What the FCC’s Decision on Net Neutrality Rules Means for Consumers

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 15, 2017 2:22:30 PM

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FCC's decision on net neutrality rulesFrom an economic standpoint, many of the changes made so far by the Trump administration have been regulatory, not legislative. For all the media coverage on the health care battles, and now the tax reform battle, the real work has been down in the trenches, looking at regulations that constrain different industries and trying to repeal those deemed most onerous.

The latest change—which has received an unusually high profile—is the decision by the Federal Communications Commission (FCC) to repeal what are called the net neutrality rules. These rules required Internet service providers (ISPs), the companies that own and operate the wires and so forth that let people connect to the Internet, to provide a level playing field for all content providers. ISPs couldn’t, say, charge Netflix extra for streaming movies, or prohibit certain content providers that they disagreed with. Every provider had to be treated equally. With the repeal of the net neutrality rules, ISPs will now be able to charge different content providers different amounts and potentially block certain providers as well.

The arguments for and against net neutrality

The companies that argued for repeal made the case that Netflix, for example, is much more demanding than, say, a site that just provides text and should have to pay for that extra usage. They also argued that it costs to provide access to consumers, and ISPs should be compensated for that cost by the content providers.

Those against the repeal argued that this will effectively reduce the services available—many content providers may not be able to pay the fees the ISPs want—and raise costs for consumers, as the content providers that can pay will certainly want to pass the extra costs along to their customers.

A real-world analogy. The best way to think about this argument in real-world terms is to consider a supermarket. Supermarkets have limited shelf space, and food companies usually pay the supermarket (often quite a lot) for the ability to be on those shelves. Special locations, such as corners or end caps, cost more, as they are more visible to customers and lead to higher sales. Supermarkets argue that shelf space is a limited resource, that they own that real estate, and that, therefore, companies can and should pay for it.

And they do. The consequences are that customers pay higher prices—as the food companies recover what they paid the supermarket company—and have access to fewer choices. That new cereal, from the small company, probably won’t show up in a big chain supermarket for a while, if ever, while your toddler will keep seeing Lucky Charms all down the aisle.

There is nothing wrong with this; it is a long-standing business practice and makes a lot of sense given the limited shelf space available in a supermarket. It also contains the essence of the net neutrality repeal argument.

The opponents of the repeal, however, point out that shelf space on the Internet is not limited, and that the only effect of the repeal is to impose an artificial limit in order to create that supermarket pricing power. They also point out that while consumers have a choice of multiple supermarkets, they often have little or no choice for an ISP. When you combine that scarcity of ISPs with an artificial shortage of space for the content providers, you may never be able to get the equivalent of the new cereal and be stuck with Lucky Charms alone.

Another good comparison is the recent trend of putting toll lanes, which tend to be less crowded, on highways. If you want to pay more, you can go faster, but for the person who doesn’t, the driving will be slower. Expect to see real differences in service from content that can pay and content that can’t.

Cause and effect

Both sides in this argument have valid points, but from a consumer point of view, the effects are likely to be real and material for most of us: slower service and more limited choices. This could be interpreted as a political stance, but it isn’t—just simple cause and effect.

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