Does Net Neutrality Matter?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Mar 4, 2015 12:51:00 PM

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net neutralityAs I mentioned at the end of this Monday’s post, one conflict with net neutrality is between use-based pricing—ordering and paying for one service at a time—and the all-you-can-eat buffet. This is a pretty clear distinction, with different value propositions for each. But what makes it interesting and complex, in an economic sense, is the effect of monopoly power.

What’s at stake?

If there was only one restaurant in town, they could charge you for each bite, and you wouldn’t have an alternative if you wanted to eat out. If the owner didn’t like fish, he or she could dictate no fish on the menu, leaving sushi lovers out of luck. It is monopoly control that raises the issue at stake in net neutrality, not the actual pricing model. If we really want to make a long-term evaluation of net neutrality, we need to consider:

  • Where does that monopoly power come from?
  • What does it mean?
  • How likely is it to last?
Evolution of the net monopoly

For most net service providers, their monopoly is something of a historical accident. Most cable companies were originally small mom-and-pop companies. They laid cables to local households, connected them, and had a big antenna or satellite dish to pull down the signal. They were monopolies because it wasn’t worth anyone’s while to compete with them.

Over time, though, these small companies were bought up and centralized. Cable TV offering became more compelling, and other services were added on, such as net access. Those monopolies became much more valuable and much more expensive to re-create. To start from scratch and re-create the existing cable network of Verizon or Comcast would cost billions. Also, there would be no guarantee of a market, as the existing providers can always lower costs to a point where new construction simply is not financially feasible.

This is the monopoly position that the cable giants are trying to profit from by charging Netflix, among others, more. Given this situation, the net neutrality regulation actually makes some sense, in that it provides some counterweight to monopoly power. Air travel, for example, used to be much more expensive when the major airlines effectively had a monopoly. Short term, you can make a good argument for regulation.

The long view

Longer term, the case becomes much less clear. Consider the telephone monopoly as an exact comparison. Yes, AT&T was broken up. But real competition came from wireless. A competitor arose, using new technology that completely changed the old competitive dynamic. This led to all-you-can-eat voice, text, and (coming soon) data. I can remember when long-distance calls were charged by the minute—and what a big deal it was when Sprint changed that!

Google and Facebook, among others, have been busy trying to do to the cable companies what cell phone companies did to the wired phone companies. They will succeed, and sooner than people think. Ultimately, prices for net access will be set by the market, as monopoly power disappears.

What’s the answer?

The answer to the net neutrality question, then, is that there are good arguments on both sides. But, ultimately, it will not matter. Technology will make the question moot. What’s really interesting, though, is to consider the other industries where this will happen. To my mind, picking those winners offers one of the next really interesting areas for investing.

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