Should broadband be regulated as a utility?

Should broadband be regulated as a utility?
BY TIM WU, COLUMBIA UNIVERSITY

History shows that when a small group of private companies owns an essential part of the nation’s infrastructure, the potential for abuse is serious.
We need to stop pretending the U.S. broadband industry forms some kind of magical exception to this rule. For 15 years, consumers have been waiting for serious competition to arrive, yet there is now less competition than ever. It’s time to face facts: Broadband is a utility and ought to be treated as such by the Federal Communications Commission.

That broadband has become a utility is obvious to anyone outside of Washington. It is hard to live or do business without the Internet, and the degree to which we take it for granted suggests broadband is an essential part of the U.S. infrastructure. As the main delivery system for so many businesses, cultural content and news, broadband has particular importance.

The broadband market, like historic utilities, is prone to concentration. High profit margins (broadband costs less than $5 a month to provide and is sold for $40 to $60 a month) are protected by high barriers to market entry: Wiring of homes is expensive, and entrants face a competitor who has already paid off its infrastructure.

So, despite 15 years of high hopes, cable operators are the dominant providers of Internet access in nearly every important market in the U.S. Verizon’s FiOS service, a worthy competitor in some areas, has a national market share of just 8%. Google Fiber has less than 1%. These numbers may eventually change, but we need to face the market as it is today, not as we hope it might be.

Toll Collectors
Similar signs of essentiality and market power have led to government oversight of broadband’s predecessors, including the phone and electricity systems. The concerns were similar: that control over such a critical part of the nation’s infrastructure, if abused, would be too costly to tolerate.
Imagine that a private company owned the only bridge into Manhattan over the Hudson River. It isn’t hard to see how that would put the owner in a position to extract cash from the rest of the economy, almost like a tax. Another, more subtle effect is the favoring of some businesses over others, distorting competition and innovation in other parts of the economy.

Broadband operators today own the effective bridges to the American home, and they have shown an inclination to use that power. Recently, they have induced direct competitors such as Netflix to agree to pay fees to ensure smoother streaming of content to customers, pegging the payments as “contributions” to their networks.

The Right Balance
Classifying broadband as a “common carrier” under the 1934 Telecommunication Act would allow the FCC to use the full extent of its authority to prevent broadband providers from extracting tolls that damage the broader economy. It also would allow the FCC to reinstate the “net neutrality” rules that courts have recently struck down.

That said, excessive regulation can stagnate an industry, and it’s important not to go overboard. There has to be a balance between protecting the public and leaving the industry room to grow. “Open Internet” rules strike that balance: They prevent broadband providers from blocking or discriminating against certain types of content, while still allowing the extraordinary profit margins that reward the initial investment.

Some believe, based more on faith than logic, that competition will always flourish if government gets out of the way. If only that were true. In fact, in high fixed-cost industries, the market yields unregulated monopolies that extract a cost on the entire economy.