if the complaints hold water. We suspect that neither net neutrality supporters (who generally embrace more-is-more regulation) nor the most aggressive broadband operators (who shun any regulatory oversight) would be satisfied playing by Litan-Singer rules. But we think this sort of compromise would strike the right balance.

[Read the U.S. News debate: Should Congress Pass Anti-Online Piracy Legislation?]

That's not all Litan and Singer propose to keep broadband humming. They favor some sensible (and, in some cases, familiar) fixes. Here's a sampling:

Get the government to auction more spectrum, sooner. This is a no-brainer. Increasing supply would allow spectrum-hungry wireless services to continue their break-neck growth, perhaps even allowing wireless providers to compete directly with cable providers. The authors oppose limits on the amount of spectrum an individual provider could control in a specific geographic market (so do we). To this end, they suggest limiting the Federal Communications Commission's discretion in offering auction preferences to favored services or operators. While one may be able to make a plausible case for such preferences on social grounds—Operator X is eager to serve schools—the temptations to politicize the process are too great.

Scrap dumb regulations. Their prime example here is the rules requiring operators to provide universal service over the old copper-wire network, even where the costs plainly exceed the social benefits. Google's decision to leave out voice-calling from its menu of fast Internet services in Kansas City provides proof that something is deeply wrong with the current regulatory approach. As Milo Medin, vice president of Google Access Services, put it, "The cost of actually delivering tele­phone services is almost nothing. However, in the United States, there are all of these special rules that apply."

[Read: FTC Right to Close Google Investigation]

Drop Federal Communications Commission merger reviews. The Department of Justice and the Federal Trade Commission have the legal jurisdiction, technical expertise, and shelter from political influence (in relative terms, anyway) to second-guess mergers. Allowing the Federal Communications Commission to join the fray is just piling on.

Use subsidies sparingly.  Litan and Singer argue that subsidies should be a last resort for improving high-speed connectivity. There may be some consumers who can't afford "basic" high-speed Internet services, and providing them with the means may serve the public interest. But here, the authors suggest that providing these via "reverse auction," where firms have an incentive to provide these services at least cost, makes the most sense.

There may be a better overview of what's needed (and not needed) from government to keep the Internet revolution on track, but we don't know about it. And there certainly isn't a more concise one.

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