Volume 17, Issue 3 - Special Issue: Recent Net Neutrality Policies in Europe and the U.S. / Guest Editor: Wolfgang Briglauer

Network neutrality for the Internet has been a fiercely debated topic for more than 15 years. Arguably spurred by recent regulatory actions in the US and the tremendous ecosystem evolution as characterized by the emergence and growing importance of global cloud platforms as well as the Internet of Things, the debate has recently seen a resurgence. This paper describes the origins and development of the regulatory stance towards network neutrality in the US and the EU. Against the background of the diverse evolutionary forces that shape the ecosystem, we examine network neutrality regulation through the lens of network economics. In doing so, we describe a series of challenges and misconceptions associated with current regulations and expound the requirement for a market-driven understanding of network neutrality.

The US debate about net neutrality has been unusually contentious for a telecommunications regulatory issue, most recently culminating in a 2017 reversal of a 2015 decision to apply traditional telephone regulations, written for a monopoly era, to internet service providers. This article reviews this history, beginning 1956 when the government first imposed an industry boundary between transmission of information on the one hand, and the creation and processing of information on the other. This regulatory legacy remains embedded in US law and has led to some of the muddle. This article also examines the academic literature relating to net neutrality. On this, the answers found in the literature vary depending on assumptions made about technology, industry structure, and industry practices. When the answer to the question of whether regulations are beneficial is “it depends,” and the scenarios that give different answers are realistic, it would seem that the policy approach should favor applying competition and consumer protection laws that address problems when they occur rather than ex ante regulations, which would be certain to harm at least in some situations.

In 2018, the Federal Communications Commission’s Restoring Internet Freedom Order reversed its 2015 decision to apply common carrier regulation to broadband Internet access services under Title II of the Communications Act of 1934. Empirical evidence indicating negative investment effects of the regulation played a key role in this reversal, though the quantification of these investment effects were a matter of substantial controversy. This article surveys the studies cited in the recent decision and the Commission’s scrutiny of them. In all, the Commission considered eight primary works but relied on only two of them, a culling process that relied on four principles: (1) simply comparing outcomes before-and-after an event is not a valid impact analysis; (2) before-and-after comparisons are more probative if regression analysis is used to condition the outcomes by accounting for potentially relevant factors like economic growth, sales, and so forth; (3) the causal effects of a regulation are best determined with reference to a counterfactual; and (4) the application of proper methods does not excuse the use of bad data. These principles are mostly uncontroversial and are consistent with the modern practice of impact analysis.

Net neutrality or “Open Internet” rulemaking has been ongoing for more than a decade. Some 50 nations have adopted formal rules including the US (then repealed), the European Union, India, and many countries in Latin America. Among other arguments, it is asserted that net neutrality rules are necessary for application innovation. While the focus for policymakers has largely been to make rules, there is less attention on how to measure the impact of such rules and how well they achieve their innovation goals. The article summaries a specific research investigation to what degree the introduction of rules in a given country stimulates innovation in that country’s mobile app ecosystem. The focus in on mobile networks because it allowed the most consistent data across countries. The study covered 53 countries, their net neutrality policies (or lack thereof), and the results to the respective mobile application ecosystems of the countries adopting rules between the period of 2010–2016. This investigation tests the proposition that countries which adopt net neutrality rules should experience an increase in mobile app development innovation within their national economy. To test this, a statistical methodology was developed based upon measuring the number of locally developed mobile apps in the country for relevant periods before and after rules are imposed and the corresponding app downloads, usage, and revenue. Measurement was conducted with two independent toolsets and adjusted for the sophistication and penetration of advanced mobile networks in the country. To make more meaningful comparisons and avoid inevitable heterogeneity across the countries, the investigation focuses on two similar countries with different rules, Denmark with soft rules (self-regulation) and Netherlands with hard rules (legislation). The study reviewed the leading theories of innovation as well as the foundational papers in net neutrality to explain the observed discrepancies. The research finds significant statistical support for “soft” net neutrality measures adopted on a voluntary basis. Hard rules adopted through legislation and regulation were not associated with greater mobile app development for the given country. Denmark increased in local mobile app development while Netherlands decreased. Additionally, the explosion of mobile apps from countries with no net neutrality rules and the general dearth of mobile apps from countries which have had hard rules for years runs counter to expected results. This suggests that policymakers revisit their assumptions and expectations for net neutrality policy.

The economics literature on Net Neutrality (NN) has been largely critical of NN regulation on the basis of theoretical findings that NN violations can be both welfare improving and welfare deteriorating, depending on the circumstances of the case in question. Thus, an ex post competition policy approach would be preferable to a strict ex ante prohibition of NN violations. In contrast, the current paper argues that NN regulation is largely ineffective, in particular, when it comes to the prohibition of fast lanes and other quality of service (QoS) differentiations, and to a lesser extent, when it comes to the zero price rule. NN regulation is only effective in preventing the blocking of specific content and in preventing the favoring of ISP owned content and in preventing some price discriminations. These are also areas where NN regulations are more likely to be welfare-enhancing. Where they are ineffective, NN regulations are likely to create inefficiencies through the cost and allocative inefficiencies caused by NN bypass. The paper ends with a call for theoretical and empirical economic analyses of NN circumvention techniques.